iSign Solutions Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________
FORM
10-K
X Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For
the Fiscal Year Ended December 31, 2007
___ Transition
report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission File No.
0-19301
Communication
Intelligence Corporation
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
94-2790442
(I.R.S.
Employer
Identification
No.)
|
|
275
Shoreline Drive, Suite 500
Redwood Shores, California
(Address
of principal executive offices)
|
94065
(Zip
Code)
|
Registrant’s
telephone number, including area code: 650-802-7888
Securities
registered under Section 12(b) of the Securities Exchange Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par
value
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act of 1933. Yes[ ] No. [ X
].
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of
1934. Yes [ ] No. [X
].
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [
X ] No [ ]
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference into Part
III of this Form 10-K or any amendment to this Form 10-K. [ X
]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the securities Exchange act of 1934 (check
one): Large accelerated filer
[ ] Accelerated filer
[ ] Non-accelerated filer [ X
]
Indicate by check mark whether the
registrant is a shell company (as defined in Exchange Act Rule
12b-2)
Yes [ ] No [
X ]
The aggregate market value of the
voting stock (Common Stock) held by non-affiliates of the registrant as of June
30, 2007 was approximately $20,105,160 based on the closing sale price of $0.19
on such date, as reported by the Nasdaq Over-the-Counter Market. The number of
shares of Common Stock outstanding as of the close of business on March 11, 2008
was 129,057,161.
COMMUNICATION
INTELLIGENCE CORPORATION
TABLE
OF CONTENTS
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Page
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PART
I
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3
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Item
1. Business
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3
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Item
1A. Risk Factors
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8
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Item
1B. Unresolved Staff Comments
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10
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Item
2. Properties
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10
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Item
3. Legal Proceedings
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10
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Item
4. Submission of Matters to a Vote of Security Holders
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10
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PART
II
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10
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Item
5. Market For Registrant's Common Equity and Related Stockholder
Matters
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10
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Item
6. Selected Financial Data
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12
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Item
7. Management's Discussion and Analysis of Financial
Condition
and
Results of Operations
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12
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Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
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25
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Item
8. Consolidated Financial Statements and Supplementary
Data
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26
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Item
9. Changes in and Disagreements with Accountants on
Accounting
and
Financial Disclosures
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26
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Item
9A. Controls and Procedures
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26
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Item
9B. Other Information
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27
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PART
III
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28
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Item
10. Directors and Executive Officers of the Registrant
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28
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Item
11. Executive Compensation
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30
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Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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38
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Item
13. Certain Relationships and Related Transactions
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40
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Item
14. Principal Accountant Fees and Services
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41
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PART
IV
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43
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Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
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43
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___________
CIC® and
its logo, Handwriter®, Jot®, iSign®, InkSnap®, InkTools®, RecoEcho®, Sign-On®,
QuickNotes®, Sign-it®, WordComplete®, INKshrINK®, SigCheck®, SignatureOne®
and The Power To Sign Online® are registered trademarks of the Company. HRSä, PenXä, and Spellerä are trademarks of the
Company. Applications for registration of various trademarks are pending in the
United States, Europe and Asia. The Company intends to register its trademarks
generally in those jurisdictions where significant marketing of its products
will be undertaken in the foreseeable future.
- 2
-
PART
I
Item 1.
Business
Unless
otherwise stated all amounts in Parts I through Part IV are stated in thousands
(“000s”).
General
Communication Intelligence Corporation
was incorporated in Delaware in October 1986. Communication Intelligence Corporation
and its joint venture (the “Company” or “CIC”) is a leading supplier of
electronic signature solutions for business process automation in the financial
industry as well as the recognized leader in biometric signature verification.
CIC’s products enable companies to achieve truly paperless business transactions
with multiple signature technologies across virtually all applications and
hardware platforms. To date, the Company has delivered biometric and electronic
signature solutions to over 400 channel partners and end-user customers
worldwide representing hundreds of millions of
electronic documents and well over 500 million electronic signatures. These deployments are primarily in the
financial industry and include AIG/AGLA, Charles Schwab & Co., JP Morgan
Chase, Prudential Financial, Inc., Snap-On-Credit, State Farm Insurance Co., Wells Fargo Bank, NA and World Financial Group. The Company provides the most comprehensive and
scaleable electronic signature solutions based on over 20 years of experience
and significant input from CIC’s valued financial industry client base.
The Company is also a leading supplier of natural
input/text entry software for handheld computers and smartphones. Major
customers for natural input software are PalmSource and Sony Ericsson. CIC sells
directly to enterprises and through system integrators, channel partners and
OEMs. The
Company is headquartered in
Redwood Shores, California and has a joint venture, CICC, in
Nanjing, China.
Revenue
for the year ended December 31, 2007 was $2,145 compared to $2,342 for the year
ended December 31, 2006. Revenue for 2007 was primarily attributable to Access
Systems of Americas, Inc. (formerly PalmSource, Inc.), Advanced Computer
Technology, AEGON/World Financial Group, AIG/AGLA, Bank of America, Charles
Schwab & Co., eCom Asia Pacific, Fiserv/IntergraSys, IA Systems, Fidelity
National Info Services/LSI, Misys Healthcare Systems, Oracle Corporation,
Prudential Financial Inc., SnapOn Credit LLC, Sony Ericsson Corp., Tennessee
Valley Authority, and Wells Fargo Bank NA.
Although
2007 revenue was essentially the same as 2006, fourth quarter revenue of $800
was up 75% over the prior quarter and up 63% over the corresponding prior year
period. eSignature sales activity in the last half of 2007, as measured by the
revenue potential reflected in the formal proposal and quotation requests, was
at the highest level in the Company’s history. The Company experienced delays in
closing several material orders in the last half of 2007, with negotiations
still ongoing, and believes that the current pipeline and it’s growth rate has
the sales potential for achieving and sustaining quarterly profitability. In
October 2007, Frost & Sullivan awarded CIC the 2007 Global Frost &
Sullivan Award for Market Leadership in the dynamic signature verification
market. The Frost & Sullivan Award, the result of an in-depth analysis of
the market by an experienced industry research team, speaks to the leadership
and outstanding achievement CIC has exhibited in ‘Excellence in Best Practices’.
This award is used to recognize companies that have achieved superior
performance in areas including leadership, technological innovation, customer
service and strategic product development for the Worldwide Signature
Verification Market. Other industry specific studies by leading research firms
including the 2004 IBG Biometrics and Signature Verification Market Report, the
2003 IMS Research Worldwide Market for Biometrics Report, and 2003
Frost & Sullivan Worldwide Signature Verification Market Study have
acknowledged CIC as the market leader in product leadership, large scale
deployments, and proven technology with proven ROI. In the third quarter, the
Company closed a $3 million financing thereby strengthening CIC’s financial
viability with top tier financial institutions and optimizing the objective of
leveraging CIC’s leadership position into sustained sales growth.
The net
loss for the year ended December 31, 2007 was $3,399 compared to $3,286 in the
prior year. Non-cash charges to interest expense for deferred financing costs
and loan discount amortization related to the convertible notes and short-term
debt, un-related third party, increased $73 to $664 compared to $591 in the
prior year. Non-cash Amortization of loan discount charged to interest expense
associated with short-term debt related party increased $235 to $305 compared to
$70 in the prior year. Operating expenses, including amortization of software
development costs, decreased approximately 12%, or $561, from $4,899 at December
31, 2006 to $4,338 for the year ended December 31, 2007. The decrease in
operating expense primarily reflects the increases in capitalization of software
development costs related to product development and enhancements and decreases
in sales and marketing and general and administrative expenses.
- 3
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Core
Technologies
The
Company's core technologies are classified into two broad categories:
"transaction and communication enabling technologies" and "natural input
technologies". These technologies include multi-modal electronic signature,
handwritten biometric signature verification, cryptography (Sign-it, iSign, and
SignatureOne) and multilingual handwriting recognition software
(Jot).
Transaction and
Communication Enabling Technologies. The Company's transaction and
communication enabling technologies are designed to provide a cost-effective
means for securing electronic transactions, providing network and device access
control and enabling workflow automation of traditional paper form processing.
The Company believes that these technologies offer more efficient methods for
conducting electronic transactions while providing more functional user
authentication and heightened data security. The Company's transaction and
communication enabling technologies have been fundamental to its development of
software for multi-modal electronic signatures, handwritten biometric signature
verification, and data security.
Natural Input
Technologies. CIC's natural input technologies are designed to allow
users to interact with a computer or handheld device by using an electronic pen
or stylus as the primary input device. CIC's natural input offering includes
multilingual handwriting recognition software for such devices as electronic
organizers, pagers and smart cellular phones that do not have a keyboard. For
such devices, handwriting recognition offers the most viable solutions for
performing text entry and editing.
Products
Key
products include the following:
|
SignatureOne
|
SignatureOne
Profile Server is the server compliment to CIC's Sign-it software, which
enables the real-time capture of electronic and digital signatures in
various application environments. All user enrollment, authentication and
transaction tracking in SignatureOne are based on data from the Sign-it
client software.
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||
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iSign
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A
suite of application development tools for electronic signatures,
biometric signature verification and cryptography for custom developed
applications and web based development.
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Sign-it
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Multi-modal
electronic signature software for common applications including; Microsoft
Word, Adobe Acrobat, AutoDesk AutoCAD, web based applications using HTML,
XML, & XHTML, and custom applications for .NET, C# and similar
development environments for the enterprise market.
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||
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Jot
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Multi-lingual
handwriting recognition software.
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- 4
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Products
and upgrades that were introduced and first shipped in 2007 include the
following:
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SignatureOne™
Sign-it® v6.2 for Acrobat®
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SignatureOne™
Sign-it® v6.2 for Acrobat® (Viewer)
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SignatureOne™
Sign-it® v6.04 for Word
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SignatureOne™
Sign-it® Tools v3.03 for Word
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SignatureOne™
Sign-it® v3.1.0.1 for AutoCAD®
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SignatureOne™
Sign-it® v3.1.0.2 for AutoCAD®
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SignatureOne™
Sign-it® v4.0 for AutoCAD®
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SignatureOne™
Sign-it® Tools v 4.0 for AutoCAD®
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iSign®
v4.3
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SignatureOne™
Sign-it® XF v1.2
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SignatureOne™
Sign-it® XF v1.3
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SignatureOne™
Profile Server v2.01. SQL (WebSphere)
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SignatureOne™
Sign-it® XF Runtime License
|
The
SignatureOne Profile Server provides server based enterprise administration and
authentication of user eSignatures and maintenance of signature transaction logs
for eSigned documents. The SignatureOne architecture implements a common process
and methodology that provides a uniform program interface for multiple signature
methods and multiple capture devices, simplifying enterprise wide integration of
business process automation tasks requiring eSignature.
iSign is
an electronic signature and handwritten signature verification software
developer’s kit for custom applications or Web based processes. It captures and
analyzes the image, speed, stroke sequence and acceleration of a person's
handwritten electronic signature. iSign provides an effective and inexpensive
handwriting security check for immediate authentication. It also stores certain
forensic elements of a signature for use in determining whether a person
actually electronically signed a document. The iSign kit includes software
libraries for industry standard encryption and hashing to protect the sensitive
nature of a user signature and the data captured in association with that
signature. This software toolkit is used internally by the Company as the
underlying technology in its SignatureOne and Sign-it products.
Sign-it
is a family of electronic signature products for recording multi-modal
electronic signatures as they are being captured as well as binding and
verifying electronic signatures within standard consumer applications. These
products combine the strengths of biometrics, and electronic signatures and
cryptography with a patented process to insure legally compliant electronic
signatures to process, transact and create electronic documents that have the
same legal standing as a traditional wet signature on paper in accordance with
the Electronic Signature in National and Global Commerce Act, and other related
legislation and regulations. Organizations wishing to process electronic forms,
requiring varying levels of security, can reduce the need for paper forms by
adding electronic signature technologies to their workflow solution. Currently,
Sign-it is available for MS Word, AutoCAD, Adobe Acrobat, Web based transactions
using common formats like XML, HTML, or XHTML, and custom application
development with .NET, C# or similar development environments.
Jot
software analyzes the individual strokes of characters written with a pen/stylus
and converts these strokes into machine-readable text characters. Jot recognizes
handwritten input and is specifically designed for small devices. Unlike many
recognizers that compete in the market for handheld data input solutions, Jot
offers a user interface that allows for the input of natural upper and lowercase
letters, standard punctuation and European languages without requiring the user
to learn and memorize unique characters or symbols. Jot has been ported to
numerous operating systems, including Palm OS, Windows, Windows CE, VT-OS, EPOC,
QNX, Linux and OS/9. The standard version of Jot, which is available through OEM
customers, recognizes and supports input of Roman-based Western European
languages.
Copyrights,
Patents and Trademarks
The
Company relies on a combination of patents, copyrights, trademarks, trade
secrets and contractual provisions to protect its software offerings and
technologies. The Company has a policy of requiring its employees and
contractors to respect proprietary information through written agreements. The
Company also has a policy of requiring prospective business partners to enter
into non-disclosure agreements before disclosure of any of its proprietary
information.
- 5
-
Over the
years, the Company has developed and patented major elements of its software
offerings and technologies. In addition, in October 2000 the Company acquired,
from PenOp, Inc. and its subsidiary, a significant patent portfolio relevant to
the markets in which the Company sells its products. The Company’s patents and
the years in which they each expire are as follows:
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Patent
No.
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Expiration
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||
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5049862
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2008
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||
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5544255
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2013
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||
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5647017
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2014
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||
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5818955
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2015
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||
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5933514
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2016
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||
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6064751
|
2017
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||
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6091835
|
2017
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||
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6212295
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2018
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||
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6381344
|
2019
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||
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6487310
|
2019
|
The
Company believes that these patents provide a competitive advantage in the
electronic signature and biometric signature verification markets. The Company
believes the technologies covered by the patents are unique and allow it to
produce superior products. The Company also believes these patents are very
broad in their coverage. The technologies go beyond the simple handwritten
signature and include measuring electronically the manner in which a person
signs to ensure tamper resistance and security of the resultant documents and
the use of other systems for identifying an individual and using that
information to close a transaction. The Company believes that the patents are
sufficiently broad in coverage that products with substantially similar
functionality would infringe its patents. Moreover, because the majority of
these patents do not expire for the next 5 to 11 years from the date of this
report on Form 10-K, the Company believes that it has sufficient time to develop
new related technologies, which may be patentable, and to establish CIC as
market leader in these product areas. Accordingly, the Company believes that for
a significant period of time its patents will deter competitors from introducing
competing products without creating substantially different technology or
licensing or infringing its technology.
The
Company has an extensive list of registered and unregistered trademarks and
applications in the United States and other countries. The Company intends to
register its trademarks generally in those jurisdictions where significant
marketing of its products will be undertaken in the foreseeable
future.
Material
Customers
Historically,
the Company’s revenues have been derived from hundreds of customers, however, a
significant percentage of the revenue has been attributable to a limited number
of customers. For instance, four customers accounted for
57% of total revenues in 2007. Access Systems Americas, Inc. (formerly
PalmSource, Inc.) accounted for 24%, Tennessee Valley Authority accounted for
10%, World Financial Group accounted for 13% and Wells Fargo Bank, NA accounted
for 10%. One customer, PalmSource, Inc., accounted for 27% of total revenues in
2006. Two customers accounted for 41% of total revenues in 2005. Snap-On Credit
Corporation accounted for 16% and PalmSource, Inc. accounted for 25%,
respectively, of our 2005 revenues.
Seasonality
of Business
The
Company believes that its products are not subject to seasonal
fluctuations.
Backlog
Backlog
approximates $431 and $404 at December 31, 2007 and 2006, respectively,
representing advanced payments on product and service maintenance agreements
that are expected to be recognized over the next twelve months.
- 6
-
Competition
The
Company faces competition at different levels. The technology-neutral nature of
the laws and regulations related to what constitutes an “electronic signature”
and CIC’s multi-modal enterprise-wide suite of products causes the
Company to compete with different companies depending upon the specific type of
electronic signature sought by a prospective customer. Our principal competition
for handwritten biometric signatures includes SoftPro, Wondernet, and low-end
tablet vendors. CIC faces additional competition from primarily Silanis and
DocuSign when the application is click-wrap, voice, fingerprint, password, and
basic click sign technology.
Certain
of the Company’s significant competitors in the natural input market segment
include PenPower Group, Advanced Research Technology, Inc., and Decuma
AB.
The
Company believes that it has a competitive advantage, in part, due to CIC’s
range of product offerings and patent portfolio. There can be no assurance,
however, that competitors, including some with greater financial or other
resources, will not succeed in developing products or technologies that are more
effective, easier to use or less expensive than our products or technologies,
which could render our products or technologies obsolete or
non-competitive.
Employees
As of December 31, 2007,
the Company employed an aggregate of 25 full-time employees, 23 of which are in
the United States and 2 of which are in China. The Company, as a
strategy, has been focused for years on being at its core “lean and agile” while
establishing long standing strategic relationships that allow the Company to
rapidly access product development and deployment capabilities required to
address virtually any business requirement. The company believes it has
scalability to virtually any business requirement through existing agreements
with specialized development teams (well versed in the area of signature
technology and processes), mid-size vertical market IT services groups (with
explicit knowledge of the intricacies of the financial services industry) and
with tier one IT Services firms with virtually limitless resources
available. None of the
Company’s employees are a party to a collective bargaining
agreement. We believe our employee relations are
good.
Geographic Areas
For the
years ended December 31, 2007, 2006, and 2005, the Company’s sales in the United
States as a percentage of total sales were 92%, 81%, and 85%, respectively. For
the years ended December 31, 2007, 2006, and 2005, the Company’s export sales as
a percentage of total revenues were approximately 8%, 19%, and 15%,
respectively. Foreign sales are based on the countries to which the Company’s
products are shipped. Long lived assets located in the United States
were $4,714 and $4,702 for the years ended December 31, 2007 and 2006
respectively. Long lived assets located in China were $0 and $8 as of December
31, 2007 and 2006 respectively.
Segments
Prior to
2006, the Company reported in two segments. Due to the immateriality of the
system integration segment the Company reclassified the operations into one
segment.
Available
Information
Our web
site is located at www.cic.com. The information on or accessible through our web
sites is not part of this Annual Report on Form 10-K. Our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to such reports are available, free of charge, on our web site as soon as
reasonably practicable after we electronically file or furnish such material
with the SEC. Further, a copy of this Annual Report on Form 10-K is located at
the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.
Information on the operation of the Public Reference Room can be obtained by
calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that
contains reports, proxy and information statements and other information
regarding our filings at www.sec.gov.
- 7 -
Note
Regarding Forward Looking Statements
Certain
statements contained in this Annual Report on Form 10-K, including without
limitation, statements containing the words “believes”, “anticipates”, “hopes”,
“intends”, “expects”, and other words of similar import, constitute “forward
looking” statements within the meaning of the Private Litigation Reform Act of
1995. Such statements involve known and unknown risks, uncertainties and other
factors that may cause actual events to differ materially from expectations.
Such factors include the following: (1) technological, engineering, quality
control or other circumstances which could delay the sale or shipment of
products; (2) economic, business, market and competitive conditions in the
software industry and technological innovations which could affect the Company’s
business; (3) the Company’s ability to protect its trade secrets or other
proprietary rights, operate without infringing upon the proprietary rights of
others or prevent others from infringing on the proprietary rights of the
Company; and (4) general economic and business conditions and the availability
of sufficient financing.
Item
1A
Risk
Factors
Our
auditors have raised substantial doubt about our ability to continue as a going
concern without additional financing or the achievement of cash flow positive
operations.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. Except for 2004, the Company has
incurred significant losses since its inception and, at December 31, 2007, the
Company’s accumulated deficit was approximately $91,300. These factors raise
substantial doubt about the Company’s ability to continue as a going
concern. The Company has primarily funded these losses through the
sale of debt and equity securities.
Operating
losses may continue, which could adversely affect financial results from
operations and stockholder value.
In each
year since its inception, except for the year ended December 31, 2004, the
Company incurred losses, which were significant in certain periods. For the
five-year period ended December 31, 2007, those net losses aggregated
approximately $11,441. At December 31, 2007, the accumulated deficit was
approximately $91,300. While net income was recorded for the year ended December
31, 2004, there is no guarantee that the Company will be profitable in future
years and it may incur substantial losses in the future, which could adversely
affect stockholder value.
Our
competitors could develop products or technologies that could make our products
or technologies non-competitive, which would adversely affect sales, financial
results from operations and stockholder value.
Although
the Company believes that its patent portfolio provides a barrier to entry to
the electronic signature market, and that its established relationships with its
OEM customers in the natural input segment are sufficient to maintain that
source of revenue, there can be no assurance that it will not face significant
competition in this and other aspects of its business.
Some of
its competitors, including more established companies or those with greater
financial or other resources, could develop products or technologies that are
more effective, easier to use or less expensive than the Company’s. This could
make the Company’s products and technologies obsolete or non-competitive, which
would adversely affect sales, financial results from operations and stockholder
value.
If
we are unable to adequately protect our intellectual property, third parties may
be able to use our technology, which could adversely affect our ability to
compete in the market, our financial results from operations and stockholder
value.
The
Company relies on a combination of patents, copyrights, trademarks, trade
secrets and contractual provisions to protect its proprietary rights in its
products and technologies. These protections may not adequately protect it for a
number of reasons. First, the Company’s competitors may independently develop
technologies that are substantially equivalent or superior to ours. Second, the
laws of some of the countries in which the Company’s products are licensed do
not protect those products and its intellectual property rights to the same
extent as do the laws of the United States. Third, because of the rapid
evolution of technology and uncertainties in intellectual property law in the
United States and internationally, the Company’s current and future products and
technologies could be subject to infringement claims by others. Fourth, a
substantial portion of its technology and know-how are trade secrets and are not
protected by patent, trademark or copyright laws. The Company requires its
employees, contractors and customers to execute written agreements that seek to
protect its proprietary information. We also have a policy of requiring
prospective business partners to enter into non-disclosure agreements before any
of our proprietary information is revealed to them. However, the measures taken
by the Company to protect its technology, products and other proprietary rights
might not adequately protect it against improper use.
- 8
-
The
Company may be required to take legal action to protect or defend its
proprietary rights. Litigation of third-party claims of intellectual property
infringement during 2004 and 2005 required the Company to spend substantial time
and financial resources to protect its proprietary rights. If the
result of any litigation of this type is adverse to the Company, it may be
required to expend significant resources to develop non-infringing technology or
obtain licenses from third parties. If the Company is not successful in those
efforts, or if it is required to pay any substantial litigation costs, its
business would be materially and adversely affected.
A
significant portion of our sales are derived from a limited number of customers,
and results from operations could be adversely affected and shareholder value
harmed if we lost any of these customers.
The
Company’s revenues historically have been derived from hundreds of customers,
however, a significant percentage of the revenue has been attributable to a
limited number of customers. Our top customer accounted for 24% and 27% of
revenues in the years ended December 31, 2007 and December 31, 2006,
respectively. The loss of any significant customer or other revenue
source would have a material adverse effect on the Company’s revenues and
profitability.
The
market price of our stock can be volatile, which could result in losses for
investors.
The
Company’s common stock is listed on the Over-the-Counter Bulletin Board (“OTC”).
Stock prices of technology companies in recent years have experienced
significant volatility, including price fluctuations that are unrelated or not
proportional to the operating performance of these companies. Volatility on the
OTC is typically higher than the volatility of stocks traded on Nasdaq or other
exchanges. The market price of the Company’s common stock has been and could be
subject to significant fluctuations as a result of variations in its operating
results, announcements of technological innovations or new products by it or our
competitors, announcements of new strategic relationships by the Company or our
competitors, general conditions in the technology industry or market conditions
unrelated to its business and operating results.
Statutory
provisions and provisions in our charter may delay or frustrate transactions
that may be beneficial to our stockholders.
Certain
provisions of the Delaware General Corporation Act and our charter may delay or
prevent a merger, tender offer or proxy contest that is not approved by the
Company’s Board of Directors, even if such events may be beneficial to the
interests of stockholders. For example, the Company’s Board of Directors,
without shareholder approval, has the authority and power to issue all
authorized and unissued shares of common stock and preferred stock that have not
otherwise been reserved for issuance. In addition, the Delaware General
Corporation Law contains provisions that may have the effect of making it more
difficult or delaying attempts by others to obtain control of the
Company.
Resale
by the holders of outstanding convertible notes and warrants, or by the holders
of shares of our common stock entitled to registration rights applicable to
those shares, could adversely affect the market price of our stock.
The
holders of the warrants to purchase shares of our common stock may immediately
sell the shares issued upon exercise of the warrants. In light of the Company’s
historically low trading volume, such sales may adversely affect the price of
the shares of the Company’s stock. In addition, certain of our
stockholders are entitled to registration rights, and the Company recently filed
with the Securities and Exchange Commission a resale registration statement on
Form S-1, which became effective on December 28, 2007. The resale of
the shares registered under the registration statement may be made at any time
into the public trading market. In light of the historically low trading volume
of our common stock, such sales or the perception that such sales may occur may
adversely affect the price of the shares of our common stock.
- 9
-
Item
1B.
Unresolved Staff
Comments
As of the
date of this report, the Company does not have any unresolved comments on our
reports filed under the 1934 Act from staff of the Securities and Exchange
Commission.
Item
2.
Properties
The
Company leases its principal facilities, consisting of approximately 9,600
square feet, in Redwood Shores, California, pursuant to a lease that expires in
2011. The Company’s China-based joint venture leases approximately 392 square
feet in Nanjing, China. The Company believes that its current facilities are
suitable to continue operations in the foreseeable future.
Item
3.
Legal
Proceedings
None
Item
4.
Submission of Matters to a
Vote of Security Holders
None
PART
II
|
Item
5.
|
Market for Registrant's Common
Equity and Related Stockholder
Matters
|
The
Company’s common stock is listed on the OTC under the trading symbol CICI.OB.
