iSign Solutions Inc. - Quarter Report: 2007 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
X
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended: June
30, 2007
OR
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from
to
Commission
File Number: 000-19301
COMMUNICATION
INTELLIGENCE CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
94-2790442
|
|||
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|||
|
incorporation
or organization)
|
Identification
No.)
|
275
Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number, including area code: (650)
802-7888
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
|
Yes
|
X
|
No
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (Check one).
|
large
accelerated filer
|
accelerated
filer
|
X
|
non-accelerated
filer
|
Indicate
by check mark whether the registrant is a shell company (as defined in Section
12b-2 of the exchange Act)
|
Yes
|
No
|
X
|
Number
of
shares outstanding of the registrant’s Common Stock, as of August 14, 2007:
107,557,161.
INDEX
|
Page
No.
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
Item
1. Financial
Statements
|
|
|
Condensed
Consolidated Balance Sheets at June 30, 2007 (unaudited) and
December
31, 2006
|
3
|
|
Condensed
Consolidated Statements of Operations for the Three and
Six-Month
Periods
Ended June 30, 2007 and 2006 (unaudited)
|
4
|
|
Condensed
Consolidated Statements of Changes in Stockholders’ Equity for the
Three
and Six-Month Periods Ended June 30, 2007 (unaudited)
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the Six-Month
Periods
Ended
June 30, 2007 and 2006 (unaudited)
|
6
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
7
|
|
Item
2. Management's
Discussion and Analysis of Financial Condition and
Results
of Operations
|
16
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
22
|
|
Item
4. Controls
and Procedures
|
22
|
|
PART
II. OTHER INFORMATION
|
|
|
Item
1. Legal
Proceedings
|
22
|
|
Item
1A. Risk
Factors
|
22
|
|
Item
2. Unregistered
Sale of Securities and Use of proceeds
|
23
|
|
Item
3. Defaults
Upon Senior Securities
|
23
|
|
Item
4. Submission
of Matters to a Vote of Security Holders
|
23
|
|
Item
5. Other
Information
|
23
|
|
Item
6. Exhibits
|
|
|
(a)
Exhibits
|
24
|
|
Signatures
|
25
|
-
2
-
Communication Intelligence Corporation
and
Subsidiary
Condensed
Consolidated Balance Sheets
(In
thousands)
|
June
30
|
December
31
|
||||||
|
2007
|
2006
|
||||||
|
Assets
|
Unaudited
|
||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
867
|
$
|
727
|
|||
|
Accounts
receivable, net of allowances of $413 and $397 at June 30, 2007 and
December 31, respectively
|
467
|
487
|
|||||
|
Prepaid
expenses and other current assets
|
76
|
105
|
|||||
|
Total
current assets
|
1,410
|
1,319
|
|||||
|
Property
and equipment, net
|
89
|
140
|
|||||
|
Patents
|
3,717
|
3,906
|
|||||
|
Capitalized
software development costs
|
877
|
656
|
|||||
|
Deferred
financing costs (Note 5)
|
30
|
75
|
|||||
|
Other
assets
|
30
|
30
|
|||||
|
Total
assets
|
$
|
6,153
|
$
|
6,126
|
|||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Convertible
notes, net of unamortized fair value assigned to beneficial conversion
feature and warrants
of $91 and $228 at June 30, 2007 and December 31, 2006, respectively
(Note
4)
|
$
|
1,291
|
$
|
1,154
|
|||
|
Short-term
debt - including $450 to a related party, net of unamortized fair
value
assigned to warrants of $169 at June 30, 2007 (Note 5)
|
431
|
-
|
|||||
|
Accounts
payable
|
85
|
72
|
|||||
|
Accrued
compensation
|
274
|
236
|
|||||
|
Other
accrued liabilities
|
270
|
269
|
|||||
|
Deferred
revenue
|
507
|
404
|
|||||
|
Total
current liabilities
|
2,858
|
2,135
|
|||||
|
Long-term
debt - including $770 and $450 to a related party, net of unamortized
fair
value assigned to warrants of $446 and $266 at June 30, 2007 and
December
31, 2006, respectively (Note 5)
|
674
|
334
|
|||||
|
Minority
interest
|
68
|
73
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Stockholders'
equity:
|
|||||||
|
Preferred
stock, $.01 par value; 10,000 shares authorized; 0 outstanding at
June 30,
2007 and December 31, 2006, respectively
|
-
|
-
|
|||||
|
Common
stock, $.01 par value; 155,000 shares authorized; 107,557 shares
issued
and outstanding at June 30, 2007 and 125,000 shares authorized; 107,557
shares issued and outstanding at December 31, 2006
|
1,076
|
1,076
|
|||||
|
Additional
paid-in capital
|
91,115
|
90,497
|
|||||
|
Accumulated
deficit
|
(89,511
|
)
|
(87,861
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(127
|
)
|
(128
|
)
|
|||
|
Total
stockholders' equity
|
2,553
|
3,584
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
6,153
|
$
|
6,126
|
|||
The
accompanying notes form an integral part of these Condensed
Consolidated Financial Statements
-
3
-
Communication
Intelligence Corporation
and
Subsidiary
Condensed
Consolidated Statements of Operations
Unaudited
(In
thousands, except per share amounts)
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
|
June
30,
|
June
30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Revenues
|
|||||||||||||
|
Product
|
$
|
385
|
$
|
222
|
$
|
543
|
$
|
626
|
|||||
|
Maintenance
|
170
|
226
|
346
|
523
|
|||||||||
|
Total
Revenues
|
|
555
|
|
448
|
889
|
|
1,149
|
||||||
|
Operating
costs and expenses:
|
|||||||||||||
|
Cost
of sales
|
|||||||||||||
|
Product
|
132
|
6
|
162
|
50
|
|||||||||
|
Maintenance
|
30
|
23
|
58
|
46
|
|||||||||
|
Research
and development
|
131
|
143
|
260
|
426
|
|||||||||
|
Sales
and marketing
|
297
|
433
|
557
|
779
|
|||||||||
|
General
and administrative
|
523
|
655
|
998
|
1,158
|
|||||||||
|
Total
operating costs and expenses
|
1,113
|
1,260
|
2,035
|
2,459
|
|||||||||
|
Loss
from operations
|
(558
|
)
|
(812
|
)
|
(1,146
|
)
|
(1,310
|
)
|
|||||
|
Interest
and other income (expense), net
|
4
|
14
|
4
|
30
|
|||||||||
|
Interest
expense:
|
|||||||||||||
|
Related
party (Note 5)
|
(33
|
)
|
−
|
(49
|
)
|
−
|
|||||||
|
Other
(Notes 4 and 5)
|
(43
|
)
|
(26
|
)
|
(74
|
)
|
(56
|
)
|
|||||
|
Amortization
of loan discount and deferred financing:
|
|||||||||||||
|
Related
party (Note 5)
|
(74
|
)
|
−
|
(147
|
)
|
−
|
|||||||
|
Other
(Notes 4 and 5)
|
(141
|
)
|
(104
|
)
|
(243
|
)
|
(405
|
)
|
|||||
|
Minority
interest
|
2
|
3
|
5
|
5
|
