iSign Solutions Inc. - Quarter Report: 2006 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
X
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended: September
30, 2006
OR
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from
to
Commission
File Number: 000-19301
COMMUNICATION
INTELLIGENCE CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
94-2790442
|
|||
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|||
|
incorporation
or organization)
|
Identification
No.)
|
275
Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number, including area code: (650)
802-7888
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
|
Yes
|
X
|
No
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (Check one).
|
large
accelerated filer
|
accelerated
filer
|
X
|
non-accelerated
filer
|
Indicate
by check mark whether the registrant is a shell company (as defined in Section
12b-2 of the exchange Act)
|
Yes
|
No
|
X
|
Number
of
shares outstanding of the registrant’s Common Stock, as of November 9, 2006:
107,557,161.
INDEX
|
Page
No.
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
Item
1. Financial
Statements
|
|
|
Condensed
Consolidated Balance Sheets at September 30, 2006 (unaudited) and
December
31, 2005
|
3
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine-Month
Periods Ended September 30, 2006 and 2005 (unaudited)
|
4
|
|
Condensed
Consolidated Statements of Changes in Stockholders’ Equity for the
Three and Nine-Month Periods Ended September 30, 2006
(unaudited)
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine-Month
Periods
Ended
September 30, 2006 and 2005 (unaudited)
|
6
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7
|
|
Item
2. Management's
Discussion and Analysis of Financial Condition and
Results
of Operations
|
20
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
|
Item
4. Controls
and Procedures
|
31
|
|
PART
II. OTHER INFORMATION
|
|
|
Item
1. Legal
Proceedings
|
31
|
|
Item
1A. Risk
Factors
|
31
|
|
Item
2. Unregistered
Sale of Securities and Use of Proceeds
|
31
|
|
Item
3. Defaults
Upon Senior Securities
|
31
|
|
Item
4. Submission
of Matters to a Vote of Security Holders
|
31
|
|
Item
5. Other
Information
|
31
|
|
Item
6. Exhibits
|
|
|
(a)
Exhibits
|
32
|
|
Signatures
|
33
|
-2-
Communication
Intelligence Corporation
and
Subsidiary
Condensed
Consolidated Balance Sheets
(In
thousands)
|
September
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
Unaudited
|
|||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
771
|
$
|
2,849
|
|||
|
Accounts
receivable, net
|
462
|
483
|
|||||
|
Deferred
financing costs - current portion
|
90
|
121
|
|||||
|
Prepaid
expenses and other current assets
|
197
|
168
|
|||||
|
Total
current assets
|
1,520
|
3,621
|
|||||
|
Property
and equipment, net
|
159
|
147
|
|||||
|
Patents
and trademarks
|
4,001
|
4,285
|
|||||
|
Capitalized
software development costs
|
587
|
283
|
|||||
|
Deferred
financing costs - long term
|
8
|
100
|
|||||
|
Other
assets
|
30
|
30
|
|||||
|
Total
assets
|
$
|
6,305
|
$
|
8,466
|
|||
|
Liabilities
and Stockholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
242
|
$
|
288
|
|||
|
Accrued
compensation
|
222
|
235
|
|||||
|
Other
accrued liabilities
|
221
|
283
|
|||||
|
Deferred
revenue
|
388
|
557
|
|||||
|
Total
current liabilities
|
1,073
|
1,363
|
|||||
|
Convertible
notes, net of unamortized fair value assigned to
the
beneficial conversion feature and warrants of $298 and $674
at
September 30, 2006 and December 31, 2005, respectively
|
1,084
|
1,169
|
|||||
|
Total
Liabilities
|
2,157
|
2,532
|
|||||
|
Minority
interest
|
70
|
78
|
|||||
|
Commitments
and contingencies
|
-
|
-
|
|||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
Stock, $.01 par value, 10,000 shares authorized, 0 outstanding at
September 30, 2006 and December 31, 2005
|
-
|
-
|
|||||
|
Common
stock $.01 par value; 125,000 shares authorized,
107,557
and 106,542 shares issued and outstanding at
September
30, 2006 and December 31, 2005
|
1,076
|
1,065
|
|||||
|
Additional
paid-in capital
|
90,118
|
89,517
|
|||||
|
Accumulated
deficit
|
(86,980
|
)
|
(84,575
|
)
|
|||
|
Accumulated
foreign currency translation adjustment
|
(136
|
)
|
(151
|
)
|
|||
|
Total
stockholders’ equity
|
4,078
|
5,856
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
6,305
|
$
|
8,466
|
|||
The
accompanying notes form an integral part of these Condensed Consolidated
Financial Statements
- 3 -
Communication
Intelligence Corporation
and Subsidiary
Condensed
Consolidated Statements of Operations
Unaudited
(In
thousands, except per share amounts)
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||
|
September
30,
|
September
30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Revenues
|
|||||||||||||
|
eSignature
|
$
|
419
|
$
|
311
|
$
|
1,223
|
$
|
1,654
|
|||||
|
Natural
input
|
282
|
296
|
627
|
741
|
|||||||||
|
Total
Revenues
|
701
|
607
|
1,850
|
2,395
|
|||||||||
|
Operating
costs and expenses:
|
|||||||||||||
|
Cost
of sales
|
|||||||||||||
|
eSignature
|
53
|
28
|
137
|
79
|
|||||||||
|
Natural
input
|
3
|
−
|
15
|
−
|
|||||||||
|
Research
and development
|
212
|
283
|
638
|
828
|
|||||||||
|
Sales
and marketing
|
463
|
307
|
1,242
|
944
|
|||||||||
|
General
and administrative
|
488
|
666
|
1,646
|
1,734
|
|||||||||
|
Total
operating costs and expenses
|
1,219
|
1,284
|
3,678
|
3,585
|
|||||||||
|
Loss
from operations
|
(518
|
)
|
(677
|
)
|
(1,828
|
)
|
(1,190
|
)
|
|||||
|
Other
income (expense)
|
|||||||||||||
|
Interest
and other income (expense), net
|
9
|
(24
|
)
|
39
|
(33
|
)
|
|||||||
|
Interest
expense
|
(70
|
)
|
(37
|
)
|
(126
|
)
|
(178
|
)
|
|||||
|
Amortization
of loan discount and deferred financing cost
|
(93
|
)
|
(837
|
)
|
(498
|
)
|
(2,109
|
)
|
|||||
|
Minority
interest
|
3
|
6
|
8
|
19
|
|||||||||
|
Net
loss
|
$
|
(669
|
)
|
$
|
(1,569
|
)
|
$
|
(2,405
|
)
|
$
|
(3,491
|
)
|
|
|
Basic
and diluted loss per common share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
107,557
|
106,093
|
107,312
|
103,401
|
|||||||||
The
accompanying notes form an integral part of these Condensed Consolidated
Financial Statements
- 4 -
Communication
Intelligence Corporation
and
Subsidiary
Consolidated
Statements of Changes in Stockholders' Equity
Unaudited
(In
thousands, except share amounts)
|
Shares
Outstanding
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
||||||||||||||
|
Balances
as of December 31, 2005
|
106,542
|
$
|
1,065
|
$
|
89,517
|
$
|
(84,575
|
)
|
$
|
(151
|
)
|
$
|
5,856
|
||||||
|
Shares
issued on conversion of notes
|
931
|
10
|
421
|
431
|
|||||||||||||||
|
Stock
based employee compensation
|
56
|
56
|
|||||||||||||||||
|
Stock
issued for services
|
6
|
6
|
|||||||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||
|
Net
loss
|
(811
|
)
|
(811
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
1
|
1
|
|||||||||||||||||
|
Total
comprehensive loss
|
(810
|
)
|
|||||||||||||||||
|
Balances
as of March 31, 2006
|
107,473
|
$
|
1,075
|
$
|
90,000
|
$
|
(85,386
|
)
|
$
|
(150
|
)
|
$
|
5,539
|
||||||
|
Shares
issued on conversion of notes
|
65
|
1
|
29
|
30
|
|||||||||||||||
|
Shares
issued for services
|
19
|
−
|
|||||||||||||||||
|
Stock
based employee compensation
|
49
|
49
|
|||||||||||||||||
|
Net
loss
|
(925
|
)
|
(925
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
(1
|
)
|
(1
|
)
|
|||||||||||||||
|
Total
comprehensive loss
|
(926
|
)
|
|||||||||||||||||
|
Balances
as of June 30, 2006
|
107,557
|
$
|
1,076
|
$
|
90,078
|
$
|
(86,311
|
)
|
$
|
(151
|
)
|
$
|
4,692
|
||||||
|
Stock
based employee compensation
|
40
|
40
|
|||||||||||||||||
|
Net
loss
|
(669
|
)
|
(669
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
15
|
15
|
|||||||||||||||||
|
Total
comprehensive loss
|
(654
|
)
|
|||||||||||||||||
|
Balances
as of September 30, 2006
|
107,557
|
$
|
1,076
|
$
|
90,118
|
$
|
(86,980
|
)
|
$
|
(136
|
)
|
$
|
4,078
|
||||||
The
accompanying notes form an integral part of these Condensed Consolidated
Financial Statements
- 5 -
Communication
Intelligence Corporation
and Subsidiary
Condensed
Consolidated Statements of Cash Flows
Unaudited
(In
thousands)
|
Nine
Months Ended
September
30,
|
|||||||
|
2006
|
2005
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(2,405
|
)
|
$
|
(3,491
|
)
|
|
|
Adjustments
to reconcile net loss to net cash
used
for operating activities:
|
|||||||
|
Depreciation
and amortization
|
420
|
353
|
|||||
|
Amortization
of discount on convertible notes
|
376
|
1,612
|
|||||
|
Deferred
financing costs
|
123
|
513
|
|||||
|
Loan
commitment fee
|
46
|
-
|
|||||
|
Stock
based employee compensation
|
145
|
-
|
|||||
|
Stock
issued for services
|
6
|
-
|
|||||
|
Loss
on disposal of fixed assets
|
-
|
38
|
|||||
|
Minority
interest
|
(8
|
)
|
(19
|
)
|
|||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable, net
|
21
|
(438
|
)
|
||||
|
Prepaid
expenses and other current assets
|
(29
|
)
|
(98
|
)
|
|||
|
Accounts
payable
|
(46
|
)
|
46
|
||||
|
Accrued
compensation
|
(13
|
)
|
(30
|
)
|
|||
|
Other
accrued liabilities
|
(100
|
)
|
7
|
||||
|
Deferred
revenue
|
(169
|
)
|
215
|
||||
|
Net
cash used for operating activities