Prior to March 14, 2003 it was listed on the Nasdaq Capital Market (formerly
known as the SmallCap Market) under the symbol CICI. The following table sets
forth the high and low sale prices of the common stock for the periods
noted.
|
Sale
Price
Per Share
|
|||||||||
|
Year
|
Period
|
High
|
Low
|
||||||
|
2006
|
First
Quarter
|
$ | 0.53 | $ | 0.40 | ||||
|
Second
Quarter
|
$ | 0.50 | $ | 0.39 | |||||
|
Third
Quarter
|
$ | 0.41 | $ | 0.24 | |||||
|
Fourth
Quarter
|
$ | 0.30 | $ | 0.18 | |||||
|
2007
|
First
Quarter
|
$ | 0.32 | $ | 0.20 | ||||
|
Second
Quarter
|
$ | 0.27 | $ | 0.13 | |||||
|
Third
Quarter
|
$ | 0.28 | $ | 0.15 | |||||
|
Fourth
Quarter
|
$ | 0.42 | $ | 0.20 | |||||
As of
March 10, 2008, the closing sale price of the Common Stock on the Nasdaq OTC was
$0.19 per share and there were approximately 967 registered holders of the
Common Stock.
To date,
the Company has not paid any dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The declaration and
payment of dividends on the Common Stock is at the discretion of the Board of
Directors and will depend on, among other things, the Company's operating
results, financial condition, capital requirements, contractual restrictions or
such other factors as the Board of Directors may deem relevant.
All
securities sold during 2007 by the Company were either previously reported on
quarterly reports on Form 10-Qs filed with the Securities and Exchange
Commission or sold pursuant to registration statements filed under the
Securities Act of 1933, as amended.
The
information required by Item 201(d) of Regulation S-K is incorporated by
reference to Note 5 (“Stockholders Equity”) of the Notes to Consolidated
Financial Statements for the Year Ended December 31, 2007, included on page F-20
on this report on Form 10-K.
- 10
-
The
following graph compares the Company's cumulative five-year return on its common
stock with a broad-based stock index and an index of peer companies selected by
the Company. This performance graph compares the cumulative five-year returns on
the common stock with the Nasdaq Computer and Data Processing Index and the
Nasdaq Index.
|
Total
Return to Shareholders
|
|||||||
|
(Includes
reinvestment of dividends)
|
|||||||
|
ANNUAL
RETURN PERCENTAGE
|
|||||||
|
Years
Ending
|
|||||||
|
Company
/ Index
|
2003
|
2004
|
2005
|
2006
|
2007
|
||
|
Communication
Intelligence Corporation
|
5.71
|
60.81
|
-27.73
|
-52.33
|
9.76
|
||
|
Nasdaq
U.S. & Foreign Index
|
50.36
|
8.41
|
2.20
|
10.27
|
9.92
|
||
|
Nasdaq
Computer & Data Processing Index
|
28.15
|
12.45
|
7.52
|
12.73
|
20.69
|
||
|
INDEXED
RETURNS
|
|||||||
|
Base
|
Years
Ending
|
||||||
|
Period
|
|||||||
|
Company
/ Index
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
|
Communication
Intelligence Corporation
|
100
|
105.71
|
170.00
|
122.86
|
58.57
|
64.29
|
|
|
Nasdaq
U.S. & Foreign Index
|
100
|
150.36
|
163.00
|
166.58
|
183.68
|
201.91
|
|
|
Nasdaq
Computer & Data Processing Index
|
100
|
128.15
|
144.10
|
154.94
|
174.66
|
210.79
|
|
- 11
-
Item
6. Selected Financial
Data
The
selected consolidated financial data presented below as of December 31, 2007,
2006, 2005, 2004, and 2003 and for each of the years in the five-year period
ended December 31, 2007 are derived from the audited consolidated financial
statements of the Company. The consolidated financial statements as of December
31, 2007 and 2006, and for each of the years in the three-year period ended
December 31, 2007, are included in Item 8 of this Form 10-K. The selected
consolidated financial data should be read in conjunction with the Company's
audited financial statements and the notes thereto and other portions of this
Form 10-K, including "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations.”
|
Years
Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||
|
Revenues
|
$ | 2,145 | $ | 2,342 | $ | 3,121 | $ | 7,284 | $ | 3,034 | ||||||||||
|
Research
and development expenses(1)
|
476 | 817 | 1,144 | 1,187 | 1,302 | |||||||||||||||
|
Sales
and marketing expenses
|
1,276 | 1,658 | 1,240 | 1,306 | 905 | |||||||||||||||
|
General
and administrative expenses
|
2,061 | 2,174 | 2,173 | 2,483 | 2,219 | |||||||||||||||
|
Income
(loss) from operations
|
(2,193 | ) | (2,557 | ) | (1,584 | ) | 2,255 | (2,157 | ) | |||||||||||
|
Net
income (loss)
|
$ | (3,399 | ) | $ | (3,286 | ) | $ | (4,031 | ) | $ | 1,620 | $ | (2,345 | ) | ||||||
|
Basic
and diluted income (loss) per share
|
$ | (0.03 | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | 0.02 | $ | (0.02 | ) | ||||||
|
As
of December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash,
cash equivalents and restricted cash
|
$ | 1,144 | $ | 727 | $ | 2,849 | $ | 4,736 | $ | 1,039 | ||||||||||
|
Working
capital(2)
|
(867 | ) | (816 | ) | 2,258 | 4,068 | (2,895 | ) | ||||||||||||
|
Total
assets
|
6,475 | 6,126 | 8,466 | 10,819 | 7,215 | |||||||||||||||
|
Deferred
revenue
|
431 | 404 | 557 | 458 | 165 | |||||||||||||||
|
Long-term
obligations (3)
|
96 | 334 | 1,169 | 1,790 | 13 | |||||||||||||||
|
Stockholders'
equity (4)
|
3,781 | 3,584 | 5,856 | 7,531 | 2,187 | |||||||||||||||
___________
|
(1)
|
Excludes
software development costs capitalized in accordance with Statement of
Financial Accounting Standards No. 86 of $788 at December 31, 2007, $510
at December 31, 2006, $299 at December 31, 2005, and $32 at December 31,
2004, respectively. No software development costs were capitalized in the
year ended December 31, 2003.
|
|
(2)
|
Current
liabilities used to calculate working capital at December 31, 2007, 2006,
2005, 2004, and 2003 include deferred revenue of $431, $404, $557, $458,
and $165, respectively.
|
|
(3)
|
Long-term
debt is net of the unamortized fair value assigned to warrants of $21 at
December 31, 2007 and $266 for related-party debt at December 31,
2006. Long-term debt is net of the unamortized debt discount
related to convertible debt of $674, and $2,410 at December 31, 2005 and
2004.
|
|
(4)
|
The
Company has never paid dividends to the holders of its common
stock.
|
Item
7. Management's Discussion and
Analysis of Financial Condition and Results of Operations
The
following discussion and analysis should be read in conjunction with our
financial statements and related notes appearing elsewhere in this Form 10-K.
The following discussion relating to projected growth and future results and
events constitutes forward-looking statements. Actual results in future periods
may differ materially from the forward-looking statements due to a number of
risks and uncertainties, including, the Risk Factors discussed in Item 1A
hereof. We cannot guarantee future results, levels of activity, performance or
achievements. Except as otherwise required under applicable law, we disclaim any
obligation to revise or update forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
- 12
-
Unless
otherwise stated herein, all figures in this Item 7, other than price per share
data, are stated in thousands (“000s”).
Overview
and Recent Developments
The
Company is a supplier of electronic signature solutions for business process
automation in the financial industry and a supplier of biometric signature
verification technology. The Company’s products enable companies to
achieve paperless business transactions with multiple signature technologies
across virtually all applications and hardware platforms. The Company was
initially incorporated in Delaware in October 1986. Except for the year ended
December 31, 2004, in each year since its inception the Company has incurred
losses. For the five-year period ended December 31, 2007, operating losses
aggregated approximately $6,200 and at December 31, 2007, the Company's
accumulated deficit was approximately $91,300.
Revenues
decreased 8% for the year ended December 31, 2007, to $2,145, compared to the
year ended December 31, 2006. Although 2007 revenue was essentially the same as
2006, fourth quarter revenue of $800 was up 75% over the prior quarter and up
63% over the corresponding prior year period. eSignature sales activity in the
last half of 2007, as measured by the revenue potential reflected in the formal
proposal & quotation requests, was at the highest level in the Company’s
history. The Company experienced delays in closing several material orders in
the last half of 2007, with negotiations still ongoing, and believes that the
current pipeline and it’s growth rate has the sales potential for
achieving and sustaining quarterly profitability. In October 2007, Frost &
Sullivan awarded CIC the 2007 Global Frost & Sullivan Award for Market
Leadership in the dynamic signature verification market. The Frost &
Sullivan Award, the result of an in-depth analysis of the market by an
experienced industry research team, speaks to the leadership and outstanding
achievement CIC has exhibited in ‘Excellence in Best Practices.’ This
award is used to recognize companies that have achieved superior performance in
areas including leadership, technological innovation, customer service and
strategic product development for the Worldwide Signature Verification Market.
In the third quarter, the Company closed a $3 million financing thereby
strengthening CIC’s financial viability with top tier financial institutions and
optimizing the objective of leveraging CIC’s leadership position into sustained
sales growth.
The net
loss for the twelve months ended December 31, 2007 was $3,399 compared to $3,286
in the prior year. Non-cash charges to interest expense for deferred financing
costs and loan discount amortization related to the convertible notes and
short-term debt, un-related third party increased $73 to $664 compared to $591
in the prior year. Non-cash amortization of loan discount charged to interest
expense associated with short-term debt, related party increased $235 to $305
compared to $70 in the prior year. Operating expenses, including amortization of
software development costs, decreased approximately 12%, or $561, from $4,899 at
December 31, 2006 to $4,338 for the year ended December 31, 2007. The decrease
in operating expense primarily reflects the increases in capitalization of
software development costs related to product development and enhancements and
decreases in sales and marketing and general and administrative
expenses.
The
Company negotiated an additional $1,120 in credit facilities during the twelve
months ended December 31, 2007 to aid in funding operations. Interest expense
has increased due to the increase in debt financing and the amortization of the
fair value assigned to warrants issued with the new debt. See Note 4 to the
Consolidated Financial Statements beginning on page F-1 of this Form
10-K.
In
September 2007, pursuant to a Securities Purchase and Registration Rights
Agreement dated August 24, 2007, or the “August 2007 Purchase Agreement”, the
Company completed the sale of 21,500 shares of its common stock at approximately
$0.14 per share, aggregating $2,602 net of expenses. In October 2007, the
Company used a portion of the proceeds of the sale of the shares for payment of
$1,265 of outstanding indebtedness payable to holders of notes due October 28,
2007.
- 13
-
In
October 2007, the Company offered the holders of outstanding convertible notes
due October 28, 2007 the option of being issued warrants to purchase two (2)
shares of the Company’s common stock for each dollar of note principal
outstanding, in exchange for a two year extension of the note due date and
termination of the conversion feature of the note. The new warrants have a three
year life from the date of issuance. The new warrants are entitled to
registration rights similar to those of the warrants that were originally issued
in connection with the notes due October 28, 2007. In October 2007, pursuant to
a Debt Restructuring Agreement, one note holder owning a note with a principal
balance of $117 accepted the offer with an exercise price of the warrants equal
to the volume weighted average price of the Company’s common stock for the
twenty day period ending on October 25, 2007, which was $0.293 per share. The
Company issued 234 warrants to the investor on the terms discussed above. On
October 26, 2007, the Company paid the remaining outstanding principal amount of
the notes due October 28, 2007 of $1,265 and accrued interest
thereon.
New
Accounting Pronouncements
See Note
1, Notes to Consolidated Financial Statements included under Part IV, Item 15 of
this report on Form 10-K.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Company’s consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported in its
balance sheets and the amounts of revenues and expenses reported for each period
presented are affected by these estimates and assumptions that are used for, but
not limited to, revenue recognition, allowance for doubtful accounts, intangible
asset impairments, fair value of financial instruments, software development
costs, research and development costs, foreign currency translation and net
operating loss carryforwards. Actual results may differ from these estimates.
The following critical accounting policies are significantly affected by
judgments, assumptions and estimates used by the Company’s management in the
preparation of the consolidated financial statements.
Revenue: Revenue is
recognized when earned in accordance with applicable accounting standards,
including AICPA Statement of Position ("SOP") No. 97-2, “Software Revenue
Recognition”, as amended, Staff Accounting Bulletin 104, “Revenue Recognition” ("SAB
104"), and the interpretive guidance issued by the Securities and Exchange
Commission and EITF issue number 00-21, “Accounting for Revenue Arrangements
with Multiple Elements”, of the FASB’s Emerging Issues Task Force. The
Company recognizes revenues from sales of software products upon shipment,
provided that persuasive evidence of an arrangement exists, collection is
determined to be probable, all non-recurring engineering work necessary to
enable the Company's product to function within the customer's application has
been completed and the Company's product has been delivered according to
specifications. Revenue from service subscriptions is recognized as costs are
incurred or over the service period which-ever is longer.
Software
license agreements may contain multiple elements, including upgrades and
enhancements, products deliverable on a when and if available basis and post
contract support. Revenue from software license agreements is recognized upon
delivery of the software, provided that persuasive evidence of an arrangement
exists, collection is determined to be probable, all nonrecurring engineering
work necessary to enable the Company's products to function within the
customer's application has been completed, and the Company has delivered its
product according to specifications.
Maintenance
revenue is recorded for post contract support and upgrades or enhancements,
which is paid for in addition to license fees, and is recognized as costs are
incurred or over the support period whichever is longer. For undelivered
elements where objective and reliable evidence of fair value does not exist,
revenue is deferred and subsequently recognized when delivery has occurred and
when fair value has been determined.
The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable. If
there is a change in actual defaults from the Company’s historical experience,
the Company’s estimates of recoverability of amounts due could be affected and
the Company would adjust the allowance accordingly.
- 14
-
Long-lived assets: The
Company performs intangible asset impairment analyses on a quarterly basis in
accordance with the guidance in Statement of Financial Accounting Standard No.
142, “Goodwill and Other
Intangible Assets” ("SFAS No. 142") and Financial Accounting Standard No.
144, “Accounting for the
Impairment or Disposal of Long Lived Assets” ("SFAS No. 144"). The
Company uses SFAS 144 in response to changes in industry and market conditions
that affect its patents, the Company then determines if an impairment of its
assets has occurred. The Company reassesses the lives of its patents and tests
for impairment at least annually in order to determine whether the book value
exceeds the fair value for each patent. Fair value is determined by estimating
future cash flows from the products that are and will be protected by the
patents and considering the following additional factors:
|
·
|
whether
there are legal, regulatory or contractual provisions known to the Company
that limit the useful life of any patent to less than the assigned useful
life;
|
|
·
|
whether
the Company needs to incur material costs or make modifications in order
for it to continue to be able to realize the protection afforded by the
patents;
|
|
·
|
whether
any effects of obsolescence or significant competitive pressure on the
Company’s current or future products are expected to reduce the
anticipated cash flow from the products covered by the
patents;
|
|
·
|
whether
demand for products utilizing the patented technology will diminish,
remain stable or increase; and
|
|
·
|
whether
the current markets for the products based on the patented technology will
remain constant or will change over the useful lives assigned to the
patents.
|
The
Company obtained an independent valuation from Strategic Equity Group of the
carrying value of its patents as of December 31, 2005. The Company
believes that the biometric market potential identified in current year market
research has improved over the data used to validate the carrying value of the
Company’s patents at the end of 2005. Management updated this
analysis at December 31, 2007 and believes that that no impairment of the
carrying value of the patents exists at December 31, 2007.
Customer Base: To date, the
Company's eSignature revenues have been derived primarily from financial service
industry end-users and from resellers and channel partners serving the financial
service industry primarily in North America, the ASEAN Region including China
(PRC) and Europe. Natural Input (text entry) revenues have been
derived primarily from hand held computer and smart phone manufacturers (OEMs)
primarily in North America, Europe and the Pacific Rim. The Company
performs periodic credit evaluations of its customers and does not require
collateral. The Company maintains reserves for potential credit
losses. Historically, such losses have been within management's
expectations.
Software Development Costs:
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under
SFAS 86, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. The costs capitalized include the coding and testing of the
product after technological feasibility has been established and ends upon the
release of the product. The annual amortization is the greater of (a) the
straight-line amortization over the estimated useful life not to exceed three
years or (b) the amount based on the ratio of current revenues to anticipated
future revenues. The Company capitalized software development costs of $788,
$510 and $299 for the years ended December 31, 2007, 2006 and 2005.
Research and Development
Costs: Research and development costs are charged to expense
as incurred.
- 15
-
Share-based compensation:
Share-based compensation expense is based on the estimated
grant date fair value of the
portion of share-based payment awards that are ultimately
expected to vest during the period. The grant date fair
value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model. SFAS No. 123(R)
requires forfeitures
of share-based payment awards to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The estimated
average forfeiture rates for the years ended December 31, 2007 and 2006 were
approximately 27.90% and 25.01%, respectively.
For the years ended
December 31, 2007 and 2006, stock-based compensation
expense includes compensation
expense for share-based payment awards granted prior to, but not yet vested as
of December 31, 2005. Share based payment
awards issued but not yet vested as of December 31, 2005 are valued in accordance
with the pro forma provisions of SFAS No. 123. Compensation
expense for the share-based payment awards granted subsequent to December 31,
2005, are based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R).
Foreign Currency Translation:
The Company considers the functional currency of the Joint Venture to be the
respective local currency and, accordingly, gains and losses from the
translation of the local foreign currency financial statements are included as a
component of "accumulated other comprehensive loss" in the Company’s
consolidated balance sheets. Foreign currency assets and liabilities are
translated into U.S. dollars at exchange rates prevailing at the end of the
period, except for long-term assets and liabilities that are translated at
historical exchange rates. Revenue and expense accounts are translated at the
average exchange rates in effect during each period. Net foreign currency
transaction gains and losses are included as components of "interest income and
other income (expense), net" in the Company's consolidated statements of
operations. Due to the stability of the currency in China, and limited
transactions in the respective periods, net foreign currency transaction gains
and losses were not material for the year ended December 31, 2007, 2006 and
2005, respectively.
Net Operating Loss
Carryforwards: Utilization of the Company's net operating losses may be
subject to an annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. As a result,
a portion of the Company's net operating loss carryforwards may not be available
to offset future taxable income. The Company has provided a full valuation
allowance for deferred tax assets at December 31, 2007 of approximately $30
million based upon the Company's history of losses.
Segments: The Company reports
its financial results in one segment. Prior to 2006, the Company reported in two
segments. Due to the immateriality of the system integration segment the Company
reclassified the operations into one segment.
Results
of Operations – Years Ended December 31, 2007 and December 31, 2006
Revenues
Total
revenue for the year ended December 31, 2007 decreased $197, or 8%, compared to
revenues of $2,342 in the prior year. Product revenue reflects a 23%
or $170 increase in eSignature and a 22% or $149 decrease in natural input
revenues compared to the prior year. The increase is primarily due to
the relative size of orders between the comparable years offset by lower
reported royalties from a major natural input/Jot customer. Maintenance revenue
decreased 24%, or $218, for year ended December 31, 2007 compared to the prior
year period. The decrease was primarily due to the non-renewal of a maintenance
contract from an ongoing customer due to financial constraints driven by a
severe natural disaster occurring in 2006.
In
addition, the Company has experienced the need to extend and enhance its product
offerings to serve various eSignature applications as the market
matures. This included multi-model signings, web based offerings,
call centers, server side and hosted solutions. Although this product
evolution is consistent with the transition from a developing market to market
take-off, 2006 and 2007 revenue was negatively impacted by the delay in large
follow-on rollout-type deployments from our installed base of initial
deployments especially with top-tier early adopter financial
institutions. The Company believes it has maintained and enhanced its
product and competitive leadership. Although 2007 revenue was essentially the
same as 2006, fourth quarter
revenue of $800 was up 75 % over the prior quarter and up 63% over the
corresponding prior year period. eSignature sales activity in the last half of
2007, as measured by the revenue potential reflected in the formal proposal and
quotation requests, was at the highest level in the Company’s history. The
Company experienced delays in closing several material orders in the last half
of 2007, with negotiations still ongoing, and believes that the current pipeline
and it’s growth rate has the sales potential for achieving and
sustaining quarterly profitability.
- 16
-
Cost
of Sales
Cost of
sales increased 110% or $275, for the twelve months ended December 31, 2007,
compared to $250 in the prior year. The increase is primarily due to the third
party hardware costs for hardware sold as part of our eSignature solution
software and increased amortization of new and previously capitalized software
development costs associated with the Company’s product and maintenance
revenues. Direct engineering costs associated with development
contracts and proof of concept orders decreased approximately $38 to $56,
compared to $94 in the prior year. Cost of sales is expected to increase near
term as capitalized engineering software development for new and existing
products is completed and products are released.
Operating
Expenses
Research
and Development Expenses
Research
and development expenses decreased approximately 42%, or $341, for the year
ended December 31, 2007 compared to the prior year. Research and
development expenses consist primarily of salaries and related costs, outside
engineering as required, maintenance items, and allocated facilities
expenses. The most significant factor contributing to the $341
decrease was the increase in software development costs capitalized during 2007
compared to the prior year. In addition salaries and related expenses
decreased 11% compared to the prior year due to the elimination of two
engineering personnel late in 2006 and early in 2007. The expense of the
estimated fair value of stock options that vested in 2007 required under SFAS
123(R), (see Critical Accounting Policies “Share-Based Compensation”)
decreased 67% or $36, for the year ended December 31, 2007. The decrease was due
to fewer options vesting in the current year period. Total expenses, before
capitalization of software development costs and other allocations was $1,057
for the year ended December 31, 2007 compared to $1,619 in the prior
year. Research and development expenses before capitalization of
software development costs, as well as the amounts to be capitalized on future
product development are expected to remain consistent with the 2007 amount in
the near term.
Sales
and Marketing Expenses
Sales and marketing expenses
decreased 23% or $382,for the twelve months ended December 31,
2007, compared to the prior year. The
decrease was primarily attributable to
a decrease in salary and related expense, including stock based
compensation, resulting from the reduction of two marketing personnel. In addition
advertising and marketing
programs and participation at trade shows
decreased compared to the
prior year. Engineering allocated expense in support
of sales related communications and customer demonstration activities including
the trade shows and exhibits was also reduced. The Company expects sales and
marketing expenses to remain consistent in the near term.
General
and Administrative Expenses
General
and administrative expenses for the twelve months ended December 31, 2007
decreased 5% or $113, compared to
the prior year.
Salaries and related expense including stock based compensation were consistent
with the prior year. Professional services, insurance and allocated expenses
were reduced due completion of our web-site in 2006, renegotiation of the
Company’s office lease and reductions in annual insurance
premiums. These favorable trends were offset by increases in the
Company’s allowance for doubtful accounts. The Company anticipates that general
and administrative expense will remain consistent over the near
term.
- 17
-
Interest
Income and Other Income (Expense), Net
Interest
income and other income (expense), net, decreased $69 to an expense of $26,
compared to the prior year. The decrease is due to the reduced cash balances
during the most of the current year, disposal of fixed assets and inventory by
the joint venture and the affect of exchange rate changes on cash compared to
the prior year.
Interest
Expense
Interest
expense related party increased $124 to $135 for the year ended December 31,
2007, compared to $11 in the prior year. The increase was due to two additional
financing in March/April 2007 and June of 2007. Interest expense-other for the
year ended December 31, 2007 increased 42%, or $44, to $149, compared to $105 in
the prior year period. The increase was primarily due to March/April
2007 financings mentioned above. See Notes 4 and 5 in the
Consolidated Financial Statements of this report on Form 10-K.
Amortization
of loan discount and deferred financing expense-related party increased $235 for
the year ended December 31, 2007. The increase was primarily due to
amortization of the additional warrant costs issued with the new debt mentioned
above.
Amortization
of loan discount and deferred financing-other, which includes warrant,
beneficial conversion feature and deferred financing costs, associated with the
convertible notes and the note and warrant purchase agreements, increased 12%,
or $73, for the year ended December 31, 2007 compared to $591 in the prior year
period. The increase was due to the increase in borrowings in 2007 and $202 of
additional beneficial conversion feature costs due to a reduction in the
conversion price of the convertible debt. See Note 3 and 4 in the Consolidated
Financial Statements of this report on Form 10-K.
The
Company will amortize an additional $371 of warrant cost related to the note and
warrant purchase agreements entered into between November 2006 and October 2007
to interest expense through October 2009.
Results
of Operations - Years Ended December 31, 2006 and December 31, 2005
Revenues
Revenues
from transaction and communication enabling technologies (“eSignature”) and
natural input technologies (“Jot”), declined 25%, or $779, in 2006, to $2,342,
compared to revenues of $3,121 in the prior year. The decline was due
to the absence of large dollar rollout-type deployments from our installed base
of proof-of-concept and pilot eSignature installations.
The Company believes the 2006 decrease in eSignature revenue, and the decrease
in 2005 revenue relative to 2004, reflects fluctuations in information
technology spending but is primarily attributable to the realities of an
emerging market. The
Company’s 2004 record
setting financial results were driven by large respected early adopter
enterprises in the financial industry. Although total 2004 eSignature revenue
was attributable to over seventy customers worldwide, 85% of the total
eSignature revenue was driven by two major orders. The Company believes these top tier respected
early adopters play a critical and necessary role as reference accounts,
confirming CIC’s technology
and its
associated ROI, and that
the successful completion of these initial deployments is fundamental to
sustained sales growth available from the much larger base of potential
customers. This mainstream market is comprised of both enterprise customers and
the channel partners required to provide the broad market access and sales
coverage needed to achieve market takeoff. These key early adopter accounts have
now successfully completed their initial deployments and are functioning as
CIC reference
accounts.
In addition, the Company has experienced the need to extend and enhance its
product offerings to serve various eSignature applications as the market
matures. This included multi-model signings, web
based offerings, call centers, server side and hosted
solutions. Although this product evolution is
consistent with the transition from a developing market to market take-off, 2006
revenue was negatively impacted by the delay in large follow-on rollout-type
deployments from our installed base of initial deployments especially with
top-tier early adopter financial institutions. The Company believes it has maintained
and enhanced its product and competitive as evidenced by follow-on
orders from top-tier early adopters as well as new orders from new top-tier
customers received late last year and in the first quarter of 2007.
