iSign Solutions Inc. - Annual Report: 2006 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________
FORM
10-K
X
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the Fiscal Year Ended December 31, 2006
___
Transition report pursuant to Section 13 of 15(d) of the Securities Exchange
Act
of 1934 For the transition period from ___ to ___
Commission
File No. 0-19301
Communication
Intelligence Corporation
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
94-2790442
(I.R.S.
Employer
Identification
No.)
|
|
275
Shoreline Drive, Suite 500
Redwood
Shores, California
(Address
of principal executive offices)
|
94065
(Zip
Code)
|
Registrant’s
telephone number, including area code: 650-802-7888
Securities
registered under Section 12(b) of the Securities Exchange Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $.01 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act of 1933. Yes[ ] No. [ X ].
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes [ ]
No.
[X ].
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference into Part III of this Form 10-K or any amendment
to
this Form 10-K. [ X ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the securities Exchange act
of 1934 (check one): Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ X ]
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2)
Yes
[ ]
No [ X ]
The
aggregate market value of the voting stock (Common Stock) held by non-affiliates
of the registrant as of June 30, 2006 was approximately $43,462,267 based on
the
closing sale price of $0.41 on such date, as reported by the Nasdaq
Over-the-Counter Market. The
number of shares of Common Stock outstanding as of the close of business on
March 22, 2007 was 107,557,161.
COMMUNICATION
INTELLIGENCE CORPORATION
TABLE
OF
CONTENTS
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Page
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PART
I
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3
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Item
1. Business
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3
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|
Item
1A. Risk Factors
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7
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|
Item
1B. Unresolved Staff Comments
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10
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Item
2. Properties
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10
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|
Item
3. Legal Proceedings
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10
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Item
4. Submission of Matters to a Vote of Security Holders
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10
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PART
II
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10
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|
Item
5. Market For Registrant's Common Equity and Related Stockholder
Matters
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10
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Item
6. Selected Financial Data
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12
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Item
7. Management's Discussion and Analysis of Financial
Condition
and
Results of Operations
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13
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Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
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23
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Item
8. Consolidated Financial Statements and Supplementary
Data
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24
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Item
9. Changes in and Disagreements with Accountants on
Accounting
and
Financial Disclosures
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24
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Item
9A. Controls and Procedures
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24
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Item
9B. Other Information
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25
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PART
III
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26
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Item
10. Directors and Executive Officers of the Registrant
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26
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Item
11. Executive Compensation
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28
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Item
12. Security Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
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35
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Item
13. Certain Relationships and Related Transactions
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36
|
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Item
14. Principal
Accountant Fees and Services
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36
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PART
IV
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38
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Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
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38
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___________
CIC®
and its
logo, Handwriter®,
Jot®,
iSign®,
InkSnap®, InkTools®࿔,
RecoEcho®, Sign-On®, QuickNotes®,Sign-it®࿔,
WordComplete®,
INKshrINK®,
SigCheck® and The Power To Sign Online®
are
registered trademarks of the Company. HRS’,
PenX’,
SignatureOne’
and
Speller’ are
trademarks of the Company. Applications for registration of various trademarks
are pending in the United States, Europe and Asia. The Company intends to
register its trademarks generally in those jurisdictions where significant
marketing of its products will be undertaken in the foreseeable
future.
2
PART
I
Item
1.
Business
Unless
otherwise stated all amounts in Parts I through Part IV are stated in thousands
(“000s”).
General
Communication
Intelligence Corporation was
incorporated in Delaware in October 1986. Communication
Intelligence Corporation and its joint venture (the “Company” or “CIC”) is a
leading supplier of electronic signature solutions for business process
automation in the financial industry as well as the recognized leader in
biometric signature verification. CIC’s products enable companies to achieve
truly paperless business transactions with multiple signature technologies
across virtually all applications and hardware platforms. To date, CIC has
delivered biometric and electronic signature solutions to over 400 companies
worldwide. These deployments are primarily in the financial industry and include
AIG/AGLA, Charles Schwab & Co., JP Morgan Chase, Prudential Financial, Inc.,
State Farm Insurance Co. and Wells Fargo Bank, NA. CIC provides the most
comprehensive and scaleable electronic signature solution suite based on over
20
years of experience and significant input from our valued financial industry
client base. CIC is also a leading supplier of natural input/text entry software
for handheld computers and smartphones. Major customers for natural input
software are PalmSource and Sony Ericsson. CIC sells directly to enterprises
and
through system integrators, channel partners and OEMs. CIC is headquartered
in
Redwood Shores, California and has a joint venture, CICC, in Nanjing, China.
Revenue
for the year ended December 31, 2006 was $2,342 compared to $3,121 for the
year
ended December 31, 2005. Revenue for 2006 was primarily attributable to American
Medical Response, ASP Software, Audata, Charles Schwab & Co., Dextera Corp.,
eCom Asia Pacific, IA Systems (Pty.) Ltd, Nationwide Bank (UK),
IntegraSys/Fiserv, Misys Healthcare Systems, PalmSource Inc., Prudential
Financial Inc., Reward Network, SnapOn Credit LLC, Software House International,
Sony Ericsson Corp., State Farm Insurance Co., Wells Fargo Bank NA, the
Tennessee Valley Authority, and Zones Corporate Solutions.
The
Company believes the decrease in eSignature revenue in 2006, compared to 2005,
reflects fluctuations in IT (information technology) spending but is primarily
attributable to the inherent characteristics of an emerging market. In response
to eSignature market demands, the Company experienced intense competitive
pressure in 2006 and responded by rapidly developing and deploying web and
server side signing products. These new product offerings significantly expand
CIC’s suite of products and afford the opportunity to serve more applications
and thereby a larger segment of the emerging eSignature market. The Company
believes this product evolution, and the need for product additions, is
consistent with the transition from a developing market to market take-off.
2006
revenue, however, was negatively impacted by the delay caused by these product
evaluations especially in large follow-on rollout-type deployments from our
installed base of initial deployments with top-tier early adopter financial
institutions. The Company believes it has enhanced its competitive position
relative to follow on deployments and to compete more effectively for new
business.
The
net
loss for the twelve months ended December 31, 2006 was $3,286 compared to $4,031
in the prior year. Non-cash charges to interest expense for deferred financing
costs and loan discount amortization related to the convertible notes decreased
$1,684 to $591 compared to $2,275 in the prior year. Operating expenses,
including amortization of software development costs, increased approximately
4%, or $194, from $4,705 at December 31, 2005 to $4,899 for the year ended
December 31, 2006. The increase in operating expense primarily reflects the
increased amortization of capitalized software development costs related to
product development and enhancements and investments in sales and marketing
personnel and programs.
Core
Technologies
The
Company's core technologies are classified into two broad categories:
"transaction and communication enabling technologies" and "natural input
technologies". These technologies include multi-modal electronic signature,
handwritten biometric signature verification, cryptography (Sign-it, iSign,
and
SignatureOne) and multilingual handwriting recognition software
(Jot).
3
Transaction
and Communication Enabling Technologies.
The
Company's transaction and communication enabling technologies are designed
to
provide a cost-effective means for securing electronic transactions, providing
network and device access control and enabling workflow automation of
traditional paper form processing. The Company believes that these technologies
offer more efficient methods for conducting electronic transactions while
providing more functional user authentication and heightened data security.
The
Company's transaction and communication enabling technologies have been
fundamental to its development of software for multi-modal electronic
signatures, handwritten biometric signature verification, and data
security.
Natural
Input Technologies.
CIC's
natural input technologies are designed to allow users to interact with a
computer or handheld device by using an electronic pen or stylus as the primary
input device. CIC's natural input offering includes multilingual handwriting
recognition software for such devices as electronic organizers, pagers and
smart
cellular phones that do not have a keyboard. For such devices, handwriting
recognition offers the most viable solutions for performing text entry and
editing.
Products
Key
products include the following:
|
SignatureOne
|
SignatureOne
Profile Server is the server compliment to CIC's Sign-it software,
which
enables the real-time capture of electronic and digital signatures
in
various application environments. All user enrollment, authentication
and
transaction tracking in SignatureOne is based on data from the Sign-it
client software.
|
||
|
iSign
|
A
suite of application development tools for electronic signatures,
biometric signature verification and cryptography for custom developed
applications and web based development.
|
||
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Sign-it
|
Multi-modal
electronic signature software for common applications including;
Microsoft
Word, Adobe Acrobat, AutoDesk AutoCAD, web based applications using
HTML,
XML, & XHTML, and custom applications for .NET, C# and similar
development environments for the enterprise market
|
||
|
Jot
|
Multi-lingual
handwriting recognition software
|
Products
and upgrades that were introduced and first shipped in 2006 include the
following:
|
iSign
v4.0
|
|
SignatureOne™
Profile Server v2.0. Oracle
SignatureOne™
Profile Server v2.0. SQL
|
|
Sign-it®
Tools v3.0 for AutoCAD®
Sign-it®
Tools v3.01 for AutoCAD®
Sign-it®
Tools v3.0 for Word
|
|
Sign-it®
Tools v3.02 for Word
|
|
Sign-it®
v3.0 for AutoCAD®
Sign-it®
v3.01 for AutoCAD®
Sign-it®
v3.02 for AutoCAD®
|
|
Sign-it®
v3.1 for AutoCAD®
Sign-it®
v6.0 for Acrobat®
|
|
Sign-it®
v6.01 for Acrobat®
|
|
Sign-it®
v6.02 for Acrobat®
|
|
Sign-it®
v6.01 for Word
Sign-it®
v6.02 for Word
Sign-it®
v6.03 for Word
|
|
Sign-it®
XF v1.0
Sign-it®
XF v1.1
|
4
The
SignatureOne Profile Server provides server based enterprise administration
and
authentication of user eSignatures and maintenance of signature transaction
logs
for eSigned documents. The SignatureOne architecture implements a common process
and methodology that provides a uniform program interface for multiple signature
methods and multiple capture devices, simplifying enterprise wide integration
of
business process automation tasks requiring eSignature.
iSign
is
an electronic signature and handwritten signature verification software
developer’s kit for custom applications or Web based processes. It captures and
analyzes the image, speed, stroke sequence and acceleration of a person's
handwritten electronic signature. iSign provides an effective and inexpensive
handwriting security check for immediate authentication. It also stores certain
forensic elements of a signature for use in determining whether a person
actually electronically signed a document. The iSign kit includes software
libraries for industry standard encryption and hashing to protect the sensitive
nature of a user signature and the data captured in association with that
signature. This software toolkit is used internally by the Company as the
underlying technology in its SignatureOne and Sign-it products.
Sign-it
is a family of electronic signature products for recording multi-modal
electronic signatures as they are being captured as well as binding and
verifying electronic signatures within standard consumer applications. These
products combine the strengths of biometrics, and electronic signatures and
cryptography with a patented process to insure legally compliant electronic
signatures to process, transact and create electronic documents that have the
same legal standing as a traditional wet signature on paper in accordance with
the Electronic Signature in National and Global Commerce Act, and other related
legislation and regulations. Organizations wishing to process electronic forms,
requiring varying levels of security, can reduce the need for paper forms by
adding electronic signature technologies to their workflow solution. Currently,
Sign-it is available for MS Word, AutoCAD, Adobe Acrobat, Web based transactions
using common formats like XML, HTML, or XHTML, and custom application
development with .NET, C# or similar development environments.
Jot
software analyzes the individual strokes of characters written with a pen/stylus
and converts these strokes into machine-readable text characters. Jot recognizes
handwritten input and is specifically designed for small devices. Unlike many
recognizers that compete in the market for handheld data input solutions, Jot
offers a user interface that allows for the input of natural upper and lowercase
letters, standard punctuation and European languages without requiring the
user
to learn and memorize unique characters or symbols. Jot has been ported to
numerous operating systems, including Palm OS, Windows, Windows CE, VT-OS,
EPOC,
QNX, Linux and OS/9. The standard version of Jot, which is available through
OEM
customers, recognizes and supports input of Roman-based Western European
languages.
Copyrights,
Patents and Trademarks
The
Company relies on a combination of patents, copyrights, trademarks, trade
secrets and contractual provisions to protect its software offerings and
technologies. The Company has a policy of requiring its employees and
contractors to respect proprietary information through written agreements.
The
Company also has a policy of requiring prospective business partners to enter
into non-disclosure agreements before disclosure of any of its proprietary
information.
Over
the
years, the Company has developed and patented major elements of its software
offerings and technologies. In addition, in October 2000 the Company acquired,
from PenOp, Inc. and its subsidiary, a significant patent portfolio relevant
to
the markets in which the Company sells its products. The Company’s patents and
the years in which they each expire are as follows:
5
|
Patent
No.
|
Expiration
|
||
|
5049862
|
2008
|
||
|
5544255
|
2013
|
||
|
5647017
|
2014
|
||
|
5818955
|
2015
|
||
|
5933514
|
2016
|
||
|
6064751
|
2017
|
||
|
6091835
|
2017
|
||
|
6212295
|
2018
|
||
|
6381344
|
2019
|
||
|
6487310
|
2019
|
The
Company believes that these patents provide a competitive advantage in the
electronic signature and biometric signature verification markets. The Company
believes the technologies covered by the patents are unique and allow it to
produce superior products. The Company also believes these patents are very
broad in their coverage. The technologies go beyond the simple handwritten
signature and include measuring electronically the manner in which a person
signs to ensure tamper resistance and security of the resultant documents and
the use of other systems for identifying an individual and using that
information to close a transaction. The Company believes that the patents are
sufficiently broad in coverage that products with substantially similar
functionality would infringe its patents. Moreover, because the majority of
these patents do not expire for the next 6 to 12 years from the date hereof,
the
Company believes that it has sufficient time to develop new related
technologies, which may be patentable, and to establish CIC as market leader
in
these product areas. Accordingly, the Company believes that for a significant
period of time its patents will deter competitors from introducing competing
products without creating substantially different technology or licensing or
infringing its technology.
The
Company has an extensive list of registered and unregistered trademarks and
applications in the United States and other countries. The Company intends
to
register its trademarks generally in those jurisdictions where significant
marketing of its products will be undertaken in the foreseeable
future.
Material
Customers
Historically,
the Company’s revenues have been derived from a limited number of customers. One
customer, PalmSource, Inc., accounted for 27% of total revenues in 2006. Two
customers accounted for 41% of total revenues in 2005. Snap-On Credit
Corporation accounted for 16% and PalmSource, Inc. accounted for 25%,
respectively, of our 2005 revenues. Two
customers accounted for 76% of total revenue in 2004. State Farm Insurance
Company accounted for 46% and Wells Fargo Bank NA accounted for 30%,
respectively, of our 2004 revenues.
Seasonality
of Business
The
Company believes that its products are not subject to seasonal
fluctuations.
Backlog
Backlog
approximated $404 and $557 at December 31, 2006 and 2005, respectively,
representing advanced payments on service maintenance agreements that are
expected to be recognized over the next twelve months.
Competition
The
Company faces competition at different levels. The technology neutral nature
of
the laws and regulations related to what constitutes an electronic signature
and
the multi-modal approach the Company has taken with its products, causes it
to
compete with different companies dependent upon the specific signature type
being sought by a prospect. Its principal competition for handwritten biometric
signatures continues to be Valyd, SoftPro Wondernet, and low-end tablet vendors.
This is the primary technology the Company has established success in
historically and faces additional competition for its click-wrap, voice,
fingerprint, password, and basic click sign technology.
6
The
Company continues to have competition from PenPower Group, Advanced Research
Technology, Inc., and Decuma AB, for its natural input market
segment.
The
Company believes that it has a competitive advantage in some cases due to its
range of product offerings. There can be no assurance, however, that
competitors, including some with greater financial or other resources, will
not
succeed in developing products or technologies that are more effective, easier
to use or less expensive than the Company’s products or technologies that would
render its products or technologies obsolete or non-competitive.
Employees
As
of
December 31, 2006, the Company employed an aggregate of 21 full-time, and 2
part-time employees, 21 of which are in the United States and 2 of which are
in
China. From time to time, the Company also utilizes additional personnel on
an
as needed basis. The Company believes it has good relations with its employees.
None of the Company’s employees are a party to a collective bargaining
agreement.
Geographic
Areas
For
the
years ended December 31, 2006, 2005, and 2004, the Company’s sales in the United
States as a percentage of total sales were 81%, 85%, and 99%, respectively.
For
the years ended December 31, 2006, 2005, and 2004, the Company’s export sales as
a percentage of total revenues were approximately 19%, 15%, and 1%,
respectively. Foreign sales are based on the countries to which the Company’s
products are shipped. Long lived assets associated with sales made in the United
States were $4,694 and $4,699 for the years ended December 31, 2006 and 2005
respectively. Long lived assets located in China were $8 and $16 as of December
31, 2006 and 2005 respectively.
Segments
Prior
to
2006, the Company reported in two segments. Due to the immateriality of the
system integration segment the Company reclassified the operations into one
segment.
Forward
Looking Statements
Certain
statements contained in this Annual Report on Form 10-K, including without
limitation, statements containing the words “believes”, “anticipates”, “hopes”,
“intends”, “expects”, and other words of similar import, constitute “forward
looking” statements within the meaning of the Private Litigation Reform Act of
1995. Such statements involve known and unknown risks, uncertainties and other
factors that may cause actual events to differ materially from expectations.
Such factors include the following: (1) technological, engineering, quality
control or other circumstances which could delay the sale or shipment of
products; (2) economic, business, market and competitive conditions in the
software industry and technological innovations which could affect the Company’s
business; (3) the Company’s ability to protect its trade secrets or other
proprietary rights, operate without infringing upon the proprietary rights
of
others or prevent others from infringing on the proprietary rights of the
Company; and (4) general economic and business conditions and the availability
of sufficient financing.
Item
1A Risk
Factors
Our
auditors have raised substantial doubt about our ability to continue as a going
concern.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. Except for 2004, the Company
has
incurred significant losses since its inception and, at December 31, 2006,
the
Company’s accumulated deficit was approximately $88,000. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
The Company has primarily funded these losses through the sale of debt and
equity securities.
7
Operating
losses may continue, which could adversely affect financial results from
operations and stockholder value.
In
each
year since its inception, except for the year ended December 31, 2004, the
Company incurred losses, which were significant in certain periods. For the
five-year period ended December 31, 2006, those net losses aggregated
approximately $11,600. At December 31, 2006, the accumulated deficit was
approximately $87,900. While a profit was recorded for the year ended December
31, 2004, there is no guarantee that the Company will be profitable in future
years and it may incur substantial losses in the future, which could adversely
affect stockholder value.
We
have experienced significant declines in revenues in recent periods which,
if
continued, could adversely affect stockholder value.
Revenues
decreased 25% for the year ended December 31, 2006, compared to the year ended
December 31, 2005. The Company believes the 2006 decrease in eSignature revenue,
and the decrease in 2005 revenue relative to 2004, reflects fluctuations in
information technology spending but is primarily attributable to the inherent
characteristics of an emerging market. Record setting financial results in
2004
were driven by large respected early adopter enterprises in the financial
industry. However, moving
from an emerging market to a market in take-off requires several generations
of
product evolution and, ultimately, acceptance of the technology and products
by
the mainstream market, not just by early adopters. This
mainstream market is comprised of both enterprise customers and the channel
partners required to provide the broad market access and sales coverage needed
to achieve market takeoff.
However,
the Company cannot predict with any degree of certainty whether eSignature
technology spending will continue to show signs of strengthening and perhaps
more significantly when or if the eSignature market, which is currently still
in
the emerging/development stage, will enter into the take-off stage of widespread
adoption of its technology and products or the impact that competition may
have
on such adoption.
We
may
need additional working
capital, which may not be available at all or on favorable terms.
As
of
December 31, 2006, the Company’s working capital deficit was approximately
$(816). With the exception of 2004, the Company has suffered recurring losses
from operations that raised a substantial doubt about its ability to continue
as
a going concern. There is no assurance that the Company will have adequate
capital resources to fund planned operations, that any additional funds will
be
available to it when needed, or if available, will be available on favorable
terms or in amounts the Company may require. If the Company is unable to obtain
adequate capital resources to fund its operations, the Company may be required
to delay, scale back or eliminate some or all of its operations, which may
have
a material adverse effect on its business, results of operations and ability
to
operate as a going concern.
Our
competitors could develop products or technologies that could make our products
or technologies non-competitive, which would adversely affect sales, financial
results from operations and stockholder value.
Although
the Company believes that its patent portfolio provides a barrier to entry
to
the electronic signature market, and that its established relationships with
its
OEM customers in the natural input segment are sufficient to maintain that
source of revenue, there can be no assurance that it will not face significant
competition in this and other aspects of its business.
Some
of
its competitors, including more established companies or those with greater
financial or other resources, could develop products or technologies that are
more effective, easier to use or less expensive than the Company’s. This could
make the Company’s products and technologies obsolete or non-competitive, which
would adversely affect sales, financial results from operations and stockholder
value.
8
If
we are unable to adequately protect our intellectual property, third parties
may
be able to use our technology, which could adversely affect our ability to
compete in the market, our financial results from operations and stockholder
value.
The
Company relies on a combination of patents, copyrights, trademarks, trade
secrets and contractual provisions to protect its proprietary rights in its
products and technologies. These protections may not adequately protect it
for a
number of reasons. First, the Company’s competitors may independently develop
technologies that are substantially equivalent or superior to ours. Second,
the
laws of some of the countries in which the Company’s products are licensed do
not protect those products and its intellectual property rights to the same
extent as do the laws of the United States. Third, because of the rapid
evolution of technology and uncertainties in intellectual property law in the
United States and internationally, the Company’s current and future products and
technologies could be subject to infringement claims by others. Fourth, a
substantial portion of its technology and know-how are trade secrets and are
not
protected by patent, trademark or copyright laws. The Company requires its
employees, contractors and customers to execute written agreements that seek
to
protect its proprietary information. We also have a policy of requiring
prospective business partners to enter into non-disclosure agreements before
any
of its proprietary information is revealed to them. However, the measures taken
by the Company to protect its technology, products and other proprietary rights
might not adequately protect it against improper use.
The
Company may be required to take legal action to protect or defend its
proprietary rights. Litigation of third-party claims of intellectual property
infringement during 2004 and 2005 required the Company to spend substantial
time
and financial resources to protect its proprietary rights. If the result of
any
litigation of this type is adverse to the Company, it may be required to expend
significant resources to develop non-infringing technology or obtain licenses
from third parties. If the Company is not successful in those efforts, or if
it
is required to pay any substantial litigation costs, its business would be
materially and adversely affected.
A
significant portion of our sales are derived from a limited number of customers,
and results from operations could be adversely affected and shareholder value
harmed if we lost any of these customers.
The
Company’s revenues historically have been derived from a limited number of
customers. Therefore, the success of its business depends on its ability to
obtain customers and maintain satisfactory relationships with them in the
future. The Company may not be able to continue to maintain satisfactory
relationships with its customers in the future. Our top customer accounted
for
27% and 25% of revenues in the years ended December 31, 2006 and December 31,
2005, respectively. The loss of any significant customer or other revenue source
would have a material adverse effect on the Company’s revenues and
profitability.
Risks
Related to our Capital Structure
The
market price of our stock can be volatile, which could result in losses for
investors.