|
(1,633
|
)
|
(1,292
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Acquisition
of property and equipment
|
(85
|
)
|
(57
|
)
|
|||
|
Capitalized
software development costs
|
(380
|
)
|
(233
|
)
|
|||
|
Net
cash used for investing activities
|
(465
|
)
|
(290
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from exercise of stock options
|
-
|
5
|
|||||
|
Payments
on short-term debt
|
-
|
(44
|
)
|
||||
|
Payments
on long-term debt
|
-
|
(5
|
)
|
||||
|
Principal
payments on capital lease obligations
|
(8
|
)
|
(7
|
)
|
|||
|
Net
cash used for financing activities
|
(8
|
)
|
(51
|
)
|
|||
|
Effect
of exchange rate changes on cash
|
28
|
(12
|
)
|
||||
|
Net
decrease in cash and cash equivalents
|
(2,078
|
)
|
(1,645
|
)
|
|||
|
Cash
and cash equivalents at beginning of period
|
2,849
|
4,736
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
771
|
$
|
3,091
|
|||
Supplemental
Disclosure of Non Cash Financing Activities
|
Convertible
Notes converted to common stock
|
$
|
461
|
$
|
2,277
|
|||
|
Supplementary
disclosure of cash flow information
|
|||||||
|
Interest
paid
|
$
|
61
|
$
|
144
|
|||
|
Income
taxes
|
$
|
-
|
$
|
39
|
The
accompanying notes form an integral part of these Condensed Consolidated
Financial Statements
- 6 -
Communication
Intelligence corporation
and Subsiderary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation
| 1. |
Nature
of business
|
The
financial information contained herein should be read in conjunction with the
Company's consolidated audited financial statements and notes thereto included
in its Annual Report on Form 10-K/A for the year ended December 31, 2005.
Certain amounts from the 2005 periods have been reclassified to conform to
the
presentation used in the current period.
The
accompanying unaudited condensed consolidated financial statements of
Communication Intelligence Corporation and its subsidiary (the “Company” or
“CIC”) have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the
information and footnotes required by accounting principles generally accepted
in the United States of America (“GAAP”) for complete consolidated financial
statements. In the opinion of management, the unaudited condensed consolidated
financial statements included in this quarterly report reflect all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of its financial position at the dates
presented and the Company’s results of operations and cash flows for the periods
presented. The Company’s interim results are not necessarily indicative of the
results to be expected for the entire year.
The
Company develops and markets electronic signature software, biometric
verification software for handwritten signatures and handwritten data entry
software solutions aimed at emerging, large potential markets such as
e-commerce, workflow automation, corporate security, smart handheld devices
such
as handheld computers & smartphones and the Palm OS
aftermarket.
The
Company offers a wide range of multi-platform software products that enable
or
enhance pen-based computing.
The
Company’s core software technologies include electronic signature, biometric
signature verification, cryptography, electronic ink recording tools
(SignatureOne™, InkTools®, Sign-it®, iSign® and Sign-On®), operating systems
extensions that enable pen input (PenX™) and multilingual handwriting
recognition systems (Jot®) and the Handwriter® Recognition System.
Transaction
and communication enabling technologies have been fundamental to the Company’s
development of software for electronic signatures, handwritten biometric
signature verification, data security, data compression, and electronic ink
capture. These 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. CIC
believes that these technologies offer more efficient methods for conducting
electronic transactions while providing greater user authentication
functionality, heightened data security, and increased user
productivity.
Natural
input technologies are designed to allow users to interact with handheld
devices, including PDA’s and smartphones, by using an electronic pen or "stylus"
as the primary input device or in conjunction with a keyboard. CIC's natural
input offerings include multilingual handwriting recognition systems, software
keyboards, and predictive text entry technologies.
- 7 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
| 1. |
Nature
of business (continued)
|
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring losses from operations that raise a substantial doubt about
its ability to continue as a going concern. At September 30, 2006, the Company’s
accumulated deficit was approximately $87,000 and the Company had working
capital of $447. The Company filed a registration statement with the Securities
and Exchange Commission that was declared effective January 2005, pursuant
to a
financing of convertible notes (See Note 6 of the condensed consolidated
financial statements). There can be no assurance that the Company will have
adequate capital resources to fund planned operations or that 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 accompanying condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Recent
Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
which changes the requirements for the accounting and reporting of a change
in
accounting principle and applies to all voluntary changes in accounting
principles. It also applies to changes required by an accounting pronouncement
in the unusual instance that the pronouncement does not include specific
transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. APB No. 20 “Accounting Changes”
requires that most voluntary changes in accounting principle be recognized
by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principles. This statement requires retrospective
application to prior period financial statements of changes in accounting
principles, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. The provisions of SFAS No.
154
are effective for fiscal years beginning after December 15, 2005. The adoption
of SFAS No. 154 by the Company did not have a material impact on its
consolidated financial statements.
In
June
2006, FASB ratified the consensuses reached in the EITF 06-3: “How Sales Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross Versus Net Presentation)”. For
taxes within the scope of this issue, the consensus will indicate that gross
vs.
net income statement classification of that tax is an accounting policy
decision. The consensus itself will not require an entity to change its current
policy related to the classification of these taxes. However, voluntarily
changing from gross to net presentation or vice versa would be considered a
change in accounting policy, which would require the application of FASB
Statement No. 154, “Accounting Changes and Error Corrections”. As a result, any
such change would need to be considered preferable. The EITF will emphasize
that
the consensus on this issue should not be used as a basis for concluding that
a
particular presentation (e.g., gross presentation) is preferable. In addition,
for taxes within the scope of this issue that are significant in amount, the
consensus will require the following disclosures: (a)
the
accounting policy elected for these taxes and (b)
the
amounts of the taxes reflected gross (as revenue) in the income statement on
an
interim and annual basis for all periods presented. The latter disclosure may
be
provided on an aggregate basis. This consensus will be effective in interim
and
annual periods beginning after December 15, 2006, with earlier application
permitted. The Company does not believe that EITF 06-3 will have an impact
on
its financial statement presentation.
-
8
-
Communication
Intelligence corporation
and Subsiderary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
| 1. |
Nature
of business (continued)
|
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.
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.
2. Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturities of
up
to 90 days to be cash equivalents.
Cash
and
cash equivalents consist of the following:
|
September
30,
2006
|
December
31,
2005
|
||||||
|
Unaudited
|
|||||||
|
Cash
in bank
|
$
|
67
|
$
|
213
|
|||
|
Money
market
|
704
|
2,636
|
|||||
|
$
|
771
|
$
|
2,849
|
||||
3. Accounts
receivable concentration
As
of
September 30, 2006, four customers accounted for 93% of net accounts receivable.
Customer A accounted for 15%, Customer B accounted for 17%, Customer C accounted
for 23% and Customer D accounted for 38%. As of December 31, 2005 three
customers accounted for 74% of net accounts receivable. Customer
A accounted for 11%, Customer B accounted for 21%, and Customer C accounted
for
42%.
-
9
-
Communication
Intelligence corporation
and Subsiderary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(thousands,
except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
| 4. |
Patents
|
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 follows 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 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.