- 18
-
Revenues
from our Jot OEM’s including maintenance declined 29% or $308, to $746, compared
to the prior year, primarily due to a lower number of units shipped by
OEM’s. The Company anticipates that its Jot revenues will remain at
levels consistent with 2006 for the near term.
Cost
of Sales
Cost of
sales increased 69% or $102, for the twelve months ended December 31, 2006,
compared to the prior year period. The increase is primarily due to increased
amortization of new and previously capitalized software development costs
associated with the Company’s product and maintenance
revenues. Direct engineering costs associated with development
contracts and proof of concepts orders increased approximately $9 to $94,
compared to the prior year. Cost of sales is expected to increase near term as
capitalized engineering software development for new and existing products is
completed and products are released.
Operating
Expenses
Research
and Development Expenses
Research
and development expenses decreased approximately 29%, or $327, for the year
ended December 31, 2006 compared to the prior year. Research and
development expenses consist primarily of salaries and related costs, outside
engineering, maintenance items, and allocated facilities
expenses. The most significant factors in the $327 decrease were the
reduction in the use of outside engineering services and the increase in of
software development costs capitalized during 2006 compared to the prior
year. Facilities and allocated expenses were down from the prior year
but were offset by the expensing of the estimated fair value of stock options
that vested in 2006 required under SFAS 123(R), (see Critical Accounting
Policies “Share-Based
Compensation”). Total expenses, before capitalization of
software development costs and other allocations was $1,628 for the year ended
December 31, 2006 compared to $1,144 in the prior year.
Sales
and Marketing Expenses
Sales and marketing expenses increased
34% or $418,for the twelve months ended December 31,
2006, compared to the prior year. The increase was primarily attributable to an
increase in salary related expense, including stock based compensation,
resulting from the addition of two sales persons, and increases in advertising
and marketing programs including increased participation at trade shows and
related exhibit and marketing collateral expenses and the redesign of our
website all aimed at increasing revenue generation through increased market
awareness and sales coverage. In addition, there was an increase in engineering
allocated expense in support of sales related communications and customer
demonstration activities including the trade shows and
exhibits.
General
and Administrative Expenses
General
and administrative expenses for the twelve months ended December 31, 2006 were
virtually unchanged compared to the prior year. Salaries and related expense
including stock based compensation increased due to salary increases and the
requirements of SFAS 123(R), (see critical accounting policies “Share-based compensation”),
while professional services, insurance and allocated expenses were reduced due
to the settlement of patent litigation, renegotiation of the Company’s office
lease and reductions in annual insurance premiums.
Interest
Income and Other Income, Net
Interest
income and other income, net increased 153%, or $26, to $43 for the year ended
December 31, 2006 compared to $17 in the prior year period. In the
prior year the Joint Venture disposed of certain fixed assets at a loss which is
included in Interest income and other, net in the prior year.
- 19
-
Interest
Expense
Interest
expense decreased 44%, or $92, to $116 for the year ended December 31, 2006
compared to $208 in the prior year period. The decrease was primarily due to
reductions in the amount of debt as the result of conversions of the outstanding
notes into shares of common stock See Note 3 in the Consolidated Financial
Statements of this Form 10-K.
Amortization
of loan discount, which includes warrant and beneficial conversion feature
costs, and deferred financing costs, associated with the convertible notes
decreased 74%, or $1,684, to $591 for the year ended December 31, 2006 compared
to $2,275 in the prior year. The decrease was primarily due to the amortization
of the loan discount and deferred financing costs related the conversion of
$2,782 of the convertible notes over the prior 24 months. As of
December 31, 2006, the Company was required to amortize an additional $303 to
interest expense over the remaining life of the convertible notes or sooner if
the notes are converted before the due date.
In
addition to the above the Company has amortized $70 of a debt discount
attributable to the fair value assigned to warrants to interest expense
associated with a note and warrant purchase agreement entered into with a
greater than 5% stockholder and an unrelated third party in August 2006 (See
Note 4 in the Consolidated Financial Statements of this Form
10-K). The Company will amortize an additional $266 to interest
expense over the life of the loan.
Liquidity
and Capital Resources
Cash and
cash equivalents at December 31, 2007 totaled $1,144, compared to cash and cash
equivalents of $727 at December 31, 2006. This increase is primarily
attributable to $2,452 provided by financing activities and $40 as a result of
exchange rate changes. These amounts were offset by $1,261 used by
operations and $814 used in investing activities.
The cash
used by operations was primarily due to a net loss of $3,399. Other net changes
in operating assets and liabilities amounted to proceeds of $252. The
cash used in operations was offset by depreciation and amortization of $857,
amortization of the loan discount, deferred financing and warrant costs of $969,
and stock based employee compensation of $130.
The cash
used in investing activities of $814 was primarily due to the capitalized
software development costs of $788 and the acquisition of office and computer
equipment of $26.
Proceeds
from financing activities consisted primarily of $2,602 in net proceeds from the
sale of common stock through a private placement and $1,120 in proceeds from
short term debt with a related party (see “Financing” below). The proceeds from the sale of
common stock and short-term notes were offset by the payment of convertible
notes amounting to $1,265 and $5 in payments on capital lease
obligations.
Accounts
receivable decreased 7%, or $35, to $452 at December 31, 2007, compared to $487
at December 31, 2006. Accounts receivable at December 31, 2007 and 2006 are net
of $117 and $397, respectively, in reserves provided for potentially
uncollectible accounts. Sales in the Company’s fourth quarter of 2007 were 63%
higher than 2006 due to recognition of deferred revenues. The Company expects
that there will be fluctuations in accounts receivable in the foreseeable future
due to volumes and timing of revenues from quarter to quarter.
The
deferred financing costs were completely written off during 2007. The deferred
financing costs are associated with the November 2004 financing (see “Financing”
below).
Prepaid
expenses and other current assets increased 29%, or $30, to $135 at December 31,
2007 compared to $105 at December 31, 2006. The increase is primarily
due the timing of the billings of annual maintenance and other prepaid
contracts. Prepaid expenses generally fluctuate due to the timing of annual
insurance premiums and maintenance and support fees, which are prepaid in
December and June of each year.
- 20
-
Accounts
payable increased 87%, or $63, primarily due to expenses associated with the
preparation and filing of a Registration Statement on Form S-1 required by the
sale of common stock in a private placement effected in fiscal
2007.
Other
current liabilities, which include deferred revenue of $431 and the related
party notes of $1,370, becoming due in May, September and December of 2008, were
$2,463 at December 31, 2007, compared to $2,063 at December 31, 2006, a net
increase of $400. Deferred revenue increased $27, to $431, at December 31, 2007,
compared to $404 at December 31, 2006. The increase in current
liabilities is due to primarily to the reclassification of the related party
notes from long-term to short-term at December 31, 2007.
Financing
August
2007 Private Placement
On August
24, 2007, the Company entered into a Securities Purchase and Registration Rights
Agreement (the “August 2007 Purchase Agreement”) with Phoenix Venture Fund LLC
(the “Purchaser”). On September 14, 2007, the transactions closed and the
Company issued to the Purchaser 21,500 shares of the Company’s common stock (the
“Shares”) at a price per share of approximately $0.14, for an aggregate purchase
price of $3,000. An advisory fee of $250 was paid to the managing member of the
Purchaser for services rendered in connection with the sale of the Shares and
$61 to the Purchaser’s legal counsel for services associated with the financing
transactions. In addition the Company paid $87 in professional fees
associated with the sale of the shares. The Company used the proceeds of the
sale of the Shares for payment of outstanding indebtedness and additional
working capital. The Company was permitted under the terms of the Purchase
Agreement to use up to $1,400 of the net proceeds to repay outstanding
indebtedness. Under the August 2007 Purchase Agreement, so long as the Purchaser
holds shares of common stock of the Company representing at least fifty-percent
of the Shares purchased pursuant to the August 2007 Purchase Agreement and at
least five-percent of the outstanding capital stock of the Company, the managing
member of the Purchaser is entitled to a right of first offer to exclusively
provide debt or equity financing to the Company prior to the Company’s pursuing
debt or equity financing from another party, subject to certain conditions and
exclusions. Additionally, provided the Purchaser meets the foregoing ownership
requirements, the managing member of the Purchaser is permitted to designate up
to two non-voting observers to attend meetings of the Company’s board of
directors and, for a period of twenty-four months following the date a
registration statement pertaining to the Shares is first declared effective by
the Securities and Exchange Commission (the “Commission”), the Company is
prohibited from selling or otherwise disposing of material properties, assets or
rights of the Company without the consent of the managing member of the
Purchaser.
The
Company was obligated under the Purchase Agreement to use its best efforts to
prepare and file with the Commission a registration statement covering the
resale of the securities sold pursuant to the Purchase Agreement. The
registration statement provides for the offering to be made on a continuous
basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the
“Securities Act”). The Company filed the registration statement on November 15,
2007, and an amended registration statement on December 20, 2007. The revised
registration statement was declared effective on December 28, 2007. The Company
must also use its best efforts to keep the registration statement continuously
effective under the Securities Act until the earlier of the date that all shares
purchased under the Purchase Agreement have been sold or can be sold publicly
under Rule 144(k). The Company was obligated to pay the costs and expenses of
such registration, which were $147.
The
August 2007 Purchase Agreement provides for certain registration rights whereby
the Company could be required to make liquidated damages payments if a
registration statement is not filed or declared effective by the SEC within a
specified time frame and if after being declared effect the registration
statement is not kept effective. The Company filed the registration statement
within the required time frame and it is currently effective. Should
the Company fail to keep the registration statement effective, it will upon that
event and each thirty days thereafter until the registration statement is again
effective, be subject to making payments to the Purchaser in an amount equal to
one and a half percent (1.5%) of the greater of: (i) the weighted average market
price of the Shares during such 30-day period, or (ii) the market price of the
Shares five (5) days after the closing (the “Closing Market Price”), until the
registration statement is again declared effective, or as to any Shares, until
such Shares can be sold in a single transaction pursuant to SEC Rule144;
provided, however, that the liquidated damages amount under this provision shall
be paid in cash and the total amount of payments shall not exceed, when
aggregated with all such payments, ten percent (10%) of the Closing Market
Price. The Company has not recorded a liability in connection with the
liquidated damages provisions of the August 2007 Purchase Agreement because it
believes that it is not probable that an event will occur which will trigger a
liquidated damages payment under the agreement.
- 21
-
Note
Financings
On June
15, 2007, The Company entered into a Note and Warrant Purchase Agreement (the
“June 2007 Purchase Agreement”) and a Registration Rights Agreement (the “June
2007 Registration Rights Agreement”), each dated as of June 15, 2007. The
Company secured the right to borrow up to one million dollars ($1,000) from the
Affiliated Shareholder through December 31, 2007. Pursuant to the June 2007
Purchase Agreement the Company issued two notes aggregating $400, due December
30, 2008. The notes bear interest at the rate of fifteen percent (15%) per annum
payable quarterly in cash. The Company used the proceeds of the financing for
working capital purposes.
In
connection with the June 2007 Purchase agreement, the Company issued 3,168
warrants to purchase shares of its common stock at an exercise price of $0.25.
The exercise price of the warrants was determined by the volume weighted average
price of the common stock for the thirty business days preceding the date of the
applicable draw. The number of warrants issued was determined by use of a
formula known as the Cox-Rubenstein Model, which takes into account the
volatility of the underlying stock, the risk free interest rate, dividend yield
and exercise price. The Company has ascribed a value of $188 to the warrants,
issued as part of this borrowing, which is recorded as a discount to short-term
debt, related party, in the balance sheet and will be amortized to interest
expense over the life of the loan. The relative fair value ascribed
to the warrants was estimated on the commitment date using the Black-Scholes
pricing model with the following assumptions: risk-free interest rate of 4.90%;
life of 3 years; expected volatility of 69%; and expected dividend yield of 0%.
The warrants included piggyback registration rights and were included in the
Company’s Registration Statement on Form S-1, which was declared effective on
December 28, 2007.
The
Company’s use of a volume weighted average pricing model to determine the $0.25
exercise price of the warrants issued with the June 2007 Purchase Agreement
produced an exercise price less than the exercise price of the warrants
associated with the convertible debt and less than the conversion price of such
debt. This resulted in the Company having to reset both the conversion price of
the convertible debt, from $0.46 to $0.45, and the exercise price of the
associated warrants. The weighted average exercise price of the warrants
associated with the convertible debt was reduced from $0.50 to $0.44, resulting
in a reduction in gross proceeds if all of the warrants are exercised of
$291. The Company reduced the conversion price of the convertible
debt from $0.46 to $0.45.
In
February 2007, the Company entered into a Note and Warrant Purchase Agreement
(the “February 2007 Purchase Agreement”) aggregating $600, and a Registration
Rights Agreement (the “February 2007 Registration Rights Agreement”), each dated
as of February 5, 2007, with an affiliated stockholder. On March 15, 2007 the
Company and the affiliated stockholder amended the February 2007 Purchase
Agreement to increase the maximum amount of borrowing from $600, to $1,000. On
March 30, 2007, and April 1, 2007 the Company borrowed $670 and $50 under the
February 2007 Purchase Agreement of which $320 was borrowed from the affiliated
stockholder and the remaining $400 from unrelated third parties. The proceeds
were used for working capital purposes. The Company issued 3,733
warrants associated with this borrowing. The warrants have a three year life
beginning June 30, 2007, and have an exercise price of $0.51. The Company has
ascribed a value of $359 to the warrants, which is recorded as a discount to
short-term debt, related party, in the balance sheet and will be amortized to
interest expense over the life of the loan. The relative fair value
ascribed to the warrants was estimated on the commitment date using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 4.68%; life of 3 years; expected volatility of 45%; and expected
dividend yield of 0%.The notes bear interest at the rate of fifteen percent
(15%) per annum payable quarterly in cash and are due September 30, 2008. The
warrants included piggyback registration rights and were included in the
Company’s Registration Statement on Form S-1, which was declared effective on
December 28, 2007.
- 22
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In August
2006, the Company entered into a Note and Warrant Purchase Agreement (the “2006
Purchase Agreement”) and a Registration Rights Agreement (the “2006 Registration
Rights Agreement”) with an affiliated stockholder, each dated as of
August 10, 2006. The Company secured the right to borrow up to six
hundred thousand dollars. On November 19, 2006 the Company borrowed the $600
available under the 2006 Purchase Agreement, $450 from the Affiliated
Shareholder and $150 from an unrelated third party. The Company used
the proceeds of the financing for additional working capital. The note is due
May 17, 2008 and bears interest at the rate of 15% per annum payable quarterly
in cash.
In
addition, the Company issued warrants to purchase 3,111 of the Company’s common
stock. The warrants issued in exchange for the $600 have a term of
three years and an exercise price of $0.51. The Company has ascribed a value of
$336 to the warrants, which was recorded as a discount to debt in the balance
sheet and will be amortized to interest expense over the life of the
loan. The fair value ascribed to the warrants was estimated on the
commitment date using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 4.68%; expected life of 3 years;
expected volatility of 54%; and expected dividend yield of 0%. The warrants
included piggyback registration rights and were included in the Company’s
Registration Statement on Form S-1, which was declared effective on December 28,
2007.
During
the year ended December 31, 2007 and 2006, the Company amortized to interest
expense approximately $463 and $77 of the loan discount associated with the
August 2006 and the February and June 2007 Note and Warrant Purchase agreements,
respectively. The balance due under the short-term debt is shown net
of the remaining $350 unamortized discount on the accompanying consolidated
balance sheet.
During
the year ended December 31, 2007 and 2006 interest expense associated with the
note and warrant purchase agreements was $203 and $11, respectively
In
November 2004, the Company entered into an unsecured Note and Warrant Purchase
Agreement (the “2004 Purchase Agreement”) and a Registration Rights Agreement
(the “2004 Registration Rights Agreement, each dated as of October 28, 2004).
The Purchase Agreement did not require the Company to deliver registered shares
upon exercise of the warrants. However, the Company was required to file a
registration statement providing for the resale of the shares that were 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 and liquidated damage clause contained in the 2004 Purchase
Agreement was analyzed under paragraphs 6 and 12 of SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities”, and 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” to determine its proper classification
in the Company’s balance sheet and to determine that no liquidated damages
existed.
The 2004
financing discussed above, involved a combination of debt and equity, closing
November 2, 2004. The proceeds to the Company under the 2004 Purchase Agreement
were approximately $3,885, net of $310 in commissions and legal
expenses. H.C. Wainwright & Co., Inc. (“Wainwright”) acted as
placement agent. As placement agent for the Company, at closing
Wainwright received $731 in commissions, legal fees and warrants. The
commissions of approximately $285 and legal fees of $25, were paid in
cash. The Company has used the proceeds of the financing for working
capital. 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 had ascribed the value of
$421 to the Wainwright warrants, which was recorded as deferred financing costs
in the balance sheet at December 31, 2004.
Under the
terms of the 2004 Purchase Agreement, the Company issued to certain accredited
investors convertible promissory notes in the aggregate principal amount of
$4,195 and warrants to acquire 3,632 shares of the Company’s common stock at an
exercise price of $0.508 per share. The notes accrued interest at the
rate of 7% per annum, payable semi-annually, and were convertible into shares of
the Company’s common stock at the rate of $0.462 per share. The
Company ascribed a value of $982 to the investor warrants, which was recorded as
a discount to notes payable in the balance sheet. The Company
expensed $202 of additional discount due the note holders as the result of the
issuance of new warrants in the short-term transaction and in a private
placement with an exercise price less than the note holders. The reduced
exercise price of the new warrants resulting in the reduction of the conversion
price of the note holder warrants from $0.46 to $0.41 per share.
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The fair
value ascribed to the Wainwright and investor 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 had ascribed
$1,569 to the beneficial conversion feature in the convertible notes, which was
recorded as a discount to notes payable in the balance sheet. The
values ascribed to the warrants and beneficial conversion feature followed 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 was amortized to expense over the life of the convertible notes or upon
earlier conversion using the effective interest method. During the
year ended December 31, 2007, the Company had amortized to interest expense
approximately $303, of the loan discount and deferred financing costs. There
were no note conversions during the year ended December 31, 2007.
The
Company offered the outstanding convertible note holders the option of being
issued warrants to purchase two (2) shares of the Company’s common stock for
each dollar of note principal outstanding in exchange for a two year extension
of the note due date and termination of the conversion feature of the
note. The warrants would have a three year life from the date of
issuance and an exercise price equal to the closing price of the Company’s
common stock on the date the warrants were issued. The new warrants would have
registration rights similar to those of the current warrants. In October 2007,
one note holder, with a principal balance of $117, accepted the offer with a
modification to the exercise price of the warrants revised to the average of the
20 day volume weighted average price of the Company’s commons stock ending on
October 25, 2007. The Company issued 234 warrants to the investor on the terms
discussed above. On October 26, 2007, the Company paid the remaining outstanding
debt of $1,265 and accrued interest thereon.
The
warrants issued under the 2004 Purchase Agreement expire on October 28, 2009.
The Company may call the warrants if the Company’s common stock trades at $1.00
or above for 20 consecutive trading days after the date that is 20 days
following the effectiveness of a registration statement providing for the resale
of the shares issued upon the conversion of the notes and exercise of the
warrants. At December 31, 2007, there are warrants outstanding to
purchase 4,903 shares of common stock at a weighted average exercise price of
$0.44 per share, adjusted for the reduction in conversion price and sale of
common stock in a private placement discussed above. The placement agent will be
paid approximately $28 in the aggregate if all of the investor warrants are
exercised. The Company will receive additional proceeds of
approximately $1,482, adjusted for the change in warrant exercise price, if all
of the investor warrants are exercised.
The
unamortized balance of the related deferred financing costs at December 31, 2007
and 2006 was $0 and $75, respectively.
Contractual
Obligations
The
Company had the following material commitments as of December 31,
2007:
|
Payments
due by period
|
||||||||||||||||||||||||||||
|
Contractual
obligations
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|||||||||||||||||||||
|
Short-term
debt related party (1)
|
$ | 1,720 | $ | 1,720 | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||||
|
Long-term
debt (2)
|
117 | – | 117 | – | – | – | – | |||||||||||||||||||||
|
Operating
lease commitments (3)
|
1,056 | 264 | 272 | 280 | 240 | – | – | |||||||||||||||||||||
|
Total
contractual cash obligations
|
$ | 2,893 | $ | 1,984 | $ | 389 | $ | 280 | $ | 240 | $ | – | $ | – | ||||||||||||||
|
1.
|
Short-term
debt reported on the balance sheet is net of approximately $350 in
discounts representing the fair value of warrants issued in connection
with the Company’s debt financings. Short-term debt includes $1,170 due to
a related party.
|
- 24
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|
2.
|
Long-term
debt reported on the balance sheet is net of approximately $21 in
discounts representing the fair value of warrants issued to the
investors.
|
|
3.
|
The
operating lease commenced on November 1, 2002. The lease was renegotiated
in December 2005 and extended for an additional 60 months. The base rent
will increase approximately 3% per annum over the term of the lease, which
expires on October 31, 2011.
|
As of
December 31, 2007, the Company leased facilities in the United States and China
totaling approximately 10,100 square feet. The Company’s rental expense for the
years ended December 31, 2007, 2006, and 2005, was approximately $333, $299, and
$401, respectively. In December 2005 the Company extended its existing lease in
Redwood Shores an additional 60 months. In addition to the base rent in the
United States, the Company pays a percentage of the increase, if any, in
operating cost incurred by the landlord in such year over the operating expenses
incurred by the landlord in the base year. The Company believes the
leased offices in the United States and China will be adequate for the Company’s
needs over the term of the leases.
As of
December 31, 2007, the Company's principal source of liquidity was its cash and
cash equivalents of $1,144. With the exception of 2004, in each year
since the Company’s inception the Company has incurred losses. The Company
believes that its current cash and resources, together with the expected revenue
levels, will provide sufficient funds for planned operations for at least the
next twelve months. However, if the Company is unable to generate adequate cash
flow from sales or if expenditures required to achieve the Company’s plans are
greater than expected the Company may need to obtain additional funds or reduce
discretionary spending. There can be no assurance that additional funds will be
available when needed or, if available, will be on favorable terms or in the
amounts the Company may require. If adequate funds are not available when
needed, the Company may be required to delay, scale back or eliminate some or
all of its marketing and development efforts or other operations, which could
have a material adverse effect on the Company's business, results of operations
and prospects. As a result of this uncertainty, our auditors have expressed
substantial doubt about our ability to continue as a going concern.
Interest Rate Risk. The
Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short-term securities. The Company did not enter into any
short-term security investments during the twelve months ended December 31,
2007.
Foreign Currency Risk. The
Company operates a joint venture in China and from time to time makes certain
capital equipment or other purchases denominated in foreign currencies. As a
result, the Company's cash flows and earnings are exposed to fluctuations in
interest rates and foreign currency exchange rates. The Company attempts to
limit these exposures through operational strategies and generally has not
hedged currency exposures.
Future Results and Stock Price
Risk. The Company's stock price may be subject to significant volatility.
The public stock markets have experienced significant volatility in stock prices
in recent years. The stock prices of technology companies have experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or disproportionate to the operating performance of such companies.
The trading price of the Company's common stock could be subject to wide
fluctuations in response to, among other factors, quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, announcements of new strategic relationships
by the Company or its competitors, general conditions in the computer industry
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.
- 25
-
Item
8. Consolidated Financial Statements and Supplementary Data
The
Company's audited consolidated financial statements for the years ended December
31, 2007 and 2006, and for each of the years in the three-year period
ended December 31, 2007 begin on page F-1 of this Annual Report on Form 10-K,
and are incorporated into this item by reference.
Item
9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosures
None
Item 9A.Controls and
Procedures
Disclosure
Controls
Under the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to applicable rules under the Securities
Exchange Act of 1934, as amended, as of December 31, 2007. Based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that these disclosure controls and procedures are
effective.
The
Company does not expect that its disclosure controls and procedures will prevent
all error and all fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedures are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The Company considered these
limitations during the development of its disclosure controls and procedures,
and will continually reevaluate them to ensure they provide reasonable assurance
that such controls and procedures are effective.
Internal
Controls and Procedures
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934) which are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management including our CEO and our CFO, as appropriate to
allow timely decisions regarding required disclosure.
Under the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its internal
controls and procedures pursuant to applicable rules under the Securities
Exchange Act of 1934, as amended. In making this assessment, the
Company’s management used the criteria established in “Internal Control,
Integrated Framework” issued by the Committee Sponsoring Organization of the
Treadway Commission (COSO). As of December 31, 2007, and based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that the internal controls and procedures are
effective.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s independent
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this Annual Report on Form 10-K.
- 26
-
There are
inherent limitations to the effectiveness of any system of internal control over
financial reporting. Accordingly, even an effective system of internal control
over financial reporting can only provide reasonable assurance with respect to
financial statement preparation and presentation in accordance with accounting
principles generally accepted in the United States of America. Our internal
controls over financial reporting are subject to various inherent limitations,
including cost limitations, judgments used in decision making, assumptions about
the likelihood of future events, the soundness of our systems, the possibility
of human error and the risk of fraud. Moreover, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may be
inadequate because of changes in conditions and the risk that the degree of
compliance with policies or procedures may deteriorate over time.
There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Item
9B. Other
Information
None.
- 27
-
PART
III
Item
10. Directors and Executive
Officers of the Registrant
Directors
The following table sets forth certain
information concerning the Directors:
|
Name
|
Age
|
Year
First Elected
or Appointed
|
|
Guido
D. DiGregorio
|
69
|
1997
|
|
Garry
Meyer (5)
|
58
|
2007
|
|
Louis
P. Panetta (1), (2), (3), (4)
|
58
|
2000
|
|
Chien-Bor
Sung (1), (2), (3), (4)
|
82
|
1986
|
|
David
E. Welch (1), (4)
|
61
|
2004
|
1. Member of
the Audit Committee (Chairman David E. Welch)
2. Member of
the Finance Committee (Chairman Chien-Bor. Sung)
3. Member of
the Compensation Committee (Chairman Louis P. Panetta)
4. Member of
the Nominating Committee (Chairman Chien-Bor Sung)
5. Member of
the Best Practices Committee
The
business experience of each of the directors for at least the past five years
includes the following:
Guido
D. DiGregorio was elected Chairman of the Board in
February 2002, Chief Executive Officer in June 1999 and President & Chief
Operating Officer in
November 1997. Mr.