|||||||||
|
Net
loss
|
$
|
(843
|
)
|
$
|
(925
|
)
|
$
|
(1,650
|
)
|
$
|
(1,736
|
)
|
|
|
Basic
and diluted loss per common share
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
107,557
|
107,552
|
107,557
|
107,199
|
|||||||||
The
accompanying notes form an integral part of these Condensed
Consolidated Financial Statements
-
4
-
Communication
Intelligence Corporation
and
Subsidiary
Consolidated
Statements of Changes in Stockholders' Equity
Unaudited
(In
thousands)
|
Shares
Outstanding
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
||||||||||||||
|
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
|
359
|
359
|
|||||||||||||||||
|
Stock
based employee compensation
|
24
|
24
|
|||||||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||
|
Net
loss
|
(807
|
)
|
(807
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
(3
|
)
|
(3
|
)
|
|||||||||||||||
|
Total
comprehensive loss
|
(810
|
)
|
|||||||||||||||||
|
Balances
as of March 31, 2007
|
107,557
|
|
1,076
|
|
90,880
|
|
(88,668
|
)
|
|
(131
|
)
|
|
3,157
|
||||||
|
Fair
value of warrants issued in connection with short-term
debt
|
187
|
187
|
|||||||||||||||||
|
Stock
based employee compensation
|
36
|
36
|
|||||||||||||||||
|
Adjustment
to the fair value of beneficial conversion feature associated with
the
convertible notes (Note 5)
|
12
|
12
|
|||||||||||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||
|
Net
loss
|
(843
|
)
|
(843
|
)
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
4
|
4
|
|||||||||||||||||
|
Total
comprehensive loss
|
(839
|
)
|
|||||||||||||||||
|
Balances
as of June 30, 2007
|
107,557
|
$
|
1,076
|
$
|
91,115
|
$
|
(89,511
|
)
|
$
|
(127
|
)
|
$
|
2,553
|
||||||
The
accompanying notes form an integral part of these Condensed
Consolidated Financial Statements
-
5
-
Communication
Intelligence Corporation
and
Subsidiary
Condensed
Consolidated Statements of Cash Flows
Unaudited
(In
thousands)
|
Six
Months Ended
June
30,
|
|||||||
|
2007
|
2006
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(1,650
|
)
|
$
|
(1,736
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used
for operating activities:
|
|||||||
|
Depreciation
and amortization
|
391
|
278
|
|||||
|
Amortization
of discount on convertible notes
|
149
|
306
|
|||||
|
Amortization
of discount on related party debt
|
197
|
||||||
|
Amortization
of deferred financing costs
|
45
|
100
|
|||||
|
Stock
based employee compensation
|
60
|
105
|
|||||
|
Stock
issued for services
|
-
|
6
|
|||||
|
Minority
interest
|
(5
|
) |
(5
|
)
|
|||
|
Provision
for doubtful accounts
|
16
|
-
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable, net
|
14
|
55
|
|||||
|
Prepaid
expenses and other current assets
|
29
|
16
|
|||||
|
Accounts
payable
|
13
|
73
|
|||||
|
Accrued
compensation
|
38
|
8
|
|||||
|
Other
accrued liabilities
|
-
|
(24
|
)
|
||||
|
Deferred
revenue
|
103
|
34
|
|||||
|
Net
cash used for operating activities
|
(600
|
)
|
(784
|
)
|
|||
|
Cash
flows from investing activities:
Acquisition
of property and equipment
|
(3
|
)
|
(85
|
)
|
|||
|
Capitalized
software development costs
|
(373
|
)
|
(277
|
)
|
|||
|
Net
cash used for investing activities
|
(376
|
)
|
(362
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from issuance of long-term debt
|
1,120
|
-
|
|||||
|
Principal
payments on capital lease obligations
|
(4
|
)
|
(5
|
)
|
|||
|
Net
cash provided by (used for) financing activities
|
1,116
|
(5
|
)
|
||||
|
Effect
of exchange rate changes on cash
|
-
|
-
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
140
|
(1,151
|
)
|
||||
|
Cash
and cash equivalents at beginning of period
|
727
|
2,849
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
867
|
$
|
1,698
|
|||
Supplemental
Disclosure of Non Cash Financing Activities
|
Convertible
Notes converted to common stock
|
$
|
−
|
$
|
460
|
|||
|
Fair
value of beneficial conversion feature and warrants
|
$
|
546
|
$
|
−
|
|||
|
Supplemental
disclosure of cash flow information
|
|||||||
|
Interest
paid
|
$
|
82
|
$
|
26
|
The
accompanying notes form an integral part of these Condensed
Consolidated Financial Statements
-
6
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1. Interim
financial statements and basis of presentation
1. Nature
of business
The
financial information contained herein should be read in conjunction with the
Company's consolidated audited financial statements and notes thereto included
in its Annual Report on Form 10-K for the year ended December 31, 2006.
The
accompanying unaudited condensed consolidated financial statements of
Communication Intelligence Corporation and its subsidiary (the “Company” or
“CIC”) have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the
information and footnotes required by accounting principles generally accepted
in the United States of America (“GAAP”) for complete consolidated financial
statements. In the opinion of management, the unaudited condensed consolidated
financial statements included in this quarterly report reflect all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of its financial position at the dates
presented and the Company’s results of operations and cash flows for the periods
presented. The Company’s interim results are not necessarily indicative of the
results to be expected for the entire year.
The
Company'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).
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.
The
Company’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.
Going
Concern
The
accompanying condensed 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 June 30,
2007, the Company’s accumulated deficit was approximately $89,500. These factors
raise substantial doubt about the Company’s ability to continue as a going
concern. The Company has primarily funded these losses through the sale of
debt
and equity securities.
In
November 2004, the Company consummated a financing in the form of convertible
notes aggregating $3,885, net of expenses (See Note 4). The remaining
outstanding debt from the November 2004 financing of $1,382 comes due in October
2007 if not earlier converted.
The
Company has consummated three financings since November 2006. In November 2006
the Company consummated a financing in the form of a note aggregating $600.