Management
recognizes that revenues have fluctuated based on comparable prior periods,
and
may continue to fluctuate based upon historical experience of the time involved
to close large sales transactions. Management obtained an independent valuation
of its patents as of December 31, 2005, to support its assertion that no
impairment of the carrying value of the patents existed. The Company believes
that its quarterly impairment analysis and the December 31, 2005 independent
valuation continue to be valid, and no impairment in the carrying values of
the
patents exists at September 30, 2006.
Amortization
of patent costs was $95 and $284 for each of the three and nine month periods
ended September 30, 2006 and 2005.
| 5. |
Deferred
revenue
|
Deferred
revenue is recorded for post-contract support and is recognized as revenue
when
costs are incurred or over the support period, generally twelve months,
whichever is longer.
| 6. |
Convertible
Notes
|
In
November 2004, the Company entered into an unsecured Note and Warrant Purchase
Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the
“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 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 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 Purchase Agreement was recorded as a debt and equity
transaction with no
-
10
-
Communication
Intelligence corporation
and Subsiderary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
6. Convertible
Notes (continued)
recorded
asset or liability associated with the conversion feature or liquidated damages
clause included in the 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 sheet at December 31, 2004. The remaining unamortized balance
of
the related deferred financing costs at December 31, 2005 and September 31,
2006
was $195 and $86, 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 and expects to continue to use the proceeds of the
financing for additional 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 nine month periods ended September 30, 2006, the
Company had amortized to interest expense approximately $93 and $498,
respectively, of the loan discount and deferred financing costs. The balance
due
under the convertible notes is shown net of the remaining $298 unamortized
discount on the accompanying consolidated balance sheet. There were no note
conversions during the three months ended September 30, 2006. During the nine
month period ended September 30, 2006, investors converted $461 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 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
-
11
-
Communication
Intelligence corporation
and Subsiderary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
6. Convertible
Notes (continued)
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 three and nine month periods ended
September 30, 2006 was $116 and $577, respectively, including $93 and $498,
respectively, related to amortization of debt discount and deferred financing
costs, respectively. For the three and nine month periods ended September 30,
2005, interest expense related to convertible debt was $874 and $2,283,
respectively, including $837 and $2,109, respectively, related to amortization
of debt discount and deferred financing costs, respectively.
| 7. |
Note
And Warrant Purchase Agreement
|
In
August
2006, the Company entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) and a Registration Rights Agreement (the “Registration
Rights Agreement”), each dated as of August 10, 2006. The Company secured the
right to borrow up to six hundred thousand dollars ($600). The Company expects
to use the proceeds of the financing for additional working
capital.
Under
the
Purchase Agreement, the Company may borrow, on demand through November 15,
2006,
an aggregate principal amount of up to $600. Amounts borrowed will be due within
eighteen (18) months of such borrowing. 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
borrowed. The notes will bear 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. In the event the full amount available under the credit facility
is not borrowed, the Company will be required to issue, as a standby commitment
fee, a pro rata portion of 335 shares of the Company’s common stock, based upon
the difference between $600 and the actual amount borrowed under the credit
facility. The warrants will include piggyback registration rights for the
underlying shares to participate in certain future registrations of the
Company’s common stock.
As
of
September 30, 2006, the Company has recorded a non cash charge to interest
expense of $46 in pro rata standby commitment fees.
8. Net
(loss) per share
The
Company calculates net 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 loss per share, which is based
on
the weighted average number of shares outstanding, and when applicable, diluted
income per share, which is based on the weighted average number of shares and
dilutive potential shares outstanding.
For
the
three months ended September 30, 2006, 6,221 shares of common stock subject
to
outstanding options, 2,993 shares issuable upon the conversion of the
convertible notes and 4,850 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 three month period ended September
30, 2005, 6,343 shares of common stock subject to outstanding options, 4,151
shares issuable upon the conversion of the convertible notes and 4,850 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.
- 12 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
8 Net
(loss) per share (continued)
|
Three
Months Ended
|
|||||||||||||||||||
|
September
30, 2006
|
September
30, 2005
|
||||||||||||||||||
|
Net
Loss
|
Weighted
Average
Shares
Outstanding
|
Per-Share
Amount
|
Net
Loss
|
Weighted
Average
Shares
Outstanding
|
Per-Share
Amount
|
||||||||||||||
|
Basic
loss per share:
|
|||||||||||||||||||
|
Loss
available to common stockholders
|
$
|
(669
|
)
|
107,557
|
$
|
(0.01
|
)
|
$
|
(1,569
|
)
|
106,903
|
$
|
(0.01
|
)
|
|||||
|
Effect
of dilutive securities
|
|||||||||||||||||||
|
Stock
options
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Diluted
loss
|
$
|
(669
|
)
|
107,557
|
$
|
(0.01
|
)
|
$
|
(1,569
|
)
|
106,093
|
$
|
(0.01
|
)
|
|||||
For
the
nine months ended September 30, 2006, 6,221 shares of common stock subject
to
outstanding options, 2,993 shares issuable upon the conversion of the
convertible notes and 4,850 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 nine-month period ended September
30, 2005, 6,343 shares of common stock subject to outstanding options, 4,151
shares issuable upon the conversion of the convertible notes and 4,850 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.
|
Nine
Months Ended
|
|||||||||||||||||||
|
September
30, 2006
|
September
30, 2005
|
||||||||||||||||||
|
Net
Loss
|
Weighted
Average
Shares
Outstanding
|
Per-Share
Amount
|
Net
Loss
|
Weighted
Average
Shares
Outstanding
|
Per-Share
Amount
|
||||||||||||||
|
Basic
loss per share:
|
|||||||||||||||||||
|
Loss
available to common stockholders
|
$
|
(2,405
|
)
|
107,312
|
$
|
(0.02
|
)
|
$
|
(3,491
|
)
|
103,401
|
$
|
(0.03
|
)
|
|||||
|
Effect
of dilutive securities
|
|||||||||||||||||||
|
Stock
options
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Diluted
loss
|
$
|
(2,405
|
)
|
107,312
|
$
|
(0.02
|
)
|
$
|
(3,491
|
)
|
103,401
|
$
|
(0.03
|
)
|
|||||
9. Common
Stock Options
The
Company has two stock-based employee compensation plans and also
grants options to employees, directors and consultants outside of the 1999
Plan
and 1994 Plan pursuant to individual plans. These plans are more fully described
in Note 7 of the Company’s Form 10K/A.
- 13 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
9. Common
Stock Options (continued)
On
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based
Payment”,
which
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. SFAS No. 123(R) supersedes the Company’s previous accounting
under Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees”
(APB 25)
for periods beginning in fiscal 2006. 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 adopted SFAS No. 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of
January 1, 2006, the first day of the Company’s fiscal year 2006. The
Company’s condensed consolidated financial statements as of and for the three
and nine-month periods ended September 30, 2006 reflects the impact of SFAS
No.
123(R). In accordance with the modified prospective transition method, the
Company’s condensed consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of SFAS No. 123(R).
SFAS
No.
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s Consolidated
Statement of Operations. Prior to the adoption of SFAS No. 123(R), the Company
accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with APB 25 as allowed under SFAS No. 123,
“Accounting for Stock-Based Compensation”.
Under
the intrinsic value method, no stock-based compensation expense had been
recognized in the Company’s Consolidated Statements of Operations.
Stock-based
compensation expense recognized during the period is based on the value of
the
portion of share-based payment awards that is ultimately expected to vest during
the period. Stock-based compensation expense recognized in the Company’s
Consolidated Statement of Operations for the first three quarters of fiscal
2006
included compensation expense for share-based payment awards granted prior
to,
but not yet vested as of December 31, 2005, based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS No. 123 and
compensation expense for the share-based payment awards granted subsequent
to
December 31, 2005, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). As stock-based compensation expense
recognized in the Consolidated Statement of Operations for the first three
quarters of fiscal 2006 is based on awards ultimately expected to vest, it
has
been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures
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 nine months ended September 30, 2006, of approximately
25.01% for grants is based on historical forfeiture experience. In the Company’s
pro forma information required under SFAS No. 123 for the periods prior to
fiscal 2006, the Company accounted for forfeitures as they occurred.
SFAS
No.
123(R) requires the cash flows resulting from the tax benefits resulting from
tax deductions in excess of the compensation cost recognized for those options
to be classified as financing cash flows. Due to the Company’s loss position,
there were no such tax benefits during the three and nine months ended
- 14 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
9. Common
Stock Options (continued)
September
30, 2006. Prior to the adoption of SFAS 123(R) those benefits would have been
reported as operating cash flows had the Company received any tax benefits
related to stock option exercises.
The
fair
value of stock-based awards to employees and directors is calculated using
the
Black-Scholes option pricing model, even though this model was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which differ significantly from the Company’s stock
options. The Black-Scholes model also requires subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The expected term of options granted is derived
from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate is based on the U.S. Treasury rates
in
effect during the corresponding period of grant. The expected volatility is
based on the historical volatility of the Company’s stock price. These factors
could change in the future, affecting the determination of stock-based
compensation expense in future periods.