The
Company’s common stock is listed on the Over-the-Counter Bulletin Board (“OTC”).
Stock prices of technology companies in recent years have experienced
significant volatility, including price fluctuations that are unrelated or
not
proportional to the operating performance of these companies. Volatility on
the
OTC is typically higher than the volatility of stocks traded on Nasdaq or other
exchanges. The market price of the Company’s common stock has been and could be
subject to significant fluctuations as a result of variations in its operating
results, announcements of technological innovations or new products by it or
our
competitors, announcements of new strategic relationships by the Company or
our
competitors, general conditions in the technology industry or market conditions
unrelated to its business and operating results.
Statutory
provisions and provisions in our charter may delay or frustrate transactions
that may be beneficial to our stockholders.
Certain
provisions of the Delaware General Corporation Act and our charter may delay
or
prevent a merger, tender offer or proxy contest that is not approved by the
Company’s Board of Directors, even if such events may be beneficial to the
interests of stockholders. For example, the Company’s Board, without shareholder
approval, has the authority and power to issue all authorized and unissued
shares of common stock and preferred stock that have not otherwise been reserved
for issuance. In addition, the Delaware General Corporation Law contains
provisions that may have the effect of making it more difficult or delaying
attempts by others to obtain control of the Company. See "Description and Price
Range of Common Stock—Anti-Takeover Provisions."
9
Resale
by the holder of the Notes and Warrants could adversely affect the market price
of our stock.
The
holders of the remaining Notes and Warrants may immediately sell the shares
issued upon conversion and exercise of the Notes and Warrants, respectively.
In
light of the Company’s historically low trading volume, such sales may adversely
affect the price of the shares of its stock.
Item
1B. Unresolved
Staff Comments
As
of the
date of this report, the Company does not have any unresolved comments on our
reports filed under the 1934 Act from staff of the Securities and Exchange
Commission.
Item
2. Properties
The
Company leases its principal facilities, consisting of approximately 9,600
square feet, in Redwood Shores, California, pursuant to a sub-lease that expires
in 2011. The Company’s China-based joint venture leases approximately 392 square
feet in Nanjing, China. The Company believes that its current facilities are
suitable to continue operations in the foreseeable future.
Item
3. Legal
Proceedings
None
Item
4. Submission
of Matters to a Vote of Security Holders
None
PART
II
|
Item
5.
|
Market
For Registrant's Common Equity and Related Stockholder
Matters
|
The
Company’s common stock is listed on the OTC under the trading symbol CICI.OB.
Prior to March 14, 2003 it was listed on the Nasdaq Capital Market (formerly
known as the SmallCap Market) under the symbol CICI. The following table sets
forth the high and low sale prices of the common stock for the periods noted.
|
Sale
Price
Per
Share
|
|||
|
Year
|
Period
|
High
|
Low
|
|
2005
|
First
Quarter
|
$
0.63
|
$ 0.38
|
|
Second
Quarter
|
$
0.59
|
$
0.23
|
|
|
Third
Quarter
|
$
0.61
|
$ 0.39
|
|
|
Fourth
Quarter
|
$
0.55
|
$ 0.37
|
|
|
2006
|
First
Quarter
|
$
0.53
|
$ 0.40
|
|
Second
Quarter
|
$
0.50
|
$
0.39
|
|
|
Third
Quarter
|
$
0.41
|
$ 0.24
|
|
|
Fourth
Quarter
|
$
0.30
|
$ 0.18
|
|
As
of
March 22, 2007, the closing sale price of the Common Stock on the Nasdaq OTC
was
$0.28 per share and there were approximately 920 registered holders of the
Common Stock.
To
date,
the Company has not paid any dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The declaration and
payment of dividends on the Common Stock is at the discretion of the Board
of
Directors and will depend on, among other things, the Company's operating
results, financial condition, capital requirements, contractual restrictions
or
such other factors as the Board of Directors may deem relevant.
10
All
securities sold during 2006 by the Company were either previously reported
on
Form 10-Qs filed with the Securities and Exchange Commission or sold pursuant
to
registration statements filed under the Securities Act of 1933, as
amended.
The
information required by Item 201(d) of Regulation S-K is incorporated by
reference to Note 5 (“Stockholders Equity”) of the Notes to Consolidated
Financial Statements for the Year Ended December 31, 2006, page
F-20.
The
following graph compares the Company's cumulative five-year return on its common
stock with a broad-based stock index and either a nationally recognized industry
index or an index of peer companies selected by the Company. This performance
graph compares the cumulative five-year returns on the common stock with the
Nasdaq Computer and Data Processing Index and the Nasdaq Index.
|
Total
Return To Shareholders
|
||||||
|
(Includes
reinvestment of dividends)
|
||||||
|
ANNUAL
RETURN PERCENTAGE
|
||||||
|
Years
Ending December 31,
|
||||||
|
Company
/ Index
|
|
2002
|
2003
|
2004
|
2005
|
2006
|
|
Communication
Intelligence Corporation
|
-45.31
|
5.71
|
60.81
|
-27.73
|
-52.33
|
|
|
Nasdaq
U.S. & Foreign Index
|
-31.19
|
50.84
|
8.81
|
2.28
|
10.31
|
|
|
Nasdaq
Computer & Data Processing Index
|
-31.04
|
31.75
|
10.12
|
3.39
|
12.23
|
|
|
INDEXED
RETURNS
|
||||||
|
Base
|
Years
Ending December 31,
|
|||||
|
Period
|
||||||
|
Company
/ Index
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
|
Communication
Intelligence Corporation
|
100
|
54.69
|
57.81
|
92.97
|
67.19
|
32.03
|
|
Nasdaq
U.S. & Foreign Index
|
100
|
68.81
|
103.79
|
112.93
|
115.50
|
127.41
|
|
Nasdaq
Computer & Data Processing Index
|
100
|
68.96
|
90.85
|
100.04
|
103.44
|
116.09
|
11
Item
6.
Selected
Financial Data
The
selected consolidated financial data presented below as of December 31, 2006,
2005, 2004, 2003, and 2002 and for each of the years in the five-year period
ended December 31, 2006 are derived from the audited consolidated financial
statements of the Company. The consolidated financial statements as of December
31, 2006 and 2005, and for each of the years in the three-year period ended
December 31, 2006, are included in Item 8 of this Form 10-K. The selected
consolidated financial data should be read in conjunction with the Company's
audited financial statements and the notes thereto and other portions of this
Form 10-K, including "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations.”
|
Years
Ended December 31,
|
||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||
|
(In
thousands, except per share amounts)
|
||||||
|
Statement
of Operations Data:
|
||||||
|
Revenues
|
$
2,342
|
$
3,121
|
$
7,284
|
$
3,034
|
$
3,272
|
|
|
Research
and development expenses(1)
|
817
|
1,144
|
1,187
|
1,302
|
1,485
|
|
|
Sales
and marketing expenses
|
1,658
|
1,240
|
1,306
|
905
|
1,543
|
|
|
General
and administrative expenses
|
2,174
|
2,173
|
2,483
|
2,219
|
2,424
|
|
|
Income
(loss) from operations
|
(2,557)
|
(1,584)
|
2,255
|
(2,157)
|
(3,337)
|
|
|
Net
income (loss)
|
$
(3,286)
|
$
(4,031)
|
$
1,620
|
$
(2,345)
|
$
(3,561)
|
|
|
Basic
and diluted income (loss) per share
|
$
(0.03)
|
$
(0.04)
|
$
0.02
|
$
(0.02)
|
$
(0.04)
|
|
|
As
of December 31,
|
|||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
(In
thousands)
|
|||||
|
Balance
Sheet Data:
|
|||||
|
Cash,
cash equivalents and restricted cash
|
$
727
|
$ 2,849
|
$
4,736
|
$
1,039
|
$
711
|
|
Working
capital(2)
|
(816)
|
2,258
|
4,068
|
(2,895)
|
443
|
|
Total
assets
|
6,126
|
8,466
|
10,819
|
7,215
|
7,168
|
|
Deferred
revenue
|
404
|
557
|
458
|
165
|
165
|
|
Long-term
obligations (3)
|
334
|
1,169
|
1,790
|
13
|
3,000
|
|
Stockholders'
equity (4)
|
3,584
|
5,856
|
7,531
|
2,187
|
2,934
|
___________
| (1) |
Excludes
software development costs capitalized in accordance with Statement
of
Financial Accounting Standards No. 86 of $510
at December 31, 2006, $299 at December 31, 2005 and $45 at December
31,
2004 respectively. No software development costs were capitalized
in the
years ended December 31, 2003 and
2002.
|
| (2) |
Current
liabilities used to calculate working capital at December 31, 2006,
2005,
2004, 2003, and 2002 include deferred revenue of $404, $557, $458,
$165,
and $165, respectively.
|
| (3) |
Long-term
debt is net of the unamortized fair value assigned to warrants of
$266 for
related-party debt at December 31, 2006. Long-term debt is net of
the
unamortized debt discount related to convertible debt of $674, and
$2,410
at December 31, 2005 and 2004.
|
| (4) |
The
Company has never paid dividends to the holders of its common stock.
|
12
Item
7.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Unless
otherwise stated herein, all figures in this Item
7
are stated in thousands (“000s”).
Overview
The
Company was initially incorporated in Delaware in October 1986. Except for
the
year ended December 31, 2004, in each year since its inception the Company
has
incurred losses. For the five-year period ended December 31, 2006, operating
losses aggregated approximately $7,380 and at December 31, 2006, the Company's
accumulated deficit was approximately $87,900.
Revenues
decreased 25% for the year ended December 31, 2006, to $2,342, compared to
the
year ended December 31, 2005. The Company believes the 2006 decrease in
eSignature revenue, and the decrease in 2005 revenue relative to 2004, reflects
fluctuations in IT (information technology) spending but is primarily
attributable to the realities of an emerging market. The Company’s 2004 record
setting financial results were driven by large respected early adopter
enterprises in the financial industry. Although total 2004 eSignature revenue
was attributable to over seventy customers worldwide, 85% of the total
eSignature revenue was driven by two major orders. The Company believes these
top tier early adopters play a critical and necessary role as reference
accounts, confirming CIC’s technology and its associated ROI, and that the
successful completion of these initial deployments is fundamental to sustained
sales growth available from the much larger base of potential customers. This
mainstream market is comprised of both enterprise customers and the channel
partners required to provide the broad market access and sales coverage needed
to achieve market takeoff. These key early adopter accounts have now
successfully completed their initial deployments and are functioning as CIC
reference accounts.
In
response to eSignature market demands, the Company experienced intense
competitive pressure in 2006 and responded by rapidly developing and deploying
web and server side signing products. These new product offerings significantly
expand CIC’s suite of products and afford the opportunity to serve more
applications and thereby a larger segment of the emerging eSignature market.
The
Company believes this product evolution, and the need for product additions,
is
consistent with the transition from a developing market to market take-off.
2006 revenue, however, was negatively impacted by the delay caused by
these product evaluations especially in large follow-on rollout-type deployments
from our installed base of initial deployments with top-tier early adopter
financial institutions. The Company believes it has enhanced its
competitive position relative to both follow-on business and new accounts.
The
net
loss for the twelve months ended December 31, 2006 was $3,286, compared to
$4,031 in the prior year. Non-cash charges to interest expense for deferred
financing costs and loan discount amortization related to the outstanding
convertible notes decreased $1,684 to $591 compared to $2,275 in the prior
year.
Operating expenses, including amortization of software development costs,
increased approximately 4%, or $194, from $4,705 at December 31, 2005 to $4,899
for the year ended December 31, 2006. The increase in operating expense
primarily reflects the increased amortization of capitalized software
development costs related to product development and enhancements and
investments in sales and marketing personal and programs.
New
Accounting Pronouncements
See
note
1, Notes to Consolidated Financial Statements included under Part IV. Item
15.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the
amounts reported in the Company’s consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported in its
balance sheets and the amounts of revenues and expenses reported for each period
presented are affected by these estimates and assumptions that are used for,
but
not limited to, revenue recognition, allowance for doubtful accounts, intangible
asset impairments, fair value of financial instruments, customer base, software
development costs research and development costs, foreign currency translation
and net operating loss carryforwards. Actual results may differ from these
estimates. The following critical accounting policies are significantly affected
by judgments, assumptions and estimates used by the Company’s management in the
preparation of the consolidated financial statements.
13
Revenue:
Revenue
is recognized when earned in accordance with applicable accounting standards,
including AICPA Statement of Position ("SOP") No. 97-2, “Software
Revenue Recognition”,
as
amended, Staff Accounting Bulletin 104, “Revenue
Recognition”
("SAB
104"), and the interpretive guidance issued by the Securities and Exchange
Commission and EITF issue number 00-21, “Accounting
for Revenue Arrangements with Multiple Elements”,
of the
FASB’s Emerging Issues Task Force. The Company recognizes revenues from sales of
software products upon shipment, provided that persuasive evidence of an
arrangement exists, collection is determined to be probable, all non-recurring
engineering work necessary to enable the Company's product to function within
the customer's application has been completed and the Company's product has
been
delivered according to specifications. Revenue from service subscriptions is
recognized as costs are incurred or over the service period which-ever is
longer.
Software
license agreements may contain multiple elements, including upgrades and
enhancements, products deliverable on a when and if available basis and post
contract support. Revenue from software license agreements is recognized upon
delivery of the software, provided that persuasive evidence of an arrangement
exists, collection is determined to be probable, all nonrecurring engineering
work necessary to enable the Company's products to function within the
customer's application has been completed, and the Company has delivered its
product according to specifications.
Maintenance
revenue is recorded for post contract support and upgrades or enhancements,
which is paid for in addition to license fees, and is recognized as costs are
incurred or over the support period whichever is longer. For undelivered
elements where objective and reliable evidence of fair value does not exist,
revenue is deferred and subsequently recognized when delivery has occurred
and
when fair value has been determined.
The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable.
If
there is a change in actual defaults from the Company’s historical experience,
the Company’s estimates of recoverability of amounts due could be affected and
the Company would adjust the allowance accordingly.
Long-lived
assets:
The
Company performs intangible asset impairment analyses on a quarterly basis
in
accordance with the guidance in Statement of Financial Accounting Standard
No.
142, “Goodwill
and Other Intangible Assets”
("SFAS
No. 142") and Financial Accounting Standard No. 144, “Accounting
for the Impairment or Disposal of Long Lived Assets”
("SFAS
No. 144"). The Company uses SFAS 144 in response to changes in industry and
market conditions that affect its patents, the Company then determines if an
impairment of its assets has occurred. The Company reassesses the lives of
its
patents and tests for impairment quarterly in order to determine whether the
book value exceeds the fair value for each patent. Fair value is determined
by
estimating future cash flows from the products that are and will be protected
by
the patents and considering the following additional factors:
| · |
whether
there are legal, regulatory or contractual provisions known to the
Company
that limit the useful life of any patent to less than the assigned
useful
life;
|
| · |
whether
the Company needs to incur material costs or make modifications in
order
for it to continue to be able to realize the protection afforded
by the
patents;
|
| · |
whether
any effects of obsolescence or significant competitive pressure on
the
Company’s current or future products are expected to reduce the
anticipated cash flow from the products covered by the
patents;
|
| · |
whether
demand for products utilizing the patented technology will diminish,
remain stable or increase; and
|
| · |
whether
the current markets for the products based on the patented technology
will
remain constant or will change over the useful lives assigned to
the
patents.
|
14
The
Company obtained an independent valuation of the carrying value of its patents
as of December 31, 2005. The Company believes that the biometric market
potential identified in current year market research has improved over the
data
used to validate the carrying value of the Company’s patents at the end of 2005.
Management updated this analysis at December 31, 2006 and believes that that
no
impairment of the carrying value of the patents exists at December 31,
2006.
Customer
Base:
To date,
the Company's eSignature revenues have been derived primarily from financial
service industry end-users and from resellers and channel partners serving
the
financial service industry primarily in North America, the ASEAN Region
including China (PRC) and Europe. Natural Input (text entry) revenues have
been
derived primarily from hand held computer and smart phone manufacturers (OEMs)
primarily in North America, Europe and the Pacific Rim. The Company performs
periodic credit evaluations of its customers and does not require collateral.
The Company maintains reserves for potential credit losses. Historically, such
losses have been within management's expectations.
Software
Development Costs:
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed"
("SFAS
86"). Under SFAS 86, capitalization of software development costs begins upon
the establishment of technological feasibility, subject to net realizable value
considerations. The costs capitalized include the coding and testing of the
product after technological feasibility has been established and ends upon
the
release of the product. The annual amortization is the greater of (a) the
straight-line amortization over the estimated useful life not to exceed three
years or (b) the amount based on the ratio of current revenues to anticipated
future revenues. The Company capitalized $510, $299 and $45 for the years ended
December 31, 2006, 2005 and 2004.
Research
and Development Costs:
Research and development costs are charged to expense as incurred.
Share-based
compensation:
Share-based compensation expense is based on the estimated
grant date fair value
of
the portion of share-based payment awards that are
ultimately expected to vest during the period. The
grant
date fair
value of stock-based awards to employees and directors is calculated using
the
Black-Scholes option pricing model.
SFAS
No.
123(R) requires forfeitures
of
share-based
payment awards to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those
estimates. The
estimated average forfeiture rate for the year ended December 31, 2006, was
approximately 25.01%.
For
the
year ended December 31, 2006,
stock-based compensation expense includes
compensation expense for share-based payment awards granted prior to, but not
yet vested as of December 31, 2005.
Share
based payment awards issued but
not yet
vested as of December 31, 2005
are
valued
in
accordance with the pro forma provisions of SFAS No. 123.
Compensation
expense for the share-based payment awards granted subsequent to December 31,
2005, are based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R).
Foreign
Currency Translation:
The
Company considers the functional currency of the Joint Venture to be the
respective local currency and, accordingly, gains and losses from the
translation of the local foreign currency financial statements are included
as a
component of "accumulated other comprehensive loss" in the Company’s
consolidated balance sheets. Foreign currency assets and liabilities are
translated into U.S. dollars at exchange rates prevailing at the end of the
period, except for long-term assets and liabilities that are translated at
historical exchange rates. Revenue and expense accounts are translated at the
average exchange rates in effect during each period. Net foreign currency
transaction gains and losses are included as components of "interest income
and
other income (expense), net" in the Company's consolidated statements of
operations. Due to the stability of the currency in China, net foreign currency
transaction gains and losses were not material for the year ended December
31,
2006, 2005 and 2004, respectively.
15
Net
Operating Loss Carryforwards:
Utilization of the Company's net operating losses may be subject to an annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. As a result, a portion of
the
Company's net operating loss carryforwards may not be available to offset future
taxable income. The Company has provided a full valuation allowance for deferred
tax assets at December 31, 2006 of $29 million based upon the Company's history
of losses.
Segments:
The
Company reports its financial results in one segment. Prior
to
2006, the Company reported in two segments. Due to the immateriality of the
system integration segment the Company reclassified the operations into one
segment.
Results
of Operations
Revenues
Revenues
from transaction and communication enabling technologies (“eSignature”) and
natural input technologies (“Jot”),
declined 25%, or $779, in 2006, to $2,342, compared to revenues of $3,121 in
the
prior year. The decline was due to the absence of large
dollar rollout-type deployments from our installed base of proof-of-concept
and
pilot eSignature installations.
The
Company believes the 2006 decrease in eSignature revenue, and the decrease
in
2005 revenue relative to 2004, reflects fluctuations in information technology
spending but is primarily attributable to the realities of an emerging market.
The Company’s 2004 record setting financial results were driven by large
respected early adopter enterprises in the financial industry. Although total
2004 eSignature revenue was attributable to over seventy customers worldwide,
85% of the total eSignature revenue was driven by two major orders. The Company
believes these top tier respected early adopters play a critical and necessary
role as reference accounts, confirming CIC’s technology and its associated ROI,
and that the successful completion of these initial deployments is fundamental
to sustained sales growth available from the much larger base of potential
customers. This mainstream market is comprised of both enterprise customers
and
the channel partners required to provide the broad market access and sales
coverage needed to achieve market takeoff. These key early adopter accounts
have
now successfully completed their initial deployments and are functioning as
CIC
reference accounts.
In
addition, the Company experienced intense competitive pressure in 2006 which
required rapid response to eSignature market demands involving second and third
generation products. This included multi-model signings, web offerings and
server side solutions. Although this product evolution is consistent with the
transition from a developing market to market take-off, 2006 revenue was
negatively impacted by the delay in large follow-on rollout-type deployments
from our installed base of initial deployments especially with top-tier early
adopter financial institutions. The Company believes it has maintained and
enhanced its product and competitive leadership as evidenced by follow-on orders
from top-tier early adopters as well as new orders from new top-tier customers
received late last year and in the first quarter of 2007.
Revenues
from our Jot OEM’s including maintenance declined 29% or $308, to $746, compared
to the prior year, primarily due to a lower number of units shipped by OEM’s.
The Company anticipates that its Jot revenues will remain at levels consistent
with 2006 for the near term.
Cost
of Sales
Cost
of
sales increased 69% or $102, for the twelve months ended December 31, 2006,
compared to the prior year. The increase is primarily due to increased
amortization of new and previously capitalized software development costs
associated with the Company’s product and maintenance revenues. Direct
engineering costs associated with development contracts and proof of concepts
orders increased approximately $9 to $94, compared to the prior year. Cost
of
sales is expected to increase near term as capitalized engineering software
development for new and existing products is completed and products are
released.
16
Operating
expenses
Research
and Development Expenses
Research
and development expenses decreased approximately 29%, or $327, for the year
ended December 31, 2006 compared to the prior year. Research and development
expenses consist primarily of salaries and related costs, outside engineering,
maintenance items, and allocated facilities expenses. The most significant
factors in the $327 decrease were the reduction in the use of outside
engineering services and the increase in of software development costs
capitalized during 2006 compared to the prior year. Facilities and allocated
expenses were down from the prior year but were offset by the expensing the
estimated fair value of stock options that vested in 2006 required under SFAS
123(R), (see Critical Accounting Policies “Share-Based
Compensation”).
Total
expenses, before capitalization of software development costs and other
allocations was $1,628 for the year ended December 31, 2006 compared to $1,144
in the prior year. Research and development expenses before capitalization
of
software development costs, as well as the amounts to be capitalized on future
product development are expected to remain consistent with the 2006 amount.
Sales
and Marketing Expenses
Sales
and
marketing expenses increased 34% or $418, for the twelve months ended December
31, 2006, compared to the prior year. The increase was primarily attributable
to
an increase in salary related expense, including stock based compensation,
resulting from the addition of two sales persons, and increases in advertising
and marketing programs including increased participation at tradeshows and
related exhibit and marketing collateral expenses and the redesign of our
website all aimed at increasing revenue generation through increased market
awareness and sales coverage. In addition, there was an increase in engineering
allocated expense in support of sales related communications and customer
demonstration activities including the trade shows and exhibits. The Company
expects sales and marketing expenses to decrease in the near term due to planned
reductions in advertising and marketing related programs.
General
and Administrative Expenses
General
and administrative expenses for the twelve months ended December 31, 2006 were
virtually unchanged compared to the prior year. Salaries and related expense
including stock based compensation increased due to salary increases and the
requirements of SFAS 123(R), (see critical accounting policies “Share-based
compensation”),
while
professional services, insurance and allocated expenses were reduced due to
the
settlement of patent litigation, renegotiation of the Company’s office lease and
reductions in annual insurance premiums. The Company anticipates that general
and administrative expense will decrease over the near term due to lower
professional services and insurance expenses.