DiGregorio began his career
with General Electric, from 1966 to 1986, where after successive promotions in
product development, sales, strategic marketing and venture management
assignments, he rose to the position of General Manager of an industrial
automation business. Prior to joining CIC, Mr. DiGregorio was recruited as CEO
of several companies to position those businesses for sustained sales and
earnings growth. Those companies include Exide Electronics, Maxitron Corp.,
Proxim and Display Technologies Inc.
Garry S. Meyer
was elected a director in
November 2007. Dr. Meyer has more than 25 years of experience in the financial
services industry, and is currently a Principal of GSMeyer & Associates LLC,
a private equity and technology consulting firm. From 2006 to 2007, he was the
Chief Information Officer of Agency and Personal Markets at Liberty Mutual
Insurance. From 1998 to 2006, Dr. Meyer was Senior Vice President & Global
IT Quality Leader for General Electric. At General Electric he developed and
implemented a strategy of core technology platforms and methods to enable
leverage in multiple businesses and was a key contributor to LEAN Six Sigma new
product introductions and best practice processes. Previously, Dr. Meyer was
Managing Director, Trusted Services at SafeNet, Vice President at Marsh &
McLennan, Principal & CIO at Smart Card International, Inc., Director,
Information Technology at Citicorp POS Information Services, Inc., and Vice
President, Management Information System at Standard & Poor’s. Dr. Meyer
holds a M.S. in electrical engineering and computer science from the
Massachusetts Institute of Technology (M.I.T.), a B.S. and Ph.D. from the State
University of New York, and is certified in Six Sigma.
Louis P. Panetta was elected a director of the Company in
October 2000. Mr. Panetta is currently the principal of Louis Panetta
Consulting, a management consulting firm, and also teaches at the school of
business at California State University, Monterey Bay. He served as Vice
President-Client Services for Valley Oak Systems from September 2003 to December
2003. From November 2001 to
September 2003 Mr. Panetta was a member of the Board of Directors of Active
Link. He was Vice President of Marketing and Investor Relations with Mobility
Concepts, Inc. (a wireless Systems Integrator), a subsidiary of Active Link
Communications from February 2001 to April 2003. He was President and Chief
Operating Officer of PortableLife.com (eCommerce products provider) from
September 1999 to October 2000 and President and Chief Executive Officer of
Fujitsu Personal Systems (a computer manufacturer) from December 1992 to
September 1999. From 1995 to 1999, Mr. Panetta served on the Board of Directors
of Fujitsu Personal Systems. Mr. Panetta’s prior positions include Vice President-Sales for Novell, Inc.
(the leading supplier of LAN network software) and Director-Product Marketing
for Grid Systems (a leading supplier of Laptop & Pen Based
Computers).
- 28
-
C.B. Sung was elected a
director of the Company in 1986. Mr. Sung has been the Chairman and
Chief Executive Officer of Unison Group, Inc. (a multi-national corporation
involved in manufacturing, computer systems, international investment and trade)
since 1986 and Unison Pacific Corporation since 1979. Unison Group manages
investment funds specializing in China-related businesses and is a pioneer in
investing in China. Mr. Sung’s background includes over twenty years in various
US high technology operating assignments during which time he rose to the
position of Corporate Vice President-Engineering & Development for the
Bendix Corporation. Mr. Sung was recently acknowledged and honored for his
contributions by his native China (PRC) with a documentary produced by China’s
National TV focusing on his life and career as an entrepreneurial scholar,
successful US hi technology executive and for his pioneering and continuing work
in fostering capital investment and economic growth between the US and
China. He has been a member of the Board of Directors of Capital
Investment of Hawaii, Inc., since 1985, and serves on the Board of Directors of
several private companies and non-profit organizations.
David E. Welch was elected a
director in March 2004 and serves as the financial expert on the Audit
Committee. From July 2002 to present Mr. Welch has been the principal
of David E. Welch Consulting, a financial consulting firm, Mr. Welch has also
been Vice President and Chief Financial Officer of American Millennium
Corporation, Inc., a provider of satellite based asset tracking and reporting
equipment, from April 2004 to present. Mr. Welch was Vice President and Chief
Financial Officer of Active Link Communications, a manufacturer of
telecommunications equipment, from 1999 to 2002. Mr. Welch has held
positions as Director of Management Information Systems and Chief Information
Officer with Micromedex, Inc. and Language Management International from 1995
through 1998. Mr. Welch is a member of the Board of Directors of
Security With Advanced Technology, Inc. and AspenBio Pharma, Inc. Mr.
Welch is a Certified Public Accountant licensed in the state of
Colorado.
Executive
Officers
The
following table sets forth the name and age of each executive officer of the
Company, or named executive officers, and all positions and offices of the
Company presently held by each of them.
|
Name
|
Age
|
Positions Currently Held
|
|
Guido
D. DiGregorio
|
69
|
Chairman
of the Board,
Chief
Executive Officer and President
|
|
Francis
V. Dane
|
56
|
Chief
Legal Officer,
Secretary
and Chief Financial Officer
|
|
Russel
L. Davis
|
43
|
Chief
Technology Officer & Vice President, Product Development
|
The
business experience of each of the executive officers for at least the past five
years includes the following:
Guido D. DiGregorio– see
above under the heading “Directors and Executive Officers of the Company –
Directors.”
Francis V. Dane was appointed
the Company's Secretary in February of 2002, its Chief Financial Officer in
October 2001, its Human Resources Executive in September 1998 and he assumed the
position of Chief Legal Officer in December of 1997. From 1991 to
1997 he served as a Vice President and Secretary of the Company, and from 1988
to 1992 as its Chief Financial Officer and Treasurer. Since July of
2000, Mr. Dane has also been the Secretary and Treasurer of Genyous
Biomed International Inc. (including its predecessors and affiliates) a company
in the biopharmaceutical field focused on the development of medical products
and services for the prevention, detection and treatment of chronic illnesses
such as cancer. From October 2000 to April 2004, Mr. Dane served as a
director of Perceptronix Medical, Inc. and SpectraVu Medical Inc., two companies
focused on developing improved methods for the early detection of cancer. From
October 2000 to June 2003 Mr. Dane was a director of CPC Cancer Prevention
Centers Inc., a company focused on developing a comprehensive cancer prevention
program based upon the detection of early stage, non-invasive
cancer. Prior to this Mr. Dane spent over a decade with
PricewaterhouseCoopers, his last position was that of Senior Manager,
Entrepreneurial Services Division. Mr. Dane is a member of the State
Bar of California and has earned a CPA certificate from the states of
Connecticut and California.
- 29
-
Russel L. Davis rejoined the
Company as Chief Product Officer in August of 2005 and now serves as its Chief
Technology Officer and Vice President of Product Development. He
served as CTO of SiVault Systems, from November of 2004 to August of
2005. Mr. Davis originally joined CIC in May of 1997 and was
appointed Vice President of Product Development & Support in October of
1998. Prior to this, Mr. Davis served in a number of technical management roles
including; Director of Service for Everex Systems, Inc., a Silicon Valley based
PC manufacturer and member of the Formosa Plastics Group, managing regional
field engineering operations for Centel Information Systems, which was acquired
by Sprint. He also served in the United States Navy supervising shipboard
Electronic Warfare operations.
Code
of Business Conduct and Ethics
We have
adopted a written code of business conduct and ethics, referred to as our Code
of Business Conduct and Ethics, which applies to all of our directors, officers,
and employees, including our principal executive officer, our principal
financial and accounting officer, and our Chief product officer. A copy of the
Code of Business Conduct and Ethics is posted on the Company’s web site, at
www.cic.com.
Item
11. Executive
Compensation
Compensation
Discussion and Analysis (in dollars)
The
compensation committee’s philosophy is based upon the belief that the success of
the Company requires the development of, and adherence to, an overall business
strategy which achieves the objective of market leadership with the resultant
financial results that maximize the Company’s value for the benefit of its
shareholders. The achievement of market leadership in the emerging
businesses that CIC is addressing requires effective sales coverage
of target markets and accounts, developing and maintaining product
differentiation consistent with achieving market share leadership within those
target markets and highly coordinated and motivated efforts of all
employees working as a team to achieve results. In essence, the major
objective for the Company, and the underlying basis for its compensation
philosophy, is based on achievement of sustained earnings growth, which, for an
emerging business, requires achieving and maintaining market share leadership;
and the added objective of achieving and maintaining that leadership position
with minimum shareholder dilution.
The
primary goals of the compensation committee of the board of directors with
respect to its philosophy and executive compensation are to attract, motivate,
reward and retain the most talented executives possible and to link annual and
long-term compensation incentives to the achievement of the Company objectives
and performance. To achieve these goals, the compensation committee and the
board have implemented and intend to maintain compensation policies that link a
substantial portion of executives’ overall compensation to key strategic,
operational and financial goals such as capturing market share, revenue, timely
product introductions, technology validation, expense and cash control,
preservation of and increases in stockholder value, and other non-financial
goals that the board may from time to time deem important. The compensation
committee and the board evaluate individual executive performance with a goal of
setting compensation at levels the board believes, based on the general business
and industry knowledge and experience of the directors, are comparable with
executives in other companies of similar size and stage of development operating
in the eCommerce and the eSignature software markets, while taking into account
our relative performance and our own strategic goals.
The base
salaries of the Company’s executive officers are established by the board of
directors as part of an annual compensation review cycle, which includes
determining the operating metrics and non-financial elements used to measure
performance and progress. This review is based on our knowledge of how other,
biometric/signature software companies and related emerging businesses measure
their executive performance and on the key operating metrics that are critical
in the effort to increase the value of the Company. The granting of stock
options is also considered as part of this annual review process. In performing
its review the board considers recommendations made by the Company’s Chief
Executive Officer regarding other named executives.
- 30
-
Mr.
DiGregorio, the Company’s Chief Executive Officer, President and Chairman
currently has a salary of $285,000. This level of compensation falls within peer
ranges according to information obtained from PayScale and SalarySource in
December 2006. Mr. DiGregorio’s salary was brought to its current level in
September of 2005, when it was increased from $250,000, representing the first
increase in his salary since 2002 when he assumed the positions of Chairman and
CEO in addition to his position as President. This consolidation of
positions eliminated approximately $150,000 in annual salary expense that the
previous Chairman had been receiving. However, this saving, although
significant, was not the driving factor in determining Mr. DiGregorio’s
salary. The September 2005, 2006 and 2007
evaluation (during which Mr. DiGregorio declined any increase, again,
in order to ease cash constraints) by the Compensation Committee reflects, Mr.
DiGregorio’s leadership in the face of adversity, which has resulted in CIC
being recognized for its leadership in the developing eSignature market, most
recently as the recipient of the 2007 Frost & Sullivan Market Leadership
Award for the Worldwide Dynamic Signature Verifications Market and in the 2003
Frost & Sullivan Growth Strategy Leadership Award which CIC received for
demonstrating outstanding ability to expand despite difficult market
conditions. Other industry specific studies by leading
research firms including the 2004 IBG Biometrics and Signature
Verification Market Report, and the 2003 IMS Research Worldwide
Market for Biometrics Report, have acknowledged CIC as the market leader in
product leadership, large scale deployments, and proven technology with proven
ROI.
When Mr.
DiGregorio joined the Company in late 1997 he initially implemented a strategy
focused on natural input/text entry embeds on mobile computing devices and
retail sales through our website, CIC.com. This strategy resulted in
an increase in the per share price of CIC stock in 2000, from under $1.00 to
nearly $13.00. However,
by early 2001, handheld device shipments of both PDAs and touch screen enabled phones began a sharp decline, driven by
the economic downturn, negatively impacted by the dot com bubble burst, a
recession, and the geopolitical environment. In the face of this
adversity, the Company rapidly refocused and identified eSignature as a viable
growth opportunity and continues to focus on that developing
market.
Whereas in established markets the CEO
is typically evaluated, to a large extent, on his ability to deliver increasing
profitability, the board
believes that the better
measure in a developing market is the achievement and maintenance of market and
product leadership that positions the Company for significant increases in
shareholder value as the market matures and enters take-off.
As stated above, despite
significant adverse market conditions, CIC is now the recognized leader in the
developing eSignature market, including product leadership through three
generations of products.
Mr. Dane’s current annual salary is
$160,000. In December 1997, Mr. Dane became the Company’s Chief Legal Officer.
In September of 2001, upon the resignation of the Company’s then Chief Financial
Officer (“CFO”), Mr. Dane assumed the position of Acting CFO at a salary
increase of $12,000. This consolidation of positions eliminated the former CFO’s
salary of $125,000 and resulted in Mr. Dane’s salary being increased from
$96,000 to $130,000 in July of 2002 when he accepted the position of CFO, in
addition to his position of Chief Legal Officer. In June of 2004, Mr. Dane’s
salary was increased to $145,000. Mr. Dane’s salary was increased to its current
level in October of 2005. This increase was based upon the same factors taken
into account in determining the CEO’s increase at that time, as discussed
above.
Mr. Davis
first joined the Company in May 1997 and has been continuously employed by the
Company since that time except for the period from November 2004 through August
2005. In August of 2005 he rejoined the Company as its Chief Technology Officer
at his current salary of $165,000. That salary is considered to be at a
competitive level for the position of Chief Technology Officer and appropriate
given Mr. Davis’ knowledge of the Company, his past contributions and
expectations as to his future contributions.
All of the Company’s officers are
evaluated under the same criteria as they relate to specific duties and
functional responsibilities in achieving the
overall Company objectives.
- 31
-
We have
not retained a compensation consultant to review our policies and procedures
with respect to executive compensation.
The board
of directors may, at its discretion, increase or decrease
compensation. Any increase or decrease would be based upon the cash
constraints and the factors discussed above.
There are
no agreements with any executive officers entitling them to compensation upon
termination, change in control or any other reason.
The
Company does not have any guidelines or policies with respect to stock ownership
by its management, except for its Insider Trading Policy.
The
executive officers of the Company play no role in determining their own
compensation, or the compensation of other named executive officers, except for
recommendations that the Chief Executive Officer may from time to time make to
the Compensation committee.
Elements
of Compensation
Executive
compensation consists of the following elements. The compensation committee and
board determine the portion of compensation allocated to each element for each
individual named executive officer:
Base Salary. Base salaries
for the Company’s executives are established based on the scope of their
responsibilities, taking into account competitive market compensation for
similar positions, as well as seniority of the individual, the Company’s ability
to replace the individual and other primarily judgmental factors deemed relevant
by the board. Generally, we believe that executive base salaries should be
targeted near the median of the range of salaries for executives in similar
positions with similar responsibilities at comparable companies, in line with
our compensation philosophy. Base salaries are reviewed annually by the
compensation committee and the board, and adjusted from time to time pursuant to
such review and or at other appropriate times, to realign salaries with market
levels after taking into account individual responsibilities, performance and
experience.
Annual Bonus. The
Company does not have an annual bonus plan and currently has no plans to
implement one.
Long-Term
Incentive Program. The Committee
believes that the use of stock options as a means of compensation provides an
incentive for executives and aligns their interests with those of the
stockholders. All employees, officers and directors are eligible to receive
stock options under the Company's 1999 Stock Option Plan. Additionally from time
to time the board grants non-qualified options outside of the 1999 Stock Option
Plan, referred to as Individual Plans (the “Individual Plans”). The
terms of grants under the Individual Plans are typically identical to grants
made under the 1999 Stock Option Plan and the stock option agreements under the
Individual Plans are typically in the same form as those used for options
granted under the 1999 Stock Option Plan. The Company does not grant
or issue restricted stock or other equity-based incentives.
The
long-term, performance-based compensation of executive officers takes the form
of option awards under the Company’s 1999 Stock Option Plan and under Individual
Plans, which are designed to align a significant portion of the executive
compensation program with long-term shareholder interests. The Compensation
Committee believes that equity-based compensation ensures that the Company’s
executive officers have a continuing stake in the long-term success of the
Company. All options granted by the Company are granted
with an exercise price equal to or above the market price of the Company’s
Common Stock on the date of grant and, accordingly, will only have value if the
Company’s stock price increases subsequent to the dates of grants and the
options are vested and exercised by the respective officers. In
granting options under the plans, the Compensation Committee generally takes
into account each executive’s responsibilities and performance, relative
position in the Company, past grants, and approximate grants to individuals in
similar positions for companies of comparable size in comparable
industries.
Other Compensation. The
Company’s executive officers do not have employment agreements. As
with other employees of the Company, executive officers are employed on an “at
will” basis.
- 32
-
Report
of the Compensation Committee
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis (“CD&A”) for the year ended December 31, 2007 with management.
Based on such review and discussions, the Compensation Committee recommended to
the board that the CD&A be included in this annual report on Form 10-K for
the year ended December 31, 2007.
By the
Compensation Committee:
Louis P.
Panetta
Chien-Bor
Sung
Summary
Compensation Table (in dollars)
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
(2)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
And
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|
Guido
DiGregorio
President
& CEO
|
2007
2006
2005
2004
|
200,000(1)
285,000(1)
322,875(1)
250,334(1)
|
−
−
−
−
|
−
−
−
−
|
−
−
502,732
−
|
−
−
−
−
|
−
−
−
−
|
9,486
9,072
8,885
9,037
|
209,486
294,072
834,492
259,371
|
|
Frank
Dane
CLO
& CFO
|
2007
2006
2005
2004
|
160,000
160,000
146,643
138,125
|
−
−
−
−
|
−
−
−
−
|
1,875
7,400
64,604
13,295
|
−
−
−
−
|
−
−
−
−
|
−
−
−
−
|
161,875
167,400
211,247
151,420
|
|
Russel
Davis
CTO
|
2007
2006
2005(3)
|
165,000
165,000
48,303
|
−
−
−
|
−
−
−
|
−
−
225,425
|
−
−
−
|
−
−
−
|
−
−
−
|
165,000
165,000
273,728
|
(1)
Mr. DiGregorio's salary was increased in February 2002 to
$250,000. In 2003 and 2004, Mr. DiGregorio voluntarily deferred
approximately $70,000 in salary payments tease cash flow
requirements. Mr. DiGregorio was paid his deferred salary from 2003
and 2004 of approximately $70,000 and $70,000 in
January 2004 and 2005, respectively. In September of 2005, Mr. DiGregorio’s
salary was increased to $285,000. As of December 2007, $85,000 of his 2007
salary has been deferred in order to ease cash constraints on the
Company.
(2)
On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based
Payment” Share-based
compensation expense is based on the estimated grant date fair value of the
portion of share-based payment awards that are ultimately expected to vest
during the period. The grant date fair value of stock-based awards to
officers, employees and directors is calculated using the Black-Scholes option
pricing model. Mr. DiGregorio has 1,950,000 options that are vested and
exercisable within sixty days of December 31, 2007. Mr. Dane has
443,943 options that are vested and exercisable within sixty days of December
31, 2007. Mr. Davis has 500,000 options that are vested and exercisable within
sixty days of December 31, 2007. In accordance with applicable regulations, the
value of such options does not reflect an estimate for features related to
service-based vesting used by the Company for financial statement purposes. See
footnote 6 in the Notes to Consolidated Financial Statements included with this
report on Form 10-K.
(3)
Mr. Davis commenced his employment with the Company on August 31,
2005.
There are no employment agreements with
any named executives, either written or oral. All employment is at
will.
- 33
-
Grants
of Plan Based Awards
The board
of directors approves awards under the Company’s 1999 Stock Option Plan and
awards that are outside of the 1999 Stock Option Plan (“Individual Plans’).
There were no awards made to our named executive officers under our 1999 Stock
Option Plan or otherwise during fiscal years 2007 and 2006 as the boards review
indicated that the number of options held by each named executive officer at
that time were adequate to satisfy the long term goal underlying the granting of
options in prior years.
The 1999
Option Plan is administered by the board of directors or a stock option
committee of the board. The board or any such committee has the
authority to determine the terms of the options granted, including the exercise
price, number of shares subject to each option, vesting provisions, if any, and
the form of consideration payable upon exercise. The exercise price
of incentive options must not be less than the fair market value of the common
stock valued at the date of grant and the exercise price for non-qualified
options must be at least 85% of the fair market value of the common stock valued
at the date of grant. The expiration date of options is determined by
the board or committee, but options cannot expire later than ten years from the
date of grant, and in the case of incentive options granted to stockholders
owning at least 10% of the Company’s stock, cannot expire later than five years
from the date of grant. Options have typically been granted with an
expiration date seven years after the date of grant.
If an
employee to whom an award has been granted under the 1999 Option Plan dies while
providing services to the Company, retires from employment with the Company
after attaining his retirement date, or terminates employment with the Company
as a result of permanent and total disability, the restrictions then applicable
to such award shall continue as if the employee had not terminated employment
and such award shall thereafter be exercisable, in whole or in part by the
person to whom it was granted (or by his duly appointed, qualified, and acting
personal representative, his estate, or by a person who acquired the right to
exercise such option by bequest or inheritance from the grantee), in the manner
set forth in the award, at any time within the remaining term of such award.
Options not vested at the time of death, retirement, termination or disability
cease to vest. Except as provided in the preceding paragraph,
generally if a person to whom an option has been granted under the 1999 Option
Plan ceases to be an employee of the Company, such options vested at the date of
termination shall continue to be exercisable to the same extent that it was
exercisable on the last day on which such person was an employee for a period of
90 days thereafter, or for such longer period as may be determined by the
Committee, whereupon such option shall terminate and shall not thereafter be
exercisable.
The board has the authority to amend or
terminate the 1999 Option Plan, provided that such action does not impair the
rights of any optionee under any option previously granted under the 1999 Option
Plan, without the consent of such optionee.
Incentive
and non-qualified options under the 1999 Option Plan may be granted to
employees, officers, and consultants of the Company. There are 4,000
shares of common stock authorized for issuance under the 1999 Option Plan. The
options generally have a seven year life and vest quarterly over three years. As
of December 31, 2007, options to acquire 3,747 shares of common stock were
outstanding under the 1999 Option Plan and options to acquire 3,174 shares of
common stock were exercisable with a weighted average exercise price of $0.55
per share. At December 31, 2007, there were 72 shares available for future
grants under the 1999 Option Plan.
The
Company has issued non-plan options to its employees and directors pursuant to
Individual Plans. As of December 31, 2007, options to acquire 2,289
shares under such Individual Plans were outstanding and 2,190 were exercisable
with a weighted average exercise price of $0.63 per share.
- 34
-
Outstanding
Equity Awards at Fiscal 2007 Year End
The following table summarizes the
outstanding equity award holdings held by our named executive
officers.
|
Name
and
Principal
Position
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($) (4)
|
Option
Expiration
Date
(5)
|
|
|
Guido
DiGregorio, President
& CEO (1)
|
250,000
425,000
1,275,000
|
−
−
−
|
$0.79
$0.39
$0.75
|
2009
2012
2012
|
|
|
Frank
Dane, CLO & CFO
(2)
|
100,000
100,000
100,000
35,985
107,958
|
−
−
−
−
−
|
$0.79
$0.33
$0.55
$0.39
$0.75
|
2009
2010
2011
2012
2012
|
|
|
Russel
Davis, CIO
(3)
|
125,000
375,000
|
−
−
|
$0.57
$0.75
|
2012
2012
|
(1)
Mr. DiGregorio options vested as follows: 250,000 options vested prorata
quarterly over three years; 425,000 options vested on the date of grant; and
1,275,000 options vested on the date of grant.
(2)
Mr. Dane's options vested as follows: 100,000 options vested prorata quarterly
over three years; 100,000 options vested prorata quarterly over three years;
100,000 options vested prorata quarterly over three years; 35,985 options vested
on the date of grant; and 107,958 options vested on the date of
grant.
(3)
Mr. Davis’s options vested as follows: 125,000 options vested on the date of
grant; and 375,000 options vested on the date of grant.
(4)
Mr. DiGregorio holds options to acquire 250,000 shares granted under the 1999
Option Plan and options to acquire 1,700,000 shares under Individual Plans. Mr.
Dane holds 300,000 options to acquire shares granted under the 1999 Option Plan
and options to acquire 143,943 shares granted under Individual Plans. Mr. Davis
holds options to acquire 500,000 shares granted under the 1999 Option
Plan.
(5)
All options granted will expire seven years from the date of grant, subject to
continuous employment with the Company.
Option
Exercises and Stock Vested
In 2007,
no stock options were exercised and 33,320 options to purchase stock granted to
Mr. Dane vested during the period. The Company does not grant or
issue restricted stock or other equity-based incentives.
Pension
Benefits
None of
the Company’s named executive officers participate in or have account balances
in qualified or non-qualified defined benefit plans sponsored by the
Company.
- 35
-
Nonqualified
Deferred Compensation
None of
the named executives participate in or have account balances in non-qualified
defined contribution plans or other deferred compensation plans maintained by
the Company, except the Chief Executive Officer who, as stated above, began
deferring a portion of his salary in January of 2007 in order to ease cash
constraints on the Company. The compensation committee, which is comprised
solely of “outside directors” as defined for purposes of Section 162(m) of the
Internal Revenue Code, may elect to provide our officers and other employees
with non-qualified defined contribution or deferred compensation benefits if the
compensation committee determines that doing so is in our best
interests.
Potential
Payments Upon Termination or Change in Control
There are
no agreements with any named executive officers entitling them to compensation
upon termination, change in control or any other reason.
Employee
Benefit Plans
The
Company’s employees, including its executive officers, are entitled to various
employee benefits. These benefits include medical and dental care plans,
flexible spending accounts for healthcare; life and accidental death and
dismemberment, long–term disability insurance, and a 401(k) plan.
401(k)
Plan
The Company sponsors a 401(k) defined
contribution plan covering all employees, including the named executives,
meeting certain eligibility requirements. Contributions made by the Company are
determined annually by the Board of Directors. To date, the Company has made no
contributions to this plan.