In
March 2007 the Company consummated a second financing in the form a note
aggregating $720, receiving $670 by March 31, 2007 and
-
7
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1. Interim
financial statements and basis of presentation
1. Nature
of business (continued)
the
remaining $50 on April 1, 2007. In June 2007 the Company consummated a third
financing in the form of a note aggregating $400 (See Note 5).
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.
Fair
value of financial instruments
The
carrying amounts of the Company's financial instruments, including cash and
cash
equivalents, accounts receivable, accounts payable, short-term debt and
long-term debt approximate fair value due to their relatively short maturities.
The fair value of the long-term debt - related party is not practicable to
estimate, due to the related party nature of the underlying
transaction.
Recent
Pronouncements
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
was 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.
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 three and six month periods ended June 30, 2007.
2. Accounts
receivable and revenue concentration
As
of
June 30, 2007 two customers accounted for 49% of net accounts receivable.
Customer A accounted for 20%, and Customer B accounted for 29%. As of December
31, 2006 four
customers accounted for 69% of net accounts receivable. Customer
A accounted for 11%, Customer B accounted for 14%, Customer C accounted for
17%
and Customer D accounted for 27%.
Two
customers accounted for 43% of total revenues for the three months ended June
30, 2007. Customer A accounted for 10%, and Customer B accounted for 33%. For
the three months ended June 30, 2006, three customers accounted for 54% of
total
revenues. Customer A accounted for 12%, Customer B accounted for 14%, and
Customer C accounted for 28% of total revenue.
For
the
six months ended June 30, 2007 two customers accounted for 44% of total revenue.
Customer A accounted for 12%, and Customer B accounted for 32% of total revenue.
For the six months ended June 30,
-
8
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1. Interim
financial statements and basis of presentation
2. Accounts
receivable and revenue concentration (continued)
2006,
2
customers accounted for 38% of total revenue. Customer A accounted for 11%
and
Customer B accounted for 27% of total revenue.
| 3. |
Patents
|
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 follows SFAS 144 in response to changes in industry and
market conditions that affect its patents. The Company then determines if an
impairment of its assets has occurred. The Company periodically reassesses
the
lives of its patents and tests for impairment in order to determine whether
the
book value of each patent exceeds its fair value. Fair value is determined
by
estimating future cash flows from the products that are and will be protected
by
the patents and considering the additional factors listed in Critical Accounting
Policies.
Management
recognizes that revenues have fluctuated based on comparable prior periods
and
may continue to fluctuate based upon historical experience of the time involved
to close large sales transactions. Management completed an analysis of its
patents as of December 31, 2006, and concluded that no impairment of the
carrying value of the patents existed. The Company believes that no events
or
circumstances which would affect that conclusion have changed through June
30,
2007 therefore, no impairment in the carrying values of the patents exists
at
June 30, 2007.
Amortization
of patent costs was $95 and $189 for each of the three and six month periods
ended June 30, 2007 and 2006, respectively.
| 4. |
Convertible
Notes
|
The
Company has convertible notes with an outstanding balance of $1,382 at June
30,
2007. During the six month period ended June 30, 2007, the Company amortized
to
interest expense approximately $194 of the loan discount and deferred financing
costs. The $194 included approximately $12 of additional discount due to the
note holders as the result of the exercise price of new warrants issued to
a
related party causing a reduction in the conversion price (see Note 5). The
balance due under the convertible notes is shown net of the remaining $91 of
unamortized discount on the accompanying consolidated balance sheet. There
were
no note conversions during the three and six month periods ended June 30, 2007.
If the remaining aggregate principal amount owing under the notes is converted,
the Company will issue 3,013 shares of its common stock, which includes an
additional 20 shares issuable as the result of the reduction in the conversion
price as referenced above. If the notes are not converted, all remaining
principal and accrued but unpaid interest will be due October 28, 2007. The
Company may pay accrued interest in cash or in shares of Company common stock,
issued at the market price for the common stock calculated prior to the interest
payment. The Company has not paid and does not intend to pay accrued interest
with shares of its common stock.
Warrants
to purchase 4,850 shares of common stock were issued in connection with the
convertible debt. The placement agent received 1,218 warrants to purchase common
stock and the note holders received warrants to purchase 3,632 shares of common
stock. The warrants expire on October 28, 2009. At June 30, 2007, there are
warrants outstanding to purchase 4,850 shares of common stock at a weighted
average exercise price of $0.49 per share, adjusted for the reduction in
conversion price discussed above. 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. The
placement agent will
be
-
9
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1. Interim
financial statements and basis of presentation
4. Convertible
Notes (continued)
paid
approximately $28 in the aggregate if all of the investor warrants are
exercised. The Company will receive additional proceeds of approximately $1,831,
adjusted for the change in warrant exercise price, if all of the investor
warrants are exercised.
If
the
Company fails to generate enough revenues and operating profits to increase
the
value of its shares and thereby prompting conversion or generate enough cash
to
pay off the notes when due, the Company will need to seek additional financing.
If
the
Company is unable to obtain additional financing when needed, it may be required
to materially change its operations, which could adversely affect its results
from operations and stockholder value.
Interest
expense related to convertible debt, included in interest expense other, for
the
three and six month periods ended June 30, 2007 was $127 and $242. For the
three
and six month periods ended June 30, 2006, interest expense related to
convertible debt, included in interest expense other, was $130 and
$461.
Amortization
of loan discount and deferred financing expense related to the convertible
debt,
for the three and six month periods ended June 30, 2007 was $103 and $194,
including $12 for re-pricing. For the three and six month periods ended June
30,
2006, amortization of loan discount and deferred financing expense related
to
the convertible debt was $130 and $405.
| 5. |
Long-term
Debt
|
Current
portion
In
November
2006, the Company entered into a $600 long-term debt agreement ( the “2006
Purchase Agreement”), of
which
$450 was borrowed from a stockholder of the Company owning approximately 7%
of
the Company’s outstanding shares of common stock(an “Affiliated Stockholder”)
and the remaining $150 from an unrelated third party.
The
notes
are due May 17, 2008, and bear interest at the rate of 15% per annum payable
quarterly in cash. In connection with the notes, the lenders were granted
warrants to purchase 3,111 shares of common stock. The warrants have a term
of
three years, commencing on June 30, 2007, and an exercise price of $0.51. The
warrants include piggyback registration rights for the underlying shares to
participate in certain future registrations of the Company’s common
stock.
Long-term
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. The warrants have
a
three year life, become exercisable on June 30, 2007, and have an exercise
price
of $0.51. The warrants include piggyback registration rights for the underlying
shares to participate in any future registrations of the Company’s common stock.