Interest
income and other income, net
Interest
income and other income, net
increased 153%, or $26, to $43 for the year ended December 31, 2006 compared
to
$17 in the prior year period. In the prior year the Joint Venture disposed
of
certain fixed assets at a loss which is included in Interest income and other,
net in the prior year.
Interest
expense
Interest
expense decreased 44%, or $92, to $116 for the year ended December 31, 2006
compared to $208 in the prior year period. The decrease was primarily due to
reductions in the amount of debt as the result of conversions of the outstanding
notes into shares of common stock (See Note 3 in the Consolidated Financial
Statements of this Form 10-K).
Amortization
of loan discount, which includes warrant and beneficial conversion feature
costs, and deferred financing costs, associated with the convertible notes
decreased 74%, or $1,684, to $591 for the year ended December 31, 2006 compared
to $2,275 in the prior year. The decrease was primarily due to the amortization
of the loan discount and deferred financing costs related the conversion of
$2,782 of the convertible notes over the prior 24 months. The Company will
be
required to amortize an additional $303 to interest expense over the remaining
life of the convertible notes or sooner if the notes are converted before the
due date.
17
In
addition to the above the Company has amortized $70 of a debt discount
attributable to the fair value assigned to warrants to interest expense
associated with a note and warrant purchase agreement entered into with a
greater than 5% stockholder and an unrelated third party in August 2006 (See
Note 4 in the Consolidated Financial Statements of this Form 10-K). The Company
will amortize an additional $266 to interest expense over the life of the
loan.
Years
Ended December 31, 2005 and December 31, 2004
Revenues
Revenues
from transaction and communication enabling technologies (“eSignature”) and
natural input technologies (“Jot”), declined 57%, or $4,163, in 2005, to $3,121,
compared to revenues of $7,284 in the prior year. The decrease is primarily
due
to the absence of large multi million dollar rollout orders from early adopter
accounts as occurred in first and third quarters in 2004.
Maintenance
revenues increased 9% or $85, to $1,054, compared to the prior year. The
increase is due to the renewal of maintenance agreements from prior
years.
In
2004,
the Company signed a new agreement with eCom Asia Pacific Pty Ltd (“eCom”). The
new agreement appoints eCom as exclusive master reseller for CIC products to
end
users and resellers with the authority and responsibility to create optimal
distribution channels within the People’s Republic of China. This agreement
provides for guaranteed minimum quarterly royalties over a two-year period.
eCom
is one of the world’s most experienced eSignature solutions providers and has
been a proven reseller and integrator of CIC eSignature products in the Asia
Pacific region for over six years. eCom has highly visible deployments including
Prudential Plc in Singapore, Malaysia and Hong Kong. The partnership with eCom
is targeted to achieve our objective of establishing enhanced sales coverage
in
China leveraging our new SignatureOne™
technology
with a trusted and proven partner. The Company believes that the channel partner
strategy will deliver increasing and sustained revenue growth.
The
Company made an investment in new sales personnel during 2005. The Company
believes that this investment will increase corporate eSignature revenues in
the
near term through a stronger focus and presence in its target markets. In
addition, the Company believes that the sales of smaller pilot deployments
of
its products to customers will lead to greater sales in future periods as the
customers roll out their applications on wider scales. However, the timing
of
customer product roll outs is difficult to project due to many factors beyond
the Company’s control. The Company views eSignature as a high potential revenue
market and intends to continue to place increasing focus on this
market.
Cost
of Sales
Cost
of
sales increased 179%, or $95, to $148 for the twelve months ended December
31,
2005 as compared to $53 in the prior year. The increase is primarily due to
increases in capital software amortization of $62 and engineering costs
amounting to $86 associated with development contracts.
Operating
expenses
Research
and Development Expenses
Research
and development expense decreased 4%, or $43, to $1,144 for the year ended
December 31, 2005 compared to $1,187 in the prior year period. Research and
development expenses consist primarily of salaries and related costs, outside
engineering, maintenance items, and allocated facilities expenses. The most
significant factors in the increase are salaries and related expense and outside
engineering expenses. Salaries and related expanse increased due primarily
as a
result of the addition of two engineers and three part-time test engineers,
while outside engineering expense increased due to the use of services to
complete a joint development project. The Company maintains a relationship
with
an outside engineering group familiar with its products and may draw on their
services, in the future, as required, which could have a material effect on
the
amount of outside engineering expense reported. Capitalized software development
costs increased 564%, or $254, to $299 for the year ended December 31, 2005
compared to $45 in the prior year period. The increase in capitalized software
development cost was due to new product development and significant upgrades
and
enhancements made to the Company’s natural input and eSignature products.
Capitalization of software development costs are expected to remain at increased
amounts for the foreseeable future. Engineering costs charged to cost of sales
increased $85 compared to $0 in the prior year period. The increase is primarily
due to customer paid development orders completed in 2005.
18
Sales
and Marketing Expenses
Sales
and
marketing expenses decreased 5%, or $66, for the year ended December 31, 2005
compared to $1,306 in the prior year period. Sales and marketing expenses
consist of salaries, commissions and related expenses, professional services,
advertising and promotion, general office and allocated facilities expenses.
The
most significant factors in the increase in expenses were increased salaries
and
related expenses. The increase in salaries and related expense was due primarily
to the addition of two sales persons. The increases in salaries and related
expenses were offset by lower commission expense due primarily to a decrease
in
revenues, and lower travel and entertainment expenses due to the changes in
geographic location of the new sales staff that required less travel expense
to
potential customer locations. Recruiting expense increased due to the hiring
of
additional sales staff utilizing professional search firms. The Company
anticipates that sales and marketing expenses, net of commissions, will continue
to increase in the near term as it strengthen its sales staff and efforts in
pursuit of new opportunities in the eSignature market space. The Company
continues to pursue a channel strategy for its eSignature products. The Company
believes the channel strategy, along with its current and potential partners,
will produce increasing revenues in the near term.
General
and Administrative Expenses
General
and administrative expenses decreased 12%, or $310, to $2,173, for the year
ended December 31, 2005 compared to $2,483 in the prior year period. General
and
administrative expense consists of salaries, professional fees, investor
relations expenses, patent amortization and office and allocated facilities
costs. Salaries and wages increased 3%, or $26, to $770 for the year ended
December 31, 2005 compared to $744 in the prior year period. The increase was
due primarily to increases in employee salaries. Professional service expense,
which includes consulting, legal and outside accounting fees, increased 6%,
or
$32, to $574 for the year ended December 31, 2005, compared to $542 in the
prior
year period. The increase was due primarily to an increases in legal fees
associated with the infringement litigation related to the enforcement of its
patents by the Company. The Company’s bad debt expense decreased 97%, or $144,
to $4 for the year ended December 31, 2005, compared to $148 in the prior year
period. The decrease was primarily due to providing a reserve for the channel
partner receivables of the Joint Venture. At this time, the Company believes
that its provision for bad debts is adequate. Other administrative expenses
decreased 21%, or $224, to $825 for the year ended December 31, 2005, compared
to $1,049 in the prior year period. The decrease was due primarily to spending
reductions. The Company believes that its General and Administrative expenses
will remain stable for the near term.
Interest
income and other income, net
Interest
income and other income, net decreased 64%, or $30, to $17 for the year ended
December 31, 2005 compared to $47 in the prior year period. The decrease is
primarily due to the disposal of fixed assets by the Joint Venture.
Interest
expense
Interest
expense decreased 60%, or $306, to $208 for the year ended December 31, 2005,
compared to $514 in the prior year period. The decrease was primarily due to
reductions in the amount of debt as the result of conversions of the notes
into
shares of common stock.
19
Amortization
of loan discount, which includes warrant and beneficial conversion feature
costs, and deferred financing costs, associated with the convertible notes
increased 1,117%, or $2,088, to $2,275 for the year ended December 31, 2005,
compared to $187 in the prior year. The increase was due to the amortization
of
the loan discount and deferred financing costs related the conversion of $2,322
of the convertible notes during the twelve months ended December 31, 2005.
Subsequent to December 31, 2005, the Company will be required to amortize an
additional $895 to interest expense over the life of the convertible notes
or
sooner if the notes are converted before the due date.
Liquidity
and Capital Resources
Cash
and
cash equivalents at December 31, 2006 totaled $727 compared to cash and cash
equivalents of $2,849 at December 31, 2005. This decrease is primarily
attributable to $2,141 used by operations, $603 used in investing activities
and
$8 used for principal payments on capital leases. The decrease was offset by
$600 in proceeds from issuance of long-term debt. The effect of exchange rate
changes on cash was $30.
The
cash
used by operations was primarily due to a net loss of $3,286 and a decrease
in
accounts payable and deferred revenues of $218 and $153, respectively. Other
net
changes in operating assets and liabilities amounted to proceeds of $60. The
cash used in operations was offset by depreciation and amortization of $623,
amortization of the loan discount, deferred financing and warrant costs of
$661,
and stock based employee compensation of $189.
The
cash
used in investing activities of $603 was primarily due to the capitalized
software development costs of $510 and the acquisition of office and computer
equipment of $93.
Proceeds
from financing activities consisted primarily of long-term debt secured through
a note and warrant Purchase Agreement with a related party totaling $600
(See
“Financing” below).
The
proceeds from the long-term note are offset by $8 in payments on capital lease
obligations.
Accounts
receivable increased 1%,
or
$4, to $487 at December 31, 2006, compared to $483 at December 31, 2005.
Accounts receivable at December 31, 2006 and 2005 are net of $397 and $387,
respectively, in reserves provided for potentially uncollectible accounts.
Sales
in the Company’s fourth quarter of 2006 and 2005 were similar in volume. The
Company expects that there will be fluctuations in accounts receivable in the
foreseeable future due to volumes and timing of revenues from quarter to
quarter.
Deferred
financing cost decreased 66%, or $146, to $75 at December 31, 2006 compared
to
$221 at December 31, 2005. The deferred financing costs are associated with
the
November 2004 financing (See “Financing” below). The remaining non-cash deferred
financing costs will be amortized to interest expense over 10 months or, the
life of the convertible notes, whichever is shorter.
Prepaid
expenses and other current assets decreased 38%, or $63, to $105 at December
31,
2006 compared to $168 at December 31, 2005. The decrease is primarily due the
timing of the billings of annual maintenance and other prepaid contracts.
Prepaid expenses generally fluctuate due to the timing of annual insurance
premiums and maintenance and support fees, which are prepaid in December and
June of each year.
Accounts
payable decreased $216 primarily due to payments associated with the patent
litigation which was concluded in 2005, and decreases in the forth quarter
operating expenses due to cash constraints.
Other
current liabilities, which include deferred revenue of $404 and the remaining
convertible notes of $1,154, due in October 2007, were $2,063 at December 31,
2006 compared to $1,075 at December 31, 2005, a net increase of $988. Deferred
revenue decreased $153 to $404 at December 31, 2006 compared to $557 at December
31, 2005. The increase in current liabilities is due to primarily to the
reclassification of the convertible notes from long-term to short-term at
December 31, 2006.
20
Financing
In
August
2006, the Company entered into a Note and Warrant Purchase Agreement (the “2006
Purchase Agreement”) and a Registration Rights Agreement (the “2006 Registration
Rights Agreement”) with a greater than 5% stockholder, each dated as of August
10, 2006. The Company secured the right to borrow up to six hundred thousand
dollars. On November 19, 2006 the Company borrowed the $600 available under
the
2006 Purchase Agreement. The Company expects to use the proceeds of the
financing for additional working capital.
On
November 19, 2006 the Company borrowed the $600 available under the 2006
Purchase Agreement. The Company expects to use the proceeds of the financing
for
additional working capital. In addition, the Company issued warrants to purchase
3,111 of the Company’s common stock. The Company has ascribed a value of $336 to
the warrants, which is recorded as a discount to long-term debt, related party,
in the balance sheet and will be amortized to interest expense over the life
of
the loan. The fair value ascribed to the warrants was estimated on the
commitment date using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 4.68%; expected life of 3 years;
expected volatility of 54%; and expected dividend yield of 0%. During the three
and twelve month periods ended December 31, 2006, the Company had amortized
to
interest expense approximately $70 of the loan discount. The balance due under
the long-term debt, related party, is shown net of the remaining $266
unamortized discount on the accompanying consolidated balance
sheet.
The
note
is due May 17, 2008, bears interest at the rate of 15% per annum payable
quarterly in cash. The warrants issued in exchange for the $600 have a term
of
three years and an exercise price of $0.51. The warrants include piggyback
registration rights for the underlying shares to participate in certain future
registrations of the Company’s common stock.
In
November 2004, the Company entered into an unsecured Note and Warrant Purchase
Agreement (the “2004 Purchase Agreement”) and a Registration Rights Agreement
(the “2004 Registration Rights Agreement, each dated as of October 28, 2004).
The Purchase Agreement did not require the Company to deliver registered shares
upon exercise of the warrants. However, the Company was required to file a
registration statement providing for the resale of the shares that are issuable
upon the conversion of the notes and the exercise of the warrants. The
registration statement was filed on December 22, 2004 and was declared effective
on January 26, 2005.
The
conversion right contained in the 2004 Purchase Agreement was analyzed under
paragraphs 6 and 12 of SFAS 133, “Accounting
for Derivative Instruments and Hedging Activities”
to
determine its proper classification in the Company’s balance sheet. The Company
also reviewed the liquidated damages clauses contained in the 2004 Registration
Rights Agreement that could potentially be payable if the registration statement
was not declared effective within 120 days of the closing, with reference to
SFAS 5. The Company determined that it was highly unlikely and not probable
that
the Company would incur liquidated damages. However, in light of EITF Issue
05-04 “The
Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
Subject to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock”,
the
Company effectively has accounted for the Registration Rights Agreement and
the
financial instrument under View C contained in EITF 05-04. The Company would
not
have recorded a liability at the inception of the debt, or at subsequent
reporting dates, or until the Registration Rights Agreement was declared
effective or thereafter, as our assessment of the likelihood that the
probability of actually paying the liquidated damages was zero. Therefore,
the
2004 Purchase Agreement was recorded as a debt and equity transaction with
no
recorded asset or liability associated with the conversion feature or liquidated
damages clause included in the 2004 Registration Rights Agreement.
The
2004
financing discussed above, a combination of debt and equity, closed November
2,
2004. The proceeds to the Company under the 2004 Purchase Agreement were
approximately $3,885, net of $310 in commissions and legal expenses. H.C.
Wainwright & Co., Inc. (“Wainwright”) acted as placement agent. As placement
agent for the Company, at closing Wainwright received $731 in commissions,
legal
fees and warrants. The commissions of approximately $285 and legal fees of
$25,
were paid in cash. The Company issued warrants to Wainwright to acquire 1,218
shares of the Company’s common stock. Of the warrants issued, 870 are
exercisable at $0.462 and 348 are exercisable at $0.508. The Company has
ascribed the value of $421 to the Wainwright warrants, which is recorded as
deferred financing costs in the balance sheet at December 31, 2004. The
remaining unamortized balance of the related deferred financing costs at
December 31, 2006 and December 31, 2005 was $75 and $221, respectively. The
fair
value ascribed to the Wainwright warrants was estimated on the commitment date
using the Black-Scholes pricing model with the following assumptions: risk-free
interest rate of 3.21%; expected life of 3 years; expected volatility of 100%;
and expected dividend yield of 0%. The Company has used the proceeds of the
financing for working capital.
21
Under
the
terms of the 2004 Purchase Agreement, the Company issued to certain accredited
investors convertible promissory notes in the aggregate principal amount of
$4,195 and warrants to acquire 3,632 shares of the Company’s common stock at an
exercise price of $0.508 per share. The notes accrue interest at the rate of
7%
per annum, payable semi-annually, and are convertible into shares of the
Company’s common stock at the rate of $0.462 per share. The Company has ascribed
a value of $982 to the investor warrants, which is recorded as a discount to
notes payable in the balance sheet. The fair value ascribed to the warrants
was
estimated on the commitment date using the Black-Scholes pricing model with
the
following assumptions: risk-free interest rate of 3.21%; expected life of 3
years; expected volatility of 100%; and expected dividend yield of 0%. In
addition to the fair value ascribed to the warrants, the Company has ascribed
$1,569 to the beneficial conversion feature in the convertible notes, which
is
recorded as a discount to notes payable in the balance sheet. The values
ascribed to the warrants and beneficial conversion feature follow the guidance
of the EITF Issue No. 98-5, “Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”,
and
ETIF Issue No. 00-27, “Application
of Issue No. 98-5 to Certain Convertible Instruments”
of
the
FASB’s Emerging Issues Task Force. The fair value of the warrants and beneficial
conversion feature is amortized to expense over the life of the convertible
notes or upon earlier conversion using the effective interest method. During
the
three and twelve month periods ended December 31, 2006, the Company had
amortized to interest expense approximately $93 and $591 respectively, of the
loan discount and deferred financing costs. The balance due under the
convertible notes is shown net of the remaining $228 unamortized discount on
the
accompanying consolidated balance sheet. There were no note conversions during
the three months ended December 31, 2006. During the twelve month period ended
December 31, 2006, investors converted $460 of the notes in exchange for 996
shares of the Company’s common stock. If the remaining aggregate principal
amount owing under the notes is converted, the Company will issue 2,993 shares
of its common stock. If the notes are not converted, all remaining principal
and
accrued but unpaid interest will be due October 28, 2007. The Company may pay
accrued interest in cash or in shares of Company common stock, issued at the
market price for the common stock calculated prior to the interest payment.
The
Company has not paid and does not intend to pay accrued interest with shares
of
its common stock.
The
warrants issued under the 2004 Purchase Agreement expire on October 28, 2009.
The Company may call the warrants if the Company’s common stock trades at $1.00
or above for 20 consecutive trading days after the date that is 20 days
following the effectiveness of a registration statement providing for the resale
of the shares issued upon the conversion of the notes and exercise of the
warrants. Wainwright will be paid approximately $28 in the aggregate if all
of
the investor warrants are exercised. The Company will receive additional
proceeds of approximately $1,845 if all of the investor warrants are
exercised.
The
Company believes it will be able to pay the remaining balance of the convertible
debt through cash generated by operations and or conversion of the debt to
equity by the Note holders. If the Company fails to generate enough revenues
and
operating profits to increase the value of its shares prompting conversion
or
generate enough cash to pay off the notes when due, the Company will need to
seek additional financing. If
the
Company is unable to get additional financing when needed, it may be required
to
materially change its operations, which could adversely affect our results
from
operations and shareholder value.
22
Contractual
Obligations
The
Company had the following material commitments as of December 31,
2006:
|
Payments
due by period
|
|||||||||||||||||||||||||
|
Contractual
obligations
|
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
|||||||||||||||||
|
Short-term
debt (1)
|
$
|
1,382
|
$
|
1,382
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||||
|
Long-term
debt related party (2)
|
600
|
-
|
600
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Operating
lease commitments (3)
|
1,252
|
196
|
264
|
272
|
280
|
240
|
-
|
||||||||||||||||||
|
Total
contractual cash obligations
|
$
|
3,234
|
$
|
1,
578
|
$
|
864
|
$
|
272
|
$
|
280
|
$
|
240
|
$
|
-
|
|||||||||||
| 1. |
Short-term
debt reported on the balance sheet is net of approximately $228 in
discounts representing the fair value of warrants issued to the investors
and the beneficial conversion feature associated with the convertible
notes.
|
| 2. |
Long-term
debt reported on the balance sheet is net of approximately $266 in
discounts representing the fair value of warrants issued to the
investors.
|
| 3. |
The
operating lease commenced on November 1, 2002. The lease was renegotiated
in December 2005 and extended for an additional 60 months. The base
rent
will increase approximately 3% per annum over the term of the lease,
which
expires on October 31, 2011.
|
As
of
December 31, 2006, the Company leased facilities in the United States and China
totaling approximately 10,100 square feet. The Company’s rental expense for the
years ended December 31, 2006, 2005, and 2004, was approximately $299, $401,
and
$443, respectively. In December 2005 the Company extended its existing lease
in
Redwood Shores an additional 60 months. In addition to the base rent in the
United States, the Company pays a percentage of the increase, if any, in
operating cost incurred by the landlord in such year over the operating expenses
incurred by the landlord in the base year. The Company believes the leased
offices in the United States and China will be adequate for the Company’s needs
over the term of the lease.
As
of
December 31, 2006, the Company's principal source of liquidity was its cash
and
cash equivalents of $727. With the exception of 2004, in each year since the
Company’s inception the Company has incurred losses. The Company believes that
its current cash and resources, together with the expected revenue levels,
will
provide sufficient funds for planned operations for at least the next twelve
months. However, if the Company is unable to generate adequate cash flow from
sales or if expenditures required to achieve the Company’s plans are greater
than expected the Company may need to obtain additional funds or reduce
discretionary spending. There can be no assurance that additional funds will
be
available when needed or, if available, will be on favorable terms or in the
amounts the Company may require. If adequate funds are not available when
needed, the Company may be required to delay, scale back or eliminate some
or
all of its marketing and development efforts or other operations, which could
have a material adverse effect on the Company's business, results of operations
and prospects. As a result of this uncertainty, our auditors have expressed
substantial doubt about our ability to continue as a going concern.
Interest
Rate Risk.
The
Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure
by
investing primarily in short-term securities. The Company did not enter into
any
short-term security investments during the twelve months ended December 31,
2006.
Foreign
Currency Risk.
The
Company operates a subsidiary in China and from time to time makes certain
capital equipment or other purchases denominated in foreign currencies. As
a
result, the Company's cash flows and earnings are exposed to fluctuations in
interest rates and foreign currency exchange rates. The Company attempts to
limit these exposures through operational strategies and generally has not
hedged currency exposures.
23
Future
Results and Stock Price Risk.
The
Company's stock price may be subject to significant volatility. The public
stock
markets have experienced significant volatility in stock prices in recent years.
The stock prices of technology companies have experienced particularly high
volatility, including, at times, severe price changes that are unrelated or
disproportionate to the operating performance of such companies. The trading
price of the Company's common stock could be subject to wide fluctuations in
response to, among other factors, quarter-to-quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, announcements of new strategic relationships by
the
Company or its competitors, general conditions in the computer industry or
the
global economy generally, or market volatility unrelated to the Company's
business and operating results.
Item
8. Consolidated Financial Statements and Supplementary
Data
The
Company's audited consolidated financial statements for the years ended
December
31,
2006, 2005, and 2004 begin on page F-1 of this Annual Report on Form 10-K,
and
is incorporated into this item by reference.
Item
9.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
None
Item
9A.
Controls
and Procedures
Disclosure
Controls
Under
the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to applicable rules under the Securities
Exchange Act of 1934, as amended, as of December 31, 2006. Based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that these disclosure controls and procedures are effective.
24
The
Company does not expect that its disclosure controls and procedures will prevent
all error and all fraud. A control procedure, no matter how well conceived
and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedures are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more
people, or by management override of the control. The Company considered these
limitations during the development of its disclosure controls and procedures,
and will continually reevaluate them to ensure they provide reasonable assurance
that such controls and procedures are effective.