Director
Compensation
For their
services as directors of the Company, all non-employee directors receive a fee
of $1,000 for each board of directors meeting attended and all directors are
reimbursed for all reasonable out-of-pocket expenses incurred in connection with
attending such meetings. First time directors receive options to acquire 50,000
shares of the Company’s common stock upon joining the board and options to
acquire 25,000 shares each time they are elected to the board
thereafter. The exercise price of all options granted to directors
are equal to the market closing price on the date of grant, vest immediately and
have a seven year life.
In June
2007, Louis Panetta, C. B. Sung and David Welch were each granted immediately
exercisable non-qualified options to purchase 25,000 shares of common stock at
an exercise price of $0.18 per share (the then current market price of the
Company’s stock), which options expire on June 25, 2014.
In
September 2007 Mr. Panetta was granted immediately exercisable non-qualified
options to purchase 50,000 shares of common stock at an exercise price of $0.22
per share (the then current market price of the Company’s stock), which options
expire on September 25, 2014.
In
December Garry Meyer was appointed to the Company’s Board of
Directors. Upon his appointment, Mr. Meyer was granted immediately
exercisable non-qualified options to purchase 50,000 shares of common stock at
an exercise price of $0.25 per share (the then current market price of the
Company’s stock), which options expire on December 11, 2014.
- 36
-
The
following table sets forth a summary of the compensation paid to our directors
during 2006.
|
Name
|
Fees
Earned
Or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
|
Garry
Meyer (1)
|
$ | 1,000 | $ | − | $ | 8,170 | $ | − | $ | − | $ | − | $ | 9,170 | ||||||||||||||
|
Louis
P. Panetta (2)
|
$ | 3,000 | $ | − | $ | 10,173 | $ | − | $ | − | $ | − | $ | 13,173 | ||||||||||||||
|
C.
B. Sung (3)
|
$ | 3,000 | $ | − | $ | 2,898 | $ | − | $ | − | $ | − | $ | 5,898 | ||||||||||||||
|
David
E. Welch (4)
|
$ | 3,000 | $ | − | $ | 2,898 | $ | − | $ | − | $ | − | $ | 5,898 | ||||||||||||||
|
|
1.
Mr. Meyer holds options to acquire 50,000 shares of stock at December 31,
2007, all of which were vested.
|
|
|
2.
Mr. Panetta holds options to acquire 253,125 shares of stock at December
31, 2007, all of which were vested.
|
|
|
3.
Mr. Sung holds options to acquire 226,190 shares of stock at December 31,
2007, all of which were vested.
|
|
|
4.
Mr. Welch holds options to acquire 125,000 shares of stock at December 31,
2006, all of which were vested.
|
Indemnification
of Officers and Directors
The
Company’s certificate of incorporation and bylaws allow it to indemnify its
officers and directors to the fullest extent permitted by the Delaware General
Corporation Law. It also contains provisions that provide for the
indemnification of directors of the Company for third party actions and actions
by or in the right of the Company that mirror Section 145 of the Delaware
General Corporation Law.
In
addition, the Company’s certificate of incorporation states that it shall have
the power to purchase and maintain insurance on behalf of any person who is or
was a director, officer or employee of the Company. We currently have and intend
to maintain director and officer liability insurance, if available on reasonable
terms.
- 37
-
Item
12. Security Ownership of
Certain Beneficial Owners and Management
The
following table sets forth information with respect to the beneficial ownership
of (i) any person known to be the beneficial owner of more than 5% of any
class of voting securities of the Company, (ii) each director and director
nominee of the Company, (iii) each of the current executive officers of the
Company named in the Summary Compensation Table under the heading "Executive
Compensation" and (iv) all directors and executive officers of the Company
as a group. Except as indicated in the footnotes to this table (i)
each person has sole voting and investment power with respect to all shares
attributable to such person and (ii) each person’s address is c/o Communication
Intelligence Corporation, 275 Shoreline Drive, Suite 500, Redwood Shores,
California 94065-1413.
|
Common
Stock
|
|||
|
Name of Beneficial Owner
|
Number
of Shares**
|
Percent
of Class**
|
|
|
Guido
DiGregorio (1)
|
2,093,900
|
1.62%
|
|
|
C.
B. Sung (2)
|
1,860,610
|
1.44%
|
|
|
Louis
P. Panetta
(3)
|
253,125
|
*
|
|
|
David
E. Welch, (4)
|
150,000
|
*
|
|
|
Garry
Meyer (5)
|
50,000
|
*
|
|
|
Francis
V. Dane (6)
|
444,155
|
*
|
|
|
Russel
L. Davis (7)
|
500,000
|
*
|
|
|
All
directors and executive officers as a group (6 persons)
|
5,351,790
|
4.15%
|
|
|
5%
Shareholders
|
|||
|
Phoenix
Venture Fund LLC (8)
|
21,500,000
|
16.66%
|
|
|
Michael
W. Engmann (9)
|
7,178,098
|
5.56%
|
|
___________
*
Less than 1%.
**
Shares of common stock beneficially owned and the respective percentages of
beneficial ownership of common stock assumes the exercise or conversion of all
options, warrants and other securities convertible into common stock
beneficially owned by such person or entity currently exercisable or exercisable
within 60 days of the date hereof. Shares issuable pursuant to the exercise of
stock options and warrants exercisable within 60 days, or securities convertible
into common stock within 60 days are deemed outstanding and held by the holder
of such shares of common stock, options, warrants, or other convertible
securities for computing the percentage of outstanding common stock beneficially
owned by such person, but are not deemed outstanding for computing the
percentage of outstanding common stock beneficially owned by any other person.
The percentage of beneficial ownership of common stock beneficially owned is
based on 129,057,161 shares of common stock outstanding as of March 10,
2008.
|
(1)
|
Represents
(a) 143,900 shares held by Mr. DiGregorio and (b) 1,950,000 shares,
issuable upon the exercise of stock options exercisable within 60 days
hereof.
|
|
(2)
|
Includes
(a) 1,631,051 shares held by the Sung Family Trust, of which Mr. Sung
is a trustee, (b) 3,369 shares held by the Sung-Kwok Foundation, of which
Mr. Sung is the Chairman, and (c) 226,190 shares of common stock issuable
upon the exercise of stock options, exercisable within 60 days
hereof. Mr. Sung may be deemed to beneficially own the shares
held by the Sung Family Trust and the Sung-Kwok Foundation. The business
address of Mr. Sung is, UNISON Group, 1001 Bayhill Dr., 2nd
Floor, San Bruno, California 94066. See “Certain Relationships
and Related Transactions.”
|
|
(3)
|
Represents
253,125 shares issuable upon the exercise of options exercisable within 60
days hereof. Mr. Panetta’s business address is 827 Via Mirada,
Monterey, California 93940. See “Certain Relationships and
Related Transactions.”
|
|
(4)
|
Represents
150,000 shares issuable upon the exercise of stock options exercisable
within 60 days hereof. The business address of Mr. Welch is
1729 East Otero Avenue, Littleton, CO 80122. See “Certain
Relationships and Related
Transactions.”
|
- 38
-
|
(5)
|
Represents
50,000 shares issuable upon the exercise of stock options exercisable
within 60 days hereof. The business address of Mr. Meyer is 4 Nersesian
Way, Hampton, NH 03842.
|
|
(6)
|
Represents
(a) 212 shares held by Mr. Dane and (b) 443,943 shares issuable upon the
exercise of stock options exercisable within 60 days
hereof.
|
|
(7)
|
Represents
500,000 shares issuable upon the exercise of stock options within 60 days
hereof.
|
|
(8)
|
SG
Phoenix Ventures LLC is the Managing Member of Phoenix Venture Fund LLC
(the “Phoenix Fund”), with the power to vote and dispose of the shares of
common stock held by the Phoenix Fund. Accordingly, SG Phoenix Ventures
LLC may be deemed to be the beneficial owner of such shares. Andrea Goren
is the co-manager of SG Phoenix Ventures LLC, has the shared power to vote
and dispose of the shares of common stock held by the Phoenix Fund and, as
such, may be deemed to be the beneficial owner of the common shares owned
by the Phoenix Fund. Philip Sassower is the co-manager of SG Phoenix
Ventures LLC, has the shared power to vote and dispose of the shares of
common stock held by the Phoenix Fund and, as such, may be deemed to be
the beneficial owner of the common shares owned by the Phoenix Fund. SG
Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial
ownership of the shares owned by the Phoenix Fund, except to the extent of
their respective pecuniary interests therein. The address of such
stockholder is 110 East 59th Street, Suite 1901, New York, NY
10022.
|
|
(9)
|
Represents
(a) 17,750 shares held by Mr. Engmann and (b) 7,160,348 warrants
beneficially owned by Mr. Engmann, of which 1,187,962 are held by
MDNH
Partners, L.P. and 1,659,200 are held by KENDU Partners Company of which
Mr. Engmann is a partner. Mr. Engmann was issued warrants to
purchase 2,333,250 shares of the Company’s common stock at $0.51 per
share, and
warrants to purchase 1,979,936 shares of the Company’s common stock
at $0.25 per share. MDNH Partners, L.P.
was issued warrants to purchase 1,659,200
shares of the Company’s common stock at $0.51 per share, and MDNH Partners, L.P.
was issued warrants to purchase 1,187962
shares of the Company’s common stock at $0.25 per share. Such
warrants were issued in connection with a notes issued in 2006 and 2007
(See note 5 to the Consolidated Financial
Statements).
|
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), requires the Company's officers, directors and persons who own more than
ten percent of a registered class of the Company's equity securities to file
certain reports with the Securities and Exchange Commission (the "SEC")
regarding ownership of, and transactions in, the Company's securities. These
officers, directors and stockholders are also required by SEC rules to furnish
the Company with copies of all Section 16(a) reports that are filed with
the SEC. Based solely on a review of copies of such forms received by the
Company and written representations received by the Company from certain
reporting persons, the Company believes that for the year ended December 31,
2007 all Section 16(a) reports required to be filed by the Company's executive
officers, directors and 10% stockholders were filed on a timely basis except for
Louis Panetta’s Form 4 for the option grant dated September 25,
2007.
- 39
-
Equity
Compensation Plan Information
The following table provides information as of December 31, 2007, regarding our
compensation plans (including individual compensation arrangements) under which
equity securities are authorized for issuance:
|
|
Number
of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
|
Weighted-Average
Exercise Price Of Outstanding Options, Warrants and Rights
|
Number
of Securities Remaining Available For Future Issuance Under Equity
Compensation Plans
|
|
Equity
Compensation Plans Approved by Security Holders
|
|||
|
1999
Stock Option Plan
|
3,747
|
$ 0.55
|
72
|
|
Equity
Compensation Plans Not Approved by Security Holders
|
2,289
|
$ 0.63
|
72
|
|
Total:
|
6,036
|
$ 0.59
|
72
|
Item
13. Certain Relationships and
Related Transactions
Procedures
for Approval of Related Person Transactions
In
accordance with our Code of Business Conduct and Ethics, we submit all proposed
transactions involving our officers and directors and related parties, and other
transactions involving conflicts of interest, to the Board of Directors or the
Audit Committee for approval. Each of the related party transactions listed
below that were submitted to our board were approved by a disinterested majority
of our Board of Directors after full disclosure of the interest of the related
party in the transaction.
Compensation
Committee Interlocks and Insider Participation in Compensation
Decisions
Our
Compensation Committee is currently comprised of Messrs. Panetta and Sung, both
of which are independent directors.
Director
Independence
The Board
of Directors has determined that Messrs. Panetta, Sung, Welch, and Meyer are
“independent,” as defined under and required by the federal securities laws and
the rules of the Nasdaq Stock Market.
Michael
W. Engmann, together with his affiliates, holds approximately 6% of the
Company’s issued and outstanding stock. In August 2006, the Company entered into
the August 2006 Purchase Agreement to which Mr. Engmann was a
party. The Company secured the right to borrow up to $600 under the
August 2006 Purchase Agreement. In November 2006 the Company borrowed
the full amount of $600, of which $450 pertains to Mr. Engmann and the remaining
$150 to an unrelated third party. The Company issued warrants to purchase 3,111
of the Company’s common stock related to the August 2006 Purchase
Agreement. The notes are due May 17, 2008 and bear interest at the
rate of 15% per annum payable quarterly in cash. The warrants have a term of
three years beginning June 30,2007 and an exercise price of $0.51.
- 40
-
In
February 2007, the Company entered into a Note and Warrant Purchase Agreement
(the “February 2007 Purchase Agreement”) and a Registration Rights Agreement
(the “February 2007 Registration Rights Agreement”), each dated as of February
5, 2007, with the Affiliated Stockholder. The Company secured the
right to borrow up to six hundred thousand dollars ($600). On March 15, 2007 the
Company and the Affiliated Stockholder amended the February 2007 Purchase
Agreement to increase the maximum amount of borrowing from $600, to $1,000. The
terms of the February 2007 Purchase Agreement and 2006 Purchase Agreement are
identical with the exception that the maximum number of warrants that may be
issued under the February 2007 Purchase Agreement is 5,185 rather than 3,111. On
March 30, 2007, and April 1, 2007 the Company borrowed $670 and $50 under the
February 2007 Purchase Agreement of which $320 pertains to Mr. Engmann and the
remaining $400 from unrelated third parties. The proceeds were used
for working capital purposes. The warrants have a three year life, become
exercisable on June 30, 2007, and have an exercise price of
$0.51. The warrants included piggyback registration rights for the
underlying shares to participate in any future registrations of the Company’s
common stock. The shares were registered with the Company’s Form
S-1/A which was declared effective December 28, 2007.
On June
15, 2007, The Company entered into a Note and Warrant Purchase Agreement (the
“June 2007 Purchase Agreement”) and a Registration Rights Agreement (the “June
2007 Registration Rights Agreement”), each dated as of June 15, 2007. The
Company secured the right to borrow up to $1,000. The June 2007
Purchase Agreement required the Company to draw $400 of the funds upon
signing. As of December 31, 2007, the Company had borrowed $400 under
this facility, all pertaining to Mr. Engmann, and the option to borrow the
remaining $600 lapsed as of that date. The Company used the proceeds of the
financing for working capital purposes. The note bears interest at
the rate of 15% per annum payable quarterly in cash. The Company issued 3,168
warrants to purchase shares of its common stock at an exercise price of $0.25.
The warrants have a three year life and included piggyback registration rights
for the underlying shares to participate in any future registrations of the
Company’s common stock. The shares were registered with the Company’s
Form S-1/A which was declared effective December 28, 2007.
The
Company paid approximately $102 in interest to Mr. Engmann as of December 31,
2007 related to the above Notes. ( See Note 4 of Notes to Consolidated Financial
Statements on page F-19 for additional details.)
Item
14. Principal Accounting Fees
and Services (in dollars)
On
September 6, 2006, the Company’s Audit Committee terminated the Company’s
relationship with its former principal accountant, Stonefield Josephson, Inc.
(“Stonefield”) of San Francisco, California and engaged GHP Horwath, P.C.
(“GHP”) of Denver, Colorado, as its principal accountants.
During
the fiscal year ended December 31, 2005 and the subsequent interim periods until
the change, there were no disagreements with Stonefield on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Stonefield, would have caused Stonefield to make reference in connection with
its report to the subject matter of the disagreement, and Stonefield has not
advised the Company of any reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
Stonefield’s
report as of and for the year ended December 31, 2005, did not contain any
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
audit scope or accounting principles, except that, Stonefield’s report contained
an explanatory paragraph that raised substantial doubts about the Company’s
ability to continue as a going concern.
During
the year ended December 31, 2005, and through September 6, 2006, the Company did
not consult with GHP regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
The
aggregate fees billed for professional services by Stonefield Josephson, Inc. in
2007 were approximately $25,000 and in 2006 were $217,000 for the following
services:
Audit
Fees: Stonefield Josephson, Inc.’s fees in connection with its review
of the year end audit for 2005 was approximately $9,000 in 2007, which
represented approximately 36% of the aggregate fees billed by Stonefield
Josephson, Inc. in 2007.
Audit-Related
Fees. Stonefield Josephson, Inc. did not bill the Company for any
assurance and related work in fiscal year 2007.
- 41
-
Tax fees:
Stonefield Josephson, Inc. did not bill the Company for any tax related issues
in 2007.
Financial
Information Systems Design and Implementation Fees: Stonefield
Josephson, Inc. did not bill the Company for any fees in fiscal year 2007 for
financial information systems design and implementation services.
All other
Fees: Fees for
all other services provided by Stonefield Josephson, Inc. in 2007 totaled
approximately $16,000 or 64% of the aggregate fees billed by Stonefield
Josephson, Inc. in 2007 and related primarily to review of the Company’s Form
S-1 and S-1/A.
The
aggregate fees billed and expected to be billed for professional services by GHP
Horwath, P.C. for 2007 are approximately $169,000 and in 2006 were $144,000 for
the following services:
Audit
Fees: GHP Horwath, P.C. fees in connection with the year end audit
for 2006 were approximately $134,000. Fees in connection with the 2007 quarterly
reviews, and the 2007 year end audit and consent procedures related to the
Company’s Form S-1 and Form S-1/A filings are expected to be $149,000 which
represents approximately 88% and 93% of the aggregate fees billed and expected
to be billed by GHP Horwath, P.C.
Audit-Related
Fees. GHP Horwath, P.C. fees for assurance and related work in fiscal
year 2007 was approximately $11,000 and represented approximately 7% of the
aggregate fees billed in 2007.
Tax fees:
GHP Horwath, P.C. fees in connection with the Company’s 2006 federal and state
tax returns was $10,000. Fees in connection with the Company’s 2007 federal and
state tax returns is expected to be approximately $9,000. The fees
represent 7% and 5% of the aggregate fees, respectively.
Financial
Information Systems Design and Implementation Fees: GHP Horwath, P.C.
did not bill the Company for any fees in fiscal year 2007 for financial
information systems design and implementation services.
Pre-Approval
Policies. It is the policy of the Company not to enter into any
agreement with its auditors to provide any non-audit services unless (a) the
agreement is approved in advance by the Audit Committee or (b) (i) the aggregate
amount of all such non-audit services constitutes no more than 5% of the total
amount the Company pays to the auditors during the fiscal year in which such
services are rendered, (ii) such services were not recognized by the Company as
constituting non-audit services at the time of the engagement of the non-audit
services and (iii) such services are promptly brought to the attention of the
Audit Committee and prior to the completion of the audit are approved by the
Audit Committee or by one or more members of the Audit Committee who are members
of the board of directors to whom authority to grant such approvals has been
delegated by the Audit Committee. The Audit Committee will not
approve any agreement in advance for non-audit services unless (x) the
procedures and policies are detailed in advance as to such services, (y) the
Audit Committee is informed of such services prior to commencement and (z) such
policies and procedures do not constitute delegation of the Audit Committee’s
responsibilities to management under the Securities Exchange Act of 1934, as
amended.
The Audit
Committee has considered whether the provision of non-audit services has
impaired the independence of Stonefield Josephson, Inc. or GHP Horwath, P. C.
and has concluded that Stonefield Josephson, Inc. and GHP Horwath, P.C. are
independent under applicable SEC and Nasdaq rules and
regulations.
- 42
-
PART
IV
Item
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
Index
to Financial Statements
|
Page
|
||
|
(a)(1)
|
Financial
Statements
|
|
|
Report
of GHP Horwath, P.C., Independent Registered Public Accounting
Firm
|
F-1
|
|
|
Report
of Stonefield Josephson, Inc., Independent Registered Public Accounting
Firm
|
F-2
|
|
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
F-3
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006,
and 2005
|
F-4
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2007, 2006 and 2005
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006
and 2005
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
|
(a)(2)
|
Financial
Statement Schedule
|
|
|
Schedule
II Valuation and Qualifying Accounts and Reserves
|
S-1
|
(b)
Reports on Form 8-K
|
1.
|
None
|
(c)
Exhibits
|
Exhibit
Number
|
Document
|
|
2.0
|
Second
Amended Plan of Reorganization of the Company, incorporated herein by
reference to the Company's Form 8-K filed October 24,
1994.
|
|
2.1
|
Orderly
Liquidation Valuation, Exhibit F to the Second Amended Plan of
Reorganization, incorporated herein by reference to the Company's
Form 8-K filed October 19, 1994.
|
|
2.2
|
Order
Confirming Plan of Reorganization, incorporated herein by reference to the
Company's Form 8-K filed November 14, 1994.
|
|
3.1
|
Certificate
of Incorporation of the Company, as amended, incorporated herein by
reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration
Statement on Form 10 (File No. 0-19301).
|
|
3.2
|
Certificate
of Amendment to the Company's Certificate of Incorporation (authorizing
the reclassification of the Class A Common Stock and Class B
Common Stock into one class of Common Stock) as filed with the Delaware
Secretary of State's office on November 1, 1991, incorporated herein
by reference to Exhibit 3 to Amendment 1 on Form 8 to the
Company's Form 8-A (File No. 0-19301).
|
|
3.3
|
Certificate
of Amendment to the Company’s Amended and Restated Certificate of
Incorporation dated June 12, 1998, incorporated herein by reference to
Exhibit 10.24 to the Company’s 1998 Form 10-K, filed April 6, 1999 (File
No. 0-19301).
|
|
3.4
|
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).
|
|
3.5
|
Certificate
of Amendment to the Company’s Amended and Restated Certificate of
Incorporation dated January 24, 2001, incorporated herein by reference to
Exhibit 3.5 to the Company’s Registration Statement on Form S/1, filed
December 28, 2007.
|
|
3.6
|
Certificate
of Elimination of the Company’s Certificate of Designation of the Series A
Preferred Stock dated August 17, 2001, incorporated herein by reference to
Exhibit 3.6 to the Company’s Registration Statement on Form S/1, filed
December 28, 2007.
|
- 43
-
|
Exhibit
Number
|
Document
|
|
3.7
|
Certificate
of Amendment to the Company’s Amended and Restated Certificate of
Incorporation dated August 17, 2007, incorporated herein by reference to
Exhibit 3.7 to the Company’s Registration Statement on Form S/1, filed
December 28, 2007.
|
|
4.1
|
1984
Stock Option Plan of the Company, as amended and restated as of
October 15, 1987 and as amended by resolutions of the stockholders of
the Company passed on August 15, 1989 and October 8, 1990 to
increase the aggregate shares covered thereby to 1,000,000, incorporated
herein by reference to Exhibit 4.4 to the Company's Registration
Statement on Form 10 (File No. 0-19301).
|
|
4.2
|
Form
of Stock Option Grant under 1984 Stock Option Plan, incorporated herein by
reference to Exhibit 4.5 to the Company's Registration Statement on
Form 10 (File No. 0-19301).
|
|
4.3
|
1991
Stock Option Plan of the Company, incorporated herein by reference to
Exhibit 4.5 of the Company's Form S-1 dated December 23,
1991 (Registration No. 33-43879).
|
|
4.4
|
1991
Non-Discretionary Stock Option Plan, incorporated herein by reference to
Exhibit 4.6 of the Company's Form S-1 dated December 23,
1991 (Registration No. 33-43879).
|
|
4.5
|
Form
of Incentive Stock Option Grant under 1991 Stock Option Plan, incorporated
herein by reference to Exhibit 4.7 of the Company's Form S-1
dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.6
|
Form
of Non-Qualified Stock Option Grant under 1991 Stock Option Plan,
incorporated herein by reference to Exhibit 4.8 of the Company's
Form S-1 dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.7
|
Form
of Stock Option Grant under 1991 Non-Discretionary Stock Option Plan,
incorporated herein by reference to Exhibit 4.9 of the Company's
Form S-1 dated December 23, 1991 (Registration
No. 33-43879).
|
|
4.8
|
1994
Stock Option Plan, incorporated herein by reference to Exhibit G of the
Company's Second Amended Disclosure Statement filed on Form 8-K dated
October 19, 1994 and approved by shareholders on November 14,
1994.
|
|
4.9
|
Form
of Warrant of the Company dated March 28, 1997 issued in connection
with the Waiver by and among the Company and the signatories thereto,
incorporated herein by reference to Exhibit 4.9 of the Company's 1996
Form 10-K (File No. 0-19301).
|
|
4.10
|
1999
Stock Option Plan, incorporated herein by reference to Exhibit A of the
Company's Definitive Proxy Statement filed on May 4, 1999 and approved by
shareholders on June 7, 1999. .
|
|
4.11
|
Form
of Convertible Promissory Note issued by Communication Intelligence
Corporation, incorporated herein by reference to Exhibit 10.3 to the
Company's Form 8-K dated November 3, 2004.
|
|
4.12
|
Form
of Warrant issued by Communication intelligence Corporation, incorporated
herein by reference to Exhibit 10.4 to the Company's Form 8-K dated
November 3, 2004.
|
|
4.13
|
Form
of Promissory Note issued by Communication Intelligence Corporation,
incorporated herein by reference to Exhibit 10.36 to the Company's Form
8-K dated August 12, 2006.
|
|
4.14
|
Form
of Warrant issued by Communication intelligence Corporation, incorporated
herein by reference to Exhibit 10.37 to the Company's Form 8-K dated
August 12, 2006.
|
|
4.15
|
Form
of Promissory Note issued by the Company, incorporated herein by reference
to Exhibit 10.36 to the Company’s Form 8-K, filed February 9,
2007.
|
|
4.16
|
Form
of Warrant issued by the Company, incorporated herein by reference to
Exhibit 10.37 to the Company’s Form 8-K, filed February 9,
2007.
|
|
4.17
|
Form
of Promissory Note issued by the Company, incorporated herein by reference
to Exhibit 10.36 to the Company’s Form 8-K, filed June 20,
2007.
|
|
4.18
|
Form
of Warrant issued the Company, incorporated herein by reference to Exhibit
10.37 to the Company’s Form 8-K, filed June 20, 2007.
|
|
†10.1
|
Licensing
and Development Agreement for Use and Marketing of Program Materials dated
September 25, 1992 between the Company and International Business
Machines Corporation, incorporated herein by reference to
Exhibit 10.13 of the Company's 1992 Form 10-K
(File No. 0-19301)
|
- 44
-
|
Exhibit
Number
|
Document
|
|
10.2
|
Standby
Stock Purchase Agreement between the Company and Philip Sassower dated
October 3, 1994, incorporated herein by reference to
Exhibit 10.13 of the Company's 1994 Form 10-K (File
No. 0-19301)
|
|
10.3
|
Form
of Subscription Agreement between the Company and the Purchasers, dated
November 28, 1995, incorporated herein by reference to Exhibit 1
of the Company's Form 8-K dated November 28,
1995.