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:
|
Three
and Nine Months Ended
September
30, 2006
|
||
|
Risk
free interest rate
|
3.65%
- 5.11%
|
|
|
Expected
life (years)
|
3.46
-7.00
|
|
|
Expected
volatility
|
101.8%
|
|
|
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 three and nine
months ended September 30, 2006. There were no stock option exercises during
the
three and nine months ended September 30, 2006, except for 19 shares exercised
by a consultant that were issued for services.
|
Three
Months Ended
September
30, 2006
|
Nine
Months Ended
September
30, 2006
|
||||||
|
Research
and development
|
$
|
8
|
$
|
42
|
|||
|
Sales
and marketing
|
26
|
65
|
|||||
|
General
and administrative
|
6
|
17
|
|||||
|
Director
options
|
−
|
21
|
|||||
|
Stock-based
compensation expense included in operating expenses
|
$
|
40
|
$
|
145
|
|||
As
a
result of adopting SFAS No. 123(R) as of January 1, 2006, the Company’s net
loss for the three and nine months ended September 30, 2006 was higher by $40
and $145, respectively, than it would have been had the Company continued to
account for share-based compensation under APB 25. The change in the
Company’s net loss per common share, basic and diluted, for the three and nine
months ended September 30, 2006, as a
- 15 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
9. Common
Stock Options (continued)
result
of
adopting SFAS No. 123(R) on January 1, 2006 was not material when compared
to the result had it continued to account for share-based compensation under
APB
25.
A
summary
of option activity under the Company’s plans as of September 30, 2006 is as
follows:
|
Options
|
Shares
(000)
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
||||||||||||
|
Outstanding
at January 1, 2006
|
8,591
|
$
|
0.75
|
|||||||||||||
|
Granted
|
1,269
|
$
|
0.52
|
|||||||||||||
|
Exercised
|
(19
|
)
|
$
|
0.42
|
||||||||||||
|
Forfeited
or expired
|
(3,620
|
)
|
$
|
0.71
|
||||||||||||
|
Outstanding
at September 30, 2006
|
6,221
|
$
|
0.73
|
5.2
|
$
|
−
|
||||||||||
|
Vested
at September 30, 2006
|
5,586
|
$
|
0.77
|
5.0
|
$
|
−
|
||||||||||
|
Exercisable
at September 30, 2006
|
5,586
|
$
|
0.77
|
5.0
|
$
|
−
|
||||||||||
The
following table summarizes significant ranges of outstanding and exercisable
options as of September 30, 2006:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life(in years)
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||
|
$
0.00 - $0.50
|
1,904
|
5.5
|
$
|
0.38
|
1,421
|
$
|
0.39
|
|||||||||
|
0.51
- 1.00
|
3,663
|
5.3
|
$
|
0.73
|
3,511
|
$
|
0.74
|
|||||||||
|
1.01
- 2.00
|
562
|
3.3
|
$
|
1.51
|
562
|
$
|
1.51
|
|||||||||
|
2.01
- 3.00
|
50
|
1.1
|
$
|
3.00
|
50
|
$
|
3.00
|
|||||||||
|
3.01
- 7.50
|
42
|
1.8
|
$
|
3.42
|
42
|
$
|
3.42
|
|||||||||
|
6,221
|
5.2
|
$
|
0.73
|
5,586
|
$
|
0.77
|
||||||||||
The
per
share weighted average fair value of options granted during the nine months
ended September 30, 2006 and September 30, 2005 was $0.20 and $0.38,
respectively.
- 16 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
9. Common
Stock Options (continued)
A
summary
of the status of the Company’s nonvested shares as of September 30, 2006 is as
follows:
|
Nonvested
Shares
|
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
|
|
|
Nonvested
at January 1, 2006
|
402
|
$
0.36
|
|
|
Granted
|
1,269
|
$
0.20
|
|
|
Unvested
options cancelled
|
(635)
|
$
0.31
|
|
|
Vested
|
(401)
|
$
0.43
|
|
|
Nonvested
at September 30, 2006
|
635
|
$
0.12
|
As
of
September 30, 2006, there was $73 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
3.5 years.
Pro
Forma
Information Under SFAS No. 123 for Periods Prior to Fiscal 2006:
Prior
to
fiscal 2006, the weighted-average fair value of stock-based compensation to
employees was based on the single option valuation approach. Forfeitures were
recognized as they occurred and it was assumed no dividends would be declared.
The estimated fair value of stock-based compensation awards to employees was
amortized using the straight-line method over the vesting period of the options.
The weighted-average fair value calculations were based on the following
assumptions for the Company’s stock option plans:
|
|
|
Nine
Months Ended
September
30, 2005
|
|
Risk free
interest
rate
|
|
4.10%
|
|
Expected life
(years)
|
|
7.0
|
|
Expected
volatility
|
|
86%
|
|
|
|
Three
Months
|
|
Nine
months
|
|
|
|
Ended
September 30,
|
|
Ended
September 30,
|
|
|
|
2005
|
|
2005
|
|
|
Net
loss available to stockholders:
|
|
|
|
|
|
As
reported................................................................................................
|
$
(1,569)
|
|
$
(3,491)
|
|
|
Add:
Stock-based employee compensation expense included in reported
results of operations, net of related tax effect......................
|
-
|
|
-
|
|
|
Deduct:
Total stock based employee compensation expense determined
under fair value based method, net of tax........................
|
(334)
|
|
(502)
|
|
|
Pro
forma....................................................................................................
|
$
(1,903)
|
|
$
(3,993)
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share available to
stockholders:
|
|
|
|
|
|
As
reported...................................................................................
|
$
(0.01)
|
|
$
(0.03)
|
|
|
Pro
forma....................................................................................................
|
$
(0.02)
|
|
$
(0.04)
|
-17
-
Communication
Intelligence corporation
and
Subsiderary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
10. Comprehensive
loss
Total
comprehensive loss was as follows:
|
Three
Months Ended September
30,
|
Nine
Months Ended September 30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Net
loss
|
$
|
(669
|
)
|
$
|
(1,569
|
)
|
$
|
(2,405
|
)
|
$
|
(3,491
|
)
|
|
|
Other
comprehensive income (loss):
|
|||||||||||||
|
Cumulative
translation adjustment
|
15
|
45
|
15
|
54
|
|||||||||
|
Total
comprehensive loss
|
$
|
(654
|
)
|
$
|
(1,524
|
)
|
$
|
(2,390
|
)
|
$
|
(3,437
|
)
|
|
11. Segment
Information
The
Company identifies reportable revenue in one segment, handwriting recognition.
Handwriting recognition software is an aggregate of two revenue categories;
eSignature and natural input. All handwriting recognition software is developed
around the Company’s core technology. All sales represent sales to external
customers.
Prior
to
January 1, 2006, the Company reported revenue and results in two segments,
Handwriting Recognition, described above, and System Integration. System
integration represented the sale and installation, by the Company’s joint
venture in China, of third party computer equipment and systems that utilized
the Company’s products. The system integration business had become highly
competitive with a low barrier to entry. It was increasingly comprised of small
Chinese owned businesses with virtually no differentiation in service offerings
and primarily competing on price and relationships. The Company decided in
late
2003 not to continue in or expand this low margin, labor intensive business,
which would require significant increases in base costs to provide the required
turn-key capabilities. Our focus in China is on the emerging high potential
workflow/office automation market leveraging our eSignature technology and
strategic channel partners.
The
accounting policies followed by the segment are the same as those described
in
the “Critical Accounting Policies.” Segment data includes revenues and allocated
costs charged to the operating segment.
The
tables below present information about reporting segments for the periods
indicated:
|
Three
Months Ended
September
30,
|
Nine
months Ended
September
30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Handwriting
Recognition
|
Handwriting
Recognition
|
Handwriting
Recognition
|
Handwriting
Recognition
|
||||||||||
|
Revenues
|
$
|
701
|
$
|
607
|
$
|
1,850
|
$
|
2,395
|
|||||
|
Loss
from Operations
|
$
|
(518
|
)
|
$
|
(677
|
)
|
$
|
(1,828
|
)
|
$
|
(1,190
|
)
|
|
For
the
three months ended September 30, 2006, three customers accounted for 54% total
handwriting recognition segment revenues. Customer A accounted for 14%, Customer
B accounted for 16% and Customer C accounted for 24%. For the three months
ended
September 30, 2005, three customers accounted for 54% of
-
18
-
Communication
Intelligence corporation
and
Subsiderary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
1. Interim
financial statements and basis of presentation (continued)
10. Comprehensive
loss (continued)
total
handwriting recognition segment revenue. Customer A accounted for 10%, Customer
B accounted for 16 % and Customer C accounted for 31%. For the nine months
ended
September 30, 2006, two customers accounted for 38% of total handwriting
recognition segment revenue. Customer A accounted for 10% and Customer B
accounted for 28%. For the nine months ended September 30, 2005, two customers
accounted for 44% of total handwriting recognition segment revenue. Customer
A
accounted for 20% and Customer B accounted for 24%.