Internal
Controls and Procedures
Management
is responsible for establishing and maintaining adequate internal controls
over
its financial reporting.
Under
the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its internal
controls and procedures pursuant to applicable rules under the Securities
Exchange Act of 1934, as amended. As of December 31, 2006, and based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that the internal controls and procedures are
effective.
There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the Company’s fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Item
9B.
Other
Information
None.
25
PART
III
Item
10.
Directors
and Executive Officers of the Registrant
Directors
The
following table sets forth certain information concerning the Directors:
|
Name
|
Age
|
Year
First Elected
or
Appointed
|
|
Guido
D. DiGregorio
|
68
|
1997
|
|
Louis
P. Panetta (1), (2), (3), (4)
|
57
|
2000
|
|
C.
B. Sung (1), (2), (3), (4)
|
81
|
1986
|
|
David
E. Welch (1), (4)
|
60
|
2004
|
1. Member
of
the Audit Committee (Chairman David E. Welch)
2. Member
of
the Finance Committee (Chairman C. B. Sung)
3. Member
of
the Compensation Committee (Chairman Louis P. Panetta)
4. Member
of
the Nominating Committee (Chairman C. B. Sung)
The
business experience of each of the directors for at least the past five years
includes the following:
Guido
D. DiGregorio was
elected Chairman of the Board in February 2002, Chief Executive Officer in
June
1999 and President & Chief Operating Officer November 1997. Mr. DiGregorio
began
his
career with General Electric, from 1966 to 1986, where after successive
promotions in product development, sales, strategic marketing and venture
management assignments, he rose to the position of General Manager of an
industrial automation business. Prior to joining CIC, Mr. DiGregorio was
recruited as CEO of several companies to position those businesses for sustained
sales and earnings growth. Those companies include Exide Electronics, Maxitron
Corp., Proxim and Display Technologies Inc.
Louis
P. Panetta was
elected a director of the Company in October 2000. Mr. Panetta is currently
the
principal of Louis Panetta Consulting, a management consulting firm, and also
teaches at the graduate school of business at California State University,
Monterey Bay. He served as Vice
President-Client Services for Valley Oak Systems from September 2003 to December
2003. From
November 2001 to September 2003 Mr. Panetta was a member of the Board of
Directors of Active Link. He was Vice President of Marketing and Investor
Relations with Mobility Concepts, Inc. (a wireless Systems Integrator), a
subsidiary of Active Link Communications from February 2001 to April 2003.
He
was President and Chief Operating Officer of PortableLife.com (eCommerce
products provider) from September 1999 to October 2000 and President and Chief
Executive Officer of Fujitsu Personal Systems (a computer manufacturer) from
December 1992 to September 1999. From 1995 to 1999, Mr. Panetta served on the
Board of Directors of Fujitsu Personal Systems. Mr. Panetta prior positions
include Vice
President-Sales for Novell, Inc. (the leading supplier of LAN network software)
and Director-Product Marketing for Grid Systems (a leading supplier of Laptop
& Pen Based Computers).
C.B.
Sung
was
elected a director of the Company in 1986. Mr. Sung has been the Chairman and
Chief Executive Officer of Unison Group, Inc. (a multi-national corporation
involved in manufacturing, computer systems, international investment and trade)
since 1986 and Unison Pacific Corporation since 1979. Unison Group manages
investment funds specializing in China-related businesses and is a pioneer
in
investing in China. Mr. Sung’s background includes over twenty years in various
US high tech operating assignments during which time he rose to the position
of
Corporate Vice President-Engineering & Development for the Bendix
Corporation. Mr. Sung was recently acknowledged and honored for his
contributions by his native China (PRC) with a documentary produced by China’s
National TV focusing on his life and career as an entrepreneurial scholar,
successful US hi tech executive and for his pioneering and continuing work
in
fostering capital investment and economic growth between the US and China.
He
has been a member of the Board of Directors of Capital Investment of Hawaii,
Inc., since 1985, and serves on the Board of Directors of several private
companies and non-profit organizations.
26
David
E. Welch was
elected a director in March 2004 and serves as the financial expert on the
Audit
Committee. From July 2002 to present Mr. Welch has been the principal of David
E. Welch Consulting, a financial consulting firm, Mr.
Welch
has also been Vice President and Chief Financial Officer of American Millennium
Corporation, Inc., a provider of satellite based asset tracking and reporting
equipment, from April 2004 to present.
Mr.
Welch was Vice President and Chief Financial Officer of Active Link
Communications, a manufacturer of telecommunications equipment, from 1999 to
2002. Mr. Welch has held positions as Director of Management Information Systems
and Chief Information Officer with Micromedex, Inc. and Language Management
International from 1995 through 1998. Mr. Welch is a member of the Board of
Directors of Security With Advanced Technology, Inc. and AspenBio, Inc. Mr.
Welch is a Certified Public Accountant licensed in the state of
Colorado.
EXECUTIVE
OFFICERS
The
following table sets forth the name and age of each executive officer of the
Company, or named executive officers, and all positions and offices of the
Company presently held by each of them.
|
Name
|
Age
|
Positions
Currently Held
|
||
|
Guido
D. DiGregorio
|
68
|
Chairman
of the Board,
Chief
Executive Officer and President
|
||
|
Francis
V. Dane
|
55
|
Chief
Legal Officer,
Secretary
and Chief Financial Officer
|
||
|
Russel
L. Davis
|
42
|
Chief
Technology Officer & Vice President, Product Development
|
The
business experience of each of the executive officers for at least the past
five
years includes the following:
Guido
D. DiGregorio
- see
above under the heading “Directors and Executive Officers of the Company -
Directors.”
Francis
V. Dane
was
appointed the Company's Secretary in February of 2002, its Chief Financial
Officer in October 2001, its Human Resources Executive in September 1998 and
he
assumed the position of Chief Legal Officer in December of 1997. From 1991
to
1997 he served as a Vice President and Secretary of the Company, and from 1988
to 1992 as its Chief Financial Officer and Treasurer. Since July of 2000, Mr.
Dane has also been the Secretary and Treasurer of Genyous Biomed International
Inc. (including its predecessors and affiliates) a company in the
biopharmaceutical field focused on the development of medical products and
services for the prevention, detection and treatment of chronic illnesses such
as cancer. From October 2000 to April 2004, Mr. Dane served as a director of
Perceptronix Medical, Inc. and SpectraVu Medical Inc., two companies focused
on
developing improved methods for the early detection of cancer. From October
2000
to June 2003 Mr. Dane was a director of CPC Cancer Prevention Centers Inc.,
a
company focused on developing a comprehensive cancer prevention program based
upon the detection of early stage, non-invasive cancer. Prior to this Mr. Dane
spent over a decade with PricewaterhouseCoopers, his last position was that
of
Senior Manager, Entrepreneurial Services Division. Mr. Dane is a member of
the
State Bar of California and has earned a CPA certificate from the states of
Connecticut and California.
Russel
L. Davis rejoined
the Company as Chief Product Officer in August of 2005 and now serves as its
Chief Technology Officer and Vice President of Product Development. He served
as
CTO of SiVault Systems, from November of 2004 to August of 2005. Mr. Davis
originally joined CIC in May of 1997 and was appointed Vice President of Product
Development & Support in October of 1998. Prior to this, Mr. Davis served in
a number of technical management roles including; Director of Service for Everex
Systems, Inc., a Silicon Valley based PC manufacturer and member of the Formosa
Plastics Group, managing regional field engineering operations for Centel
Information Systems, which was acquired by Sprint. He also served in the United
States Navy supervising shipboard Electronic Warfare operations.
27
CODE
OF BUSINESS CONDUCT AND ETHICS
We
have
adopted a written code of business conduct and ethics, known as our Code of
Business Conduct and Ethics, which applies to all of our directors, officers,
and employees, including our principal executive officer, our principal
financial and accounting officer, and our Chief product officer. A copy of
the
Code of Business Conduct and Ethics is posted on the Company’s web site, at
www.cic.com.
Item
11.
Executive
Compensation
COMPENSATION
DISCUSSION AND ANALYSIS
The
compensation committee’s philosophy is based upon the belief that the success of
the Company requires the development of, and adherence to, an overall business
strategy which achieves the objective of market leadership with the resultant
financial results that maximize the Company’s value for the benefit of its
shareholders. The achievement of market leadership in the emerging
businesses that CIC is addressing requires effective sales coverage of
target markets and accounts, developing and maintaining product differentiation
consistent with achieving market share leadership within those target markets
and highly coordinated and motivated efforts of all employees working as a
team to achieve results. In essence, the major objective for the Company,
and the underlying basis for its compensation philosophy, is based on
achievement of sustained earnings growth, which, for an emerging business,
requires achieving and maintaining market share leadership; and the added
objective of achieving and maintaining that leadership position with minimum
shareholder dilution.
The
primary goals of the compensation committee of the board of directors with
respect to its philosophy and executive compensation are to attract, motivate,
reward and retain the most talented executives possible and to link annual
and
long-term compensation incentives to the achievement of the Company objectives
and performance. To achieve these goals, the compensation committee and the
board have implemented and intend to maintain compensation policies that link
a
substantial portion of executives’ overall compensation to key strategic,
operational and financial goals such as capturing
market share, revenue,
timely
product introductions, technology validation, expense and cash control,
preservation of and increases in stockholder value,
and
other non-financial goals that the board may from time to time deem important.
The compensation committee and the board evaluate individual executive
performance with a goal of setting compensation at levels the board believes,
based on the general business and industry knowledge and experience of the
directors, are comparable with executives in other companies of similar size
and
stage of development operating in the eCommerce and the eSignature software
markets, while taking into account our relative performance and our own
strategic goals.
The
base
salaries of the Company’s executive officers are established by the board of
directors as part of an annual compensation review cycle,
which
includes determining the operating metrics and non-financial elements used
to
measure performance and progress. This review is based on our knowledge of
how
other, biometric/signature software companies and related emerging businesses
measure their executive performance and on the key operating metrics that are
critical in the effort to increase the value of the Company. The granting of
stock options is also considered as part of this annual review process. In
performing its review the board considers recommendations made by the Company’s
Chief Executive Officer regarding other named executives.
Mr.
DiGregorio, the Company’s Chief Executive Officer, President and Chairman
currently has a salary of $285,000. As of January 2007, $85,000 is being
deferred in order to ease cash constraints on the Company. This level of
compensation falls within peer ranges according to information obtained from
PayScale and SalarySource in December 2006. Mr. DiGregorio’s salary was brought
to its current level in September of 2005, when it was increased from $250,000,
representing the first increase in his salary since 2002 when he assumed the
positions of Chairman and CEO in addition to his position as President. This
consolidation of positions eliminated approximately $150,000 in annual salary
expense that the previous Chairman had been receiving. However, this saving,
although significant, was not the driving factor in determining Mr. DiGregorio’s
salary. The September 2005 evaluation and the 2006 evaluation (during which
Mr.
DiGregorio declined any increase, again, in order to ease cash constraints)
by
the Compensation Committee reflects, Mr. DiGregorio’s leadership in the face of
adversity, which has resulted in CIC being the recognized leader in the
developing eSignature market, most recently recognized in an industry analyst
report. by Frost and Sullivan in its North American Biometrics Markets -
Investment Analysis and Growth Opportunities Report, 2005. This recognition
was
a follow-on to the 2003 Frost & Sullivan Growth Strategy Leadership Award
which CIC received for demonstrating outstanding ability to expand despite
difficult market conditions.
28
When
Mr.
DiGregorio joined the Company in late 1997 he initially implemented a strategy
focused on natural input/text entry embeds on mobile computing devices and
retail sales through our website, CIC.com. This strategy resulted in an increase
in the per share price of CIC stock in 2000, from under $1.00 to nearly $13.00.
However,
by early 2001, handheld device shipments of both PDAs and touch screen enabled
phones began a sharp decline, driven by the economic downturn, negatively
impacted by the dot com bubble burst, a recession, and the geopolitical
environment. In the face of this adversity, the Company rapidly refocused and
identified eSignature as a viable growth opportunity and continues to focus
on
that developing market.
Whereas
in established markets the CEO is typically evaluated, to a large extent, on
his
ability to deliver increasing profitability, the board believes that the better
measure in a developing market is the achievement and maintenance of market
and
product leadership that positions the Company for significant increases in
shareholder value as the market matures and enters take-off. As stated above,
despite significant adverse market conditions, CIC is now the recognized leader
in the developing eSignature market, including product leadership through three
generations of products.
Mr.
Dane’s current salary is $160,000. In December of 1997 Mr. Dane became the
Company’s Chief Legal Officer. In October of 2001, upon the resignation of the
Company’s then Chief Financial Officer (“CFO”), Mr. Dane assumed the position of
Acting CFO at no additional salary. This consolidation of positions eliminated
the former CFO’s salary of $125,000 and resulted in Mr. Dane’s salary being
increased from $84,000 to $130,000 in July of 2002 when he accepted the position
of CFO in addition to his position of Chief Legal Officer. Mr. Dane’s salary was
increased to its current level in September of 2005. This increase was based
upon the same factors taken into account in determining the CEO’s increase at
that time, as discussed above.
Mr.
Davis
first joined the Company in May 1997 and has been continuously employed by
the
Company since that time except for the period from November 2004 through August
2005. In August of 2005 he rejoined the Company as its Chief Technology Officer
at his current salary of $165,000. That salary is considered to be at a
competitive level for the position of Chief Technology Officer and appropriate
given Mr. Davis’ knowledge of the Company, his past contributions and
expectations as to his future contributions.
All
of
the Company’s officers are evaluated under the same criteria as they relate to
specific duties and functional responsibilities in achieving the overall Company
objectives.
We
have
not retained a compensation consultant to review our policies and procedures
with respect to executive compensation.
The
board
of directors may, at its discretion, increase or decrease compensation. Any
increase or decrease would be based upon the cash constraints and the factors
discussed above.
There
are
no agreements with any executive officers entitling them to compensation upon
termination, change in control or any other reason.
The
Company does not have any guidelines or policies with respect to stock ownership
by its management, except for its Insider Trading Policy..
The
executive officers of the Company play no role in determining their own
compensation, or the compensation of other named executive officers, except
for
recommendations that the Chief Executive Officer may from time to time make
to
the Compensation committee.
29
Elements
of Compensation
Executive
compensation consists of the following elements. The compensation committee
and
board determine the portion of compensation allocated to each element for each
individual named executive officer:
Base
Salary.
Base
salaries for the Company’s executives are established based on the scope of
their responsibilities, taking into account competitive market compensation
for
similar positions, as well as seniority of the individual, the Company’s ability
to replace the individual and other primarily judgmental factors deemed relevant
by the board. Generally, we believe that executive base salaries should be
targeted near the median of the range of salaries for executives in similar
positions with similar responsibilities at comparable companies, in line with
our compensation philosophy. Base salaries are reviewed annually by the
compensation committee and the board, and adjusted from time to time pursuant
to
such review and or at other appropriate times, to realign salaries with market
levels after taking into account individual responsibilities, performance and
experience. For 2007, this review will occur during the second quarter of 2007
as part of our annual performance review process.
Annual
Bonus. The
Company does not have an annual bonus plan and currently has no plans to
implement one.
Long-Term
Incentive Program. The
Committee believes that the use of stock options as a means of compensation
provides an incentive for executives and aligns their interests with those
of
the stockholders. All employees, officers and directors are eligible to receive
stock options under the Company's1999 Stock Option Plan. Additionally from
time
to time the board grants non-qualified options outside of the 1999 Stock Option
Plan, referred to as Individual Plans (the “Individual Plans”). The terms of
grants under the Individual Plans are typically identical to grants made under
the 1999 Stock Option Plan and the stock option agreements under the Individual
Plans are typically in the same form as those used for options granted under
the
1999 Stock Option Plan. The Company does not grant or issue restricted stock
or
other equity-based incentives.
The
long-term, performance-based compensation of executive officers takes the form
of option awards under the Company’s 1999 Stock Option Plan and under Individual
Plans, which are designed to align a significant portion of the executive
compensation program with long-term shareholder interests. The Compensation
Committee believes that equity-based compensation ensures that the Company’s
executive officers have a continuing stake in the long-term success of the
Company. All options granted by the Company are granted with an exercise price
equal to or above the market price of the Company’s Common Stock on the date of
grant and, accordingly, will only have value if the Company’s stock price
increases subsequent to the dates of grants and the options are vested and
exercised by the respective officers. In granting options under the plans,
the
Compensation Committee generally takes into account each executive’s
responsibilities and performance, relative position in the Company, past grants,
and approximate grants to individuals in similar positions for companies of
comparable size in comparable industries.
Other
Compensation.
The
Company’s executive officers do not have employment agreements. As with other
employees of the Company, executive officers are employed on an “at will”
basis.
30
Summary
Compensation Table
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
(2)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
And
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|
Guido
DiGregorio
President
& CEO
|
2006
2005
2004
|
285,000(1)
322,875(1)
250,334(1)
|
−
−
−
|
−
−
−
|
−
502,732
−
|
−
−
−
|
−
−
−
|
9,072
8,885
9,037
|
294,072
834,492
268,408
|
|
Frank
Dane
CLO
& CFO
|
2006
2005
2004
|
160,000
146,643
138,125
|
−
−
−
|
−
−
−
|
−
42,567
39,390
|
−
−
−
|
−
−
−
|
−
−
−
|
160,000
189,210
177,515
|
|
Russel
Davis
CTO
|
2006
2005(3)
|
165,000
48,303
|
−
−
|
−
−
|
−
225,425
|
−
−
|
−
−
|
−
−
|
166,179
273,728
|
| (1) |
Mr.
DiGregorio's salary was increased in February 2002 to $250,000. In
2003
and 2004, Mr. DiGregorio voluntarily deferred approximately $70,000
in
salary payments to ease cash flow requirements. Mr. DiGregorio was
paid
his deferred salary from 2003 and 2004 of approximately $70,000 and
$70,000 in
January 2004 and 2005, respectively. In September of 2005, Mr.
DiGregorio’s salary was increased to $285,000. As of January 2007, $85,000
of his 2007 salary is being deferred in order to ease cash constraints
on
the Company.
|
|
(2)
|
On
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based
Payment”
Share-based compensation expense is based on the estimated grant
date fair
value of the portion of share-based payment awards that are ultimately
expected to vest during the period. The grant date fair value of
stock-based awards to officers, employees and directors is calculated
using the Black-Scholes option pricing model. Mr. DiGregorio has
1,950,000
options that are vested and exercisable within sixty days of December
31,
2006. Mr. Dane has 410,623 options that are vested and exercisable
within
sixty days of December 31, 2006. Mr. Davis has 500,000 options that
are
vested and exercisable within sixty days of December 31, 2006. In
accordance with applicable regulations, the value of such options
does not
reflect an estimate for features related to service-based vesting
used by
the Company for financial statement purposes(See footnote 6 in the
Notes
to Consolidated Financial
Statements)
|
(3) Mr.
Davis
commenced his employment with the Company on August 31, 2005.
There
are
no employment agreements with any named executives, either written or oral.
All
employment is at will.
Grants
of Plan Based Awards in 2006
The
board
of directors approves awards under the Company’s 1999 Stock Option Plan and
awards that are outside of the 1999 Stock Option Plan (“Individual Plans’).
There were no awards made to our named executive officers under our 1999 Stock
Option Plan or otherwise during fiscal year 2006 as the boards review indicated
that the number of options held by each named executive officer at that time
were adequate to satisfy the long term goal underlying the granting of options
in prior years.
31
The
1999
Option Plan is administered by the board of directors or a stock option
committee of the board. The board or any such committee has the authority to
determine the terms of the options granted, including the exercise price, number
of shares subject to each option, vesting provisions, if any, and the form
of
consideration payable upon exercise. The exercise price of incentive options
must not be less than the fair market value of the common stock valued at the
date of grant and the exercise price for non-qualified options must be at least
85% of the fair market value of the common stock valued at the date of grant.
The expiration date of options is determined by the board or committee, but
options cannot expire later than ten years from the date of grant, and in the
case of incentive options granted to stockholders owning at least 10% of the
Company’s stock, cannot expire later than five years from the date of grant.
Options have typically been granted with an expiration date seven years after
the date of grant.
If
an
employee to whom an award has been granted under the 1999 Option Plan dies
while
providing services to the Company, retires from employment with the Company
after attaining his retirement date, or terminates employment with the Company
as a result of permanent and total disability, the restrictions then applicable
to such award shall continue as if the employee had not terminated employment
and such award shall thereafter be exercisable, in whole or in part by the
person to whom it was granted (or by his duly appointed, qualified, and acting
personal representative, his estate, or by a person who acquired the right
to
exercise such option by bequest or inheritance from the grantee), in the manner
set forth in the award, at any time within the remaining term of such award.
Options not vested at the time of death, retirement, termination or disability
cease to vest. Except as provided in the preceding paragraph, generally if
a
person to whom an option has been granted under the 1999 Option Plan ceases
to
be an employee of the Company, such options vested at the date of termination
shall continue to be exercisable to the same extent that it was exercisable
on
the last day on which such person was an employee for a period of 90 days
thereafter, or for such longer period as may be determined by the Committee,
whereupon such option shall terminate and shall not thereafter be
exercisable.
The
board
has the authority to amend or terminate the 1999 Option Plan, provided that
such
action does not impair the rights of any optionee under any option previously
granted under the 1999 Option Plan, without the consent of such
optionee.
Incentive
and non-qualified options under the 1999 Option Plan may be granted to
employees, officers, and consultants of the Company. There are 4,000,000 shares
of common stock authorized for issuance under the 1999 Option Plan. The options
generally have a seven year life and vest quarterly over three years. As of
December 31, 2006, options to acquire 3,629,000 shares of common stock were
outstanding under the 1999 Option Plan and options to acquire 2,801,000 shares
of common stock were exercisable with a weighted average exercise price of
$0.75
per share. At December 31, 2006, there were 190,000 shares available for future
grants under the 1999 Option Plan.
The
Company has issued non-plan options to its employees and directors pursuant
to
Individual Plans.
As
of
December 31, 2006, options to acquire 2,264,000 shares under such Individual
Plans were outstanding and exercisable with a weighted average exercise price
of
$0.73 per share.
32
Outstanding
Equity Awards at Fiscal 2006 Year End
The
following table summarizes the outstanding equity award holdings held by our
named executive officers.
|
Name
and
Principal
Position
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($) (4)
|
Option
Expiration
Date
(5)
|
|
|
Guido
DiGregorio, President
& CEO (1)
|
250,000
425,000
1,275,000
|
−
−
−
|
$ 0.79
$ 0.39
$ 0.75
|
2009
2012
2012
|
|
|
Frank
Dane, CLO
& CFO (2)
|
100,000
100,000
66,680
35,985
107,958
|
−
−
33,320
−
−
|
$ 0.79
$ 0.33
$ 0.55
$ 0.39
$ 0.75
|
2009
2010
2011
2012
2012
|
|
|
Russel
Davis, CIO
(3)
|
125,000
375,000
|
−
−
|
$ 0.57
$ 0.75
|
2012
2012
|
(1) Mr.
DiGregorio options vest as follows: 250,000 options vested prorata quarterly
over three years; 425,000 options vested on the date of grant; and 1,275,000
options vested on the date of grant.