-
10
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1.Interim
financial statements and basis of presentation
5. Long-term
Debt (continued)
Long
term (continued)
On
March
30, 2007, and April 1, 2007 the Company borrowed $670 and $50 under the February
2007 Purchase Agreement of which $370 was borrowed from the Affiliated
Stockholder and the remaining $350 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 long-term debt, related party, in the balance sheet and will be
amortized to interest expense over the life of the loan. The relative fair
value
ascribed to the warrants was estimated on the commitment date using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 4.68%; 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 August 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 one million dollars ($1,000) from
an
Affiliated Stockholder. As of June 30, 2007, the Company had borrowed $400
under
this facility. The Company used such proceeds, and expects to use the remaining
proceeds of the financing for additional working capital. Pursuant to the June
2007 Purchase Agreement, upon each draw, the Company is required to issue one
or
more notes, payable within eighteen months after issuance, bearing interest
at
the rate of fifteen percent (15%) per annum payable quarterly in cash. The
Company will be 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 will be determined by the volume weighted average
price of the common stock for the thirty business days preceding the date of
the
applicable draw. The warrants will include piggyback registration rights for
the
underlying shares to participate in certain future registrations of the
Company’s common stock.
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 long-term debt, related party,
in
the balance sheet and will be amortized to interest expense over the life of
the
loan. The relative fair value ascribed to the warrants was estimated on the
commitment date using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 4.90%; 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. No commitment fee is required
to
keep the remaining $600 of funds available.
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 $12 of additional
interest expense during the three and six month periods ended June 30,
2007.
If all
of the $1,382 remaining notes are converted to common stock, the Company will
issue an additional 20 shares due to this price reset. The weighted average
exercise price of the warrants associated with the convertible debt was reduced
from $0.50 to $0.49, resulting in a reduction in gross proceeds if all of the
warrants are exercised of $18.
-
11
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1. Interim
financial statements and basis of presentation
5. Long-term
Debt (continued)
Long
term (continued)
Interest
expense related to the note and warrant purchase agreements for the three and
six month periods ended June 30, 2007, was $164 and $271, respectively, which
includes related party interest of $107 and $196, respectively. Amortization
of
debt discount included in interest expense for the three and six month periods
ended June 30, 2007 was $113 and $197, respectively, which includes amortization
of related party discount of $74 and $147, respectively.
| 6. |
Net
(loss) per share
|
The
Company calculates net loss per share under the provisions of Statement of
Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). SFAS
128 requires the disclosure of both basic net loss per share, which is based
on
the weighted average number of shares outstanding, and when applicable, diluted
income per share, which is based on the weighted average number of shares and
dilutive potential shares outstanding. For the three and six month periods
ended
June 30, 2007, 5,641 shares of common stock subject to outstanding options,
3,013 shares issuable upon the conversion of the convertible notes and 14,862
warrants were excluded from the calculation of dilutive earnings per share
because the exercise or conversion of such options and warrants would be
anti-dilutive. For the three and six month periods ended June 30, 2006, 6,401
shares of common stock subject to outstanding options, 2,993 shares issuable
upon the conversion of the convertible notes and 4,850 warrants were excluded
from the calculation of dilutive earnings per share because the exercise or
conversion of such options and warrants would be anti-dilutive.
| 7. |
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 pursuant to Individual
Plans. 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. Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
“Share-Based
Payment”
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 six months
ended June 30, 2007 and 2006 was approximately 26.68% and 26.77%, respectively,
based on historical data.
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 were no such tax
benefits during the three and six month periods ending June 30, 2007 and 2006.
-
12
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1. Interim
financial statements and basis of presentation
7. Common
Stock Options (continued)
Valuation
and Expense Information under SFAS No. 123(R):
The
weighted-average fair value of stock-based compensation is based on the single
option valuation approach. Forfeitures are estimated and it is assumed no
dividends will be declared. The estimated fair value of stock-based compensation
awards to employees is amortized using the accrual method over the vesting
period of the options. The fair value calculations are based on the following
assumptions:
|
Three
and Six Months Ended
June
30, 2007
|
Three
and Six Months Ended
June
30, 2006
|
|||
|
Risk
free interest rate
|
3.65%
- 5.11%
|
3.65%
- 5.11%
|
||
|
Expected
life (years)
|
3.19
-7.00
|
3.66
-7.00
|
||
|
Expected
volatility
|
51.68%
- 104.57%
|
82.1%
|
||
|
Expected
dividends
|
None
|
None
|
The
following table summarizes the allocation of stock-based compensation expense
related to stock option grants under SFAS 123(R) included in operating expenses
for the three and six months ended June 30, 2007 and 2006. There were 325 stock
options granted during the three and six months ended June 30, 2007 and no
options were exercised. There were 675 and 844 stock options granted during
the
three and six months ended June 30, 2006, and 19 options were exercised by
a
consultant that were issued for services rendered.