-
19 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Forward
Looking Statements
Certain
statements contained in this quarterly report on Form 10-Q, 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 Securities Litigation
Reform Act of 1995. Such statements involve known and unknown risks,
uncertainties and other factors which may cause actual events to differ
materially from expectations. Such factors include those set fourth in the
Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005 and
delineated as follows:
| · |
Technological,
engineering, manufacturing, quality control or other circumstances
that
could delay the sale or shipment of products;
|
| · |
Economic,
business, market and competitive conditions in the software industry
and
technological innovations that could affect the Company’s
business;
|
| · |
The
Company’s inability to protect its trade secrets or other proprietary
rights, operate without infringing upon the proprietary rights of
others
and prevent others from infringing on the proprietary rights of the
Company; and
|
| · |
General
economic and business conditions and the availability of sufficient
financing.
|
Except
as
otherwise required by applicable laws, the Company undertakes no obligation
to
publicly update or revise any forward-looking statements, as a result of new
information, future events or otherwise.
The
following discussion and analysis should be read in conjunction with the
Company’s unaudited condensed consolidated financial statements and notes
thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” set forth in the Company’s Annual report on Form 10-K/A for the
fiscal year ended December 31, 2005.
Overview
The
Company was incorporated in Delaware in October 1986. Except for 2004, in each
year since its inception, the Company has incurred losses. For the five-year
period ended December 31, 2005, net operating losses aggregated approximately
$8,000 and at December 31, 2005 the Company's accumulated deficit was
approximately $85,000. At September 30, 2006, the Company’s accumulated deficit
was approximately $87,000.
Total
revenue of $701 for the three months ended September 30, 2006 increased 15%
compared to revenues of $607 in the corresponding prior year period. The
increase in revenue is due primarily to an increase in channel sales. Total
revenues of $1,850 for the nine months ended September 30, 2006 decreased 23%,
or $545 compared to revenues of $2,395 in the corresponding prior year period.
This decrease in revenue is due primarily to the absence of large deployments
such as Snap-On Credit LC, American General Life & Assurance, Everypath and
Bell South which aggregated $661, and which closed in the corresponding nine
month period of the prior year.
The
net
loss for the three months ended September 30, 2006 was $669, compared with
a net
loss of $1,569 in the corresponding prior year period. The net loss for the
three months included $93 and $837, respectively, in non-cash charges to
interest expense for prepaid financing costs and loan discount amortization
related to the convertible notes. The net loss for the nine months ended
September 30, 2006 was $2,405, compared to a net loss of $3,491 in the prior
year. The net loss for the nine month period includes $498 and $2,109,
respectively, in non-cash charges to interest expense for prepaid financing
costs and loan discount amortization related to the convertible notes. The
decrease in the net loss is primarily due to the factors discussed above.
Our
ability to predict quarterly sales continues to be challenged by the emerging
market realities of our eSignature business. We believe that the benefits of
risk mitigation, both legal and compliance related, together with the ROI
potential afforded by our solutions are recognized by our pilot and proof of
concept customers. We
believe the delay in large follow-on rollouts is partially due to customer
requirements for a more complete solution to their overall
eSignature needs. This involved gathering feedback from key early deployments
necessary to develop new products and extensions required to meet the needs
of
both end-users and channel partners. The Company believes that these new
products and extensions, including both multi-modal biometrics and PDF and
HTML/Web based products, will provide a comprehensive range of solutions to
address the needs of the larger mainstream segment of the banking, insurance
and
financial services market. The Company also believes the delays reflect the
time
necessary for market evaluation of our newer products. Such delays are inherent
with a transition from the early adopter phase of an emerging market to market
takeoff where large mainstream companies commit to the technology, choose their
preferred supplier and fund large scale deployments.
-
20
-
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States (“GAAP”) requires
us to make judgments, assumptions, and estimates that affect the amounts
reported in the condensed
consolidated financial statements and accompanying notes. We consider certain
accounting policies related to revenue recognition, valuation of inventories,
accounts receivable, acquired intangibles and impairment of long-lived assets
including goodwill to be critical policies due to the estimation process
involved in each. Management discusses its estimates and judgments with the
Audit Committee of our Board of Directors.
For
a
more detailed description on the application of these and other accounting
policies, see Note 2 of the Consolidated Financial Statements included in our
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2005
(“the 2005 Form 10-K/A”). Reference is also made to the discussion of the
application of these critical accounting policies and estimates contained in
Management’s Discussion and Analysis in our 2005 Form 10-K/A. During the three
and nine months ended September 30, 2006, there were no significant or material
changes in the application of critical accounting policies that would require
an
update to the information provided in the 2005 Form 10-K/A except for the
following addition to the critical accounting policies:
Stock-based
Compensation Expense. On
January 1, 2006, we adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to our employees and directors including
employee stock options based on estimated fair values. We adopted SFAS 123(R)
using the modified prospective transition method, which requires the application
of the accounting standard as of January 1, 2006, the first day of our
fiscal year 2006. Our Consolidated Financial Statements as of and for the three
and nine month periods ended September 30, 2006 reflect the impact of SFAS
123(R). In accordance with the modified prospective transition method, our
Consolidated Financial Statements for prior periods have not been restated
to
reflect, and do not include, the impact of SFAS 123(R). The value of the portion
of the award that is ultimately expected to vest is recognized as expense over
the requisite service periods in our Consolidated Statement of Operations.
Prior
to the adoption of SFAS 123(R), we accounted for stock-based awards to employees
and directors using the intrinsic value method in accordance with APB 25 as
allowed under Statement of Financial Accounting Standards No. 123,
Accounting
for Stock-Based Compensation
(SFAS
123). As stock-based compensation expense recognized in the Consolidated
Statement of Operations for the first quarter of fiscal 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures.
SFAS
123(R) requires forfeitures 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 nine months ended
September 30, 2006, of approximately 25% for grants was based on historical
forfeiture experience. In our pro forma information required under SFAS 123 for
the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.
Stock-based
compensation expense recognized under SFAS 123(R) for the three and nine month
periods ended September 30, 2006 was $40 and $145, determined by the
Black-Scholes valuation model, and consisting of stock-based compensation
expense related to employee and director stock options. As of September 30,
2006, total unrecognized compensation costs related to unvested stock options
was $73, which is expected to be recognized as an expense over a weighted
average period of approximately 3.5 years. Subsequent to the adoption of SFAS
123(R), we have not made any changes in the type of incentive equity instruments
or added any performance conditions to the incentive options. See Note 8 to
the
Consolidated Financial Statements for additional information.
-
21 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Segments. We
report
in one segment: handwriting recognition. Handwriting recognition includes
online/retail revenues and corporate sales, including eSignature and natural
input/original equipment manufacturers ("OEM") revenues. Handwriting recognition
represents the sale of software for electronic signatures, handwritten biometric
signature verification, data security, data compression, and electronic ink
capture. It also includes the sale of natural input technologies that are
designed to allow users to interact with handheld devices. All handwriting
recognition software is developed around our core technology. Handwriting
recognition product revenues are generated through a direct sales force to
individual or enterprise end users (see Revenues - Handwriting recognition).
We
also license a version of our handwriting recognition software to OEM's. The
handwriting recognition software is included as part of the OEM's product
offering. From time to time, we are required to develop an interface (port)
for
our software to run on a new customer's hardware platform or within the
customer's software operating system. The development contract revenues are
included in the handwriting recognition segment.