(2) Mr.
Danes
options vest as follows: 100,000 options vested prorata quarterly over three
years; 100,000 options vested prorata quarterly over three years; 100,000
options vest prorata quarterly over three years; 35,985 options vested on the
date of grant; and 107,958 options vested on the date of grant.
(3) Mr.
Davis’s options vest as follows: 125,000 options vested on the date of grant;
and 375,000 options vested on the date of grant.
(4) Mr.
DiGregorio holds options to acquire 250,000 shares granted under the 1999 Option
Plan and options to acquire 1,700,000 shares under Individual Plans. Mr. Dane
holds 300,000 options to acquire shares granted under the 1999 Option Plan
and
options to acquire 143,943 shares granted under Individual Plans. Mr. Davis
holds options to acquire 500,000 shares granted under the 1999 Option
Plan
(5) All
options granted will expire seven years from the date of grant, subject to
continuous employment with the Company.
Option
Exercises and Stock Vested
In
2006,
no stock options were exercised and 25,000 options to purchase stock granted
to
Mr. Dane vested during the period. The
Company does not grant or issue restricted stock or other equity-based
incentives.
Pension
Benefits
None
of
the Company’s named executive officers participate in or have account balances
in qualified or non-qualified defined benefit plans sponsored by the
Company.
33
Nonqualified
Deferred Compensation
None
of
the named executives participate in or have account balances in non-qualified
defined contribution plans or other deferred compensation plans maintained
by
the Company, except the Chief Executive Officer who, as stated above, began
deferring a portion of his salary in January of 2007 in order to ease cash
constraints on the Company. The compensation committee, which is comprised
solely of “outside directors” as defined for purposes of Section 162(m) of the
Internal Revenue Code, may elect to provide our officers and other employees
with non-qualified defined contribution or
deferred compensation benefits if the compensation committee determines that
doing so is in our best interests.
Potential
Payments Upon Termination or Change in Control
There
are
no agreements with any named executive officers entitling them to compensation
upon termination, change in control or any other reason.
Director
Compensation
For
their
services as directors of the Company, all non-employee directors receive a
fee
of $1,000 for each board of directors meeting attended and all directors are
reimbursed for all reasonable out-of-pocket expenses incurred in connection
with
attending such meetings. First time directors receive options to acquire 50,000
shares of the Company’s common stock upon joining the board and options to
acquire 25,000 shares each time they are elected to the board thereafter. The
exercise price of all options granted to directors are equal to the market
closing price on the date of grant, vest immediately and have a seven year
life.
In June 2006, Louis Panetta, C. B. Sung and David Welch were each granted
immediately exercisable non-qualified options to purchase 25,000 shares of
common stock at an exercise price of $0.40 per share (the then current market
price of the Company’s stock), which options expire on June 27, 2013.
The
following table sets forth a summary of the compensation paid to our directors
during 2006.
|
Name
|
Fees
Earned
Or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|
Louis
P. Panetta (1)
|
$ 3,000
|
$ −
|
$ 7,072
|
$
−
|
$
−
|
$
−
|
$ 10,072
|
|
C.
B. Sung (2)
|
$ 2,000
|
$
−
|
$ 7,072
|
$
−
|
$ −
|
$
−
|
$ 9,072
|
|
David
E. Welch(3)
|
$ 3,000
|
$
−
|
$ 7,072
|
$
−
|
$
−
|
$
−
|
$ 10,072
|
1.
Mr.
Panetta holds options to acquire 228,125 shares of stock at December 31, 2006,
all of which were vested.
2.
Mr.
Sung holds options to acquire 226,190 shares of stock at December 31, 2006,
all
of which were vested.
3.
Mr.
Welch holds options to acquire 125,000 shares of stock at December 31, 2006,
all
of which were vested.
34
Employee
Benefit Plans
The
Company’s employees, including its executive officers, are entitled to various
employee benefits. These benefits include medical and dental care plans,
flexible spending accounts for healthcare; life and accidental death and
dismemberment, long -term disability insurance, and a 401(k) plan.
401(k)
Plan
The
Company sponsors a 401(k) defined contribution plan covering all employees,
including the named executives, meeting certain eligibility requirements.
Contributions made by the Company are determined annually by the Board of
Directors. To date, the Company has made no contributions to this
plan.
Indemnification
of Officers and Directors
The
Company’s certificate of incorporation and bylaws allow it to indemnify its
officers and directors to the fullest extent permitted by the Delaware General
Corporation Law. It also contains provisions that provide for the
indemnification of directors of the Company for third party actions and actions
by or in the right of the Company that mirror Section 145 of the Delaware
General Corporation Law.
In
addition, the Company’s certificate of incorporation states that it shall have
the power to purchase and maintain insurance on behalf of any person who is
or
was a director, officer or employee of the Company. We currently have and intend
to maintain director and officer liability insurance, if available on reasonable
terms.
Item
12.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information with respect to the beneficial ownership
of (i) any person known to be the beneficial owner of more than 5% of any
class of voting securities of the Company, (ii) each director and director
nominee of the Company, (iii) each of the current executive officers of the
Company named in the Summary Compensation Table under the heading "Executive
Compensation" and (iv) all directors and executive officers of the Company
as a group.
|
Common
Stock
|
|||
|
Name
of Beneficial Owner
|
Number
of
Shares
|
Percent
of
Class
|
|
|
Guido
DiGregorio (1)
|
2,073,900
|
1.93%
|
|
|
C.
B. Sung (2)
|
1,797,610
|
1.67%
|
|
|
Louis
P. Panetta (3)
|
228,125
|
*
|
|
|
David
E. Welch, (4)
|
125,000
|
*
|
|
|
Francis
V. Dane (5)
|
419,165
|
*
|
|
|
Russel
L. Davis (6)
|
500,000
|
*
|
|
|
All
directors and executive officers as a group (6 persons)
|
5,143,800
|
4.78%
|
|
|
5%
Shareholder
|
|||
|
Michael
W. Engmann (7)
|
8,033,877
|
7.46%
|
|
___________
|
*
|
Less
than 1%.
|
| (1) |
Represents
(a) 123,900 shares held by Mr. DiGregorio and (b) 1,950,000 shares,
issuable upon the exercise of stock options exercisable within 60
days
hereof. The business address of Mr. DiGregorio is 275 Shoreline
Drive, Suite 500, Redwood Shores, California
94065.
|
| (2) |
Includes
(a) 1,568,051 shares held by the Sung Family Trust, of which Mr. Sung
is a trustee, (b) 3,369 shares held by the Sung-Kwok Foundation,
of which
Mr. Sung is the Chairman, and (c) 226,190 shares of common stock
issuable
upon the exercise of stock options, exercisable within 60 days hereof.
Mr.
Sung may be deemed to beneficially own the shares held by the Sung
Family
Trust and the Sung-Kwok Foundation. The business address of Mr. Sung
is, UNISON Group, 1001 Bayhill Dr., 2nd
Floor, San Bruno, California 94066. See
“Certain Relationships and Related
Transactions.”
|
35
| (3) |
Represents
228,125 shares issuable upon the exercise of options exercisable
within 60
days hereof. Mr. Panetta’s business address is 827 Via Mirada,
Monterey, California 93940. See
“Certain Relationships and Related
Transactions.”
|
| (4) |
Represents
125,000 shares issuable upon the exercise of stock options exercisable
within 60 days hereof. The business address of Mr. Welch is 1729
East
Otero Avenue, Littleton, CO 80122. See “Certain Relationships and Related
Transactions.”
|
| (5) |
Represents
(a) 212 shares held by Mr. Dane and (b) 418,953 shares issuable upon
the
exercise of stock options exercisable within 60 days hereof. The
business
address of Mr. Dane is 275 Shoreline Drive, Suite 500, Redwood
Shores, California 94065.
|
| (6) |
Represents
500,000 shares issuable upon the exercise of stock options within
60 days
hereof. The business address of Mr. Davis is 275 Shoreline Drive,
Suite 500, Redwood Shores, California 94065.
|
| (7) |
Represents
8,033,877 shares beneficially owned by Mr. Engmann, of which 3,360,311
are
held by MDNH
Partners, L.P. of which Mr. Engmann is a partner. Such
shares were reported on Schedule 13G dated December 31, 2006.
In
addition, Mr. Engmann was issued warrants to purchase 2,333,250 shares
of
the Company’s common stock at $0.51 per share. Such warrants were issued
in connection with a note in the amount of $600,000 (See note 5 to
the
Consolidated Financial Statements). The warrants first become exercisable
on June 30, 2007.
|
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), requires the Company's officers, directors and persons who own more than
ten percent of a registered class of the Company's equity securities to file
certain reports with the Securities and Exchange Commission (the "SEC")
regarding ownership of, and transactions in, the Company's securities. These
officers, directors and stockholders are also required by SEC rules to furnish
the Company with copies of all Section 16(a) reports that are filed with
the SEC. Based solely on a review of copies of such forms received by the
Company and written representations received by the Company from certain
reporting persons, the Company believes that for the year ended December 31,
2006 all Section 16(a) reports required to be filed by the Company's executive
officers, directors and 10% stockholders were filed on a timely
basis.
Item
13.
Certain
Relationships and Related Transactions
Michael
W. Engmann is an approximate 7% shareholder in the Company. In
August
2006, the Company entered into a Note and Warrant Purchase Agreement and a
Registration Rights Agreement, each dated as of August 10, 2006. The Company
secured the right to borrow up to six hundred thousand dollars ($600,000).
In
November the Company borrowed the full amount of $600,000, of which $450,000
pertains to Mr. Engmann and the remaining $150,000 to an unrelated third party.
The Company issued warrants to purchase 3,111,000 of the Company’s common stock
related to the Note and Warrant Purchase Agreement. The note is due May 17,
2008
and bears interest at the rate of 15% per annum payable quarterly in cash.
The
warrants will have a term of three years and an exercise price of $0.51. The
warrants include piggyback registration rights for the underlying shares to
participate in certain future registrations of the Company’s common stock. The
Company paid approximately $11,000 in interest as of December 31, 2006 related
to the Note.
Item
14.
Principal
Accounting Fees and Services
On
September 6, 2006, the Company’s Audit Committee terminated the Company’s
relationship with its former principal accountant, Stonefield Josephson, Inc.
(“Stonefield”) of San Francisco, California and engaged GHP Horwath, P.C.
(“GHP”) of Denver, Colorado, as its principal accountants.
36
During
the fiscal year ended December 31, 2005 and the subsequent interim periods
until
the change, there were no disagreements with Stonefield on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction
of
Stonefield, would have caused Stonefield to make reference in connection with
its report to the subject matter of the disagreement, and Stonefield has not
advised the Company of any reportable events as defined in Item 304(a)(1)(v)
of
Regulation S-K.
Stonefield's
report as of and for the year ended December 31, 2005, did not contain any
adverse opinion or disclaimer of opinion, nor was it qualified or modified
as to
audit scope or accounting principles,except that, Stonefield's report contained
an explanitory paragraph that raised substantial doubt about the Company's
ability to continue as a going concern.
During
the year ended December 31, 2005, and through September 6, 2006, the Company
did
not consult with GHP regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
The
aggregate fees billed for professional services by Stonefield Josephson, Inc.
in
2006 were approximately $217,000 and in 2005 were $183,000 for the following
services:
Audit
Fees: Stonefield Josephson, Inc.’s fees in connection with its quarterly reviews
and the year end audit for 2005 were approximately $169,000 in 2006, which
represented approximately 63% of the aggregate fees billed by Stonefield
Josephson, Inc. in 2006.
Audit-Related
Fees. Stonefield Josephson, Inc. did not bill the Company for any assurance
and
related work in fiscal year 2006.
Tax
fees:
Fees in connection with the 2005 federal and state tax returns were
approximately $7,000 or 2% of the aggregate fees paid 2006 for professional
services by Stonefield Josephson, Inc.
Financial
Information Systems Design and Implementation Fees: There were no fees incurred
in fiscal year 2006 for financial information systems design and implementation
services.
All
other
Fees: Fees
for
all other services provided totaled approximately $23,000 or 11% of the
aggregate fees billed by Stonefield
Josephson, Inc. in 2006 and
related primarily to review of the Company’s Form S-8 and other SEC related
maters.
The
aggregate fees that are expected to be billed for professional services by
GHP
Horwath P.C. are approximately $109,000. GHP Horwath, P.C.’s fees will be in
connection with the Company’s 2006 year end audit, the 2006 quarterly reviews
and the 2006 tax returns. The audit fees are expected to be $102,000 and the
tax
fees are expected to be $7,000.
Pre-Approval
Policies. It is the policy of the Company not to enter into any agreement with
its auditors to provide any non-audit services unless (a) the agreement is
approved in advance by the Audit Committee or (b) (i) the aggregate amount
of
all such non-audit services constitutes no more than 5% of the total amount
the
Company pays to the auditors during the fiscal year in which such services
are
rendered, (ii) such services were not recognized by the Company as constituting
non-audit services at the time of the engagement of the non-audit services
and
(iii) such services are promptly brought to the attention of the Audit Committee
and prior to the completion of the audit are approved by the Audit Committee
or
by one or more members of the Audit Committee who are members of the board of
directors to whom authority to grant such approvals has been delegated by the
Audit Committee. The Audit Committee will not approve any agreement in advance
for non-audit services unless (x) the procedures and policies are detailed
in
advance as to such services, (y) the Audit Committee is informed of such
services prior to commencement and (z) such policies and procedures do not
constitute delegation of the Audit Committee’s responsibilities to management
under the Securities Exchange Act of 1934, as amended.
The
Audit
Committee has considered whether the provision of non-audit services has
impaired the independence of Stonefield Josephson, Inc. or GHP Horwath, P.
C.
and has concluded that Stonefield Josephson, Inc. is independent under
applicable SEC and Nasdaq rules and regulations.
37
PART
IV
Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
Index
to Financial Statements
|
Page
|
||
|
(a)(1)
|
Financial
Statements
|
|
|
Report
of GHP Horwath, P.C., Independent Registered Public Accounting
Firm
|
F-1
|
|
|
Report
of Stonefield Josephson, Inc., Independent Registered Public Accounting
Firm
|
F-2
|
|
|
Consolidated
Balance Sheets at December 31, 2006 and 2005
|
F-3
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2006, 2005,
and 2004
|
F-4
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2006, 2005 and 2004
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and 2004
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
|
(a)(2)
|
Financial
Statement Schedule
|
|
|
Schedule
II Valuation and Qualifying Accounts and Reserves
|
S-1
|
(b)
Reports on Form 8-K
| 1. |
Current
Report on Form 8-K/A, Item 4.01 dated September 12, 2006, with respect
to
the termination of Stonefield Josephson, Inc. as the Company’s principal
accountants and the engagement of GHP Horwath P.C. as it principal
accountants.
|
(c)
Exhibits
|
Exhibit
Number
|
Document
|
|
2.0
|
Second
Amended Plan of Reorganization of the Company, incorporated herein
by
reference to the Company's Form 8-K filed October 24,
1994.
|
|
2.1
|
Orderly
Liquidation Valuation, Exhibit F to the Second Amended Plan of
Reorganization, incorporated herein by reference to the Company's
Form 8-K filed October 19, 1994.
|
|
2.2
|
Order
Confirming Plan of Reorganization, incorporated herein by reference
to the
Company's Form 8-K filed November 14, 1994.
|
|
3.1
|
Certificate
of Incorporation of the Company, as amended, incorporated herein
by
reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration
Statement on Form 10 (File No. 0-19301).
|
|
3.2
|
Certificate
of Amendment to the Company's Certificate of Incorporation (authorizing
the reclassification of the Class A Common Stock and Class B
Common Stock into one class of Common Stock) as filed with the Delaware
Secretary of State's office on November 1, 1991, incorporated herein
by reference to Exhibit 3 to Amendment 1 on Form 8 to the
Company's Form 8-A (File No. 0-19301).
|
|
3.3
|
By-laws
of the Company adopted on October 6, 1986, incorporated herein by
reference to Exhibit 3.5 to the Company's Registration Statement on
Form 10 (File No. 0-19301).
|
|
4.1
|
1984
Stock Option Plan of the Company, as amended and restated as of
October 15, 1987 and as amended by resolutions of the stockholders of
the Company passed on August 15, 1989 and October 8, 1990 to
increase the aggregate shares covered thereby to 1,000,000, incorporated
herein by reference to Exhibit 4.4 to the Company's Registration
Statement on Form 10 (File No. 0-19301).
|
|
4.2
|
Form
of Stock Option Grant under 1984 Stock Option Plan, incorporated
herein by
reference to Exhibit 4.5 to the Company's Registration Statement on
Form 10 (File No. 0-19301).
|
|
4.3
|
1991
Stock Option Plan of the Company, incorporated herein by reference
to
Exhibit 4.5 of the Company's Form S-1 dated December 23,
1991 (Registration
No. 33-43879).
|
38
|
Exhibit
Number
|
Document
|
|
4.4
|
1991
Non-Discretionary Stock Option Plan, incorporated herein by reference
to
Exhibit 4.6 of the Company's Form S-1 dated December 23,
1991 (Registration No. 33-43879).
|
|
4.5
|
Form
of Incentive Stock Option Grant under 1991 Stock Option Plan, incorporated
herein by reference to Exhibit 4.7 of the Company's Form S-1
dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.6
|
Form
of Non-Qualified Stock Option Grant under 1991 Stock Option Plan,
incorporated herein by reference to Exhibit 4.8 of the Company's
Form S-1 dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.7
|
Form
of Stock Option Grant under 1991 Non-Discretionary Stock Option Plan,
incorporated herein by reference to Exhibit 4.9 of the Company's
Form S-1 dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.8
|
1994
Stock Option Plan, incorporated herein by reference to Exhibit G
of the
Company's Second Amended Disclosure Statement filed on Form 8-K dated
October 19, 1994 and approved by shareholders on November 14,
1994.
|
|
4.9
|
Form
of Warrant of the Company dated March 28, 1997 issued in connection
with the Waiver by and among the Company and the signatories thereto,
incorporated herein by reference to Exhibit 4.9 of the Company's 1996
Form 10-K (File No. 0-19301).
|
|
4.10
|
1999
Stock Option Plan, incorporated herein by reference to Exhibit A
of the
Company's Definitive Proxy Statement filed on May 4, 1999 and approved
by
shareholders on June 7, 1999. .
|
|
4.11
|
Form
of Convertible Promissory Note issued by Communication Intelligence
Corporation, incorporated herein by reference to Exhibit 10.3 to
the
Company's Form 8-K dated November 3, 2004.
|
|
4.12
|
Form
of Warrant issued by Communication intelligence Corporation, incorporated
herein by reference to Exhibit 10.4 to the Company's Form 8-K dated
November 3, 2004.
|
|
4.13
|
Form
of Promissory Note issued by Communication Intelligence Corporation,
incorporated herein by reference to Exhibit 10.36 to the Company's
Form
8-K dated August 12, 2006.
|
|
4.14
|
Form
of Warrant issued by Communication intelligence Corporation, incorporated
herein by reference to Exhibit 10.37 to the Company's Form 8-K dated
August 12, 2006.
|
|
†10.1
|
Licensing
and Development Agreement for Use and Marketing of Program Materials
dated
September 25, 1992 between the Company and International Business
Machines Corporation, incorporated herein by reference to
Exhibit 10.13 of the Company's 1992 Form 10-K
(File No. 0-19301)
|
|
10.2
|
Standby
Stock Purchase Agreement between the Company and Philip Sassower
dated
October 3, 1994, incorporated herein by reference to
Exhibit 10.13 of the Company's 1994 Form 10-K (File
No. 0-19301)
|
|
10.3
|
Form
of Subscription Agreement between the Company and the Purchasers,
dated
November 28, 1995, incorporated herein by reference to Exhibit 1
of the Company's Form 8-K dated November 28,
1995.
|
|
10.4
|
Form
of Registration Rights Agreement between the Company and the Purchasers,
dated November 28, 1995, incorporated herein by reference to
Exhibit 1 of the Company's Form 8-K dated November 28,
1995.
|
|
10.5
|
Form
of Warrant of the Company issued to Libra Investments, Inc. on
November 28, 1995, incorporated herein by reference to Exhibit 1
of the Company's Form 8-K dated November 28,
1995.
|
|
10.6
|
Form
of Registration Rights Agreement between the Company and Libra
Investments, Inc., dated November 28, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated
November 28, 1995.
|
|
10.7
|
Form
of Subscription Agreement between the Company and various investors,
dated
June 13, 1996, incorporated herein by reference to Exhibit 1 of
the Company's Form 8-K dated June 27, 1996.
|
|
10.8
|
Form
of Registration Rights Agreement between the Company and various
investors, dated June 13, 1996, incorporated herein by reference to
Exhibit 2 of the Company's Form 8-K dated June 27,
1996.
|
|
10.9
|
Form
of Preferred Stock Investment Agreement, dated as of December 31,
1996, between the Company and the investors listed on Schedule 1
thereto, incorporated herein by reference to Exhibit 1 of the
Company's Form 8-K dated December 31,
1996.
|
39
|
Exhibit
Number
|
Document
|
|
10.10
|
Form
of Registration Rights Agreement between the Company and the Investors
Listed on Schedule 1 thereto, incorporated herein by reference to
Exhibit 2 of the Company's Form 8-K dated December 31,
1996.
|
|
10.11
|
Form
of Certificate of Designation of the Company with respect to the
5%
Cumulative Convertible Preferred Stock, incorporated herein by reference
to Exhibit 3 of the Company's Form 8-K dated December 31,
1996.
|
|
10.12
|
Waiver,
dated March 26, 1997, effective December 31, 1996, by and among
the Company and the signatories thereto, incorporated herein by reference
to Exhibit 10.19 of the Company's 1996 Form 10-K (File
No. 0-19301).
|
|
10.13
|
Form
of Subscription Agreement between the Company and each subscriber,
dated
as of November 25, 1997, incorporated herein by reference to Exhibit
10.1 of the Company's Form 8-K dated December 3,
1997.
|
|
10.14
|
Certificate
of Designations of the Company with respect to the Series B 5% Cumulative
Convertible Preferred Stock, incorporated herein by reference to
Exhibit
10.2 of the Company's Form 8-K dated November 13,
1997.
|
|
10.15
|
Form
of Registration Rights Agreement, by and among the Company and the
signatories thereto, dated as of November 25, 1997, incorporated
herein by reference to Exhibit 10.3 to the Company's Form 8-K dated
November 13, 1997.
|
|
10.16
|
Amendment
to the Company’s Certificate of Designation with respect to the 5%
Cumulative Convertible Preferred Stock dated June 12, 1998, incorporated
herein by reference to Exhibit 10.23 of the Company's 1998
Form 10-K (File No. 0-19301).
|
|
10.17
|
Amendment
to the Company’s Amended and Restated Certificate of Incorporation dated
June 12, 1998 incorporated herein by reference to Exhibit 10.24 of
the Company's 1998 Form 10-K (File
No. 0-19301).
|
|
10.18
|
Employment
Agreement dated August 14, 1998 between James Dao and the Company
incorporated herein by reference to Exhibit 10.25 of the Company's
1998 Form 10-K (File No. 0-19301).
|
|
††10.19
|
Software
Development and License Agreement dated December 4, 1998 between
Ericsson
Mobile Communications AB and the Company incorporated herein by reference
to Exhibit 10.26 of the Company's 1998 Form 10-K (File
No. 0-19301).
|
|
10.20
|
Loan
and Warrant Agreement dated October 20, 1999 between the Company
and the
Philip S. Sassower 1996 Charitable Remainder Annuity
Trust.
|
|
10.21
|
Asset
Purchase Agreement between the Company and PenOp Ltd and PenOp Inc.
incorporated herein by reference to the Company’s Form 8-K dated October
6, 2000.
|
|
10.22
|
Loan
Agreement dated June 19, 2001 between the Company and the Philip
S.