|
|
10.4
|
Form
of Registration Rights Agreement between the Company and the Purchasers,
dated November 28, 1995, incorporated herein by reference to
Exhibit 1 of the Company's Form 8-K dated November 28,
1995.
|
|
10.5
|
Form
of Warrant of the Company issued to Libra Investments, Inc. on
November 28, 1995, incorporated herein by reference to Exhibit 1
of the Company's Form 8-K dated November 28,
1995.
|
|
10.6
|
Form
of Registration Rights Agreement between the Company and Libra
Investments, Inc., dated November 28, 1995, incorporated herein by
reference to Exhibit 1 of the Company's Form 8-K dated
November 28, 1995.
|
|
10.7
|
Form
of Subscription Agreement between the Company and various investors, dated
June 13, 1996, incorporated herein by reference to Exhibit 1 of
the Company's Form 8-K dated June 27, 1996.
|
|
10.8
|
Form
of Registration Rights Agreement between the Company and various
investors, dated June 13, 1996, incorporated herein by reference to
Exhibit 2 of the Company's Form 8-K dated June 27,
1996.
|
|
10.9
|
Form
of Preferred Stock Investment Agreement, dated as of December 31,
1996, between the Company and the investors listed on Schedule 1
thereto, incorporated herein by reference to Exhibit 1 of the
Company's Form 8-K dated December 31, 1996.
|
|
10.10
|
Form
of Registration Rights Agreement between the Company and the Investors
Listed on Schedule 1 thereto, incorporated herein by reference to
Exhibit 2 of the Company's Form 8-K dated December 31,
1996.
|
|
10.11
|
Form
of Certificate of Designation of the Company with respect to the 5%
Cumulative Convertible Preferred Stock, incorporated herein by reference
to Exhibit 3 of the Company's Form 8-K dated December 31,
1996.
|
|
10.12
|
Waiver,
dated March 26, 1997, effective December 31, 1996, by and among
the Company and the signatories thereto, incorporated herein by reference
to Exhibit 10.19 of the Company's 1996 Form 10-K (File
No. 0-19301).
|
|
10.13
|
Form
of Subscription Agreement between the Company and each subscriber, dated
as of November 25, 1997, incorporated herein by reference to Exhibit
10.1 of the Company's Form 8-K dated December 3,
1997.
|
|
10.14
|
Certificate
of Designations of the Company with respect to the Series B 5% Cumulative
Convertible Preferred Stock, incorporated herein by reference to Exhibit
10.2 of the Company's Form 8-K dated November 13,
1997.
|
|
10.15
|
Form
of Registration Rights Agreement, by and among the Company and the
signatories thereto, dated as of November 25, 1997, incorporated
herein by reference to Exhibit 10.3 to the Company's Form 8-K dated
November 13, 1997.
|
|
10.16
|
Amendment
to the Company’s Certificate of Designation with respect to the 5%
Cumulative Convertible Preferred Stock dated June 12, 1998, incorporated
herein by reference to Exhibit 10.23 of the Company's 1998
Form 10-K (File No. 0-19301).
|
|
10.17
|
Amendment
to the Company’s Amended and Restated Certificate of Incorporation dated
June 12, 1998 incorporated herein by reference to Exhibit 10.24 of
the Company's 1998 Form 10-K (File
No. 0-19301).
|
|
10.18
|
Employment
Agreement dated August 14, 1998 between James Dao and the Company
incorporated herein by reference to Exhibit 10.25 of the Company's
1998 Form 10-K (File No. 0-19301).
|
|
††10.19
|
Software
Development and License Agreement dated December 4, 1998 between Ericsson
Mobile Communications AB and the Company incorporated herein by reference
to Exhibit 10.26 of the Company's 1998 Form 10-K (File
No. 0-19301).
|
- 45
-
|
Exhibit
Number
|
Document
|
|
10.20
|
Loan
and Warrant Agreement dated October 20, 1999 between the Company and the
Philip S. Sassower 1996 Charitable Remainder Annuity
Trust.
|
|
10.21
|
Asset
Purchase Agreement between the Company and PenOp Ltd and PenOp Inc.
incorporated herein by reference to the Company’s Form 8-K dated October
6, 2000.
|
|
10.22
|
Loan
Agreement dated June 19, 2001 between the Company and the Philip S.
Sassower 1996 Charitable Remainder Annuity Trust.
|
|
10.23
|
Equity
Line of Credit Agreement between the Company and Cornell Capital Partners,
LP, incorporated by reference to the Company’s Registration Statement on
Form S-1 dated February 13, 2003 (File No. 333-103157)
|
|
10.24
|
Form
of Note and Warrant Purchase Agreement dated October 28, 2004, among
Communication Intelligence Corporation and the Purchasers identified
therein, incorporated herein by reference to Exhibit 10.1 to the Company's
Form 8-K dated November 3, 2004.
|
|
10.25
|
Form
of Registration Rights Agreement dated October 28, 2004, among
Communication Intelligence Corporation and the parties identified there
in, incorporated herein by reference to Exhibit 10.2 to the Company's Form
8-K dated November 3, 2004.
|
|
10.26
|
Form
of Note and Warrant Purchase Agreement dated August 10, 2006, among
Communication Intelligence Corporation and the Purchasers identified
therein, incorporated herein by reference to Exhibit 10.34 to the
Company's Form 8-K dated August 12, 2006.
|
|
10.27
|
Form
of Registration Rights Agreement dated August 10, 2006, among
Communication Intelligence Corporation and the parties identified there
in, incorporated herein by reference to Exhibit 10.35 to the Company's
Form 8-K dated August 12, 2006.
|
|
Xx
10.28
|
Amendment
dated May 31, 2005 to the License agreement dated December 22, 2000
between the Company and eCom Asia Pacific, Ltd. filed as Exhibit 10.26 of
the Company’s Form 10-K/A (file no. 0-19301) filed with the Commission on
September 15, 2005.
|
|
Xx
10.29
|
License
agreement dated June 2, 2005 between the Company and SnapOn Credit LLC.
filed as Exhibit 10.27 of the Company’s Form 10-K/A (file no. 0-19301)
filed with the Commission on September 15, 2005.
|
|
10.30
|
Amendment
to employment agreement with Guido DiGregorio, incorporated herein by
reference to the Company's Form 8-K dated September 21,
2005.
|
|
10.31
|
Amendment
to employment agreement with Frank V. Dane, incorporated herein by
reference to the Company's Form 8-K dated September 21,
2005.
|
|
10.32
|
Form
of stock option agreement dated August 31, 2005 with Russel L. Davis -
incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A
(file no. 0-19301) filed with the Commission on September 15,
2006.
|
|
10.33
|
Form
of stock option agreement dated December 19, 2005 with Guido DiGregorio -
incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A
(file no. 0-19301) filed with the Commission on September 15,
2006.
|
|
10.34
|
Form
of stock option agreement dated August 31, 2005 with Francis V. Dane -
incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A
(file no. 0-19301) filed with the Commission on September 15,
2006.
|
|
10.35
|
Form
of stock option agreement dated August 31, 2005 with C. B. Sung -
incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A
(file no. 0-19301) filed with the Commission on September 15,
2006.
|
|
10.36
|
Form
of Note and Warrant Purchase Agreement dated February 5, 2007, among
Communication Intelligence Corporation and the Purchasers identified
therein, incorporated herein by reference to Exhibit 10.34 to the
Company's Form 8-K dated February 5, 2007.
|
|
10.37
|
Form
of Registration Rights Agreement dated February 5, 2007, among
Communication Intelligence Corporation and the parties identified there
in, incorporated herein by reference to Exhibit 10.35 to the Company's
Form 8-K dated February 5, 2007.
|
|
10.38
|
Amendment
to the Note and Warrant Purchase Agreement dated February 5, 2007, among
Communication Intelligence Corporation and the parties identified there
in, incorporated herein by reference to Exhibit 99.1 to the Company's Form
8-K dated March 15, 2007.
|
- 46
-
|
Exhibit
Number
|
Document
|
|
10.39
|
Form
of Note and Warrant Purchase Agreement dated June 15, 2007, among
Communication Intelligence Corporation and the Purchasers identified
therein, incorporated herein by reference to Exhibit 10.34 to the
Company's Form 8-K dated June 15, 2007.
|
|
10.40
|
Form
of Registration Rights Agreement dated June 15, 2007, among Communication
Intelligence Corporation and the parties identified there in, incorporated
herein by reference to Exhibit 10.35 to the Company's Form 8-K dated June
15, 2007.
|
|
10.41
|
Form
of Securities Purchase and Registration Rights Agreement dated August 24,
2007, among Communication Intelligence Corporation and Phoenix Venture
Fund LLC, incorporated herein by reference to Exhibit 10.36 to the
Company's Form 8-K dated August 27, 2007.
|
|
†††*10.42
|
Consulting
Agreement dated January 9, 2008 between the Company and GS Meyer &
Associates LLC
|
|
14.00
|
Code
of Ethics –Incorporated by reference to the registrant’s Annual Report on
Form 10-K (File No. 0-19301) filed with the Commission on March 30,
2004.
|
|
*21.1
|
Schedule
of Subsidiaries.
|
|
*23.1
|
Consent
of GHP Horwath, P.C., Independent Registered Public Accounting
Firm.
|
|
*23.2
|
Consent
of Stonefield Josephson, Inc, Independent Registered Public Accounting
Firm.
|
|
*31.1
|
Certification
of Company’s Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
*31.2
|
Certificate
of Company’s Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
*32.1
|
Certification
of Chief Executive Officer pursuant to 18 USC Section 1750, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*32.2
|
Certification
of Chief Financial Officer pursuant to 18 USC Section 1750, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
†
|
Confidential
treatment of certain portions of this exhibit have been previously granted
pursuant to a request for confidentiality dated March 29, 1993, filed
pursuant to the Securities Exchange Act of 1934.
|
|
*
|
Filed
herewith.
|
|
††
|
Confidential
treatment of certain portions of this exhibit have been requested from the
SEC pursuant to a request for confidentiality dated March 30, 1999, filed
pursuant to the Securities and Exchange Act of 1934.
|
|
†††
|
Confidential
treatment of certain portions of this exhibit have been requested from the
SEC pursuant to a request for confidentiality dated March 10,2008, filed
pursuant to the Securities and Exchange Act of 1934.
|
|
Xx
|
Confidential
treatment of certain portions of this exhibit have been requested from the
SEC pursuant to a request for confidentiality dated March 30, 2006 filed
pursuant to the Securities and Exchange Act of 1934.
|
- 47 -
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned; thereunto duly authorized, in the City of Redwood Shores, State
of California, on March 12, 2007.
|
Communication
Intelligence Corp.
|
||
|
By:
|
/s/ Francis V. Dane
Francis
V. Dane
(Principal
Financial Officer and Officer Duly Authorized to Sign on Behalf of the
Registrant)
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of Registrant and in the capacities indicated on
March 12, 2007.
|
Signature
|
Title
|
|
/s/ Guido DiGregorio
Guido
DiGregorio
|
Chairman,
President and Chief Executive Officer
(Principal
Executive Officer)
|
|
/s/ Francis V. Dane
Francis
V. Dane
|
Chief
Legal Officer and Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
|
/s/ Garry Meyer
Garry
Meyer
|
Director
|
|
/s/ Louis P. Panetta
Louis
P. Panetta
|
Director
|
|
/s/ Chien Bor Sung
Chien
Bor Sung
|
Director
|
|
/s/ David Welch
David
Welch
|
Director
|
- 48
-
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Communication
Intelligence Corporation
We have
audited the accompanying consolidated balance sheets of Communication
Intelligence Corporation and its subsidiary (“the Company”) as of December 31,
2007 and 2006, and the related consolidated statements of operations, changes in
stockholders' equity, cash flows and financial statement schedule for each of
the two years in the period ended December 31, 2007. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by the management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Communication Intelligence
Corporation and its subsidiary as of December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company’s significant recurring
operating losses and accumulated deficit raise substantial doubt about its
ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/S/ GHP
Horwath, P.C.
Denver,
Colorado
March 10,
2008
F-1
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Stockholders of
Communication
Intelligence Corporation
Redwood
Shores, California
We have
audited the accompanying consolidated statements of operations, changes in
stockholders’ equity, cash flows and financial statement schedule of
Communication Intelligence Corporation and its subsidiary (the “Company”) for
the year ended December 31, 2005. These consolidated financial
statements and financial statement schedule, as listed in the index appearing
under Item 15(a)(1) and (2) of this Annual Report on Form 10-K, are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements of the Company referred to above
present fairly, in all material respects, the consolidated results of their
operations and their cash flows for the year ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company’s significant recurring operating
losses and accumulated deficit raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
/S/
STONEFIELD JOSEPHSON, INC.
San
Francisco, California
February
17, 2006
F-2
Communication
Intelligence Corporation
Consolidated
Balance Sheets
(In
thousands, except par value amounts)
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 1,144 | $ | 727 | ||||
|
Accounts receivable, net of
allowances of $117 and $397 at December 31, 2007 and 2006,
respectively
|
452 | 487 | ||||||
|
Prepaid expenses and other
current assets
|
135 | 105 | ||||||
|
Total current
assets
|
1,731 | 1,319 | ||||||
|
Property
and equipment, net
|
77 | 140 | ||||||
|
Patents
|
3,528 | 3,906 | ||||||
|
Capitalized
software development costs
|
1,109 | 656 | ||||||
|
Deferred
financing costs (Note 3)
|
− | 75 | ||||||
|
Other
assets
|
30 | 30 | ||||||
|
Total assets
|
$ | 6,475 | $ | 6,126 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Convertible notes, net of
unamortized fair value assigned to beneficial conversion feature and
warrants of $228 at December 31, 2006 (Note 3)
|
$ | − | $ | 1,154 | ||||
|
Short-term debt –net of
unamortized fair value assigned to warrants of $350 including related
party debt of $1,170, net of $247 of unamortized fair value assigned to
warrants (Note 4)
|
1,370 | – | ||||||
|
Accounts payable
|
135 | 72 | ||||||
|
Accrued
compensation
|
364 | 236 | ||||||
|
Other accrued
liabilities
|
298 | 269 | ||||||
|
Deferred revenue
|
431 | 404 | ||||||
|
Total current
liabilities
|
2,598 | 2,135 | ||||||
|
Long-term
debt –net of unamortized fair value assigned to warrants of $266,
including related party debt of $450, net of $199 of unamortized fair
value assigned to warrants (Note 4)
|
− | 334 | ||||||
|
Long-
term debt – other, net of unamortized fair value assigned to warrants of
$21 at December 31, 2007 (Note 3)
|
96 | |||||||
|
Minority
interest
|
– | 73 | ||||||
|
Commitments
and contingencies (Note 7)
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred stock, $.01 par value;
10,000 shares authorized; 0 outstanding at December 31, 2007 and 2006,
respectively
|
– | – | ||||||
|
Common stock, $.01 par value;
155,000 shares authorized; 129,057 and 107,557 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
1,291 | 1,076 | ||||||
|
Additional paid-in
capital
|
93,785 | 90,497 | ||||||
|
Accumulated
deficit
|
(91,260 | ) | (87,861 | ) | ||||
|
Accumulated other comprehensive
loss
|
(35 | ) | (128 | ) | ||||
|
Total
stockholders' equity
|
3,781 | 3,584 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 6,475 | $ | 6,126 | ||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-3
Communication
Intelligence Corporation
Consolidated
Statements of Operations
(In
thousands, except per share amounts)
|
Years
ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues:
|
||||||||||||
|
Product
|
$ | 1,448 | $ | 1,427 | $ | 2,256 | ||||||
|
Maintenance
|
697 | 915 | 865 | |||||||||
| 2,145 | 2,342 | 3,121 | ||||||||||
|
Operating
costs and expenses:
|
||||||||||||
|
Cost of sales:
|
||||||||||||
|
Product
|
367 | 101 | 109 | |||||||||
|
Maintenance
|
158 | 149 | 39 | |||||||||
|
Research and
development
|
476 | 817 | 1,144 | |||||||||
|
Sales and
marketing
|
1,276 | 1,658 | 1,240 | |||||||||
|
General and
administrative
|
2,061 | 2,174 | 2,173 | |||||||||
| 4,338 | 4,899 | 4,705 | ||||||||||
|
Loss
from operations
|
(2,193 | ) | (2,557 | ) | (1,584 | ) | ||||||
|
Interest
income and other income (expense), net
|
(26 | ) | 43 | 17 | ||||||||
|
Interest
expense:
|
||||||||||||
|
Related
party (Note 4)
|
(135 | ) | (11 | ) | – | |||||||
|
Other
(Note 3)
|
(149 | ) | (105 | ) | (208 | ) | ||||||
|
Amortization
of loan discount and deferred financing cost:
|
||||||||||||
|
Related
party (Note 4)
|
(305 | ) | (70 | ) | – | |||||||
|
Other
(Note 3)
|
(664 | ) | (591 | ) | (2,275 | ) | ||||||
|
Minority
interest
|
73 | 5 | 19 | |||||||||
|
Net
loss
|
$ | (3,399 | ) | $ | (3,286 | ) | $ | (4,031 | ) | |||
|
Basic
and diluted loss per share
|
$ | (0.03 | ) | $ | (0.03 | ) | $ | (0.04 | ) | |||
|
Basic
and diluted weighted average shares
|
113,960 | 107,374 | 104,189 | |||||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-4
Communication
Intelligence Corporation
Consolidated
Statements of Changes in Stockholders' Equity
(In
thousands except per share amounts)
|
Common
Shares
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
|||||||||||||||||||
|
Balances
as of December 31, 2004
|
101,412 | $ | 1,014 | $ | 87,231 | $ | (80,544 | ) | $ | (170 | ) | $ | 7,531 | |||||||||||
|
Shares
of Common Stock issued on conversion of long-term notes
|
5,092 | 51 | 2,271 | 2,322 | ||||||||||||||||||||
|
Shares
issued for services
|
24 | 10 | 10 | |||||||||||||||||||||
|
Shares
issued on exercise of stock options
|
14 | 5 | 5 | |||||||||||||||||||||
|
Comprehensive
(loss):
Net
loss
|
(4,031 | ) | (4,031 | ) | ||||||||||||||||||||
|
Foreign
currency translation adjustment
|
19 | 19 | ||||||||||||||||||||||
|
Total
comprehensive loss
|
(4,012 | ) | ||||||||||||||||||||||
|
Balances
as of December 31, 2005
|
106,542 | 1,065 | 89,517 | (84,575 | ) | (151 | ) | 5,856 | ||||||||||||||||
|
Shares
of Common Stock issued on conversion of long-term notes
|
996 | 11 | 449 | 460 | ||||||||||||||||||||
|
Shares
issued for services
|
19 | 6 | 6 | |||||||||||||||||||||
|
Stock
based employee compensation
|
189 | 189 | ||||||||||||||||||||||
|
Fair
value of warrants issued to the investors in connection with long –term
debt, related party
|
336 | 336 | ||||||||||||||||||||||
|
Comprehensive
(loss):
Net
loss
|
(3,286 | ) | (3,286 | ) | ||||||||||||||||||||
|
Foreign
currency translation adjustment
|
23 | 23 | ||||||||||||||||||||||
|
Total
comprehensive loss
|
(3,263 | ) | ||||||||||||||||||||||
|
Balances
as of December 31, 2006
|
107,557 | 1,076 | 90,497 | (87,861 | ) | (128 | ) | 3,584 | ||||||||||||||||
|
Fair
value of warrants issued in connection with
short-term
debt
|
546 | 546 | ||||||||||||||||||||||
|
Fair
value of warrants issued in connection with long-term
debt
|
23 | 23 | ||||||||||||||||||||||
|
Stock
based employee compensation
|
130 | 130 | ||||||||||||||||||||||
|
Adjustment
to the fair value of beneficial conversion feature associated with the
convertible notes (Note 5)
|
202 | 202 | ||||||||||||||||||||||
|
Sale
of common stock at approximately $0.14 per share net of related costs of
$398
|
21,500 | 215 | 2,387 | 2,602 | ||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
(3,399 | ) | (3,399 | ) | ||||||||||||||||||||
|
Foreign
currency translation adjustment
|
93 | 93 | ||||||||||||||||||||||
|
Total
comprehensive loss
|
(3,306 | ) | ||||||||||||||||||||||
|
Balances
as of December 31, 2007
|
129,057 | $ | 1,291 | $ | 93,785 | $ | (91,260 | ) | $ | (35 | ) | $ | 3,781 | |||||||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-5
Communication
Intelligence Corporation
Consolidated
Statements of Cash Flows
(In
thousands)
|
2007
|
2006
|
2005 | |||||||||||
|
Cash
flows from operating activities:
|
|||||||||||||
|
Net
loss
|
$ | (3,399 | ) | $ |
(3,286
|
) | $ | (4,031 | ) | ||||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||||||||
|
Depreciation and
amortization
|
857 | 623 | 466 | ||||||||||
|
Amortization of convertible note
discount
|
589 | 445 | 1,706 | ||||||||||
|
Amortization of warrant costs on
long-term debt - related party
|
305 | 70 | – | ||||||||||
|
Deferred financing
costs
|
75 | 146 | 553 | ||||||||||
|
Loss on disposal of property and
equipment
|
3 | – | 43 | ||||||||||
|
Provision for doubtful
accounts
|
– | – | 4 | ||||||||||
|
Stock issued for
services
|
– | 6 | 10 | ||||||||||
|
Stock based employee
compensation
|
130 | 189 | – | ||||||||||
|
Minority
interest
|
(73 | ) | (5 | ) | – | ||||||||
|
Changes in operating assets and
liabilities:
|
|||||||||||||
|
Accounts
receivable
|
35 | (4 | ) | (131 | ) | ||||||||
|
Prepaid expenses and other
current assets
|
(30 | ) | 63 | (63 | ) | ||||||||
|
Accounts
payable
|
63 | (218 | ) | 47 | |||||||||
|
Accrued
compensation
|
128 | 1 | (23 | ) | |||||||||
|
Other accrued
liabilities
|
29 | (18 | ) | (108 | ) | ||||||||
|
Deferred
revenue
|
27 | (153 | ) | 99 | |||||||||
|
Net
cash used in operating activities
|
(1,261 | ) | (2,141 | ) | (1,428 | ) | |||||||
|
Cash
flows from investing activities:
|
|||||||||||||
|
Acquisition
of property and equipment
|
(26 | ) | (93 | ) | (107 | ) | |||||||
|
Capitalization
of software development costs
|
(788 | ) | (510 | ) | (299 | ) | |||||||
|
Net
cash used in investing activities
|
(814 | ) | (603 | ) | (406 | ) | |||||||
|
Cash
flows from financing activities:
|
|||||||||||||
|
Proceeds
from issuance of long-term debt – related party
|
1,120 | 600 | – | ||||||||||
|
Proceeds
from issuance of common stock net of related expenses
|
2,602 | – | – | ||||||||||
|
Principal
payments on short-term debt
|
(1,265 | ) | – | (36 | ) | ||||||||
|
Principal
payments on long-term debt – related party
|
– | – | (13 | ) | |||||||||
|
Principal
payments on capital lease obligations
|
(5 | ) | (8 | ) | (9 | ) | |||||||
|
Proceeds
from exercise of stock options
|
– | – | 5 | ||||||||||
|
Net
cash provided by (used in) financing activities
|
2,452 | 592 | (53 | ) | |||||||||
|
Effect
of exchange rate changes on cash
|
40 | 30 | – | ||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
417 | (2,122 | ) | (1,887 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
727 | 2,849 | 4,736 | ||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 1,144 | $ | 727 | $ | 2,849 | |||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-6
Communication
Intelligence Corporation
Consolidated
Statements of Cash Flows
(In
thousands)
Supplemental
disclosure of cash flow information:
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Interest paid
|
$ | 244 | $ | 109 | $ | 237 | ||||||
|
Schedule
of non-cash transactions:
|
||||||||||||
|
Fair
value of warrants issued to the investors in connection with long –term
debt
|
$ | 23 | $ | – | $ | – | ||||||
|
Fair
value of warrants issued to the investors in connection with long –term
debt
|
$ | 546 | $ | 336 | – | |||||||
|
Fair
value of the adjustment to the beneficial conversion feature associated
with the convertible notes
|
$ | 202 | $ | – | $ | – | ||||||
|
Common
stock issued upon the conversion of long-term debt, net
|
$ | – | $ | 460 | $ | 2,322 | ||||||
|
Issuance
of common stock for services
|
$ | – | $ | 6 | $ | 10 | ||||||
The
accompanying notes form an integral part of these Consolidated Financial
Statements
F-7
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies
The
Company:
Communication
Intelligence Corporation and its joint venture (the "Company" or "CIC") develops
and markets natural input and biometric electronic signature solutions aimed at
the emerging markets such as, e-commerce, wireless internet/information devices,
and corporate security. These markets include all areas of personal computing,
as well as electronic commerce and communications.
The
Company's research and development activities have given rise to numerous
technologies and products. The Company's core technologies are classified into
two broad categories: "transaction and communication enabling technologies" and
"natural input technologies”. CIC's transaction and communication enabling
technologies provide a means for protecting electronic transactions and
documents. CIC has developed products for dynamic signature verification,
electronic signatures and encryption and a suite of development tools and
applications which the Company believes could increase the functionality of its
core products and facilitate their integration into original equipment
manufacturers' ("OEM") hardware products and computer systems and networks.
CIC's natural input technologies are designed to allow users to interact with a
computer or handheld device through the use of an electronic pen or “stylus”.
Such products include the Company's SignatureOne®, Sign-it®, and iSign®,
biometric and electronic signature products, and multi-lingual Jot® handwriting
recognition system.
The
Company’s 90% owned joint venture, Communication Intelligence Computer
Corporation, in China (the "Joint Venture"), has licensed eCom Asia Pacific Pty
Ltd (“eCom”) as its master reseller for CIC products to end users and resellers
with the authority and responsibility to create optimal distribution channels
within the People’s Republic of China.