|
Three
Months Ended June 30,
|
Six
months Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Research
and development
|
$
|
3
|
$
|
9
|
$
|
6
|
$
|
34
|
|||||
|
Sales
and marketing
|
19
|
12
|
37
|
38
|
|||||||||
|
General
and administrative
|
5
|
7
|
8
|
11
|
|||||||||
|
Director
options
|
9
|
21
|
9
|
21
|
|||||||||
|
Stock-based
compensation expense
|
$
|
36
|
$
|
49
|
$
|
60
|
$
|
104
|
|||||
-
13
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1. Interim
financial statements and basis of presentation
7. Common
Stock Options (continued)
A
summary
of option activity under the Company’s plans as of June 30, 2007 and 2006 is as
follows:
|
As
of June 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
||||||||||||||||||||||||||||||
|
Options
|
Shares
(000)
|
Weighted
Average Exercise Price
|
Weighted
average Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
Shares
(000)
|
Weighted
Average Exercise Price
|
Weighted
average Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
|||||||||||||||||||||||
|
Outstanding
at January 1,
|
5,893
|
$
|
0.69
|
8,591
|
$
|
0.75
|
|||||||||||||||||||||||||
|
Granted
|
325
|
$
|
0.22
|
844
|
$
|
0.58
|
|||||||||||||||||||||||||
|
Exercised
|
−
|
(19
|
)
|
$
|
0.42
|
||||||||||||||||||||||||||
|
Forfeited
or expired
|
(577
|
)
|
$
|
0.95
|
(3,015
|
)
|
$
|
0.77
|
|||||||||||||||||||||||
|
Outstanding
at June 30
|
5,641
|
$
|
0.63
|
4.79
|
$
|
−
|
6,401
|
$
|
0.73
|
5.59
|
$−
|
||||||||||||||||||||
|
Vested
and expected to vest at June 30
|
5,641
|
$
|
0.63
|
4.94
|
$
|
−
|
5,537
|
$
|
0.77
|
5.44
|
$−
|
||||||||||||||||||||
|
Exercisable
at June 30
|
4,978
|
$
|
0.68
|
4.78
|
$
|
−
|
5,537
|
$
|
0.77
|
5.44
|
$−
|
||||||||||||||||||||
The
following tables summarize significant ranges of outstanding and exercisable
options as of June 30, 2007:
|
As
of June 30, 2007
|
||||||||||||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life(in years)
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||
|
$
0.14 - $0.50
|
2,059
|
5.5
|
$
|
0.34
|
1,442
|
$
|
0.36
|
|||||||||
|
0.51
- 1.00
|
3,341
|
4.8
|
$
|
0.73
|
3,295
|
$
|
0.73
|
|||||||||
|
1.01
- 2.00
|
176
|
2.5
|
$
|
1.31
|
176
|
$
|
1.31
|
|||||||||
|
2.01
- 3.00
|
50
|
0.3
|
$
|
3.00
|
50
|
$
|
3.00
|
|||||||||
|
3.01
- 7.50
|
15
|
2.9
|
$
|
3.56
|
15
|
$
|
3.56
|
|||||||||
|
5,641
|
4.8
|
$
|
0.63
|
4,978
|
$
|
0.68
|
||||||||||
-
14
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item1. Interim
financial statements and basis of presentation
7. Common
Stock Options (continued)
The
following tables summarize significant ranges of outstanding and exercisable
options as of June 30, 2006:
|
As
of June 30, 2006
|
||||||||||||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life(in years)
|
Weighted
Average Exercise Price
|
Number
Outstanding
|
Weighted
Average Exercise Price
|
|||||||||||
|
$
0.14 - $0.50
|
2,111
|
6.0
|
$
|
0.40
|
1,397
|
$
|
0.39
|
|||||||||
|
0.51
- 1.00
|
3,636
|
5.7
|
$
|
0.73
|
3,486
|
$
|
0.74
|
|||||||||
|
1.01
- 2.00
|
562
|
4.1
|
$
|
1.51
|
562
|
$
|
1.51
|
|||||||||
|
2.01
- 3.00
|
50
|
1.3
|
$
|
3.00
|
50
|
$
|
3.00
|
|||||||||
|
3.01
- 7.50
|
42
|
2.0
|
$
|
3.42
|
42
|
$
|
3.42
|
|||||||||
|
6,401
|
5.6
|
$
|
0.73
|
5,537
|
$
|
0.77
|
||||||||||
There
were 325 options granted during the three and six months ended June 30, 2007.
The per share weighted average fair value of options granted during the three
and six months ended June 30, 2007 was $0.14.
A
summary
of the status of the Company’s non-vested shares as of June 30, 2007 is as
follows:
|
Non-vested
Shares
|
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
|||||
|
Non-vested
at January 1, 2007
|
827
|
$
|
0.22
|
||||
|
Granted
|
325
|
$
|
0.22
|
||||
|
Vested
|
(489
|
)
|
$
|
0.32
|
|||
|
Non-vested
at June 30, 2007
|
663
|
$
|
0.29
|
||||
As
of
June 30, 2007, there was $54 of total unrecognized compensation cost related
to
non-vested share-based compensation arrangements granted under the plans. The
unrecognized compensation cost is expected to be realized over a weighted
average period of 3.2 years.
8. Segment
Information
The
Company identifies reportable revenue in one segment, handwriting recognition.
Handwriting recognition software is an aggregate of two revenue categories;
transaction and communication enabling technologies (“eSignature”) and natural
input technologies (“natural input”). All handwriting recognition software is
developed around the Company’s core technology. All sales represent sales to
external customers.
-
15
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Forward
Looking Statements
Certain
statements contained in this quarterly report on Form 10-Q, including, without
limitation, statements containing the words “believes”, “anticipates”, “hopes”,
“intends”, “expects”, and other words of similar import, constitute “forward
looking” statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements involve known and unknown risks,
uncertainties and other factors which may cause actual events to differ
materially from expectations. Such factors include those set forth in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2006,
including the following:
| · |
Technological,
engineering, manufacturing, quality control or other circumstances
that
could delay the sale or shipment of products;
|
| · |
Economic,
business, market and competitive conditions in the software industry
and
technological innovations that could affect the Company’s
business;
|
| · |
The
Company’s inability to protect its trade secrets or other proprietary
rights, operate without infringing upon the proprietary rights of
others
and prevent others from infringing on the proprietary rights of the
Company; and
|
| · |
General
economic and business conditions and the availability of sufficient
financing.
|
Except
as
otherwise required by applicable laws, the Company undertakes no obligation
to
publicly update or revise any forward-looking statements, as a result of new
information, future events or otherwise.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis should be read in conjunction with the
Company’s unaudited condensed consolidated financial statements and notes
thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” set forth in the Company’s Annual report on Form 10-K for the fiscal
year ended December 31, 2006.
Overview
The
Company was incorporated in Delaware in October 1986. Except for 2004, in each
year since its inception the Company has incurred losses. For the five-year
period ended December 31, 2006, net losses aggregated approximately $11,600
and
at December 31, 2006 the Company's accumulated deficit was approximately
$87,900. At June 30, 2007, the Company’s accumulated deficit was approximately
$89,500.
Total
revenues for the quarter ended June 30, 2007 increased 24%, or $107, compared
to
the prior year period and $221, or 66%, over the first quarter of 2007. Total
revenues for the six months ended June 30, 2007, are approximately 23%, or
$260
less than total revenues for the corresponding period in the prior year
period.
eSignature
revenue has developed slower than expected however, the Company anticipates
that
the substantive sales related progress we have made, with targeted customers,
represents the revenue potential to achieve profitability this year. For
instance, key early adopter customers have now fully and successfully deployed
their initial eSignature installations and are now actively functioning as
reference accounts and engaging the Company in follow-on deployments. This
is
having a positive impact sales activity with other end users. More importantly,
it is driving license and teaming agreements with leading enterprise software
solutions providers, who afford the Company the market access and sales coverage
necessary to accelerate sustained sales growth. The timing of orders remains
challenging and is still somewhat unpredictable; however, the Company believes
it has built a strong pipeline that continues to grow. The Company believes
the
fundamentals are in place, the momentum is building and its efforts together
with market adoption are reaching the critical mass required to achieve near
term and sustained sales growth and profitability.
-
16
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
The
loss
from operations for the six months ended June 30, 2007 was $1,146, compared
with
a loss from operations of $1,310 in the prior year period. The Company continues
to control its expenses, as evidenced by the 17% reduction in operating costs
over the current six months compared to the corresponding six months of the
prior year. The reduction in expense is more fully discussed in the results
of
operations below.