Sassower 1996 Charitable Remainder Annuity Trust.
|
|
10.23
|
Equity
Line of Credit Agreement between the Company and Cornell Capital
Partners,
LP, incorporated by reference to the Company’s Registration Statement on
Form S1 dated February 13, 2003 (File No. 333-103157)
|
|
10.24
|
Form
of Note and Warrant Purchase Agreement dated October 28, 2004, among
Communication Intelligence Corporation and the Purchasers identified
therein,
incorporated herein by reference to Exhibit 10.1 to the Company's
Form 8-K
dated November 3, 2004.
|
|
10.25
|
Form
of Registration Rights Agreement dated October 28, 2004, among
Communication Intelligence Corporation and the parties identified
there
in,
incorporated herein by reference to Exhibit 10.2 to the Company's
Form 8-K
dated November 3, 2004.
|
|
10.26
|
Form
of Note and Warrant Purchase Agreement dated August 10, 2006, among
Communication Intelligence Corporation and the Purchasers identified
therein,
incorporated herein by reference to Exhibit 10.34 to the Company's
Form
8-K dated August 12, 2006.
|
|
10.27
|
Form
of Registration Rights Agreement dated August 10, 2006, among
Communication Intelligence Corporation and the parties identified
there
in,
incorporated herein by reference to Exhibit 10.35 to the Company's
Form
8-K dated August 12, 2006.
|
|
Xx
10.28
|
Amendment
dated May 31, 2005 to the License agreement dated December 22, 2000
between the Company and eCom Asia Pacific, Ltd. filed as Exhibit
10.26 of
the Company’s Form 10-K/A (file no. 0-19301) filed with the Commission on
September 15, 2005.
|
40
|
Exhibit
Number
|
Document
|
|
Xx
10.29
|
License
agreement dated June 2, 2005 between the Company and SnapOn Credit
LLC.
filed as Exhibit 10.27 of the Company’s Form 10-K/A (file no. 0-19301)
filed with the Commission on September 15, 2005.
|
|
10.30
|
Amendment
to employment agreement with Guido DiGregorio, incorporated herein
by
reference to the Company's Form 8-K dated September 21,
2005.
|
|
10.31
|
Amendment
to employment agreement with Frank V. Dane, incorporated herein by
reference to the Company's Form 8-K dated September 21,
2005.
|
|
10.32
|
Form
of stock option agreement dated August 31, 2005 with Russel L. Davis
-
incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A
(file no. 0-19301) filed with the Commission on September 15,
2006.
|
|
10.33
|
Form
of stock option agreement dated December 19, 2005 with Guido DiGregorio
-
incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A
(file no. 0-19301) filed with the Commission on September 15,
2006.
|
|
10.34
|
Form
of stock option agreement dated August 31, 2005 with Francis V. Dane
-
incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A
(file no. 0-19301) filed with the Commission on September 15,
2006.
|
|
10.35
|
Form
of stock option agreement dated August 31, 2005 with C. B. Sung -
incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A
(file no. 0-19301) filed with the Commission on September 15,
2006.
|
|
14.00
|
Code
of Ethics -Incorporated by reference to the registrant’s Annual Report on
Form 10-K (file no. 0-19301) filed with the Commission on March 30,
2004.
|
|
*21.1
|
Schedule
of Subsidiaries.
|
|
*23.1
|
Consent
of GHP Horwath, P.C., Independent Registered Public Accounting
Firm.
|
|
*23.2
|
Consent
of Stonefield Josephson, Inc, Independent Registered Public Accounting
Firm.
|
|
*31.1
|
Certification
of Company’s Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
*31.2
|
Certificate
of Company’s Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
*32.1
|
Certification
of Chief Executive Officer pursuant to 18 USC Section 1750, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*32.2
|
Certification
of Chief Financial Officer pursuant to 18 USC Section 1750, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
†
|
Confidential
treatment of certain portions of this exhibit have been previously
granted
pursuant to a request for confidentiality dated March 29, 1993, filed
pursuant to the Securities Exchange Act of 1934.
|
|
*
|
Filed
herewith.
|
|
††
|
Confidential
treatment of certain portions of this exhibit have been requested
from the
SEC pursuant to a request for confidentiality dated March 30, 1999,
filed
pursuant to the Securities and Exchange Act of
1934.
|
|
Xx
|
Confidential
treatment of certain portions of this exhibit have been requested
from the
SEC pursuant to a request for confidentiality dated March 30, 2006
filed
pursuant to the Securities and Exchange Act of
1934.
|
41
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; thereunto duly authorized, in the City of Redwood Shores,
State
of California, on March 22, 2007.
|
Communication
Intelligence Corp.
|
||
|
By:
|
/s/
Francis V. Dane
Francis
V. Dane
(Principal
Financial Officer and Officer Duly Authorized to Sign on Behalf of
the
Registrant)
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of Registrant and in the
capacities indicated on March 22, 2007.
|
Signature
|
Title
|
|
/s/
Guido DiGregorio
Guido
DiGregorio
|
Chairman,
President and Chief Executive Officer
(Principal
Executive Officer)
|
|
/s/
Francis V. Dane
Francis
V. Dane
|
Chief
Legal Officer and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
|
/s/
Louis P. Panetta
Louis
P. Panetta
|
Director
|
|
/s/
Chien Bor Sung
Chien
Bor Sung
|
Director
|
|
/s/
David Welch
David
Welch
|
Director
|
42
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Communication
Intelligence Corporation
We
have
audited the accompanying consolidated balance sheet of Communication
Intelligence Corporation and its subsidiary (“the Company”) as of December 31,
2006, and the related consolidated statements of operations, changes in
stockholders'
equity, cash flows and financial statement schedule for the year ended December
31, 2006, as listed in the index appearing under Item 15(a)(1) and (2) of this
Annual Report on Form 10-K. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
the
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Communication Intelligence
Corporation and its subsidiary as of December 31, 2006, and the results of
their
operations and their cash flows for the year ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States
of
America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a
whole, presents fairly, in all material respects, the information set forth
therein.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company’s significant recurring operating
losses and accumulated deficit raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2006, the Company adopted Statement of Financial Accounting Standards
No.
123(R), “Share-Based Payment”.
/S/
GHP
Horwath, P.C.
Denver,
Colorado
March
22,
2007
F-1
Report
of
Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders of
Communication
Intelligence Corporation
Redwood
Shores, California
We
have
audited the accompanying consolidated balance sheet of Communication
Intelligence Corporation and its subsidiary (“the Company”) as of December 31,
2005, and the related consolidated statements of operations, changes in
stockholders’ equity, cash flows and financial statement schedule for each of
the two years in the period ended December 31, 2005, as listed in the index
appearing under Item 15(a)(1) and (2) of this Annual Report on Form 10-K. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We believe
that
our audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Communication
Intelligence Corporation and its subsidiary as of December 31, 2005, and the
results of their operations and their cash flows for each of the two years
in
the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company’s significant recurring operating
losses and accumulated deficit raise substantial doubts about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
/S/
STONEFIELD JOSEPHSON, INC.
San
Francisco, California
February
17, 2006
F-2
Communication
Intelligence Corporation
Consolidated
Balance Sheets
(In
thousands, except par value amounts)
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
727
|
$
|
2,849
|
|||
|
Accounts
receivable, net of allowances of $397 and $387 at December 31, 2006
and
2005, respectively
|
487
|
483
|
|||||
|
Prepaid
expenses and other current assets
|
105
|
168
|
|||||
|
Deferred
financing costs - current portion
|
−
|
121
|
|||||
|
Total
current assets
|
1,319
|
3,621
|
|||||
|
Property
and equipment, net
|
140
|
147
|
|||||
|
Patents
|
3,906
|
4,285
|
|||||
|
Capitalized
software development costs
|
656
|
283
|
|||||
|
Deferred
financing costs (Note 3)
|
75
|
100
|
|||||
|
Other
assets
|
30
|
30
|
|||||
|
Total
assets
|
$
|
6,126
|
$
|
8,466
|
|||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Convertible
notes, net of unamortized fair value assigned to beneficial conversion
feature and warrants
of $228 at December 31, 2006 (Note
3)
|
$
|
1,154
|
$
|
−
|
|||
|
Accounts
payable
|
72
|
288
|
|||||
|
Accrued
compensation
|
236
|
235
|
|||||
|
Other
accrued liabilities
|
269
|
283
|
|||||
|
Deferred
revenue
|
404
|
557
|
|||||
|
Total
current liabilities
|
2,135
|
1,363
|
|||||
|
Long-term
debt - related party, net of unamortized fair value assigned to warrants
of $266 at December 31, 2006 (Note 4)
|
334
|
−
|
|||||
|
Convertible
notes, net of unamortized fair value assigned to beneficial conversion
feature and warrants of $674 at December 31, 2005 (Note 3)
|
−
|
1,169
|
|||||
|
Minority
interest
|
73
|
78
|
|||||
|
Commitments
and contingencies (Note 7)
|
|
||||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
stock, $.01 par value; 10,000 shares authorized; 0 outstanding at
December
31, 2006 and 2005, respectively
|
-
|
-
|
|||||
|
Common
stock, $.01 par value; 125,000 shares authorized; 107,557 and 106,542
shares issued and outstanding at December 31, 2006 and 2005,
respectively
|
1,076
|
1,065
|
|||||
|
Additional
paid-in capital
|
90,497
|
89,517
|
|||||
|
Accumulated
deficit
|
(87,861
|
)
|
(84,575
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(128
|
)
|
(151
|
)
|
|||
|
Total
stockholders' equity
|
3,584
|
5,856
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
6,126
|
$
|
8,466
|
|||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-3
Communication
Intelligence Corporation
Consolidated
Statements of Operations
(In
thousands, except per share amounts)
|
Years
ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Revenues:
|
||||||||||
|
Product
|
$
|
1,427
|
$
|
2,067
|
$
|
6,315
|
||||
|
Maintenance
|
915
|
1,054
|
969
|
|||||||
|
2,342
|
3,121
|
7,284
|
||||||||
|
Operating
costs and expenses:
|
||||||||||
|
Cost
of sales:
|
||||||||||
|
Product
|
101
|
105
|
53
|
|||||||
|
Maintenance
|
149
|
43
|
-
|
|||||||
|
Research
and development
|
817
|
1,144
|
1,187
|
|||||||
|
Sales
and marketing
|
1,658
|
1,240
|
1,306
|
|||||||
|
General
and administrative
|
2,174
|
2,173
|
2,483
|
|||||||
|
4,899
|
4,705
|
5,029
|
||||||||
|
(Loss)
income from operations
|
(2,557
|
)
|
(1,584
|
)
|
2,255
|
|||||
|
Interest
income and other income, net
|
43
|
17
|
47
|
|||||||
|
Interest
expense:
|
||||||||||
|
Related
party (Note 4)
|
(11
|
)
|
-
|
-
|
||||||
|
Other
(Note 3)
|
(105
|
)
|
(208
|
)
|
(514
|
)
|
||||
|
Amortization
of loan discount and deferred financing cost:
|
||||||||||
|
Related
party (Note 4)
|
(70
|
)
|
-
|
-
|
||||||
|
Other
(Note 3)
|
(591
|
)
|
(2,275
|
)
|
(187
|
)
|
||||
|
Minority
interest
|
5
|
19
|
19
|
|||||||
|
Net
(loss) income
|
$
|
(3,286
|
)
|
$
|
(4,031
|
)
|
$
|
1,620
|
||
|
Basic
and diluted (loss) income per share
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
0.02
|
||
|
Basic
weighted average shares
|
107,374
|
104,189
|
100,909
|
|||||||
|
Diluted
weighted average shares
|
107,374
|
104,189
|
107,572
|
|||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-4
Communication
Intelligence Corporation
Consolidated
Statements of Changes in Stockholders' Equity
(In
thousands)
|
Common
Shares
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
||||||||||||||
|
Balances
as of December 31, 2003
|
100,102
|
$
|
1,001
|
$
|
83,528
|
$
|
(82,164
|
)
|
$
|
(178
|
)
|
$
|
2,187
|
||||||
|
Sale
of shares of Common Stock through Cornell Capital net of
expenses
|
1,133
|
11
|
680
|
691
|
|||||||||||||||
|
Exercise
of options for shares of common stock
|
177
|
2
|
51
|
53
|
|||||||||||||||
|
Fair
value of warrants issued to the agent in connection with convertible
notes
|
421
|
421
|
|||||||||||||||||
|
Fair
value of warrants issued to the investors in connection with convertible
notes
|
982
|
982
|
|||||||||||||||||
|
Fair
value of beneficial conversion feature associated with the convertible
notes
|
1,569
|
1,569
|
|||||||||||||||||
|
Comprehensive
income:
Net
income
|
1,620
|
1,620
|
|||||||||||||||||
|
Foreign
currency translation adjustment
|
8
|
8
|
|||||||||||||||||
|
Total
comprehensive income
|
1,628
|
||||||||||||||||||
|
Balances
as of December 31, 2004
|
101,412
|
1,014
|
87,231
|
(80,544
|
)
|
(170
|
)
|
7,531
|
|||||||||||
|
Shares
of Common Stock issued on conversion of long-term notes
|
5,092
|
51
|
2,271
|
2,322
|
|||||||||||||||
|
Shares
issued for services
|
24
|
10
|
10
|
||||||||||||||||
|
Shares
issued on exercise of stock options
|
14
|
5
|
5
|
||||||||||||||||
|
Comprehensive
(loss):
Net
loss
|
(4,031
|
)
|
(4,031
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
19
|
19
|
|||||||||||||||||
|
Total
comprehensive loss
|
(4,012
|
)
|
|||||||||||||||||
|
Balances
as of December 31, 2005
|
106,542
|
1,065
|
89,517
|
(84,575
|
)
|
(151
|
)
|
5,856
|
|||||||||||
|
Shares
of Common Stock issued on conversion of long-term notes
|
996
|
11
|
449
|
460
|
|||||||||||||||
|
Shares
issued for services
|
19
|
6
|
6
|
||||||||||||||||
|
Stock
based employee compensation
|
189
|
189
|
|||||||||||||||||
|
Fair
value of warrants issued to the investors in connection with long
-term
debt, related party
|
336
|
336
|
|||||||||||||||||
|
Comprehensive
(loss):
Net
loss
|
(3,286
|
)
|
(3,286
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
23
|
23
|
|||||||||||||||||
|
Total
comprehensive loss
|
(3,263
|
)
|
|||||||||||||||||
|
Balances
as of December 31, 2006
|
107,557
|
$
|
1,076
|
$
|
90,497
|
$
|
(87,861
|
)
|
$
|
(128
|
)
|
$
|
3,584
|
||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-5
Communication
Intelligence Corporation
Consolidated
Statements of Cash Flows
(In
thousands)
|
Years
ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||
|
Net
income (loss)
|
$
|
(3,286
|
)
|
$
|
(4,031
|
)
|
$
|
1,620
|
||||||||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
||||||||||||||||
|
Depreciation
and amortization
|
623
|
466
|
425
|
|||||||||||||
|
Amortization
of convertible note discount
|
445
|
1,706
|
142
|
|||||||||||||
|
Amortization
of warrant costs on long-term debt - related party
|
70
|
-
|
-
|
|||||||||||||
|
Deferred
financing costs
|
146
|
553
|
-
|
|||||||||||||
|
Loss
on disposal of property and equipment
|
-
|
43
|
8
|
|||||||||||||
|
Provision
for doubtful accounts
|
-
|
4
|
148
|
|||||||||||||
|
Stock
issued for services
|
6
|
10
|
-
|
|||||||||||||
|
Stock
based employee compensation
|
189
|
-
|
-
|
|||||||||||||
|
Minority
interest
|
(5
|
)
|
-
|
-
|
||||||||||||
|
Changes
in operating assets and liabilities
|
||||||||||||||||
|
Accounts
receivable
|
(4
|
)
|
(131
|
)
|
238
|
|||||||||||
|
Inventories
|
-
|
-
|
47
|
|||||||||||||
|
Prepaid
expenses and other current assets
|
63
|
(63
|
)
|
(12
|
)
|
|||||||||||
|
Accounts
payable
|
(218
|
)
|
47
|
(2
|
)
|
|||||||||||
|
Accrued
compensation
|
1
|
(23
|
)
|
(1
|
)
|
|||||||||||
|
Other
accrued liabilities
|
(18
|
)
|
(108
|
)
|
(85
|
)
|
||||||||||
|
Deferred
revenue
|
(153
|
)
|
99
|
293
|
||||||||||||
|
Net
cash provided by (used in) operating activities
|
(2,141
|
)
|
(1,428
|
)
|
2,821
|
|||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Acquisition
of property and equipment
|
(93
|
)
|
(107
|
)
|
(37
|
)
|
||||||||||
|
Capitalization
of software development costs
|
(510
|
)
|
(299
|
)
|
(45
|
)
|
||||||||||
|
Net
cash used in investing activities
|
(603
|
)
|
(406
|
)
|
(82
|
)
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Proceeds
from issuance of short-term debt
|
-
|
-
|
36
|
|||||||||||||
|
Proceeds
from issuance of long-term debt - related party
|
600
|
-
|
-
|
|||||||||||||
|
Proceeds
from issuance of convertible notes, net
|
-
|
-
|
3,885
|
|||||||||||||
|
Principal
payments on short-term debt
|
-
|
(36
|
)
|
(3,008
|
)
|
|||||||||||
|
Principal
payments on long-term debt - related party
|
-
|
(13
|
)
|
-
|
||||||||||||
|
Principal
payments on capital lease obligations
|
(8
|
)
|
(9
|
)
|
(8
|
)
|
||||||||||
|
Proceeds
from exercise of stock options
|
-
|
5
|
53
|
|||||||||||||
|
Net
cash provided by (used in) financing activities
|
592
|
(53
|
)
|
958
|
||||||||||||
|
Effect
of exchange rate changes on cash
|
30
|
-
|
-
|
|||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(2,122
|
)
|
(1,887
|
)
|
3,697
|
|||||||||||
|
Cash
and cash equivalents at beginning of year
|
2,849
|
4,736
|
1,039
|
|||||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
727
|
$
|
2,849
|
$
|
4,736
|
||||||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-6
Communication
Intelligence Corporation
Consolidated
Statements of Cash Flows
(In
thousands)
Supplemental
disclosure of cash flow information:
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Interest
paid
|
$
|
109
|
$
|
237
|
$
|
509
|
||||
|
Schedule
of non-cash transactions:
|
||||||||||
|
Fair
value of warrants issued to the investors in connection with long
-term
debt, related party
|
$
|
336
|
-
|
$
|
-
|
|||||
|
Non-cash
compensation
|
$
|
-
|
$
|
-
|
$
|
70
|
||||
|
Common
stock issued upon the conversion of short-term debt, net
|
$
|
-
|
$
|
-
|
$
|
691
|
||||
|
Common
stock issued upon the conversion of long-term debt, net
|
$
|
460
|
$
|
2,322
|
$
|
-
|
||||
|
Deferred
financing costs associated with convertible notes
|
$
|
-
|
$
|
-
|
$
|
714
|
||||
|
Loan
discount associated with convertible notes net of
amortization
|
$
|
-
|
$
|
-
|
$
|
2,409
|
||||
|
Issuance
of common stock for services
|
$
|
6
|
$
|
10
|
$
|
-
|
||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-7
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies
The
Company:
Communication
Intelligence Corporation and its joint venture (the "Company" or "CIC") develops
and markets natural input and biometric electronic signature solutions aimed
at
the emerging markets such as, e-commerce, wireless internet/information devices,
and corporate security. These markets include all areas of personal computing,
as well as electronic commerce and communications.
The
Company's research and development activities have given rise to numerous
technologies and products. The Company's core technologies are classified into
two broad categories: "transaction and communication enabling technologies"
and
"natural input technologies. CIC's transaction and communication enabling
technologies provide a means for protecting electronic transactions and
documents. CIC has developed products for dynamic signature verification,
electronic signatures and encryption and a suite of development tools and
applications which the Company believes could increase the functionality of
its
core products and facilitate their integration into original equipment
manufacturers' ("OEM") hardware products and computer systems and networks.
CIC's natural input technologies are designed to allow users to interact with
a
computer or handheld device through the use of an electronic pen or “stylus”.
Such products include the Company's SignatureOne™, Sign-it®, and iSign®,
biometric and electronic signature products, and multi-lingual Jot® handwriting
recognition system.
The
Company’s 90% owned joint venture, Communication Intelligence Computer
Corporation, in China (the "Joint Venture"), has licensed eCom
Asia
Pacific Pty Ltd (“eCom”)
as
its
master
reseller for CIC products to end users and resellers with the authority and
responsibility to create optimal distribution channels within the People’s
Republic of China.
Going
concern:
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. Except for 2004, the Company
has
incurred significant losses since its inception and, at December 31, 2006,
the
Company’s accumulated deficit was approximately $88,000. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
The Company has primarily funded these losses through the sale of debt and
equity securities.
In
November 2004, the Company consummated a financing in the form of convertible
notes aggregating $3,885, net of expenses (See Note 4). The remaining
outstanding debt from the November 2004 financing of $1,382 comes due in October
2007. In November 2006 the Company consummated a financing in the form of a
note
aggregating $600 (See Note 5). However, there can be no assurance that the
Company will have adequate capital resources to fund planned operations or
that
any additional funds will be available to the Company when needed, or if
available, will be available on favorable terms or in amounts required by the
Company. If the Company is unable to obtain adequate capital resources to fund
operations, it may be required to delay, scale back or eliminate some or all
of
its operations, which may have a material adverse effect on the Company's
business, results of operations and ability to operate as a going concern.
The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis
of
consolidation:
The
accompanying consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America, and
include the accounts of Communication Intelligence Corporation and its 90%
owned
Joint Venture in the People's Republic of China. All inter-company accounts
and
transactions have been eliminated. All amounts shown in the accompanying
consolidated financial statements are in thousands of dollars except per share
amounts.
F-8
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature
of
Business, Basis of Presentation and Summary of Significant Accounting Policies
(continued)
Segments
The
Company reports its financial results in one segment. Prior to 2006, the Company
reported in two segments. Due to the immateriality of the system integration
segment the Company reclassified the operations into one segment.
Use
of estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, at the date of the consolidated financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting periods. Actual results could differ from these
estimates.
Fair
value
of
financial instruments:
The
carrying amounts of the Company's financial instruments, including cash and
cash
equivalents, accounts receivable, accounts payable, short-term debt and
long-term debt approximate fair value due to their relatively short maturities.
The fair value of the long-term debt - related party is not practicable to
estimate, due to the related party nature of the underlying
transaction.