Going
concern:
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. Except for 2004, the Company has
incurred significant losses since its inception and, at December 31, 2007, the
Company’s accumulated deficit was approximately $91,300. These factors raise
substantial doubt about the Company’s ability to continue as a going
concern. The Company has primarily funded these losses through the
sale of debt and equity securities.
In November 2004,
the Company consummated a financing in the form of convertible notes aggregating
$3,885, net of expenses. In November 2006 and in March and June 2007, the
Company consummated financings in the form of a notes and warrant purchase
agreements aggregating $1,720. The funds were used for working capital
purposes. In September 2007, the Company closed a Securities Purchase and
Registration Rights Agreement aggregating $2,602, net of expenses, the proceeds
of which were used for payment of outstanding indebtedness and working
capital purposes. In 2007, prior to the
convertible note maturity date of October 27, 2007, the Company offered the
outstanding convertible note holders the option of being issued warrants to
purchase two (2) shares of the Company’s common stock for each dollar of note
principal outstanding in exchange for a two year extension of the note due date
and termination of the conversion feature of the note. One note
holder, with a principal balance of $117, accepted the offer and the remaining
outstanding debt of $1,265 and accrued interest thereon was paid in October 2007
(See Note 4). The Company has experienced delays in closing several
material orders in the last half of 2007, with negotiations still ongoing, and
believes that the current pipeline and it’s growth rate has the sales
potential for achieving and sustaining quarterly
profitability.
There can
be no assurance that the Company will have adequate capital resources to fund
planned operations or that any additional funds will be available to the Company
when needed, or if available, will be available on favorable terms or in amounts
required by the Company. If the Company is unable to obtain adequate capital
resources to fund operations, it may be required to delay, scale back or
eliminate some or all of its operations, which may have a material adverse
effect on the Company's business, results of operations and ability to operate
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
F-8
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1. Nature of Business, Basis of
Presentation and Summary of Significant Accounting Policies
(continued)
Basis
of consolidation:
The
accompanying consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America, and
include the accounts of Communication Intelligence Corporation and its 90% owned
Joint Venture in the People's Republic of China. All inter-company accounts and
transactions have been eliminated. All amounts shown in the
accompanying consolidated financial statements are in thousands of dollars
except per share amounts.
Segments
The
Company reports its financial results in one segment. Prior to 2006,
the Company reported in two segments. Due to the immateriality of the system
integration segment the Company reclassified the operations into one
segment.
Use
of estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, at the date of the consolidated financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these
estimates.
Fair
value of financial instruments:
The
carrying amounts of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, short-term debt and
long-term debt approximate fair value due to their relatively short
maturities.
Cash
and cash equivalents:
The
Company considers all highly liquid investments with maturities at the date of
purchase of three months or less to be cash equivalents.
The Company's cash and cash
equivalents, at December 31, consisted of the following:
|
2007
|
2006
|
|||||||
|
Cash
in bank
|
$ | 89 | $ | 533 | ||||
|
Money
market funds
|
1,055 | 194 | ||||||
|
Cash and cash
equivalents
|
$ | 1,144 | $ | 727 | ||||
Concentrations
of credit risk:
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash, cash equivalents, and accounts
receivable. The Company maintains its cash and cash equivalents with various
financial institutions. This diversification of risk is consistent with Company
policy to maintain liquidity, and mitigate risk of loss as to principal. At
December 31, 2007, the Joint Venture had approximately $1 in cash accounts held
by a financial institution in the People's Republic of China.
To date,
accounts receivable have been derived principally from revenues earned from end
users, manufacturers, retailers and distributors of computer products in North
America and the Pacific Rim. The Company performs periodic credit evaluations of
its customers, and does not require collateral. The Company maintains reserves
for potential credit losses; historically, such losses have been within
management's expectations.
F-9
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Concentrations
of credit risk (continued):
The
allowance for doubtful accounts is based on the Company’s assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable. If
there is a change in actual defaults from the Company’s historical experience,
the Company’s estimates of recoverability of amounts due could be affected and
the Company will adjust the allowance accordingly (See Schedule
II).
Deferred
financing costs:
Deferred
financing costs include costs paid in cash, such as professional fees and
commissions. The costs were amortized to interest expense over the
life of the convertible notes or upon earlier conversion using the effective
interest method. The costs amortized to interest expense amounted to
$75, $146, and $568, for the years ended December 31, 2007, 2006, and 2005,
respectively.
Property
and equipment, net:
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred. Depreciation expense was $78,
$100 and $40 for the years ended December 31, 2007, 2006 and 2005, respectively.
The Chinese Joint Venture disposed of certain assets at net book value of $3,
and $119 in 2007 and 2005, respectively.
Property
and equipment, net at December 31, consists of the following:
|
2007
|
2006
|
|||||||
|
Machinery
and equipment
|
$ | 1,179 | $ | 1,216 | ||||
|
Office
furniture and fixtures
|
435 | 483 | ||||||
|
Leasehold
improvements
|
90 | 90 | ||||||
|
Purchased
software
|
319 | 315 | ||||||
| 2,023 | 2,104 | |||||||
|
Less
accumulated depreciation and amortization
|
(1,946 | ) | (1,964 | ) | ||||
| $ | 77 | $ | 140 | |||||
Included
in property and equipment, as of December 31, 2007 and 2006, are $42 and
$82, respectively, of assets acquired under capital leases. Accumulated
depreciation on such assets totaled $42 and $77 at December 31, 2007 and 2006,
respectively.
Patents:
On
October 6, 2000, the Company acquired certain assets of PenOp Limited (“PenOp”)
and its subsidiary PenOp Inc. pursuant to an asset purchase agreement dated as
of September 29, 2000.
The
nature of the underlying technology of each material patent is as
follows:
|
·
|
Patent
numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the electronic
capture of a handwritten signature utilizing an electronic tablet device
on a standard computer system within an electronic document, (b) the
verification of the identity of the person providing the electronic
signature through comparison of stored signature measurements, and (c) a
system to determine whether an electronic document has been modified after
signature.
|
F-10
Communication
Intelligence Corporation
Notes
to Consolidated Financial Statements
(in
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Patents (continued):
|
·
|
Patent
number 6091835 involves all of the foregoing and the recording of the
electronic execution of a document regardless of whether execution occurs
through a handwritten signature, voice pattern, fingerprint or other
identifiable means.
|
|
·
|
Patent
numbers 5933514, 6212295, 6381344, and 6487310 involve methods and
processes related to handwriting recognition developed by the Company over
the years. Legal fees associated with these patents were
immaterial and expensed as the fees were
incurred.
|
Patents,
net consists of the following at December 31:
|
Expiration
|
Estimated Original
Life
|
2007
|
2006
|
||||||||||||
|
Patent
(Various)
|
Various
|
5 | $ | 9 | $ | 9 | |||||||||
|
Patent
(Various)
|
Various
|
7 | 476 | 476 | |||||||||||
| 5544255 |
2013
|
13 | 93 | 93 | |||||||||||
| 5647017 |
2014
|
14 | 187 | 187 | |||||||||||
| 5818955 |
2015
|
15 | 373 | 373 | |||||||||||
| 6064751 |
2017
|
17 | 1,213 | 1,213 | |||||||||||
| 6091835 |
2017
|
17 | 4,394 | 4,394 | |||||||||||
| 6,745 | 6,745 | ||||||||||||||
|
Less
accumulated amortization
|
(3,217 | ) | (2,839 | ) | |||||||||||
| $ | 3,528 | $ | 3,906 | ||||||||||||
Patents
are stated at cost less accumulated amortization that, in management’s opinion,
does not exceed fair value. Amortization is computed using the straight-line
method over the estimated lives of the related assets, ranging from five to
seventeen years. Amortization expense was $378, $379, and $378 for the years
ended December 31, 2007, 2006 and 2005, respectively. Amortization
expense is estimated to be $379 for each of the five years through December 31,
2012. The estimated remaining weighted average useful lives of the
patents are 9 years. The patents identified, as "various" are
technically narrow or dated patents that the Company believes the expiration of
which will not be material to its operations. At December 31, 2007,
the net carrying value of those patents is $0.
The
useful lives assigned to the patents are based upon the following assumptions
and conclusions:
|
·
|
The
estimated cash flow from products based upon each patent are expected to
exceed the value assigned to each
patent;
|
|
·
|
There
are no legal, regulatory or contractual provisions known to the Company
that limit the useful life of each patent to less than the assigned useful
life;
|
|
·
|
No
additional material costs need to be incurred or modifications made in
order for the Company to continue to be able to realize the protection
afforded by the patents; and
|
|
·
|
The
Company, does not foresee any effects of obsolescence or significant
competitive pressure on its current or future products, anticipates
increasing demand for products utilizing the patented technology, and
believes that the current markets for its products based on the patented
technology will remain constant or will grow over the useful lives
assigned to the patents because of a legal, regulatory and business
environment encouraging the use of electronic
signatures.
|
F-11
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Patents
(continued):
The
Company performs intangible asset impairment analyses at least annually in
accordance with the guidance in Statement of Financial Accounting Standards No.
142, “Goodwill and Other
Intangible Assets” ("SFAS 142") and Statement of Financial Accounting
Standards No. 144, “Accounting
for the Impairment or Disposal of Long Lived Assets” ("SFAS 144"). The
Company uses SFAS 144 in response to changes in industry and market conditions
that affects its patents; the Company then determines if an impairment of its
assets has occurred. The Company reassesses the lives of its patents and tests
for impairment at least annually in order to determine whether the book value of
each patent exceeds the fair value of each patent. Fair value is determined by
estimating future cash flows from the products that are and will be protected by
the patents and considering the additional factors listed in Critical Accounting
Policies in Item 7 of this Form 10-K.
Long-lived
assets:
The
Company evaluates the recoverability of its long-lived assets at least annually
or whenever circumstances or events indicate such assets might be impaired. The
Company would recognize an impairment charge in the event the net book value of
such assets exceeded the future undiscounted cash flows attributable to such
assets. No such impairment charges have been recorded in the three years ended
December 31, 2007.
Software
development costs:
Software
development costs are accounted for in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under
SFAS 86, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. The costs capitalized include the coding and testing of the
product after the technological feasibility has been established and ends upon
the release of the product. The annual amortization is the greater of (a) the
straight-line amortization over the estimated useful life not to exceed three
years or (b) the amount based on the ratio of current revenues to anticipated
future revenues. The Company performs periodic impairment reviews to ensure that
unamortized deferred development costs remain recoverable from the projected
future net cash flows that they are expected to generate.
The
capitalized costs are amortized to cost of sales. At December 31, 2007, 2006 and
2005 the Company had capitalized approximately $788, $510 and $299 of software
development costs, respectively. Amortization of capitalized software
development costs for the years ended December 31, 2007, 2006 and 2005 was $335,
$149, and $39, respectively.
Other
current liabilities:
The
Company records liabilities based on reasonable estimates for expenses, or
payables that are known but some amounts must be estimated such as deposits,
taxes, rents and services. The estimates are for current liabilities
that should be extinguished within one year.
The
Company had the following other accrued liabilities at December 31:
|
2007
|
2006
|
|||||||
|
Accrued
professional services
|
$ | 134 | $ | 125 | ||||
|
Refundable
deposits
|
− | 48 | ||||||
|
Rents
|
43 | − | ||||||
|
Interest
|
66 | 27 | ||||||
|
Other
|
55 | 69 | ||||||
|
Total
|
$ | 298 | $ | 269 | ||||
F-12
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Other
current liabilities (continued):
Material
commitments:
The
Company had the following commitments at December 31, 2007:
|
Payments
due by period
|
||||||||||||||||||||||||||||
|
Contractual
obligations
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|||||||||||||||||||||
|
Short-term
debt related party (1)
|
$ | 1,720 | $ | 1,720 | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||||
|
Long-term
debt (2)
|
117 | – | 117 | – | – | – | – | |||||||||||||||||||||
|
Operating
lease commitments (3)
|
1,056 | 264 | 272 | 280 | 240 | – | – | |||||||||||||||||||||
|
Total
contractual cash obligations
|
$ | 2,893 | $ | 1,984 | $ | 389 | $ | 280 | $ | 240 | $ | – | $ | – | ||||||||||||||
|
1.
|
Short-term
debt reported on the balance sheet is net of approximately $350 in
discounts representing the fair value of warrants issued in connection
with the Company’s debt financings. Short-term debt includes $1,170 due to
a related party.
|
|
2.
|
Long-term
debt reported on the balance sheet is net of approximately $21 in
discounts representing the fair value of warrants issued to the
investors.
|
|
3.
|
The
operating lease commenced on November 1, 2002. The lease was renegotiated
in December 2005 and extended for an additional 60 months. The base rent
will increase approximately 3% per annum over the term of the lease, which
expires on October 31, 2011.
|
Stock-based
compensation:
The
Company has one stock option plan, the 1999 Option Plan, and also grants options
to employees, directors and consultants outside of the 1999 Option Plan pursuant
to Individual Plans.
On
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”, using
the modified prospective transition method, which requires the application of
the accounting standard as of January 1, 2006. SFAS
No. 123(R) establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains employee
services in share-based payment transactions. SFAS No.
123(R) requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, including stock
options, based on the grant-date fair value of the award and to recognize it as
compensation expense over the period the employee is required to provide service
in exchange for the award, usually the vesting period. In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 107 (SAB 107) relating to SFAS No. 123(R). The Company has applied the
provisions of SAB 107 in its adoption of SFAS No. 123(R).
The
Company’s consolidated financial statements as of and for the years ended
December 31, 2007 and 2006 reflect the impact of SFAS No. 123(R). In accordance
with the modified prospective transition method, the Company’s consolidated
financial statements for the year ended December 31, 2005 have not been restated
to reflect the impact of SFAS No. 123(R).
F-13
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Stock-based
compensation (continued):
Prior to
the Company adopting SFAS 123 (R), the Company accounted for stock-based
compensation plans under Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued
to Employees”: ("APB 25"). Under APB 25, generally no compensation
expense is recorded when the terms of the award are fixed an the exercise price
of the employee stock option equals or exceeds the fair value of the underlying
stock on the date of grant. The Company had previously adopted the
disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Through December 31, 2005, the Company had
applied APB Opinion No. 25 and related interpretations in accounting for its
stock-based employee compensation plans. Accordingly, no compensation expense
had been recognized for options granted to employees at fair market
value.
Had
compensation cost for the Company's option plans been determined based on the
fair value of the options at the date of grant, as prescribed by SFAS 123, the
Company's net loss available to common stockholders and basic and diluted net
loss per share available to stockholders would have been as follows for the year
ended December 31:
|
2005
|
||||
|
Net
income (loss) as reported
|
$ | (4,031 | ) | |
|
Add:
Stock-based employee compensation expense included in reported results of
operations, net of related tax effects
|
- | |||
|
Deduct:
Total stock-based employee compensation expense determined under fair
value-based method for all awards, net of related tax
effects
|
(1,298 | ) | ||
|
Pro forma net
loss
|
$ | (5,329 | ) | |
|
Basic
and diluted net loss per share available to stockholders:
|
||||
|
As reported
|
$ | (0.04 | ) | |
|
Pro forma
|
$ | (0.05 | ) | |
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable period: risk-free interest
rate of 4.34%, an expected life of 6.84 years, expected volatility of 94.1%, and
a dividend yield of 0%.
These
plans and related compensation expense prescribed by SFAS 123(R) are more fully
described in Note 5 of the Notes to Consolidated Financial
Statements.
Revenue
recognition:
Revenue
is recognized when earned in accordance with applicable accounting standards,
including AICPA Statement of Position ("SOP") No. 97-2, “Software Revenue
Recognition”, as amended, Staff Accounting Bulletin 104, “Revenue Recognition” ("SAB
104"), and the interpretive guidance issued by the Securities and Exchange
Commission and EITF issue number 00-21, “Accounting for Revenue Arrangements
with Multiple Elements”, of the FASB’s Emerging Issues Task Force. The
Company recognizes revenues from sales of software products upon shipment,
provided that persuasive evidence of an arrangement exists, collection is
determined to be probable, all non-recurring engineering work necessary to
enable the Company's product to function within the customer's application has
been completed and the Company's product has been delivered according to
specifications. Revenue from service subscriptions is recognized as costs are
incurred or over the service period which-ever is longer. Software license
agreements may contain multiple elements, including upgrades and enhancements,
products deliverable on a when and if available basis and post contract support.
Revenue from software license agreements is
F-14
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Revenue
recognition (continued):
recognized
upon delivery of the software, provided that persuasive evidence of an
arrangement exists, collection is determined to be probable, all nonrecurring
engineering work necessary to enable the Company's products to function within
the customer's application has been completed, and the Company has delivered its
product according to specifications.
Maintenance
revenue is recorded for post contract support and upgrades or enhancements,
which is paid for in addition to license fees, and is recognized as costs are
incurred or over the support period whichever is longer. For undelivered
elements where objective and reliable evidence of fair value does not exist,
revenue is deferred and subsequently recognized when delivery has occurred and
when fair value has been determined.
For the
years ended December 31, 2007, 2006, and 2005, the Company’s sales in the United
States as a percentage of total sales were 92%, 81%, and 85%, respectively. For
the years ended December 31, 2007, 2006, and 2005, the Company’s export sales as
a percentage of total revenues were approximately 8%, 19%, and
15%, respectively. Foreign sales are determined based on the
countries to which the Company’s products are shipped.
Major
customers:
For the
year ended December 31, 2007, four customers accounted for 57% of total revenues
in 2007. Access Systems Americas, Inc. (formerly PalmSource, Inc.) accounted for
24%, Tennessee Valley Authority accounted for 10%, World Financial Group
accounted for 13% and Wells Fargo Bank, NA accounted for 10%. One customer,
PalmSource, Inc., accounted for 27% of total revenues in 2006. Two customers
accounted for 41% of total revenues in 2005. Snap-On Credit Corporation
accounted for 16% and PalmSource, Inc. accounted for 25%,
respectively.
Four
customers accounted for 92% of accounts receivable at December 31,
2007. eCom Asia Pacific, Ltd accounted for 22%, Access Systems
Americas, Inc, (formerly PalmSource) accounted for 28%, Sony Ericsson accounted
for 10% and Tennessee Valley Authority accounted for 32%. Four
customers accounted for 69% of accounts receivable at December 31,
2006. Prudential Insurance Co. of America accounted for 11%, eCom
Asia Pacific Pty. Ltd. accounted for 14%, IA Systems Pty. Ltd. accounted for 17%
and PalmSource, Inc. accounted for 27%.
Research
and development:
Research
and development costs are charged to expense as incurred.
Advertising:
The
Company expenses advertising costs as incurred. Advertising expense for the
years ended December 31, 2007 and 2006 was $100 and $177,
respectively. There was no advertising expense for the year ended
December 31, 2005.
Net
(loss) income per share:
The
Company calculates net (loss) income per share under the provisions of Statement
of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS
128”). SFAS 128 requires the disclosure of both basic net income (loss) per
share, which is based on the weighted average number of shares outstanding, and
diluted income (loss) per share, which is based on the weighted average number
of shares and dilutive potential shares outstanding.
For the
year ended December 31, 2007, 6,036 shares of common stock subject to
outstanding options and 15,149 shares issuable upon exercise of the warrants
were excluded from the calculation of dilutive earnings per share because the
exercise of such options and warrants would be anti-dilutive.
F-15
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
Net (loss) income
per share(continued):
For the
year ended December 31, 2006, 5,893 shares of common stock subject to
outstanding options, 2,993 shares issuable upon the conversion of the
convertible notes and 7,961 shares issuable upon exercise of the warrants were
excluded from the calculation of dilutive earnings per share because the
exercise or conversion of such options and warrants would be
anti-dilutive.
For the
year ended December 31, 2005, 8,190 shares of common stock subject to
outstanding options, 3,989 shares issuable upon the conversion of the
convertible notes and 4,850 shares issuable upon exercise of the warrants were
excluded from the calculation of dilutive earnings per share because the
exercise or conversion of such options and warrants would be
anti-dilutive.
Foreign
currency translation:
The
Company considers the functional currency of the Joint Venture to be the local
currency and, accordingly, gains and losses from the translation of the local
foreign currency financial statements are included as a component of
"accumulated other comprehensive loss" in the accompanying consolidated balance
sheets. Foreign currency assets and liabilities are translated into U.S. dollars
at the end-of-period exchange rates except for long-term assets and liabilities,
which are translated at historical exchange rates. Revenues and expenses are
translated at the average exchange rates in effect during each period except for
those expenses related to balance sheet amounts which are translated at
historical exchange rates.
Net
foreign currency transaction gains and losses are included in "Interest income
and other income (expense), net" in the accompanying consolidated statements of
operations. Foreign currency transaction gains in 2007, 2006 and 2005 were
insignificant.
Comprehensive
income:
In June
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, “Reporting Comprehensive
Income” (“SFAS 130”). The Company adopted SFAS 130 effective January 1,
1998. SFAS 130 requires that all items recognized under accounting
standards as components of comprehensive earnings be reported in an annual
statement that is displayed with the same prominence as other annual financial
statements. SFAS 130 also requires that an entity classify items as other
comprehensive earnings by their nature in an annual financial
statement.
Income
taxes:
Deferred
tax assets and liabilities are recognized for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and their
financial statement reported amounts and for tax loss and credit carryforwards.
A valuation allowance is provided against deferred tax assets when it is
determined to be more likely than not that the deferred tax asset will not be
realized.
The
Company adopted the provisions of Financial Standards Accounting Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 ("FIN 48"), on January 1, 2007. There
were no unrecognized tax benefits and, accordingly, there has been no effect on
the Company's financial condition or results of operations as a result of
implementing FIN 48.
The
Company files income tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions. The Company is no longer subject to U.S.
federal tax examinations for years before 2003, and state tax examinations for
years before 2002. Management does not believe there will be any
material changes in our unrecognized tax positions over the next 12
months.
F-16
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
1.
Nature of Business, Basis of Presentation and Summary of Significant Accounting
Policies (continued)
The
Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of FIN 48, there was no accrued interest or penalties associated
with any unrecognized tax benefits, nor was any interest expense recognized
during the twelve month period ended December 31, 2007.
Recent
pronouncements:
In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (R), Business Combinations (“SFAS 141 (R)”),which becomes effective for
fiscal periods beginning after December 15, 2008. SFAS No. 141 (R) requires
all business combinations completed after the effective date to be accounted for
by applying the acquisition method (previously referred to as the purchase
method). Companies applying this method will have to identify the acquirer,
determine the acquisition date and purchase price and recognize at their
acquisition date fair values of the identifiable assets acquired, liabilities
assumed, and any non-controlling interests in the acquiree. In the case of a
bargain purchase the acquirer is required to reevaluate the measurements of the
recognized assets and liabilities at the acquisition date and recognize a gain
on that date if an excess remains. The Company does not expect the adoption of
this statement to have a material impact on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51 (“SFAS 160”) which
becomes effective for fiscal periods beginning after December 15, 2008.
This statement amends ARB 51 to establish accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. The statement requires ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled, and presented in
the consolidated statement of financial position within equity, but separate
from the parent’s equity. The statement also requires consolidated net income to
be reported at amounts that include the amounts attributable to both the parent
and the non-controlling interest with disclosure on the face of the consolidated
statement of income, of the amounts of consolidated net income attributable to
the parent and to the non-controlling interest. In addition this statement
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation and requires that
a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. The Company does not expect the adoption of this statement to
have a material impact on its consolidated financial statements.
In February 2007, the FASB issued
Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities – Including an amendment
to FASB Statement No. 115”.This statement permits companies to
choose to measure many financial instruments and other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use
of fair value measurement of accounting for financial
instruments. This statement applies to all entities,
including not for profit.
The fair
value option established by this statement permits all entities to measure
eligible items at fair value at specified election dates. This
statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007.
The
Company is currently assessing the impact adoption of SFAS No. 159 will have on
its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”. This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement applies under other accounting pronouncements
that require or permit fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact of the adoption of SFAS No. 157 will have on its
consolidated financial statements.
F-17
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
Reclassifications:
Certain
amounts reported in the 2005 consolidated financial statements have been
reclassified to conform to the 2007 presentation. Revenues have been
reclassified into two headings: product revenue and maintenance
revenue.
2.
Chinese Joint Venture:
The
Company currently owns 90% of a joint venture (the “Joint Venture”) with the
Jiangsu Hongtu Electronics Group, a provincial agency of the People's Republic
of China (the "Agency"). In June 1998, the registered capital of the Joint
Venture was reduced from $10,000 to $2,550. As of December 31, 2005, the Company
had contributed an aggregate of $1,800 in cash to the Joint Venture and provided
it with non-exclusive licenses to technologies and certain distribution rights
and the Agency had contributed certain land use rights. Following the reduction
in registered capital of the Joint Venture, neither the Company nor the Agency
is required to make further contributions to the Joint Venture. Prior to the
reduction in the amount of registered capital, the Joint Venture was subject to
the annual licensing requirements of the Chinese government. Concurrent with the
reduction in registered capital, the Joint Venture's business license has been
renewed through October 18, 2043.
Revenues
from the Joint Venture were $39, $153, and $230 for the years ended December 31,
2007, 2006 and 2005, respectively. Long lived assets were $0 and $8
as of December 31, 2007, and 2006, respectively.
3.
Convertible notes:
In
November 2004, the Company entered into an unsecured Note and Warrant Purchase
Agreement (the “2004 Purchase Agreement”) and a Registration Rights Agreement
(the “2004 Registration Rights Agreement, each dated as of October 28, 2004).
The 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 were 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 and liquidated damage clause contained in the 2004 Purchase
Agreement was analyzed under paragraphs 6 and 12 of SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities”, and 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” to determine its proper classification
in the Company’s balance sheet and to determine that no liquidated damages
existed.