Results
of Operations
The
following table provides unaudited financial information for our
segment.
|
Three
Months Ended
|
Nine
months Ended
|
||||||||||||
|
September
30,
|
September
30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Segment
revenues:
|
|||||||||||||
|
Handwriting
recognition
|
|||||||||||||
|
eSignature
|
$
|
382
|
$
|
280
|
$
|
1,104
|
$
|
1,465
|
|||||
|
eSignature
China
|
37
|
31
|
119
|
189
|
|||||||||
|
Natural
input
|
282
|
296
|
627
|
741
|
|||||||||
|
Total
handwriting recognition
|
$
|
701
|
$
|
607
|
$
|
1,850
|
$
|
2,395
|
|||||
|
Cost
of Sales
|
|||||||||||||
|
eSignature
|
$
|
53
|
$
|
28
|
$
|
137
|
$
|
79
|
|||||
|
Natural
input
|
3
|
-
|
15
|
-
|
|||||||||
|
Total
cost of sales
|
$
|
56
|
$
|
28
|
$
|
152
|
$
|
79
|
|||||
|
Operating
cost and expenses
|
|||||||||||||
|
Research
and development
|
$
|
212
|
$
|
283
|
$
|
638
|
$
|
828
|
|||||
|
Sales
and Marketing
|
463
|
307
|
1,242
|
944
|
|||||||||
|
General
and administrative
|
488
|
666
|
1,646
|
1,734
|
|||||||||
|
Total
operating costs and expenses
|
$
|
1,163
|
$
|
1,256
|
$
|
3,526
|
$
|
3,506
|
|||||
|
Interest
and other income (expense), net
|
$
|
12
|
$
|
(18
|
)
|
$
|
47
|
$
|
(14
|
)
|
|||
|
Interest
expense
|
(163
|
)
|
(874
|
)
|
(624
|
)
|
(2,287
|
)
|
|||||
|
Net
(loss)
|
$
|
(669
|
)
|
$
|
(1,569
|
)
|
$
|
(2,405
|
)
|
$
|
(3,491
|
)
|
|
|
Amortization
of intangible assets
|
|||||||||||||
|
Cost
of sales, capitalized software costs
|
$
|
30
|
$
|
12
|
$
|
87
|
$
|
32
|
|||||
|
General
and administrative
|
95
|
95
|
284
|
284
|
|||||||||
|
Total
amortization of intangible assets
|
$
|
125
|
$
|
107
|
$
|
371
|
$
|
316
|
|||||
Revenues
eSignature
revenue. eSignature
revenues are derived from channel partners and end users. eSignature revenues
increased 35%, or $108, to $419 for the three months ended September 30, 2006,
as compared to $311 in the prior year period. For the nine months ended
September 30, 2006, eSignature revenues decreased 26%, or $431, to $1,223,
as
compared to $1,654 in the prior year period. The changes to eSignature revenues
are discussed more fully below.
-
22 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
eSignature
revenues through channel partners for the three months ended September 30,
2006,
increased 112%, or $84, to $159, as compared to $75 in the prior year period.
The increase is due primarily to an order placed by one of the Company’s
resellers aggregating $100 in the current three month period. For the nine
month
period ended September 30, 2006, eSignature sales through channel partners
decreased 12%, or $39, to $277, as compared to $316 in the prior year
period.
eSignature
revenues from sales to end users increased 9%, or $18, to $223, for the three
months ended September 30, 2006, compared to $205 in the prior year period.
The
increase in eSignature sales to end users was due primarily to the
follow on order in the current quarter from TVA.
For the
nine months ended September 30, 2006, eSignature revenues from sales to end
users decreased 28%, or $322, to $827, as compared to $1,149 in the prior year
period. The decrease is due to the absence of large orders such
as
Snap-On Credit LC and American General Life & Assurance, which aggregated
$508 in the prior year period.
eSignature
revenues in China increased 19%, or $6, to $37, for the three months ended
September 30, 2006, as compared to $31 in the prior year period. For the nine
months ended September 30, 2006, eSignature revenues in China decreased 37%,
or
$70, to $119, as compared to $189 in the prior year period. The decrease in
China eSignature revenues was due to the initial purchase of licenses pursuant
to an agreement made in 2005 with eCom Asia Pacific Pty Ltd (“eCom”). The
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. The 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.
Our
ability to predict quarterly sales continues to be challenged by the emerging
market realities of our eSignature business. The Company made an investment
in
new sales personnel in 2005 and 2006. 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.
Natural
input revenues.
Natural
Input revenues are derived from OEM’s and web-based sales.
Revenue
from the sales of the Company’s natural input products, which include Jot,
decreased 5%, or $14, to $282 for the three months ended September 30, 2006,
as
compared to $296 in the prior year period. For the nine months ended September
30, 2006 revenues from the sales of the Company’s natural input products
decreased 15% or $114, to $627 as compared to $741 in the prior year period.
The
reasons for the decline are discussed below.
Natural
input product revenues through OEM’s decreased 5%, or $14, to $282 for the three
months ended September 30, 2006, compared to $296 in the prior year period.
The
decrease is due primarily to a decrease in royalties received from Palm Source
and development contract revenues from Sony Ericsson compared to the prior
year
period. For the nine months ended September 30, 2006, natural input revenues
decreased 12%, or $87, to $627, as compared to $714 in the prior year period.
The lower reported revenues from Palm Source and Sony Ericsson are the primary
reason for the decline in natural input revenues. In addition one of the
Company’s OEMs discontinued one of its products that included the Company’s Jot
software in December of 2005, which reduced revenues by approximately $7 and
$13, respectively, for the three and nine months ended September 30, 2006,
compared to the prior year periods.
-
23 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
There
were no online/retail revenues for the three and nine months ended September
30,
2006, as compared to $27 in the prior year nine month period. In early 2003,
PalmSource announced that it had licensed CIC’s Jot handwriting recognition
software to replace Graffiti® as the standard and only handwriting software on
all new Palm Powered® devices. The embedding of Jot on Palm related devices had
a negative impact on the online/retail sales by limiting the number of older
units that would be upgraded. The transition to Jot based PalmSource operating
systems by OEM’s was completed in the third quarter of 2004 and the Company no
longer offers its products through online/retail outlets. CIC has phased out
the
consumer offering of its Palm OS products. Jot continues to be embedded in
the
PalmSource OS that is used by leading handheld computer and smartphones
suppliers.
Cost
of Sales
Cost
of
sales includes online/retail, corporate and China software sales costs. Such
costs are comprised of royalty and import tax payments, third party hardware
costs, direct mail costs, engineering direct costs and amortization of
intangible assets excluding patents. Cost of sales for the three months ended
September 30, 2006, increased 100%, or $28, to $56, as compared to $28 in the
prior year. Amortization of capitalized software development costs increased
$8
while engineering cost related to development contracts increased $20 for the
three months ended September 30, 2006 as compared to the prior year period.
The
amortization of software development costs will continue to increase as new
products and enhancements are developed and capitalized. For the nine months
ended September 30, 2006, cost of sales increased 92%, or $73, to $152, compared
to $79 in the prior year period. The increase was primarily due to the
engineering costs associated with the TVA and SnapOn Credit LP development
contract revenue and increased amortization of capitalized software development
costs as compared to the prior year period. Cost of sales may vary in the future
depending on the customer’s decision to purchase its software solution and third
party hardware as a complete package, from the Company rather than buying
individual components from separate vendors, non-recurring engineering work
for
customer requested applications and increasing amortization of capitalized
software development costs.
eSignature
and natural input channel partner and OEM cost of sales increased 89%, or $25,
to $53 for the three months ended September 30, 2006, compared to $28 in the
prior year period. The increase was primarily due to increased engineering
cost
associated with development contract revenues, and by increased amortization
of
capitalized software development costs compared to the prior year period. For
the nine months ended September 30, 2006, eSignature cost of sales increased
73%, or $58, to $137, as compared to $79 in the prior year period. The increase
was primarily due to engineering costs associated with the TVA and SnapOn Credit
LP development contract revenue and amortization of capitalized software
development costs. Increases in eSignature cost of sales in the future may
be
driven by the amount of third party hardware that is sold with the Company’s
software solutions, engineering costs associated with development contracts
and
increased amortization of software development costs capitalized in future
periods associated with enhancements and new product development.
Natural
input cost of sales increased to $3 for the three months ended September 30,
2006 compared to $0 in the prior year period. The increase is due to the
amortization of software development costs capitalized during 2005 for
enhancements and upgrades to the Jot products. For the nine months ended
September 30, 2006, natural input cost of sales increased $15 compared to $0
in
the prior year period. The increase is due to the reasons stated for the three
month period discussed above. The Company no longer offers its products through
online/retail outlets. Jot continues to be the de facto standard, embedded
in
the PalmSource OS that is used by many leading handheld computer and smartphones
suppliers. In addition, major device manufacturers, such as Sony-Ericsson,
continue to embed Jot in their products.
Operating
expenses
Research
and Development Expenses.
Research and development expense decreased 25%, or $71, to $212 for the three
months ended September 30, 2006, as compared to $283 in the prior year period.
For the nine months ended September 30, 2006, research and development expenses
decreased 23%, or $190, to $638 as compared to $828 in the prior year. Research
and development expenses consist primarily of salaries and related costs,
outside engineering, maintenance items, and allocated facilities expenses.
-
24 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Salaries
and related expense increased 5%, or $15, to $319 for the three months ended
September 30, 2006, as compared to $304 in the prior year period. For the nine
months ended September 30, 2006, engineering salaries increased 16%, or $137,
to
$969, as compared to $832 in the prior year period. The increase is due
primarily to the increase of one engineer compared to the prior year periods.
Stock based compensation expense, included for the first time as expense, was
$8
and $42, respectively, for the three and nine months ended September 30, 2006.
There was no comparable expense in the prior year periods.