Cash
and cash equivalents:
The
Company considers all highly liquid investments with maturities at the date
of
purchase of three months or less to be cash equivalents.
The
Company's cash and cash equivalents, at December 31, consisted of the following:
|
2006
|
2005
|
|||||||||
|
Cash
in bank
|
$
|
533
|
$
|
213
|
||||||
|
Money
market funds
|
194
|
2,636
|
||||||||
|
Cash
and cash equivalents
|
$
|
727
|
$
|
2,849
|
||||||
Concentrations
of credit risk:
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash, cash equivalents, and accounts
receivable. The Company maintains its cash and cash equivalents with various
financial institutions. This diversification of risk is consistent with Company
policy to maintain liquidity, and mitigate risk of loss as to principal. At
December 31, 2006, the Joint Venture had approximately $14 in cash accounts
held
by a financial institution in the People's Republic of China.
To
date,
accounts receivable have been derived principally from revenues earned from
end
users, manufacturers, retailers and distributors of computer products in North
America and the Pacific Rim. The Company performs periodic credit evaluations
of
its customers, and does not require collateral. The Company maintains reserves
for potential credit losses; historically, such losses have been within
management's expectations.
The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable.
If
there is a change in actual defaults from the Company’s historical experience,
the Company’s estimates of recoverability of amounts due could be affected and
the Company will adjust the allowance accordingly (See Schedule
II).
F-9
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Deferred
financing
costs:
Deferred
financing costs are stated at fair value and include costs paid in cash, such
as
professional fees and commissions, and warrant costs. The
fair
value ascribed to the warrants issued in 2004 was estimated on the commitment
date using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 3.21%; expected life of 3 years; expected volatility
of 100%; and expected dividend yield of 0% (See Note 4). The
costs
are amortized
to interest expense over the life of the convertible notes or upon earlier
conversion using the effective interest method.
The
costs amortized to interest expense amounted to $146, $568, and $46 for the
years ended December 31, 2006, 2005, and 2004, respectively. Amortization
expense for the year ending December 31, 2007 will be $75.
Property
and equipment, net:
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease.
The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred. Depreciation expense was $100, $40, and
$31
for the years ended December 31, 2006, 2005 and 2004, respectively. The Chinese
Joint Venture disposed of certain assets at cost of $119 and $34 in 2005 and
2004, respectively.
Property
and equipment, net at December 31, consists of the following:
|
2006
|
2005
|
||||||
|
Machinery
and equipment
|
$
|
1,216
|
$
|
1,198
|
|||
|
Office
furniture and fixtures
|
483
|
459
|
|||||
|
Leasehold
improvements
|
90
|
84
|
|||||
|
Purchased
software
|
315
|
270
|
|||||
|
2,104
|
2,011
|
||||||
|
Less
accumulated depreciation and amortization
|
(1,964
|
)
|
(1,864
|
)
|
|||
|
$
|
140
|
$
|
147
|
||||
Included
in property and equipment, as of December 31, 2006 and 2005, are $82 and
$82, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $77 and $69 at December 31, 2006 and 2005,
respectively.
Patents:
On
October 6, 2000, the Company acquired certain assets of PenOp Limited (“PenOp”)
and its subsidiary PenOp Inc. pursuant to an asset purchase agreement dated
as
of September 29, 2000.
The
nature of the underlying technology of each material patent is as
follows:
| · |
Patent
numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the electronic
capture of a handwritten signature utilizing an electronic tablet
device
on a standard computer system within an electronic document, (b)
the
verification of the identity of the person providing the electronic
signature through comparison of stored signature measurements, and
(c) a
system to determine whether an electronic document has been modified
after
signature.
|
F-10
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Patents
(continued):
| · |
Patent
number 6091835 involves all of the foregoing and the recording of
the
electronic execution of a document regardless of whether execution
occurs
through a handwritten signature, voice pattern, fingerprint or other
identifiable means.
|
| · |
Patent
numbers 5933514, 6212295, 6381344, and 6487310 involve methods and
processes related to handwriting recognition developed by the Company
over
the years. Legal fees associated with these patents were immaterial
and
expensed as the fees were incurred.
|
Patents,
net consists of the following at December 31:
|
Expiration
|
Estimated
Original
Life
|
2006
|
2005
|
||||||||||
|
Patent
(Various)
|
Various
|
5
|
$
|
9
|
$
|
9
|
|||||||
|
Patent
(Various)
|
Various
|
7
|
476
|
476
|
|||||||||
|
5544255
|
2013
|
13
|
93
|
93
|
|||||||||
|
5647017
|
2014
|
14
|
187
|
187
|
|||||||||
|
5818955
|
2015
|
15
|
373
|
373
|
|||||||||
|
6064751
|
2017
|
17
|
1,213
|
1,213
|
|||||||||
|
6091835
|
2017
|
17
|
4,394
|
4,394
|
|||||||||
|
6,745
|
6,745
|
||||||||||||
|
Less
accumulated amortization
|
(2,839
|
)
|
(2,460
|
)
|
|||||||||
|
$
|
3,906
|
$
|
4,285
|
||||||||||
Patents
are stated at cost less accumulated amortization that, in management’s opinion
does not exceed fair value. Amortization is computed using the straight-line
method over the estimated lives of the related assets, ranging from five to
seventeen years. Amortization expense was $379, $378, and $379 for the years
ended December 31, 2006, 2005 and 2004, respectively. Amortization
expense is estimated to be $379 for each of the five years through December
31,
2011. The
estimated remaining weighted average useful lives of the patents are 10 years.
The
patents identified, as "various" are technically narrow or dated patents that
the Company believes the expiration of which will not be material to its
operations.
At
December 31, 2006, the net carrying value of those patents is $9.
The
useful lives assigned to the patents are based upon the following assumptions
and conclusions:
| · |
The
estimated cash flow from products based upon each patent are expected
to
exceed the value assigned to each
patent;
|
| · |
There
are no legal, regulatory or contractual provisions known to the Company
that limit the useful life of each patent to less than the assigned
useful
life;
|
| · |
No
additional material costs need to be incurred or modifications made
in
order for the Company to continue to be able to realize the protection
afforded by the patents; and
|
| · |
The
Company does not foresee any effects of obsolescence or significant
competitive pressure on its current or future products, anticipates
increasing demand for products utilizing the patented technology,
and
believes that the current markets for its products based on the patented
technology will remain constant or will grow over the useful lives
assigned to the patents because of a legal, regulatory and business
environment encouraging the use of electronic
signatures.
|
F-11
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Patents
(continued):
The
Company performs intangible asset impairment analyses on a quarterly basis
in
accordance with the guidance in Statement of Financial Accounting Standards
No.
142, “Goodwill
and Other Intangible Assets”
("SFAS
142") and Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long Lived Assets”
("SFAS
144"). The Company uses SFAS 144 in response to changes in industry and market
conditions that affects its patents; the Company then determines if an
impairment of its assets has occurred. The Company reassesses the lives of
its
patents and tests for impairment quarterly in order to determine whether the
book value of each patent exceeds the fair value of each patent. Fair value
is
determined by estimating future cash flows from the products that are and will
be protected by the patents and considering the additional factors listed in
Critical Accounting Policies in Item 7 of this Form 10-K.
Long-lived
assets:
The
Company evaluates the recoverability of its long-lived assets whenever
circumstances or events indicate such assets might be impaired. The Company
would recognize an impairment charge in the event the net book value of such
assets exceeded the future undiscounted cash flows attributable to such assets.
No such impairment charges have been recorded in the three years ended December
31, 2006.
Software
development
costs:
Software
development costs are accounted for in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed"
("SFAS
86"). Under SFAS 86, capitalization of software development costs begins upon
the establishment of technological feasibility, subject to net realizable value
considerations. The costs capitalized include the coding and testing of the
product after the technological feasibility has been established and ends upon
the release of the product. The annual amortization is the greater of (a) the
straight-line amortization over the estimated useful life not to exceed three
years or (b) the amount based on the ratio of current revenues to anticipated
future revenues. The Company performs periodic impairment reviews to ensure
that
unamortized deferred development costs remain recoverable from the projected
future net cash flows that they are expected to generate.
The
capitalized costs are amortized to cost of sales.
At
December 31, 2006 and 2005 the Company had capitalized approximately $510 and
$299 of software development costs, respectively. Amortization of capitalized
software development costs for the years ended December 31, 2006, 2005 and
2004
was $149, $39, and $13, respectively.
Other
current liabilities:
The
Company records liabilities based on reasonable estimates for expenses, or
payables that are known but some amounts must be estimated such as deposits,
taxes, rents and services. The estimates are for current liabilities that should
be extinguished within one year.
The
Company had the following other accrued liabilities at December 31:
|
2006
|
2005
|
||||||
|
Accrued
professional services
|
$
|
125
|
$
|
104
|
|||
|
Refundable
deposits
|
48
|
115
|
|||||
|
Other
|
96
|
64
|
|||||
|
Total
|
$
|
269
|
$
|
283
|
|||
F-12
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Other
current
liabilities (continued):
Material
commitments:
The
Company had the following commitments at December 31, 2006:
|
Payments
due by period
|
||||||||||||||||||||||||||||
|
Contractual
obligations
|
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
||||||||||||||||||||
|
Short-term
debt (1)
|
$
|
1,382
|
$
|
1,382
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||||
|
Long-term
debt related party (2)
|
600
|
-
|
600
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Operating
lease commitments (3)
|
1,252
|
196
|
264
|
272
|
280
|
240
|
-
|
|||||||||||||||||||||
|
Total
contractual cash obligations
|
$
|
3,234
|
$
|
1,578
|
$
|
864
|
$
|
272
|
$
|
280
|
$
|
240
|
$
|
-
|
||||||||||||||
| 1. |
Short-term
debt reported on the balance sheet is net of approximately $228 in
discounts representing the fair value of warrants issued to the investors
and the beneficial conversion feature associated with the convertible
notes.
|
| 2. |
Long-term
debt - related party reported on the balance sheet, is net of
approximately $266 in discounts representing the fair value of warrants
issued to the investor.
|
| 3. |
The
operating lease commenced on November 1, 2002. The lease was renegotiated
in December 2005 and extended an additional 60 months. The base rent
cash
payments will increase approximately 3% per annum over the term of
the
lease, which expires on October 31,
2011.
|
Stock-based
compensation:
The
Company has one stock option plan, the
1999
Option Plan,
and
also
grants options to employees, directors and consultants outside of the 1999
Option Plan pursuant to Individual Plans.
On
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based
Payment”,
using
the modified prospective transition method, which requires the application
of
the accounting standard as of January 1, 2006.
SFAS
No.
123(R) establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains employee
services in share-based payment transactions. SFAS
No.
123(R) requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, including stock
options, based on the grant-date fair value of the award and to recognize it
as
compensation expense over the period the employee is required to provide service
in exchange for the award, usually the vesting period. In
March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 107 (SAB 107) relating to SFAS No. 123(R). The Company has applied the
provisions of SAB 107 in its adoption of SFAS No. 123(R).
The
Company’s consolidated financial statements as of and for the year ended
December 31, 2006 reflects the impact of SFAS No. 123(R). In accordance with
the
modified prospective transition method, the Company’s consolidated financial
statements for the years ended December 31, 2005 and 2004 have not been restated
to reflect the impact of SFAS No. 123(R).
F-13
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Stock-based
compensation (continued):
Prior
to
the Company adopting SFAS 123 (R), the Company accounted for stock-based
compensation plans under Accounting Principles Board Opinion ("APB") No. 25,
"Accounting
for Stock Issued to Employees”:
("APB
25"). Under APB 25, generally no compensation expense is recorded when the
terms
of the award are fixed an the exercise price of the employee stock option equals
or exceeds the fair value of the underlying stock on the date of grant. The
Company had previously adopted the disclosure-only provision of SFAS No. 123,
"Accounting
for Stock-Based Compensation"
("SFAS
123"). Through December 31, 2005, the Company had applied APB Opinion No. 25
and
related interpretations in accounting for its stock-based employee compensation
plans. Accordingly, no compensation expense had been recognized for options
granted to employees at fair market value.
Had
compensation cost for the Company's option plans been determined based on the
fair value of the options at the date of grant, as prescribed by SFAS 123,
the
Company's net income (loss) available to common stockholders and basic and
diluted net income (loss) per share available to stockholders would have been
as
follows for the year ended December 31:
|
2005
|
2004
|
||||||
|
Net
income (loss) as reported
|
$
|
(4,031
|
)
|
$
|
1,620
|
||
|
Add:
Stock-based employee compensation expense included in reported results
of
operations, net of related tax effects
|
-
|
-
|
|||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value-based method for all awards, net of related tax
effects
|
(1,298
|
)
|
(248
|
)
|
|||
|
Pro
forma net income (loss)
|
$
|
(5,329
|
)
|
$
|
1,372
|
||
|
Basic
and diluted net income (loss) per share available to
stockholders:
|
|||||||
|
As
reported
|
$
|
(0.04
|
)
|
$
|
0.02
|
||
|
Pro
forma
|
$
|
(0.05
|
)
|
$
|
0.01
|
||
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable periods: risk-free interest
rate of 4.34% for 2005, and 3.65% for 2004, an expected life of 6.84 years
for
2005, 5.61 years for 2004, expected volatility of 94.1% for 2005, and 51.6%
for
2004, and a dividend yield of 0% for both periods.
These
plans and related compensation expense prescribed
by SFAS 123(R) are
more
fully described in Note 6 of the Notes to Consolidated Financial Statements.
Revenue
recognition:
Revenue
is recognized when earned in accordance with applicable accounting standards,
including AICPA Statement of Position ("SOP") No. 97-2, “Software
Revenue Recognition”,
as
amended, Staff Accounting Bulletin 104, “Revenue
Recognition”
("SAB
104"), and the interpretive guidance issued by the Securities and Exchange
Commission and EITF issue number 00-21, “Accounting
for Revenue Arrangements with Multiple Elements”,
of the
FASB’s Emerging Issues Task Force. The Company recognizes revenues from sales of
software products upon shipment, provided that persuasive evidence of an
arrangement exists, collection is determined to be probable, all non-recurring
engineering work necessary to enable the Company's product to function within
the customer's application has been completed and the Company's product has
been
delivered according to specifications. Revenue from service subscriptions is
recognized as costs are incurred or over the service period which-ever is
longer.
Software
license agreements may contain multiple elements, including upgrades and
enhancements, products deliverable on a when and if available basis and post
contract support. Revenue from software license agreements is 1.
Nature
of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
F-14
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Revenue recognition (continued):
recognized
upon delivery of the software, provided that persuasive evidence of an
arrangement exists, collection is determined to be probable, all nonrecurring
engineering work necessary to enable the Company's products to function within
the customer's application has been completed, and the Company has delivered
its
product according to specifications.
Maintenance
revenue is recorded for post contract support and upgrades or enhancements,
which is paid for in addition to license fees, and is recognized as costs are
incurred or over the support period whichever is longer. For undelivered
elements where objective and reliable evidence of fair value does not exist,
revenue is deferred and subsequently recognized when delivery has occurred
and
when fair value has been determined.
For
the
years ended December 31, 2006, 2005, and 2004, the Company’s sales in the United
States as a percentage of total sales were 81%, 85%, and 99%, respectively.
For
the years ended December 31, 2006, 2005, and 2004, the Company’s export sales as
a percentage of total revenues were approximately 19%, 15%, and 1%,
respectively. Foreign sales are based on the countries to which the Company’s
products are shipped.
Major
customers:
For
the
year ended December 31, 2006, one
customer, PalmSource, Inc., accounted for 27% of total revenues in 2006. Two
customers accounted for 41% of total revenues in 2005. Snap-On Credit
Corporation accounted for 16% and PalmSource, Inc. accounted for 25%,
respectively. Two
customers accounted for 74% of total revenue in 2004. State Farm Insurance
Company accounted for 46% and Wells Fargo Bank NA accounted for
28%.
Four
customers accounted for 69% of accounts receivable at December 31, 2006.
Prudential
Insurance Co. of America accounted for 11%, eCom Asia Pacific Pty. Ltd.
accounted for 14%, IA Systems Pty. Ltd. accounted for 17% and PalmSource, Inc.
accounted for 27%. Three
customers accounted for 74% of accounts receivable at December 31, 2005.
Seaton
Health Corp. accounted for 11%, Sony Ericsson Mobile Comm AB accounted for
21%,
and PalmSource, Inc. accounted for 42%.
Research
and development:
Research
and development costs are charged to expense as incurred.
Advertising:
The
Company expenses advertising costs as incurred. Advertising expense for the
years ended December 31, 2006 was $177. Advertising expense for the years ended
December 31, 2005 and 2004 was $0 for each year.
Net
(loss) income per share:
The
Company calculates net income (loss) per share under the provisions of Statement
of Financial Accounting Standards No. 128, “Earnings
Per Share”
(“SFAS
128”). SFAS 128 requires the disclosure of both basic net income (loss) per
share, which is based on the weighted average number of shares outstanding,
and
diluted income (loss) per share, which is based on the weighted average number
of shares and dilutive potential shares outstanding.
For
the
year ended December 31, 2006, 5,893 shares of common stock subject to
outstanding options, 2,993 shares issuable upon the conversion of the
convertible notes and 7,961 shares issuable upon exercise of the warrants were
excluded from the calculation of dilutive earnings per share because the
exercise or conversion of such options and warrants would be
anti-dilutive.
F-15
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Net
(loss) income per share (continued):
For
the
year ended December 31, 2005, 8,190 shares of common stock subject to
outstanding options, 3,989 shares issuable upon the conversion of the
convertible notes and 4,850 shares
issuable upon exercise of the warrants were excluded from the calculation of
dilutive earnings per share because the exercise or conversion of such options
and warrants would be anti-dilutive.
For
the
year ended December 31, 2004, 3,902 potential equivalent shares were
excluded from the calculation of dilutive earnings per share due to the exercise
price of such options was greater than the average market price of the Company’s
common stock. At
December 31, 2004, there were in-the money warrants outstanding for the purchase
of 4,850 share of common stock included in the calculation of diluted income
(loss) per share.
|
For
the Year Ended December 31,
|
||||||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||
|
Net
Loss
|
Weighted
Average Shares
Outstanding
|
Per-Share
Amount
|
Net
Income
|
Weighted
Average
Shares
Outstanding
|
Per-Share
Amount
|
Net
Loss
|
Weighted
Average
Shares
Outstanding
|
Per-Share
Amount
|
||||||||||||||||||||||||||
|
Basic
income (loss):
|
||||||||||||||||||||||||||||||||||
|
Income
(loss) available to stockholders
|
$
|
(3,286
|
)
|
107,374
|
$
|
(0.03
|
)
|
$
|
(4,031
|
)
|
104,189
|
$
|
(0.04
|
)
|
$
|
1,620
|
100,909
|
$
0.02
|
||||||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||||||||||||||||||||
|
Stock
options
|
-
|
-
|
-
|
-
|
-
|
1,813
|
-
|
|||||||||||||||||||||||||||
|
Warrants
|
-
|
-
|
-
|
-
|
-
|
4,850
|
-
|
|||||||||||||||||||||||||||
|
Diluted
income (loss)
|
$
|
(3,286
|
)
|
107,374
|
$
|
(0.03
|
)
|
$
|
(4,031
|
)
|
104,189
|
$
|
(0.04
|
)
|
$
|
1,620
|
107,572
|
$
0.02
|
||||||||||||||||
Foreign
currency translation:
The
Company considers the functional currency of the Joint Venture to be the local
currency and, accordingly, gains and losses from the translation of the local
foreign currency financial statements are included as a component of
"accumulated other comprehensive loss" in the accompanying consolidated balance
sheets. Foreign currency assets and liabilities are translated into U.S. dollars
at the end-of-period exchange rates except for long-term assets and liabilities,
which are translated at historical exchange rates. Revenues and expenses are
translated at the average exchange rates in effect during each period except
for
those expenses related to balance sheet amounts which are translated at
historical exchange rates.
Net
foreign currency transaction gains and losses are included in "Interest income
and other income (expense), net" in the accompanying consolidated statements
of
operations. Foreign currency transaction gains in 2006, 2005 and 2004 were
insignificant.
Comprehensive
income:
In
June
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, “Reporting
Comprehensive Income”
(“SFAS
130”). The Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual statement that is displayed
with
the same prominence as other annual financial statements. SFAS 130 also requires
that an entity classify items as other comprehensive earnings by their nature
in
an annual financial statement.
F-16
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Income
taxes:
Deferred
tax assets and liabilities are recognized for the expected tax consequences
of
temporary differences between the tax bases of assets and liabilities and their
financial statement reported amounts and for tax loss and credit carryforwards.
A valuation allowance is provided against deferred tax assets when it is
determined to be more likely than not that the deferred tax asset will not
be
realized.
Recent
pronouncements:
In
February 2007, the FASB issued Statement No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
amendment to FASB Statement No. 115”.
This
statement permits companies to choose to measure many financial instruments
and
other items at fair value. The objective is to improve financial reporting
by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This Statement is expected
to expand the use of fair value measurement of accounting for financial
instruments. This
statement applies to all entities, including not for profit.
The
fair
value option established by this statement permits all entities to measure
eligible items at fair value at specified election dates. This statement is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007.
The
Company is currently assessing the impact adoption of SFAS No. 159 will have
on
its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurement”.
This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair
value measurements. This statement applies under other accounting pronouncements
that require or permit fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact of the adoption of SFAS No. 157 will have on its
consolidated financial statements.
In
September 2006, the SEC issued SAB No. 108 in order to eliminate the diversity
of practice surrounding how public companies quantify financial statement
misstatements. In SAB No. 108, the SEC staff established an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatements on each of the company’s financial statements and
the related financial statement disclosures. SAB No. 108 is effective for fiscal
years ending after November 15, 2006. The Company believes that complying with
the interpretive guidance of SAB No. 108 will not have a material impact to
its
consolidated financial statements.
In
July
2006, the FASB issued FASB Interpretation No.48, "Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement
109"("FIN
48") which clarifies the accounting for uncertainty in income taxes recognized
in accordance with SFAS No. 109, "Accounting
for Income Taxes."
FIN 48
is a comprehensive model for how a company should recognize, measure, present,
and disclose in its financial statements uncertain tax positions that the
company has taken or expects to take on a tax return. If an income tax position
exceeds a more likely than not (greater than 50%) probability of success upon
tax audit, the company will recognize an income tax benefit in its financial
statements. Additionally, companies are required to accrue interest and related
penalties, if applicable, on all tax exposures consistent with jurisdictional
tax laws. The effective date of this interpretation will be fiscal years
beginning after December 15, 2006 and the Company is currently in the process
of
evaluating the impact of this interpretation on its consolidated financial
statements.
F-17
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Reclassifications:
Certain
amounts reported in the 2004 and 2005 consolidated financial statements have
been reclassified to conform to the 2006 presentation. Revenues have been
reclassified into two headings: product revenue and maintenance
revenue.
2.