The 2004
financing discussed above, was a combination of debt and equity, closing
November 2, 2004. The proceeds to the Company under the 2004 Purchase Agreement
were approximately $3,885, net of $310 in commissions and legal
expenses. H.C. Wainwright & Co., Inc. (“Wainwright”) acted as
placement agent. As placement agent for the Company, at closing
Wainwright received $731 in commissions, legal fees and warrants. The
commissions of approximately $285 and legal fees of $25, were paid in
cash. The Company has used the proceeds of the financing for working
capital. 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 had ascribed the value of
$421 to the Wainwright warrants, which was recorded as deferred financing costs
in the balance sheet at December 31, 2004.
Under the
terms of the 2004 Purchase Agreement, the Company issued to certain accredited
investors convertible promissory notes in the aggregate principal amount of
$4,195 and warrants to acquire 3,632 shares of the Company’s common stock at an
exercise price of $0.508 per share. The notes accrued interest at the
rate of 7% per annum, payable semi-annually, and were convertible into shares of
the Company’s common stock at the rate of $0.462 per share. The
Company ascribed a value of $982 to the investor warrants, which was recorded as
a discount to notes payable in the balance sheet. In 2007, due to the
Company’s March/April and June 2007 debt financings, the Company expensed $202
of additional discount due the note holders as the result of the issuance of new
warrants in a related party transaction and in a private placement with an
exercise price less than the note holders. The
F-18
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
3.
Convertible notes (continued):
reduced
exercise price of the new warrants resulting in the reduction of the conversion
price of the note holder warrants from $0.46 to $0.41 per share.
The fair
value ascribed to the Wainwright and investor 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 had ascribed
$1,569 to the beneficial conversion feature in the convertible notes, which was
recorded as a discount to notes payable in the balance sheet. The
values ascribed to the warrants and beneficial conversion feature followed 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 was amortized to expense over the life of the convertible notes or upon
earlier conversion using the effective interest method. During the
year ended December 31, 2007, the Company had amortized to interest expense
approximately $303, of the loan discount and deferred financing costs. There
were no note conversions during the year ended December 31, 2007.
The
Company offered the outstanding convertible note holders the option of being
issued warrants to purchase two (2) shares of the Company’s common stock for
each dollar of note principal outstanding in exchange for a two year extension
of the note due date and termination of the conversion feature of the
note. The warrants would have a three year life from the date of
issuance and an exercise price equal to the closing price of the Company’s
common stock on the date the warrants were issued. The new warrants would have
registration rights similar to those of the current warrants. In October 2007,
one note holder, with a principal balance of $117, accepted the offer with a
modification to the exercise price of the warrants revised to the average of the
20 day volume weighted average price of the Company’s commons stock ending on
October 25, 2007. The Company issued 234 warrants to the investor on the terms
discussed above. The relative fair value of $23 ascribed to the warrants was
estimated on the commitment date using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 4.90%; life of 3 years;
expected volatility of 86%; and expected dividend yield of 0%. On October
26, 2007, the Company paid the remaining outstanding debt of $1,265 and accrued
interest thereon.
The
warrants issued under the 2004 Purchase Agreement expire on October 28, 2009.
The Company may call the warrants if the Company’s common stock trades at $1.00
or above for 20 consecutive trading days after the date that is 20 days
following the effectiveness of a registration statement providing for the resale
of the shares issued upon the conversion of the notes and exercise of the
warrants. At December 31, 2007, there are warrants outstanding to
purchase 4,903 shares of common stock at a weighted average exercise price of
$0.44 per share, adjusted for the reduction in conversion price and sale of
common stock in a private placement discussed above. The placement agent will be
paid approximately $28 in the aggregate if all of the investor warrants are
exercised. The Company will receive additional proceeds of
approximately $1,482, adjusted for the change in warrant exercise price, if all
of the investor warrants are exercised.
Interest
expense related to convertible debt for the years ended December 31, 2007, 2006
and 2005 was $584, $694, and $2,478, respectively. Amortization of debt discount
and deferred financing costs, including $202 related to the warrant re-pricing
explained above, included in interest expense for the years ended December 31,
2007, 2006 and 2005 was $505, $591 and $2,275, respectively.
4.
Short-term debt:
In August
2006, the Company entered into a Note and Warrant Purchase Agreement (the “2006
Purchase Agreement”) and a Registration Rights Agreement (the “2006 Registration
Rights Agreement”), each dated as of August 10, 2006. The Company
secured the right to borrow up to six hundred thousand dollars
($600). On November 19, 2006 the Company borrowed the $600 available
under the 2006 Purchase Agreement, of which $450 was borrowed from an
approximate 7% shareholder (“Affiliated Shareholder”) of the Company and the
remaining $150 from an unrelated third party. The Company used the
proceeds of the financing for additional working capital. In addition, the
Company issued warrants to purchase 3,111 of the Company’s common
stock. The Company has ascribed a value of $336 to the warrants,
which is recorded as a discount to long-term debt, in the balance sheet
and
F-19
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
4.
Short-term debt (continued):
will be
amortized to interest expense over the life of the loan. The relative
fair value ascribed to the warrants was estimated on the commitment date using
the Black-Scholes pricing model with the following assumptions: risk-free
interest rate of 4.68%; expected life of 3 years; expected volatility of 54%;
and expected dividend yield of 0%.
The note
is due May 17, 2008, bears interest at the rate of 15% per annum payable
quarterly in cash. The warrants have a term of three years and an exercise price
of $0.51. The warrants included piggyback registration rights for the underlying
shares to participate in certain future registrations of the Company’s common
stock. The shares were registered with the Company’s Form S-1/A which
was declared effective December 28, 2007.
In
February 2007, the Company entered into a Note and Warrant Purchase Agreement
(the “February 2007 Purchase Agreement”) and a Registration Rights Agreement
(the “February 2007 Registration Rights Agreement”), each dated as of February
5, 2007, with the Affiliated Stockholder. The Company secured the
right to borrow up to $600. On March 15, 2007 the Company and the Affiliated
Stockholder amended the February 2007 Purchase Agreement to increase the maximum
amount of borrowing from $600, to $1,000. The terms of the February 2007
Purchase Agreement and 2006 Purchase Agreement are identical with the exception
that the maximum number of warrants that may be issued under the February 2007
Purchase Agreement is 5,185 rather than 3,111. The warrants have a three year
life, become exercisable on June 30, 2007, and have an exercise price of
$0.51. The warrants included
piggyback registration rights for the underlying shares to participate in any
future registrations of the Company’s common stock. The shares were registered
with the Company’s Form S-1/A which was declared effective December 28,
2007.
On March
30, 2007, and April 1, 2007 the Company borrowed $670 and $50 under the February
2007 Purchase Agreement of which $320 was borrowed from the Affiliated
Stockholder and the remaining $400 from unrelated third parties. The
proceeds were used for working capital purposes. The Company has
ascribed a value of $359 to the 3,733 warrants, issued as part of this
borrowing, which is recorded as a discount to short-term debt in the balance
sheet and will be amortized to interest expense over the life of the
loan. The relative fair value ascribed to the warrants was estimated
on the commitment date using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 4.68%; life of 3 years; expected
volatility of 45%; and expected dividend yield of 0%. The notes bear interest at
the rate of fifteen percent (15%) per annum payable quarterly in cash and are
due September 30, 2008.
On June
15, 2007, The Company entered into a Note and Warrant Purchase Agreement (the
“June 2007 Purchase Agreement”) and a Registration Rights Agreement (the “June
2007 Registration Rights Agreement”), each dated as of June 15, 2007. The
Company secured the right to borrow up to $1,000 from the Affiliated
Stockholder. As of December 31, 2007, the Company had borrowed $400 under this
facility and the option to borrow the remaining $600 lapsed as of that date. The
Company used the proceeds of the financing for working capital purposes. The
Note bears interest at the rate of fifteen percent (15%) per annum payable
quarterly in cash. The Company was required to issue warrants to purchase shares
of its common stock, the number to be determined by use of a formula known as
the Cox-Rubenstein Model, which takes into account the volatility of the
underlying stock, the risk free interest rate, dividend yield and exercise
price. The exercise price of the warrants was determined by the volume weighted
average price of the common stock for the thirty business days preceding the
date of the draw. The warrants included piggyback registration rights for the
underlying shares to participate in certain future registrations of the
Company’s common stock. The shares were registered with the Company’s
Form S-1/A which was declared effective December 28, 2007.
The June
2007 Purchase Agreement required the Company to draw $400 of the funds upon
signing. Applying the formula described above, the Company issued
warrants to purchase 3,168 shares of its common stock at an exercise price of
$0.25. The Company has ascribed a value of $187 to the warrants,
issued as part of this borrowing, which is recorded as a discount to short-term
debt in the balance sheet and will be amortized to interest expense over the
life of the loan. The relative fair value ascribed to the warrants
was estimated on the commitment date using the
F-20
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
4.
Short-term debt (continued):
Black-Scholes
pricing model with the following assumptions: risk-free interest rate of 4.90%;
life of 3 years; expected volatility of 69%; and expected dividend yield of 0%.
As described above, the $400 note bears interest at the rate of fifteen percent
(15%) per annum payable quarterly in cash and is due December 30,
2008.
The
Company used a volume weighted average price of the common stock for the thirty
business days preceding the date of the applicable draw to determine the $0.25
exercise price of the 3,168 warrants issued with the June 2007 Purchase
Agreement. The calculation produces an exercise price less than the exercise
price of the warrants associated with the convertible debt and less than the
conversion price of such debt. This resulted in the Company having to reset both
the conversion price of the convertible debt and the exercise price of the
associated warrants. The Company reduced the conversion price of the
convertible debt from $0.46 to $0.45. The effect of this re-pricing resulted in
the Company incurring $202 of additional interest expense during the period. The
weighted average exercise price of the warrants associated with the convertible
debt was reduced from $0.50 to $0.44, resulting in a reduction in gross proceeds
if all of the warrants are exercised of $291.
Interest
expense associated with short-term debt for the year ended December 31, 2007 and
2006 was $666 and $81, respectively, of which $440 and $81 related to the
Affiliated Shareholder, respectively. Amortization of debt discount included in
interest expense for the year ended December 31, 2007 and 2006 was $463 and $70,
respectively, of which $305 and $70 related to the Affiliated Shareholder,
respectively.
5.
Stockholders' equity:
Common
stock options:
The
Company has one stock-based employee compensation plan, (the "1999 Option Plan")
and also grants options to employees, directors and consultants outside of the
1999 Option Plan under Individual Plans.
In June
1999, the Company adopted and the shareholders approved the 1999 Option Plan.
Incentive and non-qualified options under the 1999 Option Plan may be granted to
employees, officers, and consultants of the Company. There are 4,000 shares of
Common Stock authorized for issuance under the 1999 Option Plan. The options
have a seven year life and generally vest quarterly over three years. At
December 31, 2007, there were 72 shares available for future grants. As of
December 31, 2007, 3,747 plan options were outstanding and 3,174 plan options
were exercisable with a weighted average exercise price of $0.60 per
share.
The
Company has issued options under Individual Plans to its employees and
directors. The Individual Plan options generally vest over four years or prorata
quarterly over three years. Non-plan options are generally exercisable over a
period not to exceed seven years. As of December 31, 2007, 2,289 non-plan
options were outstanding and 2,189 non-plan options were exercisable with a
weighted average exercise price of $0.65 per share.
Share-based
payment:
On
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”, using the modified
prospective transition method, which requires the application of the accounting
standard as of January 1, 2006. In accordance with the modified
prospective transition method, the Company’s consolidated financial statements
for the years ended December 31, 2005 and 2004 have not been restated to include
the impact of SFAS No. 123(R).
SFAS No.
123(R) establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains employee
services in share-based payment transactions. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB
107) relating to SFAS No. 123(R). The Company has applied the provisions of SAB
107 in its adoption of SFAS No. 123(R).
F-21
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
5.
Stockholders' equity (continued):
Share-based
payment (continued):
Share-based
compensation expense is based on the estimated
grant date fair value of the
portion of share-based payment awards that are ultimately
expected to vest during the period. The grant date fair
value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model. SFAS No. 123(R)
requires forfeitures
of share-based payment awards to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The estimated
average forfeiture rates for the year ended December 31, 2007,
was
approximately 27.90%.
For the years ended December 31, 2007
and 2006, stock-based compensation expense includes compensation expense for
share-based payment awards granted prior to, but not yet vested as of December
31, 2005. Share based payment awards issued but not yet vested as of December
31, 2005 are valued in accordance with the pro forma provisions of section SFAS
No. 123. Compensation expense for the share-based payment awards granted
subsequent to December 31, 2005, are based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123(R).
SFAS No.
123(R) requires the cash flows from tax benefits for deductions in excess of the
compensation costs recognized for share-based payment awards
to be classified as financing cash flows. Due to the Company’s
loss position, there was no such tax benefits during the year ended December 31,
2007.
Valuation
and Expense Information under SFAS No. 123(R):
The
weighted-average fair value of stock-based compensation is based on the single
option valuation approach. Forfeitures are estimated and it is
assumed no dividends will be declared. The estimated fair value of
stock-based compensation awards to employees is amortized using the accrual
method over the vesting period of the options. The fair value calculations are
based on the following assumptions:
|
Year
Ended
December
31, 2007
|
Year
Ended
December
31, 2006
|
||
|
Risk
free interest rate
|
3.32%
- 5.11%
|
4.60%
- 5.11%
|
|
|
Expected
life (years)
|
3.21
– 6.83
|
3.46
-5.02
|
|
|
Expected
volatility
|
80.96%
- 104.57%
|
80.92%
- 104.57%
|
|
|
Expected
dividends
|
None
|
None
|
The
following table summarizes the allocation of stock-based compensation expense
related to stock option grants under SFAS No. 123(R) for the years ended
December 31, 2007 and 2006. There were no stock option exercises during the
years ended December 31, 2007 and 2006, except for 19 shares exercised in 2006
by a consultant that were issued for services.
|
Year
Ended
December
31, 2007
|
Year
Ended
December
31, 2006
|
|||
|
Research
and development
|
$
18
|
$
54
|
||
|
Sales
and marketing
|
66
|
92
|
||
|
General
and administrative
|
13
|
22
|
||
|
Director
options
|
33
|
21
|
||
|
Stock-based
compensation expense included in operating expenses
|
$
130
|
$
189
|
F-22
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
5.
Stockholders' equity (continued):
Share-based
payment (continued):
The
summary activity under the Company’s 1999 Option Plan and Individual Plans is as
follows:
|
December
31, 2007
|
December
31, 2006
|
|||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
Weighted
Average Remaining Contractual Life
|
Shares
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
Weighted
Average Remaining Contractual Life
|
|
|
Outstanding
at beginning of period
|
5,893
|
$0.69
|
8,591
|
$0.75
|
||||
|
Granted
|
870
|
$0.21
|
1,764
|
$0.44
|
||||
|
Exercised
|
−
|
$0.00
|
(19)
|
$0.42
|
||||
|
Forfeited
|
(727)
|
$0.98
|
(4,443)
|
$0.72
|
||||
|
Outstanding
at period end
|
6,036
|
$0.59
|
4.7
|
5,893
|
$0.69
|
5.4
|
||
|
Options
vested and exercisable at period end
|
5,364
|
$0.62
|
4.5
|
5,066
|
$0.74
|
5.2
|
||
|
Weighted
average grant-date fair value of options granted during the
period
|
$0.14
|
$0.24
|
||||||
The
following table summarizes significant ranges of outstanding and exercisable
options as of December 31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Range
of Exercise Prices
|
Options
Outstanding
|
Weighted
Average Remaining Contractual Life(in years)
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||||||||
| $ | 0.00 – $0.50 | 2,504 | 5.3 | $ | 0.32 | 1,832 | $ | 0.34 | ||||||||||||||
| $ | 0.51 – $1.00 | 3,341 | 4.3 | $ | 0.73 | 3,341 | $ | 0.73 | ||||||||||||||
| $ | 1.01 – $2.00 | 176 | 2.0 | $ | 1.31 | 176 | $ | 1.31 | ||||||||||||||
| $ | 2.01 – $2.99 | − | 0.0 | $ | 0.00 | − | $ | 0.00 | ||||||||||||||
| $ | 3.00 – $7.50 | 15 | 2.5 | $ | 3.56 | 15 | $ | 3.56 | ||||||||||||||
| 6,036 | 5,364 | |||||||||||||||||||||
F-23
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
5.
Stockholders' equity (continued):
Share-based
payment (continued):
A summary
of the status of the Company’s nonvested shares as of December 31, 2007 is as
follows:
|
Nonvested
Shares
|
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
||||||
|
Nonvested
at January 1, 2007
|
827 | $ | 0.36 | |||||
|
Granted
|
870 | $ | 0.14 | |||||
|
Forfeited
|
(727 | ) | $ | 0.29 | ||||
|
Vested
|
(298 | ) | $ | 0.26 | ||||
|
Nonvested
|
672 | $ | 0.22 | |||||
As of
December 31, 2007, there was $49 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
2.4 years.
The
Company expects to make additional option grants in future years. The options
issued to employees and directors will be subject to the provisions of FASB
Statement 123(R), which may have a material impact on the Company’s financial
operations.
As of
December 31, 2007, 6,036 shares of Common Stock were reserved for issuance
upon exercise of outstanding options.
Warrants:
At
December 31, 2007, 15,149 shares of Common stock were reserved for issuance upon
exercise of outstanding warrants.
Private
placement of Common Stock
On August
24, 2007, the Company entered into a Securities Purchase and Registration Rights
Agreement (the “August 2007 Purchase Agreement”) with Phoenix Venture Fund LLC
(the “Purchaser”). On September 14, 2007, the transactions closed and the
Company issued to the Purchaser 21,500 shares of the Company’s common stock (the
“Shares”) at a price per share of approximately $0.14, for an aggregate purchase
price of $3,000. An advisory fee of $250 was paid to the managing member of the
Purchaser for services rendered in connection with the sale of the Shares and
$61 to the Purchaser’s legal counsel for services associated with the financing
transactions. In addition the Company paid $87 in professional fees
associated with the sale of the shares. The Company expects to use
the proceeds of the sale of the Shares for payment of outstanding indebtedness
and additional working capital. The Company was permitted under the terms of the
Purchase Agreement to use up to $1,400 of the net proceeds to repay outstanding
indebtedness. Under the August 2007 Purchase Agreement, so long as the Purchaser
holds shares of common stock of the Company representing at least fifty-percent
of the Shares purchased pursuant to the August 2007 Purchase Agreement and at
least five-percent of the outstanding capital stock of the Company, the managing
member of the Purchaser is entitled to a right of first offer to exclusively
provide debt or equity financing to the Company prior to the Company’s pursuing
debt or equity financing from another party, subject to certain conditions and
exclusions. Additionally, provided the Purchaser meets the foregoing ownership
requirements, the managing member of the Purchaser is permitted to designate up
to two non-voting observers to attend meetings of the Company’s board of
directors and, for a period of twenty-four months following the date a
registration statement pertaining to the Shares is first declared effective by
the Securities and Exchange Commission (the “Commission”), the Company is
prohibited from selling or otherwise disposing of material properties, assets or
rights of the Company without the consent of the managing member of the
Purchaser.
F-24
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
5.
Stockholders' equity (continued):
Private
placement of Common Stock (continued)
The
Company was obligated under the Purchase Agreement to use its best efforts to
prepare and file with the Commission a registration statement covering the
resale of the securities sold pursuant to the Purchase Agreement. The
registration statement will provide for an offering to be made on a continuous
basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the
“Securities Act”). The Company filed the registration statement on November 15,
2007, and the registration statement was declared effective on December 28,
2007. The Company must use its best efforts to keep the registration statement
continuously effective under the Securities Act until the earlier of the date
that all shares purchased under the Purchase Agreement have been sold or can be
sold publicly under Rule 144(k). The Company was obligated to pay the costs and
expenses of such registration, which was approximately $147.
The
August 2007 Purchase Agreement provides for certain registration rights whereby
the Company could be required to make liquidated damages payments if a
registration statement is not filed or declared effective by the SEC within a
specified time frame and if after being declared effect the registration
statement is not kept effective. The Company filed the registration statement
within the required time frame and it is currently effective. Should
the Company fail to keep the registration statement effective, it will upon that
event and each thirty days thereafter until the registration statement is again
effective, be subject to making payments to the Purchaser in an amount equal to
one and a half percent (1.5%) of the greater of: (i) the weighted average market
price of the Shares during such 30-day period, or (ii) the market price of the
Shares five (5) days after the closing (the “Closing Market Price”), until the
registration statement is again declared effective, or as to any Shares, until
such Shares can be sold in a single transaction pursuant to SEC Rule144;
provided, however, that the liquidated damages amount under this provision shall
be paid in cash and the total amount of payments shall not exceed, when
aggregated with all such payments, ten percent (10%) of the Closing Market
Price. The Company has not recorded a liability in connection with the
liquidated damages provisions of the August 2007 Purchase Agreement because it
believes that it is not probable that an event will occur which will trigger a
liquidated damages payment under the agreement.
6.
Commitments:
Lease
commitments:
The
Company currently leases its principal facilities (the "Principal Offices) in
Redwood Shores, California, pursuant to a sublease that expires in 2011. The
Joint Venture leases space on a month to month basis in Nanjing, China. In
addition to monthly rent, the U.S. facilities are subject to additional rental
payments for utilities and other costs above the base amount. Facilities rent
expense was approximately $333, $299, and $401, in 2007, 2006, and 2005,
respectively.
The
Company has no future minimum payments required under capital
leases.
7.
Income taxes:
As of
December 31, 2007, the Company had federal net operating loss carryforwards
available to reduce taxable income of approximately $72,469. The net
operating loss carryforwards expire between 2008 and 2027. The Company also had
federal research and investment tax credit carryforwards of approximately $315
that expire at various dates through 2012.
F-25
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
7.
Income taxes (continued):
Deferred tax assets and liabilities at
December 31, consist of the following:
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$ | 28,987 | $ | 28,182 | ||||
|
Credit
carryforwards
|
315 | 315 | ||||||
|
Deferred
income
|
172 | 162 | ||||||
|
Other,
net
|
317 | 213 | ||||||
|
Total
deferred tax assets
|
29,791 | 28,872 | ||||||
|
Valuation
allowance
|
(29,791 | ) | (28,872 | ) | ||||
|
Net
deferred tax assets
|
$ | - | $ | - | ||||
Income
tax (benefit) differs from the expected statutory rate as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Expected
income tax benefit
|
$ | (1,157 | ) | $ | (1,085 | ) | $ | (1,327 | ) | |||
|
State
income tax benefit
|
(204 | ) | (291 | ) | 234 | |||||||
|
Expired
net operating loss
|
1,512 | 1,471 | 2,268 | |||||||||
|
Change
in valuation allowance and other
|
(151 | ) | (95 | ) | (1,175 | ) | ||||||
|
Income
tax expense (benefit)
|
$ | – | $ | – | $ | – | ||||||
A full
valuation allowance has been established for the Company's net deferred tax
assets since the realization of such assets through the generation of future
taxable income is uncertain.
Under the
Tax Reform Act of 1986, the amounts of, and the benefit from, net operating
losses and tax credit carryforwards may be impaired or limited in certain
circumstances. These circumstances include, but are not limited to, a cumulative
stock ownership change of greater than 50%, as defined, over a three-year
period. During 1997, the Company experienced stock ownership changes which could
limit the utilization of its net operating loss and research and investment tax
credit carryforwards in future periods.
8.
Employee benefit plans:
The
Company sponsors a 401(k) defined contribution plan covering all employees
meeting certain eligibility requirements. Contributions made by the Company are
determined annually by the Board of Directors. To date, the Company has made no
contributions to this plan.
F-26
Communication
Intelligence Corporation
Notes to
Consolidated Financial Statements
(In
thousands)
9.
Quarterly information (unaudited)
The
unaudited summarized quarterly financial data for the years ended December 31,
2007, 2006 and 2005, presented below, in the opinion of Management, reflects all
adjustments which are of a normal and recurring nature necessary to present
fairly the results of operations for the periods presented.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
||||||||||||||||
|
2007
Unaudited
|
||||||||||||||||||||
|
Net
sales
|
$ | 334 | $ | 555 | $ | 456 | $ | 800 | $ | 2,145 | ||||||||||
|
Gross
profit
|
$ | 276 | $ | 393 | $ | 356 | $ | 595 | $ | 1,620 | ||||||||||
|
Loss
before income taxes, and minority interest
|
$ | (810 | ) | $ | (845 | ) | $ | (1,107 | ) | $ | (710 | ) | $ | (3,472 | ) | |||||
|
Net
loss
|
$ | (807 | ) | $ | (843 | ) | $ | (1,105 | ) | $ | (644 | ) | $ | (3,399 | ) | |||||
|
Basic
and diluted loss per share
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||||
|
2006
Unaudited
|
||||||||||||||||||||
|
Net
sales
|
$ | 701 | $ | 448 | $ | 701 | $ | 492 | $ | 2,342 | ||||||||||
|
Gross
profit
|
$ | 634 | $ | 419 | $ | 645 | $ | 394 | $ | 2,092 | ||||||||||
|
Loss
before income taxes, and minority interest
|
$ | (813 | ) | $ | (928 | ) | $ | (672 | ) | $ | (878 | ) | $ | (3,291 | ) | |||||
|
Net
loss
|
$ | (811 | ) | $ | (925 | ) | $ | (669 | ) | $ | (881 | ) | $ | (3,286 | ) | |||||
|
Basic
and diluted loss per share
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | |||||
F-27
SCHEDULE
II
Communication
Intelligence Corporation
Valuation
and Qualifying Accounts and Reserves
(In
thousands)
Years
Ended December 31, 2005, 2006, and 2007
|
Balance
At
Beginning
Of Period
|
Charged
to
Costs
and
Expense
|
Deductions
|
Balance
At
End
Of Period
|
|||||||||||||
|
Year
ended December 31, 2005:
|
||||||||||||||||
|
Accounts
receivable reserves
|
$ | 404 | $ | 4 | $ | (21 | ) | $ | 387 | |||||||
|
Year
ended December 31, 2006:
|
||||||||||||||||
|
Accounts
receivable reserves
|
$ | 387 | $ | 10 | $ | - | $ | 397 | ||||||||
|
Year
ended December 31, 2007:
|
||||||||||||||||
|
Accounts
receivable reserves
|
$ | 397 | $ | 123 | $ | (403 | ) | $ | 117 | |||||||
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