Outside
engineering cost and expenses decreased 70%, or $7, to $3 for the three months
ended September 30, 2006, compared to $10 in the prior year period. The decrease
was due to the curtailment of consulting services associated with the Company’s
web-site development in the current three month period. For the nine months
ended September 30, 2006, outside engineering costs decreased 82%, or $54 to
$12, as compared to $66 in the prior year period. The decrease was due primarily
to the curtailment of outside engineering services upon completion of several
projects in the prior year. The Company maintains a relationship with an outside
engineering group familiar with its products and may draw on its services,
as
required, which could have a material effect on the amount of outside
engineering expense reported.
Facilities
allocation decreased 17%, or $12, to $57 for the three months ended September
30, 2006, compared to $69 in the prior year period. For the nine months ended
September 30, 2006, facilities allocation decreased 22%, or $47, to $162, as
compared to $209 in the prior year period. Despite the increased engineering
head count, the facilities allocation decreased due to a reduction in the
Company’s rent expense resulting from a renegotiation of the Company’s office
lease.
Capitalized
software development costs increased 43%, or $31, to $103 for the three months
ended September 30, 2006, as compared to $72 in the prior year period. For
the
nine months ended September 30, 2006 capitalized software development costs
increased 46%, or $119, to $380, as compared to $261 in the prior year period.
The increase in capitalized software development was due to new product
development and significant upgrades and enhancements being made to the
Company’s eSignature products. The new product development, as well as the
upgrades and enhancements, currently being capitalized will be completed in
the
fourth quarter of 2006. Capitalization of software development costs is expected
to be consistent with the increased amounts reported for the three and nine
months ended September 30, 2006 for the foreseeable future. Engineering costs
transferred to cost of sales increased 233%, or $14, to $20 for the three months
ended September 30, 2006, compared to $6 in the prior year period. For the
nine
months ended September 30, 2006, engineering costs transferred to cost of sales
increased 115%, or $31, to $58, as compared to $27 in the prior year. The change
is due to the amount of development services purchased by a customer in the
current three and nine month periods.
Sales
and Marketing Expenses.
Sales
and marketing expenses increased 51%, or $156, to $463 for the three months
ended September 30, 2006, compared to $307 in the prior year period. For the
nine months ended September 30, 2006, sales and marketing expense increased
32%,
or $298, to $1,242, as compared to $944 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.
Salaries
and related expense increased 19%, or $32, to $204 for the three months ended
September 30, 2006, as compared to $172 in the prior year period. For the nine
months ended September 30, 2006, sales and marketing salaries increased 24%,
or
$110, to $562, as compared to $452 in the prior year period. The increase in
salaries and related expense was due primarily to the increase of two sales
employees and, to a lesser extent, increases in employee salaries. Stock based
compensation expense, included for the first time as expense was $26 and $65,
respectively, for the three and nine months ended September 30, 2006. There
was
no comparable expense in the prior year periods.
Travel
and related expenses increased 450%, or $18, to $22 for the three months ended
September 30, 2006, as compared to $4 in the prior year period. For the nine
months ended September 30, 2006, travel and related costs increased 123%, or
$38, to $69, as compared to $31 in the prior year period. The increase is due
to
the increased headcount and sales related activities compared to the prior
year
periods. Recruiting expense decreased 33%, or $1, to $2 for the three months
ended September 30, 2006, compared to $3 in the prior year period. For the
nine
months ended September 30, 2006, recruiting expenses decreased 38%, or $30,
to
$49, as compared to $79 in the prior year period. The Company expects that
recruiting expense will decline in the fourth quarter of
-
25 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
2006
as
its planned staffing of the sales and marketing departments is not currently
under expansion. Professional service expense was consistent with the prior
year
for the three months ended September 30, 2006. For the nine month period
ended
September 30, 2006 professional services decreased 55%, or $12, to $10, as
compared to $22 in the prior year period. The decrease is due to not sponsoring
health care focus groups related to the eSignature market as was done in
the
prior year period. Commission expense decreased 84%, or $37, to $7 for the
three
months ended September 30, 2006, compared to $44 in the prior year period.
For
the nine months ended September 30, 2006, commission expense decreased 60%,
or
$73, to $49, as compared to $122 in the prior year. The decrease in the
commission expense over the three and nine month periods is due to lower
commissionable sales. Advertising expense for the three months ending September
30, 2006 increased 100%, or $88, to $88, as compared to $0 in the prior year
period. For the nine month period ended September 30, 2006, advertising expense
increased $133 to $138 as compared to $5 in the prior year period. The increase
for the three and nine month periods is due to internet advertising, attendance
at trade shows and marketing events that the Company had not incurred in
the
prior year. Advertising expense will remain at the increased amounts compared
to
the prior year through the fourth quarter of 2006.
Other
expense, including general office and allocated facilities expenses increased
35%, or $29, to $112 for the three months ended September 30, 2006, compared
to
$83 in the prior year period. For the nine months ended September 30, 2006,
other expenses increased 29%, or $67, to $300, compared to $233 in the prior
year period. The increase is due to the additional headcount and sales related
activities compared to the prior year periods.
The
Company anticipates that sales and marketing expenses will continue to increase
in the near term as the Company’s sales efforts focus on 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.
Our
ability to predict quarterly sales continues to be challenged by the emerging
market realities of our eSignature business.
General
and Administrative Expenses.
General
and administrative expenses decreased 27%, or $178, to $488, for the three
months ended September 30, 2006, compared to $666 in the prior year period.
For
the nine months ended September 30, 2006, general and administrative expenses
decreased 5%, or $88, to $1,646 as compared to $1,734 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 10%, or $19, to $209 for the three months ended September
30, 2006, compared to $190 in the prior year period. For the nine months ended
September 30, 2006, salaries expense increased 11%, or $63, to $631 as compared
to $568 in the prior year period. The increase was due primarily to increases
in
employee salaries. Stock based compensation expense, included for the first
time
as an expense, was $6 and $17, respectively, for the three and nine months
ended
September 30, 2006. There was no comparable expense in the prior year period.
Stock based director compensation expense was $21 for the nine months ended
September 30, 2006. There was no such expense during the three months ended
September 30, 2006.
Professional
service expenses, which include consulting, legal and outside accounting fees,
decreased 61%, or $130, to $82 for the three months ended September 30, 2006,
as
compared to $212 in the prior year period. The decrease was due to reduced
legal
fees as a result of completing the patent litigation in the prior year period.
For the nine months ended September 30, 2006, professional service expense
decreased 23%, or $115, to $385, as compared to $500 in the prior year period.
The decrease was due primarily to the reason discussed above. Insurance expense
decreased 37%, or $10, to $17 for the three months ended September 30, 2006,
compared to $27 in the prior year period. For the nine months ended September
30, 2006, insurance expense decreased 4%, or $3, to $71, as compared to $74
in
the prior year period. The decrease is due to decreased premiums for the
Company’s D&O insurance policies compared to the prior year period. Other
administrative expenses decreased 24%, or $54, to $172 for the three months
ended September 30, 2006, as compared to $226 in the prior year period. For
the
nine months ended September 30, 2006, other expenses decreased 7%, or $41,
to
$540, as compared to $581 in the prior year period. The decrease was due to
reduced investor related expenses. The Company believes that its General and
Administrative expenses will remain fairly stable for the balance of the
year.
- 26
-
Communication
Intelligence Corporation
And
Subsidiary
(In
thousands, except per share amounts)
Form
10-Q
Interest
and other income (expense), net
Interest
and other income (expense), net increased
$33, to $9 for the three months ended September 30, 2006, compared to a net
expense of $24 in the prior year period. The increase was due to the loss on
disposal of fixed assets by our joint venture in China, in the prior year
period. For the nine months ended September 30, 2006, interest and other income
(expense), net increased $72 to $39 as compared to a net expense of $33 in
the
prior year. This increase is primarily due to the loss on the disposal of fixed
assets discussed above.
Interest
expense
Interest
expense increased 89%, or $33, to $70 for the three months ended September
30,
2006, compared to $37 in the prior year period. The increase was primarily
due
to expensing $46 of the commitment fee associated with a note and warrant
purchase agreement entered into by the Company in August of 2006 (see note
7 of
the condensed consolidated financial statements). For the nine months ended
September 30, 2006, interest expense decreased 29%, or $52, to $126, as compared
to $178 in the prior year period. The decrease was primarily due to conversion
of long term debt into shares of the Company’s common stock, offset by the
commitment fee discussed above.
Non-cash
charges for the
loan commitment fees related to the note and warrant purchase agreement and
amortization of prepaid financing costs, and warrant and beneficial conversion
feature costs associated with the convertible notes decreased 83%, or $698,
to
$139 for the three months ended June 30 2006 as compared to $837 in the prior
year period. For the nine months ended September 30, 2006, non-cash charges
for
the above mentioned items decreased 74%, or $1,565, to $544, as compared
to
$2,109 in the prior year period. (See note 6 of the condensed consolidated
financial statements). The reason for the decrease in the non-cash charges
is
discussed above. The Company will be required to amortize an additional $298
to
interest expense over the remaining life of the convertible notes or sooner
if
the notes are converted before the due date.