The
Company negotiated an additional $1,120 in credit facilities during the current
six months ended June 30, 2007 to aid in funding its operations. There is
currently $600 in available credit. Interest expense will increase due to the
increase in debt financing and the amortization of the fair value assigned
to
warrants issued with the new debt. (See Note 5 to the Condensed Consolidated
Financial Statements in this Form 10-Q).
Critical
Accounting Policies and Estimates
Refer
to
Item 7, “Management Discussion and Analysis of Financial Condition and Results
of Operations” in the Company’s 2006 Form 10-K.
Results
of Operations
Revenues
Total
revenue for
the
three months ended June 30, 2007 of $555 increased $107, or 24% compared to
revenues of $448 in the corresponding prior year period. Product
revenue reflects a 63% increase in eSignature and a 37% increase in natural
input revenues compared to the prior year period. The increase is primarily
due
to the relative size of orders between the comparable quarters and higher
reported royalties from a major natural input/Jot customer. Maintenance revenue
decreased 25%, or $56, for the three months ended June 30, 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.
For
the
six month period ended June 30, 2007, total revenues declined $260, or 23%,
compared to total revenues of $1,149 in the corresponding prior year period.
Product revenues decreased 13% or $83, and maintenance revenues decreased 34%,
or $177, compared to the corresponding prior year period. The reduction in
revenue reflects reduced royalties from our Asia Pacific channel partner and
lower reported royalties from a major natural input/Jot customer compared to
the
six month period of the prior year. Maintenance revenue decreased 34% or $177
for the six months ended June 30, 2007 compared to the corresponding six month
period of the prior year... The decrease was primarily due to the non-renewal
of
a maintenance contract discussed above for the three month period.
Cost
of Sales
Cost
of
sales primarily includes amortization of new and previously capitalized software
development costs associated with the Company’s product and maintenance
revenues. Cost of sales increased $133, or 459%, to $162 for the three months
ended June 30, 2007, compared to $29 in the prior year period. The increase
is
due to third party tablet sales and engineering labor for product development
work completed in the second quarter. In addition, amortization of previously
capitalized software development costs increased $29 to $94, compared to $65
in
the prior year period.
For
the
six month period ended June 30, 2007, cost of sales increased $124 or 129%,
compared to $96 in the prior year period. The increase over the comparable
six
month period is due to the reasons stated above. Cost of sales is expected
to
increase near term as capitalized engineering software development for new
and
existing products is completed and amortization begins.
-
17
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Operating
expenses
Research
and Development Expenses
Research
and development expenses consist primarily of salaries and related costs,
outside engineering, maintenance, and allocated facilities expenses. Research
and development expenses decreased approximately 8%, or $12, for the three
month
period ended June 30, 2007 compared to the prior year period. There were no
significant factors in the $12 decrease compared to the prior year period.
Total
costs, before capitalization of software development and other
allocations, were $367 for the three month period ended June 30, 2007
compared to $405 in the prior year period.
For
the
six months ended June 30, 2007, research and development expenses decreased
$166, or 39%, compared to the prior year period. The decrease is primarily
due
to reduced salaries and related expenses, resulting from the a cut back of
two
engineers and an increase in the amount of software development costs
capitalized compared to the prior year period.
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 at current levels.
Sales
and Marketing Expenses
Sales
and
marketing expenses decreased 31% or $136, for the three month period ended
June
30, 2007 compared to the prior year period. The decrease was attributable to
reductions in salary and related expenses, including stock based compensation,
resulting from the reduction of two sales persons and decreases in recruiting,
advertising and marketing programs.
For
the
six month period ended June 30, 2007, sales and marketing expense decreased
$222, or 28%, compared to the prior year period. The decrease is due primarily
to the reasons discussed above for the change in the three month
period.
The
Company expects sales and marketing expenses will increase above the current
levels in the near term due to planned increases in sales
personnel.
General
and Administrative Expenses
General
and administrative expenses decreased 20%, or $132, for the three month period
ended June 30, 2007, compared to the prior year period. The decrease was
primarily due to reduced professional services expense and reductions in annual
insurance premiums compared to the prior year period. These decreases were
offset by an increase in the Company’s bad debt provision at June 30, 2007 of
$5.
For
the
six month period ended June 30, 2007, general and administrative expenses
decreased $160 or 14%, compared to the prior period. The decrease is primarily
due to the reasons discussed above for the change in the three month
period.
The
Company anticipates that general and administrative expense will remain below
the level of expense incurred in the prior year due to lower professional
services and insurance expenses.
Interest
income and other income, net
Interest
income and other income
(expense), net, decreased $10 and $26 to $4, for the three and six month periods
ended June 30, 2007, from income of $14 and $30, respectively, in the prior
year
periods. The decrease is due to the reduced cash balance during the current
periods compared to the prior year periods.
Interest
expense
Interest
expense increased 192%, or $50, to $76 for the three months ended June 30,
2007,
compared to $26 in the prior year period. The increase was primarily due to
the
increase in debt financing completed in the first half of the current year
and
late in the prior year. (See Note 4 and 5 in the Condensed Consolidated
Financial Statements of this Form 10-Q).
-
18
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Amortization
of loan discount, which includes warrant and beneficial conversion feature
costs, deferred financing costs, associated with the convertible notes and
note
and warrant purchase agreements increased 107% or $111 for the three month
period ended June 30, 2007 compared to $104 in the prior year period and
decreased $15 for the six month period ended June 30, 2007 as compared to $405
in the prior year period. The increase was primarily due to the increase in
borrowings in 2007 The Company will amortize an additional $121 to interest
expense over the remaining life of the convertible notes or sooner if the notes
are converted before the due date. In addition the Company will amortize an
additional $615 of warrant cost related to the note and warrant purchase
agreements to interest expense over the remaining life of the
notes.
Liquidity
and Capital Resources
At
June
30, 2007, cash and cash equivalents totaled $867 compared to cash and cash
equivalents of $727 at December 31, 2006. The increase in cash was primarily
due
to cash provided from financing activities of $1,120. The increase was offset
by
$600 used for operating activities, capitalization of software development
costs
of $373, principal payments on capital lease obligations of $4 and the
acquisition of property and equipment amounting to $3. Total current assets
were
$1,410 at June 30, 2007, compared to $1,319 at December 31, 2006. As of June
30,
2007, the Company's principal sources of funds included its cash and cash
equivalents aggregating $867.
Accounts
receivable decreased $4 over the six month period ended June 30, 2007, compared
to the December 31, 2006 balance, due primarily to improved collections during
the current three months ended June 30, 2007 of billed receivables.