Chinese Joint Venture:
The
Company currently owns 90% of a joint venture (the “Joint Venture”) with the
Jiangsu Hongtu Electronics Group, a provincial agency of the People's Republic
of China (the "Agency"). In June 1998, the registered capital of the
Joint
Venture was reduced from $10,000 to $2,550. As of December 31, 2005, the Company
had contributed an aggregate of $1,800 in cash to the Joint Venture and provided
it with non-exclusive licenses to technologies and certain distribution rights
and the Agency had contributed certain land use rights. Following the reduction
in registered capital of the Joint Venture, neither the Company nor the Agency
is required to make further contributions to the Joint Venture. Prior to the
reduction in the amount of registered capital, the Joint Venture was subject
to
the annual licensing requirements of the Chinese government. Concurrent with
the
reduction in registered capital, the Joint Venture's business license has been
renewed through October 18, 2043.
Revenues
from the Joint Venture were $153, $230 and $157 for the
years
ended December 31, 2006, 2005 and 2004, respectively.
Long
lived assets were $8 and $16 as of December 31, 2006, and 2005,
respectively.
3.
Convertible
notes:
In
November 2004, the Company entered into an unsecured Note and Warrant Purchase
Agreement (the “2004 Purchase Agreement”) and a Registration Rights Agreement
(the “2004 Registration Rights Agreement, each dated as of October 28, 2004).
The 2004 Purchase Agreement did not require the Company to deliver registered
shares upon exercise of the warrants. However the Company was required to file
a
registration statement providing for the resale of the shares that are issuable
upon the conversion of the notes and the exercise of the warrants. The
registration statement was filed on December 22, 2004 and was declared effective
on January 26, 2005.
The
conversion right contained in the 2004 Purchase Agreement was analyzed under
paragraphs 6 and 12 of SFAS 133, “Accounting
for Derivative Instruments and Hedging Activities”
to
determine its proper classification in the Company’s balance sheet. The Company
also reviewed the liquidated damages clauses contained in the 2004 Registration
Rights Agreement that could potentially be payable if the registration statement
was not declared effective within 120 days of the closing, with reference to
SFAS 5. The Company determined that it was highly unlikely and not probable
that
the Company would incur liquidated damages. However, in light of EITF Issue
05-04 “The
Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
Subject to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock”,
the
Company effectively has accounted for the 2004 Registration Rights Agreement
and
the financial instrument under View C contained in EITF 05-04. The Company
would
not have recorded a liability at the inception of the debt, or at subsequent
reporting dates, or until the registration statement was declared effective
or
thereafter, as our assessment of the likelihood that the probability of actually
paying the liquidated damages was zero. Therefore, the 2004 Purchase Agreement
was recorded as a debt and equity transaction with no recorded asset or
liability associated with the conversion feature or liquidated damages clause
included in the 2004 Registration Rights Agreement.
The
financing discussed above, a combination of debt and equity, closed November
2,
2004. The proceeds to the Company were approximately $3,885, net of $310 in
commissions and legal expenses. H.C. Wainwright & Co., Inc. (“Wainwright”)
acted as placement agent. As placement agent for the Company, at closing
Wainwright received $731
in
commissions, legal fees and warrants. The commissions of approximately $285
and
legal fees of $25, mentioned above, were paid in cash. The Company issued
warrants to Wainwright to acquire 1,218 shares of the Company’s common stock. Of
the warrants issued, 870 are exercisable at $0.462 and 348 are exercisable
at
$0.508. The Company has ascribed the value of $421 to the Wainwright warrants,
which is recorded as deferred financing costs in the balance
F-18
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
3.
Convertible
notes (continued):
sheet
at
December 31, 2004. The remaining unamortized balance of the related deferred
financing costs at December 31, 2006 and December 31, 2005 was $75 and $221,
respectively. The fair value ascribed to the Wainwright warrants was estimated
on the commitment date using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 3.21%; expected life of 3 years;
expected volatility of 100%; and expected dividend yield of 0%. The Company
has
used the proceeds of the financing for working capital.
Under
the
terms of the financing, the Company issued to certain accredited investors
convertible promissory notes in the aggregate principal amount of $4,195 and
warrants to acquire 3,632 shares of the Company’s common stock at an exercise
price of $0.508 per share. The notes accrue interest at the rate of 7% per
annum, payable semi-annually, and are convertible into shares of the Company’s
common stock at the rate of $0.462 per share. The Company has ascribed a value
of $982 to the investor warrants, which is recorded as a discount to notes
payable in the balance sheet. The fair value ascribed to the warrants was
estimated on the commitment date using the Black-Scholes pricing model with
the
following assumptions: risk-free interest rate of 3.21%; expected life of 3
years; expected volatility of 100%; and expected dividend yield of 0%. In
addition to the fair value ascribed to the warrants, the Company has ascribed
$1,569 to the beneficial conversion feature in the convertible notes, which
is
recorded as a discount to notes payable in the balance sheet. The values
ascribed to the warrants and beneficial conversion feature follow the guidance
of the EITF Issue No. 98-5, “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”,
and ETIF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments” of the FASB’s Emerging Issues Task Force. The fair value of the
warrants and beneficial conversion feature is amortized to expense over the
life
of the convertible notes or upon earlier conversion using the effective interest
method. During the three and twelve month periods ended December 31, 2006,
the
Company had amortized to interest expense approximately $93 and $591,
respectively, of the loan discount and deferred financing costs. The balance
due
under the convertible notes is shown net of the remaining $228 unamortized
discount on the accompanying consolidated balance sheet. There were no note
conversions during the three months ended December 31, 2006. During the year
ended December 31, 2006, investors converted $460 of the notes in exchange
for
996 shares of the Company’s common stock. If the remaining aggregate principal
amount owing under the notes is converted, the Company will issue 2,993 shares
of its common stock. If the notes are not converted, all remaining principal
and
accrued but unpaid interest amount will be due October 28, 2007. The Company
may
pay accrued interest in cash or in shares of Company common stock, issued at
the
market price for the common stock calculated prior to the interest payment.
The
Company has not paid and does not intend to pay accrued interest with shares
of
its common stock.
The
warrants described above expire on October 28, 2009. The Company may call the
warrants if the Company’s common stock trades at $1.00 or above for 20
consecutive trading days after the date that is 20 days following the
effectiveness of a registration statement providing for the resale of the shares
issued upon the conversion of the notes and exercise of the warrants. Wainwright
will be paid approximately $28 in the aggregate if all of the investor warrants
are exercised. The Company will receive additional proceeds of approximately
$1,845 if all of the investor warrants are exercised.
Interest
expense related to convertible debt for the years ended December 31, 2006,
2005
and 2004 was $694, $2,478 and $238, respectively. Amortization of debt discount
and deferred financing costs included in interest expense for the years ended
December 31, 2006, 2005 and 2004 was $591, $2,275 and $187,
respectively.
4.
Long-term debt - related party:
In
August
2006, the Company entered into a Note and Warrant Purchase Agreement (the “2006
Purchase Agreement”) and a Registration Rights Agreement (the “2006 Registration
Rights Agreement”), each dated as of August 10, 2006. The Company secured the
right to borrow up to six hundred thousand dollars ($600).
F-19
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
4.
Long-term debt - related party (continued):
On
November 19, 2006 the Company borrowed the $600 available under the 2006
Purchase Agreement, of which $450 was borrowed from an approximate 7%
shareholder of the Company and the remaining $150 from an unrelated third party.
The Company expects to use the proceeds of the financing for additional working
capital. In addition, the Company issued warrants to purchase 3,111 of the
Company’s common stock. The Company has ascribed a value of $336 to the
warrants, which is recorded as a discount to long-term debt, related party,
in
the balance sheet and will be amortized to interest expense over the life of
the
loan. The relative fair value ascribed to the warrants was estimated on the
commitment date using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 4.68%; expected life of 3 years;
expected volatility of 54%; and expected dividend yield of 0%. During the three
and
twelve
month periods ended December 31, 2006, the Company had amortized to interest
expense approximately $70 of the loan discount. The balance due under
long-term
debt, related party, is shown net of the remaining $266 unamortized discount
on
the accompanying consolidated balance sheet.
The
note
is due May 17, 2008, bears interest at the rate of 15% per annum payable
quarterly in cash. The warrants will have a term of three years and an exercise
price of $0.51. The warrants include piggyback registration rights for the
underlying shares to participate in certain future registrations of the
Company’s common stock.
Interest
expense related to long-term debt, related party for the year ended December
31,
2006, was $11. Amortization of debt discount included in interest expense for
the year ended December 31, 2006 was $70.
5.
Stockholders' equity:
Common
stock
options:
The
Company has one stock-based employee compensation plan, (the
"1999 Option Plan")
and
also
grants options to employees, directors and consultants outside of the 1999
Plan.
In
June
1999, the Company adopted and the shareholders approved the 1999 Option Plan.
Incentive and non-qualified options under the 1999 Option Plan may be granted
to
employees, officers, and consultants of the Company. There are 4,000 shares
of
Common Stock authorized for issuance under the 1999 Option Plan. The options
have a seven year life and generally vest quarterly over three years. At
December 31, 2006, there were 190 shares available for future grants. As of
December 31, 2006, 3,629 plan options were outstanding and 2,801 plan options
were exercisable with a weighted average exercise price of $0.75 per
share.
The
Company has issued non-plan options to its employees and directors. The non-plan
options generally vest over four years or prorata quarterly over three years.
Non-plan options are generally exercisable over a period not to exceed seven
years. As
of
December 31, 2006, 2,264 non-plan options were outstanding and exercisable
with
a weighted average exercise price of $0.73 per share.
Share-based
payment:
On
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based
Payment”,
using
the modified prospective transition method, which requires the application
of
the accounting standard as of January 1, 2006. In accordance with the modified
prospective transition method, the Company’s consolidated financial statements
for the years ended December 31, 2005 and 2004 have not been restated to include
the impact of SFAS No. 123(R).
SFAS
No.
123(R) establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains employee
services in share-based payment transactions. In March 2005, the Securities
and
Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating
to SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its
adoption of SFAS No. 123(R).
F-20
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
5.
Stockholders' equity (continued):
Share-based
payment (continued):
Share-based
compensation expense is based on the estimated
grant date fair value
of
the portion of share-based payment awards that are
ultimately expected to vest during the period. The
grant
date fair
value of stock-based awards to employees and directors is calculated using
the
Black-Scholes option pricing model.
SFAS
No.
123(R) requires forfeitures
of
share-based
payment awards to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those
estimates. The
estimated average forfeiture rates for the year
ended
December
31,
2006,
was
approximately 25.01%.
For
the
year ended December 31, 2006,
stock-based compensation expense includes
compensation expense for share-based payment awards granted prior to, but not
yet vested as of December 31, 2005.
Share
based payment awards issued but
not
yet vested as of December 31, 2005
are
valued
in
accordance with the pro forma provisions of section SFAS No. 123.
Compensation
expense for the share-based payment awards granted subsequent to December 31,
2005, are based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R).
SFAS
No.
123(R) requires the cash flows from tax benefits for deductions in excess of
the
compensation costs recognized for share-based
payment awards to
be
classified as financing cash flows. Due to the Company’s loss position, there
was no such tax benefits during the year ended December 31, 2006.
Valuation
and Expense Information under SFAS No. 123(R):
The
weighted-average fair value of stock-based compensation is based on the single
option valuation approach. Forfeitures are estimated and it is assumed no
dividends will be declared. The estimated fair value of stock-based compensation
awards to employees is amortized using the accrual method over the vesting
period of the options. The fair value calculations are based on the following
assumptions:
|
Year
Ended
December
31, 2006
|
||
|
Risk
free interest rate
|
4.60%
- 5.11%
|
|
|
Expected
life (years)
|
3.46
-5.02
|
|
|
Expected
volatility
|
80.92%
- 104.57%
|
|
|
Expected
dividends
|
None
|
The
following table summarizes the allocation of stock-based compensation expense
related to stock option grants under SFAS No. 123(R) for the year ended December
31, 2006. There were no stock option exercises during the year ended December
31, 2006, except for 19 shares exercised by a consultant that were issued for
services.
|
Year
Ended
December
31, 2006
|
|||
|
Research
and development
|
$54
|
||
|
Sales
and marketing
|
92
|
||
|
General
and administrative
|
22
|
||
|
Director
options
|
21
|
||
|
Stock-based
compensation expense included in operating expenses
|
$189
|
F-21
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
5.
Stockholders' equity:
Share-based
payment (continued):
A
summary
activity under the Company’s plan and non plan options is as
follows:
|
December
31, 2006
|
December
31, 2005
|
|||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
Weighted
Average Remaining Contractual Life
|
Shares
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
Weighted
Average Remaining Contractual Life
|
|
|
Outstanding
at beginning of period
|
8,591
|
$0.75
|
$
6,498
|
5,716
|
$0.74
|
|||
|
Granted
|
1,764
|
$0.44
|
$
779
|
4,142
|
$0.75
|
|||
|
Exercised
|
(19)
|
$0.42
|
−
|
(24)
|
$0.41
|
|||
|
Forfeited
|
(4,443)
|
$0.72
|
$
3,232
|
(1,243)
|
$0.69
|
|||
|
Outstanding
at period end
|
5,893
|
$0.69
|
$
4,038
|
5.4
|
8,591
|
$0.75
|
||
|
Options
vested and exercisable at period end
|
5,066
|
$0.74
|
$
3,761
|
5.2
|
|
|||
|
Weighted
average grant-date fair value of options granted during the
period
|
$0.24
|
|||||||
The
following table summarizes significant ranges of outstanding and exercisable
options as of December 31, 2006:
|
Options
Outstanding
|
Options
Exercisable
|
|||||
|
Range
of Exercise Prices
|
Options
Outstanding
|
Weighted
Average Remaining Contractual Life(in years)
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|
|
$0.00
- $0.50
|
2,014
|
5.8
|
$0.35
|
1,312
|
$ 0.39
|
|
|
$0.51
- $1.00
|
3,454
|
5.4
|
$0.73
|
3,329
|
$ 0.74
|
|
|
$1.01
- $2.00
|
333
|
4.3
|
$1.51
|
333
|
$ 1.51
|
|
|
$2.01
- $2.99
|
50
|
0.8
|
$
3.00
|
50
|
$ 3.00
|
|
|
$3.00
- $7.50
|
42
|
1.5
|
$3.42
|
42
|
$ 3.42
|
|
|
5,893
|
5,066
|
|||||
F-22
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
5.
Stockholders' equity (continued):
Share-based
payment (continued):
A
summary
of the status of the Company’s nonvested shares as of December 31, 2006 is as
follows:
|
Nonvested
Shares
|
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
|||
|
Nonvested
at January 1, 2006
|
401
|
$0.36
|
|||
|
Granted
|
1,764
|
$0.24
|
|||
|
Unvested
options cancelled
|
(885)
|
$0.29
|
|||
|
Vested
|
(453)
|
$0.26
|
|||
|
Nonvested
|
827
|
$0.22
|
As
of
December 31, 2006, there was $93 of total unrecognized compensation cost related
to nonvested share-based compensation arrangements. The unrecognized
compensation cost is expected to be recognized over a weighted average period
of
4.0 years.
The
Company expects to make additional option grants in future years. The
options
issued to employees and directors will be subject to the provisions of FASB
Statement 123(R), which may have a material impact on the Company’s financial
operations.
As
of
December 31, 2006, 5,893 shares of Common Stock were reserved for issuance
upon exercise of outstanding options.
Warrants:
At
December 31, 2006, 7,961 shares of Common stock were reserved for issuance
upon
exercise of outstanding warrants.
6.
Commitments:
Lease
commitments:
The
Company currently leases its principal facilities (the "Principal Offices)
in
Redwood Shores, California, pursuant to a sublease that expires in 2011. The
Joint Venture leases space on a month to month basis in Nanjing, China. In
addition to monthly rent, the U.S. facilities are subject to additional rental
payments for utilities and other costs above the base amount. Facilities rent
expense was approximately $299, $401, and $443, in 2006, 2005, and 2004,
respectively.
Future
minimum payments required under capital leases, which expire in 2007, were
insignificant at December 31, 2006.
F-23
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
7.
Income taxes:
As
of
December 31, 2006, the Company had federal net operating loss carryforwards
available to reduce taxable income of approximately $70,454. The net operating
loss carryforwards expire between 2007 and 2026. The Company also had federal
research and investment tax credit carryforwards of approximately $315 that
expire at various dates through 2012.
Deferred
tax assets and liabilities at December 31, consist of the following:
|
2006
|
2005
|
||
|
Deferred
tax assets:
|
|||
|
Net
operating loss carryforwards
|
$28,182
|
$24,585
|
|
|
Credit
carryforwards
|
315
|
396
|
|
|
Deferred
income
|
162
|
223
|
|
|
Other,
net
|
213
|
215
|
|
|
Total
deferred tax assets
|
28,872
|
25,419
|
|
|
Valuation
allowance
|
(28,872)
|
(25,419)
|
|
|
Net
deferred tax assets
|
$
-
|
$
-
|
Income
tax (benefit) differs from the expected statutory rate as follows:
|
2006
|
2005
|
2004
|
||||||||
|
Expected
income tax cost (benefit)
|
$
|
(1,085
|
)
|
$
|
(1,327
|
)
|
$
|
668
|
||
|
State
income tax net of federal benefit cost
|
291
|
234
|
(89
|
)
|
||||||
|
Expired
net operating loss
|
1,471
|
2,268
|
254
|
|||||||
|
Change
in valuation allowance
|
(111
|
)
|
(2,848
|
)
|
(833
|
)
|
||||
|
Other
|
(566
|
)
|
1,673
|
-
|
||||||
|
Income
tax expense (benefit)
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
A
full
valuation allowance has been established for the Company's net deferred tax
assets since the realization of such assets through the generation of future
taxable income is uncertain.
Under
the
Tax Reform Act of 1986, the amounts of, and the benefit from, net operating
losses and tax credit carryforwards may be impaired or limited in certain
circumstances. These circumstances include, but are not limited to, a cumulative
stock ownership change of greater than 50%, as defined, over a three-year
period. During 1997, the Company experienced stock ownership changes which
could
limit the utilization of its net operating loss and research and investment
tax
credit carryforwards in future periods.
8.
Employee benefit plans:
The
Company sponsors a 401(k) defined contribution plan covering all employees
meeting certain eligibility requirements. Contributions made by the Company
are
determined annually by the Board of Directors. To date, the Company has made
no
contributions to this plan.
F-24
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
9.
Quarterly information (unaudited)
The
unaudited summarized quarterly financial data for the years ended December
31,
2006, 2005 and 2004, presented below, in the opinion of Management, reflects
all
adjustments which are of a normal and recurring nature necessary to present
fairly the results of operations for the periods presented.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
||||||||||||
|
2006
Unaudited
|
||||||||||||||||
|
Net
sales
|
$
|
701
|
$
|
448
|
$
|
701
|
$
|
492
|
$
|
2,342
|
||||||
|
Gross
profit
|
$
|
634
|
$
|
419
|
$
|
645
|
$
|
394
|
$
|
2,092
|
||||||
|
Loss
before income taxes, and minority interest
|
$
|
(813
|
)
|
$
|
(928
|
)
|
$
|
(672
|
)
|
$
|
(878
|
)
|
$
|
(3,291
|
)
|
|
|
Net
loss
|
$
|
(811
|
)
|
$
|
(925
|
)
|
$
|
(669
|
)
|
$
|
(881
|
)
|
$
|
(3,286
|
)
|
|
|
Basic
and diluted loss per share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
|
|
2005
Unaudited
|
||||||||||||||||
|
Net
sales
|
$
|
579
|
$
|
1,209
|
$
|
607
|
$
|
726
|
$
|
3,121
|
||||||
|
Gross
profit
|
$
|
557
|
$
|
1,180
|
$
|
579
|
$
|
657
|
$
|
2,973
|
||||||
|
Loss
before income taxes, and minority interest
|
$
|
(1,095
|
)
|
$
|
(840
|
)
|
$
|
(1,575
|
)
|
$
|
(540
|
)
|
$
|
(4,050
|
)
|
|
|
Net
loss
|
$
|
(1,088
|
)
|
$
|
(834
|
)
|
$
|
(1,569
|
)
|
$
|
(540
|
)
|
$
|
(4,031
|
)
|
|
|
Basic
and diluted loss per share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
|
|
2004
Unaudited
|
||||||||||||||||
|
Net
sales
|
$
|
2,429
|
$
|
630
|
$
|
3,669
|
$
|
556
|
$
|
7,284
|
||||||
|
Gross
profit
|
$
|
2,396
|
$
|
619
|
$
|
3,663
|
$
|
553
|
$
|
7,231
|
||||||
|
Income
(loss) before income taxes, and minority interest
|
$
|
1,167
|
$
|
(678
|
)
|
$
|
2,138
|
$
|
(1,026
|
)
|
$
|
1,601
|
||||
|
Net
income (loss)
|
$
|
1,167
|
$
|
(678
|
)
|
$
|
2,145
|
$
|
(1,014
|
)
|
$
|
1,620
|
||||
|
Basic
and diluted income (loss) per share
|
$
|
0.01
|
$
|
(0.01
|
)
|
$
|
0.02
|
$
|
(0.01
|
)
|
$
|
0.02
|
||||
10.
Subsequent event:
In
February 2007, the Company established a second credit facility pursuant to
a
note and warrant purchase agreement with an approximate 7% shareholder of the
Company. The terms of the agreement allow the Company to borrow, on demand
and
during a period not to exceed eighteen months, an aggregate principal amount
of
up to six hundred thousand dollars ($600). Upon each draw, the Company will
be
required to issue warrants to purchase a pro rata number of shares of its common
stock, with a maximum number of 3,111 to be issued if the entire $600 is drawn.
The notes will bear interest at the rate of fifteen percent (15%) per annum
payable quarterly in cash. The warrants will have a three year life and an
exercise price of $0.51. In the event the credit facility is not fully drawn
upon, the Company shall issue to the investor, as a standby commitment fee,
a
pro rata portion of 250 shares of the Company’s common stock, based upon the
amount not drawn to the total amount available. The Warrants will include
piggyback registration rights, for the underlying shares, to participate in
any
future registrations of the Company’s common stock.
F-25
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
10.
Subsequent event (continued):
On
March
15, 2007 the company and the approximate 7% shareholder signed an amendment
to
the note and warrant purchase agreement. The maximum amount of borrowing after
the amendment was increased from $600, to $1,000, and all references to $600
are
amended to $1,000. The maximum number of warrants that may be issued under
the
Agreements was increased from 3,111 to 5,185 and all references to such maximum
number are amended as such.
F-26
Communication
Intelligence Corporation
Notes
to
Consolidated Financial Statements
(In
thousands)
SCHEDULE
II
Communication
Intelligence Corporation
Valuation
and Qualifying Accounts and Reserves
(In
thousands)
Years
Ended December 31, 2004, 2005, and 2006
|
Balance
At
Beginning
Of
Period
|
Charged
to
Costs
and
Expense
|
Deductions
|
Balance
At
End
Of
Period
|
|
|
Year
ended December 31, 2004:
|
||||
|
Accounts
receivable reserves
|
$
256
|
$
234
|
$ (86)
|
$
404
|
|
Year
ended December 31, 2005:
|
||||
|
Accounts
receivable reserves
|
$
404
|
$
4
|
$ (21)
|
$
387
|
|
Year
ended December 31, 2006:
|
||||
|
Accounts
receivable reserves
|
$
387
|
$
10
|
$
-
|
$
397
|
S-1