Liquidity
and Capital Resources
At
September 30, 2006, cash and cash equivalents totaled $771 compared to cash
and
cash equivalents of $2,849 at December 31, 2005. The decrease in cash of $2,078
was primarily due to cash used in operating activities of $1,633, acquisition
of
property and equipment amounting to $85, capitalization of software development
costs of $380 and payments of capital lease obligations of $8. Total current
assets are $1,520 at September 30, 2006, compared to $3,621 at December 31,
2005. As of September 30, 2006, the Company's principal sources of funds
included its cash and cash equivalents $771, accounts receivable of $462, and
a
credit facility through one of its investors aggregating $600.
In
August
2006, the Company entered into a Note and Warrant Purchase Agreement (the
“Purchase Agreement”) and a Registration Rights Agreement (the “Registration
Rights Agreement”), each dated as of August 10, 2006. The Company secured the
right to borrow up to six hundred thousand dollars ($600). The Company expects
to use the proceeds of the financing for additional working
capital.
Under
the
Purchase Agreement, the Company may borrow, on demand through November 15,
2006,
an aggregate principal amount of up to $600. Amounts borrowed will be due within
eighteen (18) months of such borrowing. 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
borrowed. The notes will bear 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. In the event the full amount available under the credit facility
is not borrowed, the Company will be required to issue, as a standby commitment
fee, a pro rata portion of 335 shares of the Company’s common stock, based upon
the difference between $600 and the actual amount borrowed under the credit
facility. The warrants will include piggyback registration rights for the
underlying shares to participate in certain future registrations of the
Company’s common stock. As of September 30, 2006, the Company has recorded a non
cash charge to interest expense of $46 in pro rata standby commitment
fees.
-
27 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Accounts
receivable decreased $21 for the nine months ended September 30, 2006 compared
to the December 31, 2005 balance, due primarily to the decrease in recurring
maintenance billings and sales compared to the prior quarter.
The
Company expects the development of the eSignature market will ultimately result
in more consistent revenue on a quarter to quarter basis and therefore, less
fluctuation in accounts receivable from quarter to quarter.
At
September 30, 2006,
in addition to cash of $771, the Company also has $462 in short term accounts
receivable, expected to be collected in full based upon past collection
history,
and as discussed above, $600 available under the Purchase Agreement (line
of
credit). Thus at September 30, 2006, the Company has resources totaling
approximately $1.8 million available to fund operations. As we have discussed
in
the past, our ability to predict quarterly sales is challenged by the emerging
market nature or our eSignature business. Given the unpredictability of
expected
orders, the Company may draw on the line of credit prior to its expiration
on
November 15, 2006. Furthermore, although the Company is encouraged by the
current level of sales activity, including requests for quotations and
lead
generation, and therefore about its ability to fund operations from anticipated
fourth quarter revenues, again based upon the unpredictability of quarterly
sales that we have experienced in the past and the "Net cash used for operating
activities" in recent periods (See Condensed Consolidated Statements of
Cash
Flows), we are investigating alternative sources of funding consistent
with our
goal of achieving sustainable profitable results with minimal shareholder
dilution.
Deferred
financing costs, including the current and non-current portion, decreased $123
over the nine months ended September 30, 2006 as the result of amortization
to
interest expense.
Prepaid
expenses and other current assets increased $29 for the nine months ended
September 30, 2006, compared to December 31, 2005, due to annual fees for
maintenance and support costs that will be charges to expense over the next
twelve months. Generally, annual insurance premiums and maintenance and support
fees are prepaid in December and June of each year and, therefore, the balances
typically begin to decrease in the first and third quarters as the prepaid
balances are amortized.
Accounts
payable decreased $46 for the nine months ended September 30, 2006, compared
to
December 31, 2005, due to decreased professional service and marketing fees.
Accounts payable balances typically increase in the second and fourth quarters
when the insurance and annual maintenance and support fees are incurred.
Materials used in cost of sales may impact accounts payable depending on the
amount of third party hardware sold as part of the software solution.
Current
liabilities, which include deferred revenue, were $1,073 at September 30, 2006,
compared to $1,363 at December 31, 2005. Deferred revenue was $388 at September
30, 2006, compared to $557 at December 31, 2005. Deferred revenue primarily
reflects advance payments for products and maintenance fees from the Company's
licensees. Deferred revenues are generally recognized as revenue by the Company
when all obligations are met or over the term of the maintenance agreement,
whichever is longer.
In
November 2004, the Company entered into an unsecured Note and Warrant Purchase
Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the
“Registration Rights Agreement), each dated as of October 28, 2004). The
Purchase Agreement does 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 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 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
-
28 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
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 probably of actually paying the
liquidated damages was zero. Therefore the Purchase Agreement was recorded
as a
debt and equity transaction with no recorded asset or liability associated
with
the conversion feature or liquidated damage clause included in the 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 sheet at December 31, 2004. 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 and expects to continue to use the proceeds
of
the financing for additional 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 nine month periods ended September 30, 2006, the
Company had amortized to interest expense approximately $92 and $498 of the
loan
discount and deferred financing costs. The balance due under the convertible
notes is shown net of the remaining $298 unamortized discount on the
accompanying consolidated balance sheet. There were no note conversions during
the three months ended September 30, 2006. During the nine month period ended
September 30, 2006, the investors converted $461 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 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.
-
29 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
Interest
expense related to convertible debt for the three and nine month periods ended
September 30, 2006 was $116 and $577, including $93 and $498 related to
amortization of debt discount and deferred financing costs, respectively. For
the three and nine month periods ended September 30, 2005, interest expense
related to convertible debt was $874 and $2,283, including $837 and $2,109
related to amortization of debt discount and deferred financing costs,
respectively.
The
Company has the following material commitments as of September 30,
2006:
|
|
|
Payments
due by period
|
|||||||||||
|
|
Contractual
obligations
|
Total
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
|||||
|
|
Long-term
debt (1)
|
$
1,084
|
$
–
|
$
1,084
|
$
–
|
$
–
|
$
–
|
$
–
|
|||||
|
|
Operating
lease Commitments (2)
|
1,354
|
62
|
236
|
264
|
272
|
280
|
240
|
|||||
|
|
Total
contractual cash obligations
|
$
2,438
|
$
62
|
$
1,320
|
$
264
|
$
272
|
$
280
|
$
240
|
|||||
| 1. |
Long-term
debt is net of approximately $298 in discounts representing the fair
value
of warrants issued to the investors and the beneficial conversion
feature
associated with the convertible
notes.
|
| 2. |
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.
|
The
Company has suffered recurring losses from operations that raise a substantial
doubt about its ability to continue as a going concern. 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 it when needed,
or
if available, will be available on favorable terms or in amounts required by
it.
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 its business,
results of operations and ability to operate as a going concern. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
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 three and nine months ended September
30, 2006.
Foreign
Currency Risk
From
time
to time, the Company 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. The
Company has not suffered any material impacts from foreign currency risks during
the three and nine months ended September 30, 2006.
-
30 -
Communication
Intelligence Corporation
and Subsidiary
Notes
to
Unaudited Condensed Consolidated Financial Statements
(In
thousands, except per share amounts)
Form
10-Q
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 in general, or market volatility unrelated to the Company's
business and operating results.
Item
4.
Controls
and Procedures
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 Exchange Act Rule 13a-14(c) as
of the
end of the period covered by this quarterly report.
Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
have
concluded that these disclosure controls and procedures are effective. There
were no significant changes in the Company’s internal controls or in other
factors that could significantly affect internal controls subsequent to the
date
of their evaluation.
Part
II-Other Information
Item
1. Legal
Proceedings
None
Item
1A. Risk
Factors
For
the
three and nine months ended September 30, 2006, there were no material changes
in the risk factors discussed in the Company’s annual report on From
10-K/A.
Item
2. Unregistered
Sale of Securities and Use of Proceeds
None
Item
3. Defaults
Upon Senior Securities
None
Item
4. Submission
of Matters to a Vote of Security Holders
None
Item
5. Other
Information
None
- 31
-
Communication
Intelligence Corporation
And
Subsidiary
(In
thousands, except per share amounts)
Form
10-Q
Item
6. Exhibits
(a) 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).
|
|
*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
|
|
*
|
Filed
herewith.
|
-
32
-
Communication
Intelligence Corporation
And
Subsidiary
(In
thousands, except per share amounts)
Form
10-Q
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
COMMUNICATION
INTELLIGENCE CORPORATION
|
||
|
Registrant
|
||
|
November
9, 2006
|
/s/
Francis V. Dane
|
|
|
Date
|
Francis
V. Dane
|
|
|
(Principal
Financial Officer and Officer Duly Authorized to Sign on Behalf of
the
Registrant)
|
-
33
-