The
Company expects the development of the eSignature market ultimately will result
in more consistent revenue on a quarter to quarter basis and, therefore, less
fluctuation in accounts receivable from quarter to quarter.
Prepaid
expenses and other current assets decreased by $29 over the six month period
ended June 30, 2007, compared to December 31, 2006, due primarily to expensing
the prepayment fees for the Financial Services Technology Summit that was held
in April 2007. Annual fees on maintenance and support costs added to prepaid
expenses over the six month period ended June 30, 2007 were approximately equal
to the quarterly amortization amounts.
Accounts
payable increased $13 over the six months ended June 30, 2007, compared to
December 31, 2006, due to professional fees related to the printing and mailing
expense associated with the Company’s annual shareholders meeting. Accounts
payable balances typically increase in the second and fourth quarters when
the
insurance and annual maintenance and support fees are incurred. Materials used
in cost of sales may impact accounts payable depending on the amount of third
party hardware sold as part of the software solution. Accrued compensation
increased $38 over the six months ended June 30, 2007, compared to the prior
December 31, 2006 balance. The increase is due primarily to the salary deferral
by employees in an effort to ease the cash constraints on the Company. The
accrued compensation balance may fluctuate due to increases or decreases in
the
number of personnel and utilization of or additional accruals to the accrued
vacation balance.
Total
current liabilities were $2,858 at June 30, 2007, compared to $2,135 at December
31, 2006. The increase is primarily due to the classification of $600 related
party debt, net of the related unamortized fair value assigned to the warrants,
due in May 2008 from long to short-term debt.
Deferred
revenue, totaling $507 at June 30, 2007, compared to $404 at December 31, 2006,
primarily reflects advance payments for maintenance fees from the Company's
licensees that are generally recognized as revenue by the Company when all
obligations are met or over the term of the maintenance agreement, whichever
is
longer. Deferred revenue is recorded when the Company receives payment from
its
customers.
In
November 2006, the Company entered into a $600 long-term debt agreement ( the
“2006 Purchase Agreement”), of which $450 was borrowed from a stockholder of the
Company owning approximately 7% of the Company’s outstanding shares of common
stock (an “Affiliated Stockholder”) and the remaining $150 from an unrelated
third party.
-
19
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
The
notes
are due May 17, 2008, and bear interest at the rate of 15% per annum payable
quarterly in cash. In connection with the notes, the lenders were granted
warrants to purchase 3,111 shares of common stock. The warrants have a term
of
three years, commencing on June 30, 2007, and an exercise price of $0.51. The
warrants include piggyback registration rights for the underlying shares to
participate in certain future registrations of the Company’s common
stock.
In
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. The warrants have
a
three year life commencing June 30, 2007 and become exercisable on that date.
The warrants have an exercise price of $0.51. The warrants include piggyback
registration rights for the underlying shares to participate in any future
registrations of the Company’s common stock.
On
March
30, 2007, and April 1, 2007 the Company borrowed $670 and $50 under the February
2007 Purchase Agreement of which $350 was borrowed from the Affiliated
Stockholder and the remaining $370 from unrelated third parties. The proceeds
were used for working capital purposes. The Company has ascribed a value of
$359
to the 3,474 warrants, issued as part of this borrowing, which is recorded
as a
discount to long-term debt, related party, in the balance sheet and will be
amortized to interest expense over the life of the loan. The relative fair
value
ascribed to the warrants was estimated on the commitment date using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 4.68%; 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 August 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 one million dollars ($1,000). As
of
June 30, 2007, $400 had been borrowed under this facility. The Company used
such
proceeds and expects to use future proceeds of the financing for additional
working capital. Pursuant to the June 2007 Purchase Agreement, upon each draw,
the Company is required to issue one or more notes, payable within eighteen
months after issuance, bearing interest at the rate of fifteen percent (15%)
per
annum payable quarterly in cash. The Company, upon drawing on the facility,
is
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
will
be determined by the volume weighted average price of the common stock for
the
thirty business days preceding the date of the applicable draw. The warrants
will include piggyback registration rights for the underlying shares to
participate in certain future registrations of the Company’s common stock.
The
June
2007 Purchase Agreement required the Company to draw $400 of the funds upon
signing. Applying the formula described above, as of June 30, 2007, the Company
has 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 long-term debt,
related party, in the balance sheet and will be amortized to interest expense
over the life of the loan. The relative fair value ascribed to the warrants
was
estimated on the commitment date using the Black-Scholes pricing model with
the
following assumptions: risk-free interest rate of 4.90%; 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. No commitment
fee
is required to keep the remaining $600 of funds available.
-
20
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
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. 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 $12 of additional interest expense
during the three and six month periods ended June 30, 2007. If all of the $1,382
remaining notes are converted to common stock, the Company will issue an
additional 20 shares due to this price reset. The weighted average exercise
price of the warrants associated with the convertible debt was reduced from
$0.50 to $0.49, resulting in a reduction in gross proceeds if all of the
warrants are exercised of $18.
Interest
expense related to the note and warrant purchase agreements for the three and
six month periods ended June 30, 2007, was $164 and $271, respectively, which
includes related party interest of $107 and $196, respectively. Amortization
of
debt discount included in interest expense for the three and six month periods
ended June 30, 2007 was $113 and $197, respectively, which includes amortization
of related party discount of $74 and $147, respectively.
The
Company has the following material commitments as of June, 2007:
|
Payments
due by period
|
|||||||||||||||||||||||||
| Contractual obligations |
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
|||||||||||||||||
|
Short-term
debt (1)
|
$
|
1,382
|
$
|
1,382
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||||
|
Short-term
debt related party (2)
|
600
|
600
|
|||||||||||||||||||||||
|
Long-term
debt related party (3)
|
1,120
|
-
|
1,120
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Operating
lease commitments (4)
|
1,184
|
128
|
264
|
272
|
280
|
240
|
-
|
||||||||||||||||||
|
Total
contractual cash obligations
|
$
|
4,286
|
$
|
1,510
|
$
|
1,984
|
$
|
272
|
$
|
280
|
$
|
240
|
$
|
-
|
|||||||||||
| 1. |
Short-term
debt reported on the balance sheet is net of approximately $91 in
discounts representing the fair value of warrants issued to the investors
and the beneficial conversion feature associated with the convertible
notes.
|
| 2. |
Short-term
debt related party reported on the balance sheet is net of approximately
$169 in discounts representing the fair value of warrants issued
to the
investors.
|
| 3. |
Long-term
debt reported on the balance sheet is net of approximately $446 in
discounts representing the fair value of warrants issued to the
investors.
|
| 4. |
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
increases approximately 3% per annum over the term of the lease,
which
expires on October 31, 2011.
|
The
Company has suffered recurring losses from operations that raise a substantial
doubt about its ability to continue as a going concern. There can be no
assurance that the Company will have adequate capital resources to fund planned
operations or that any additional funds will be available to it when needed,
or
if available, will be available on favorable terms or in amounts required by
it.
If the Company is unable to obtain adequate capital resources to fund
operations, it may be required to delay, scale back or eliminate some or all
of
its operations, which may have a material adverse effect on its business,
results of operations and ability to operate as a going concern. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
-
21
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Risk
The
Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase. The Company attempts to limit this exposure
by
investing primarily in short term securities. The Company did not enter into
any
short-term security investments during the three and six month periods ended
June 30, 2007.
Foreign
Currency Risk
From
time
to time, the Company makes certain capital equipment or other purchases
denominated in foreign currencies. As a result, the Company’s cash flows and
earnings are exposed to fluctuations in interest rates and foreign currency
exchange rates. The Company attempts to limit these exposures through
operational strategies and generally has not hedged currency exposures. During
the three and six month periods ended June 30, 2007 and 2006, foreign currency
translation gains and losses were insignificant.
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, price changes that are unrelated or
disproportionate to the operating performance of such companies. The trading
price of the Company's common stock could be subject to wide fluctuations in
response to, among other factors, quarter-to-quarter variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, announcements of new strategic relationships by
the
Company or its competitors, general conditions in the computer industry or
the
global economy in general, or market volatility unrelated to the Company's
business and operating results.
Item
4. Controls and Procedures
Under
the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14(c) as
of the
end of the period covered by this quarterly report.
Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
have
concluded that these disclosure controls and procedures are effective.
There
were no significant changes in the Company’s internal controls or in other
factors that could significantly affect internal controls subsequent to the
date
of their evaluation.
Part
II-Other Information
Item
1. Legal
Proceedings
None
Item
1A. Risk
Factors
For
the
three and six months ended June 30, 2007, there were no material changes in
the
risk factors discussed in the Company’s annual report on From 10-K.
-
22
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
Item
2. Unregistered
Sale of Securities and Use of Proceeds
Information
with respect to Item 2 is incorporated by reference to Exhibits 10.36, 10.37,
10.38, 10.39, and 10.40 of this Form 10-Q.
The
securities referenced in the above Exhibits were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act
of
1933, as amended (the “Securities Act”), for transactions by an issuer not
involving any public offering. Each investor was an accredited investor, as
such
term is defined in 2(a)(15) of the Securities Act.
Item
3. Defaults
Upon Senior Securities
None
Item
4. Submission
of Matters to a Vote of Security Holders
The
Company held its Annual Meeting of Stockholders on June 25, 2007. The number
of
shares of common stock with voting rights as of the record date represented
at
the meeting either in person or by proxy was 100,831 shares, or 93.7% of the
eligible outstanding Common Stock of the Company. Two proposals were voted
upon
by the stockholders. The proposals and the voting results are as
follows:
Proposal
1
The
four
persons listed below received the most votes in favor of election at the annual
meeting and, accordingly were elected as directors to serve until the next
Annual Meeting or until his successor is elected or appointed.
|
Name
|
For
|
|||
|
Guido
DiGregorio
|
96,954
|
|||
|
Louis
P. Panetta
|
96,368
|
|||
|
C.
B. Sung
|
96,436
|
|||
|
David
E. Welch
|
94,530
|
Proposal
2
The
voting on the proposal to amend the Company’s amended and restated certificate
of incorporation to increase the number of common shares available for issuance
from 125,000 to 155,000 was as follows:
|
FOR
|
Against
|
Abstain
|
|||
|
Shares
voted
|
91,875
|
8,528
|
431
|
||
|
Percent
of voted
|
91.1%
|
8.45%
|
0.42%
|
||
|
Percent
of total
|
85.4%
|
7.92%
|
0.40%
|
Item
5. Other
Information
None
Item
6. Exhibits
(a) Exhibits
-
23
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
|
Exhibit
Number
|
Document
|
|
2.0
|
Second
Amended Plan of Reorganization of the Company, incorporated herein
by
reference to the Company's Form 8-K filed October 24,
1994.
|
|
2.1
|
Orderly
Liquidation Valuation, Exhibit F to the Second Amended Plan of
Reorganization, incorporated herein by reference to the Company's
Form 8-K filed October 19, 1994.
|
|
2.2
|
Order
Confirming Plan of Reorganization, incorporated herein by reference
to the
Company's Form 8-K filed November 14, 1994.
|
|
3.1
|
Certificate
of Incorporation of the Company, as amended, incorporated herein
by
reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration
Statement on Form 10
(File No. 0-19301).
|
|
3.2
|
Certificate
of Amendment to the Company's Certificate of Incorporation (authorizing
the reclassification of the Class A Common Stock and Class B
Common Stock into one class of Common Stock) as filed with the Delaware
Secretary of State's office on November 1, 1991, incorporated herein
by reference to Exhibit 3 to Amendment 1 on Form 8 to the
Company's Form 8-A (File No. 0-19301).
|
|
3.3
|
By-laws
of the Company adopted on October 6, 1986, incorporated herein by
reference to Exhibit 3.5 to the Company's Registration Statement on
Form 10 (File No. 0-19301).
|
|
4.15
|
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 February 5, 2007.
|
|
4.16
|
Form
of Warrant issued by Communication intelligence Corporation, incorporated
herein by reference to Exhibit 10.37 to the Company's Form 8-K dated
February 5, 2007.
|
|
4.17
|
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 June 15, 2007.
|
|
4.18
|
Form
of Warrant issued by Communication intelligence Corporation, incorporated
herein by reference to Exhibit 10.37 to the Company's Form 8-K dated
June
15, 2007.
|
|
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.
|
|
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.
|
|
*31.1
|
Certification
of Company’s Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
*31.2
|
Certificate
of Company’s Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
*32.1
|
Certification
of Chief Executive Officer pursuant to 18 USC Section 1750, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*32.2
|
Certification
of Chief Financial Officer pursuant to 18 USC Section 1750, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
*
|
Filed
herewith.
|
-
24
-
Communication
Intelligence Corporation
and
Subsidiary
(in
thousands, except per share ampunts)
FORM
10-Q
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
COMMUNICATION
INTELLIGENCE CORPORATION
|
||
|
Registrant
|
||
|
August
14, 2007
|
/s/
Francis V. Dane
|
|
|
Date
|
Francis
V. Dane
|
|
|
(Principal
Financial Officer and Officer Duly Authorized to Sign on Behalf of
the
Registrant)
|
-
25 -