iSign Solutions Inc. - Quarter Report: 2009 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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X
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period
ended: September 30,
2009
OR
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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)
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Delaware
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94-2790442
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|||
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(State
or other jurisdiction of
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(I.R.S.
Employer
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|||
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incorporation
or organization)
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Identification
No.)
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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.
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Yes
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X
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No
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Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
|
Yes
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No
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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large
accelerated filer
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accelerated
filer
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non-accelerated
filer
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X
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Smaller
reporting Company
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Indicate
by check mark whether the registrant is a shell company (as defined in Section
12b-2 of the exchange Act)
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Yes
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No
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X
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Number of
shares outstanding of the issuer's Common Stock, as of October 28, 2009:
131,751,574.
INDEX
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Page No.
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PART
I. FINANCIAL INFORMATION
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|
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Item
1. Financial
Statements
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|
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Condensed
Consolidated Balance Sheets at September 30, 2009 (unaudited)
and
December 31, 2008
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3
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Condensed
Consolidated Statements of Operations for the Three-Month
And Nine-Month Periods Ended
September 30, 2009 and 2008 (unaudited)
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4
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Condensed
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for
the
Nine-Month Period Ended
September 30, 2009 (unaudited)
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5
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Condensed
Consolidated Statements of Cash Flows for the Nine-Month
Periods
Ended September 30, 2009 and
2008 (unaudited)
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6
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Notes
to Unaudited Condensed Consolidated Financial Statements
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8
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Item
2. Management's
Discussion and Analysis of Financial Condition and
Results of Operations
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18
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Item
3. Quantitative and
Qualitative Disclosures About Market Risk
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25
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Item
4. Controls and
Procedures
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25
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PART
II. OTHER INFORMATION
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|
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Item
1. Legal
Proceedings
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25
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Item
1A. Risk
Factors
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25
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Item
2. Unregistered Sale of
Securities and Use of proceeds
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25
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Item
3. Defaults Upon Senior
Securities
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25
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Item
4. Submission of Matters
to a Vote of Security Holders
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25
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Item
5. Other
Information
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25
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Item
6. Exhibits
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|
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(a)
Exhibits
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25
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Signatures
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27
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- 2
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PART I–FINANCIAL
INFORMATION
Item
1. Financial
Statements.
Communication
Intelligence Corporation
and
Subsidiary
Condensed
Consolidated Balance Sheets
(In
thousands)
|
September,
30
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December,
31
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|||||||
|
2009
|
2008
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|||||||
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Assets
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Unaudited
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|||||||
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Current
assets:
|
||||||||
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Cash and cash equivalents
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$ | 631 | $ | 929 | ||||
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Accounts receivable, net of
allowances of $117 and $104 at September 30, 2009 and December 31, 2008,
respectively
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654 | 700 | ||||||
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Prepaid expenses and other
current assets
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82 | 80 | ||||||
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Total current assets
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1,367 | 1,709 | ||||||
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Property
and equipment, net
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31 | 48 | ||||||
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Patents
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2,865 | 3,149 | ||||||
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Capitalized
software development costs
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1,543 | 1,406 | ||||||
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Deferred
financing costs
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274 | 301 | ||||||
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Other
assets
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29 | 30 | ||||||
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Total assets
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$ | 6,109 | $ | 6,643 | ||||
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Liabilities
and Stockholders' Equity (Deficit)
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||||||||
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Current
liabilities:
|
||||||||
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Short-term debt – net of
discount of $0 at September 30, 2009 and $5 at December 31,
2008
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$ | 20 | $ | 60 | ||||
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Accounts payable
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202 | 92 | ||||||
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Accrued compensation
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361 | 369 | ||||||
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Other accrued liabilities
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165 | 236 | ||||||
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Deferred revenue
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706 | 343 | ||||||
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Total current liabilities
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1,454 | 1,100 | ||||||
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Long-term
debt – net of discount of $2,666 and $873 at September 30, 2009 and
December 31, 2008, including related party debt of $4,823 and $2,644 net
of discount of $2,576 and $834 at September 30, 2009 and December 31,
2008, respectively
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2,325 | 2,765 | ||||||
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Derivative
liability
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6,501 | − | ||||||
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Total
liabilities
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10,280 | 3,865 | ||||||
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Commitments
and contingencies
|
||||||||
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Stockholders'
equity (deficit):
|
||||||||
|
Preferred stock, $.01 par value;
10,000 shares authorized; 756 shares outstanding at September 30, 2009 and
856 at December 31, 2008
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756 | 856 | ||||||
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Common stock, $.01 par value;
275,000 shares authorized; 131,379 and 130,374 shares issued and
outstanding at September 30, 2009 and December 31, 2008,
respectively
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1,314 | 1,304 | ||||||
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Additional paid-in capital
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92,840 | 95,174 | ||||||
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Accumulated deficit
|
(99,090 | ) | (94,569 | ) | ||||
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Accumulated other comprehensive
income
|
9 | 13 | ||||||
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Total
stockholders' equity (deficit)
|
(4,171 | ) | 2,778 | |||||
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Total
liabilities and stockholders' equity (deficit)
|
$ | 6,109 | $ | 6,643 | ||||
The
accompanying notes form an integral part of these Condensed Consolidated
Financial Statements
- 3
-
Communication
Intelligence Corporation
and
Subsidiary
Condensed
Consolidated Statements of Operations
Unaudited
(In
thousands, except per share amounts)
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
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September
30,
|
|||||||||||||||
|
2009
|
2008
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2009
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2008
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|||||||||||||
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Revenues:
|
||||||||||||||||
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Product
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$ | 688 | $ | 546 | $ | 968 | $ | 1,006 | ||||||||
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Maintenance
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189 | 175 | 559 | 552 | ||||||||||||
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Total Revenues
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877 | 721 | 1,527 | 1,558 | ||||||||||||
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Operating
costs and expenses:
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||||||||||||||||
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Cost of sales:
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||||||||||||||||
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Product
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186 | 216 | 539 | 543 | ||||||||||||
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Maintenance
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44 | 47 | 141 | 120 | ||||||||||||
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Research and
development
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60 | 73 | 186 | 169 | ||||||||||||
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Sales and
marketing
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407 | 337 | 1,104 | 1,052 | ||||||||||||
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General and
administrative
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545 | 535 | 1,504 | 1,554 | ||||||||||||
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Total operating costs and
expenses
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1,242 | 1,208 | 3,474 | 3,438 | ||||||||||||
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Loss
from
operations
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(365 | ) | (487 | ) | (1,947 | ) | (1,880 | ) | ||||||||
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Interest
and other income (expense), net
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1 | 40 | 2 | 45 | ||||||||||||
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Interest
expense:
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||||||||||||||||
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Related
party
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(96 | ) | (55 | ) | (243 | ) | (147 | ) | ||||||||
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Other
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(4 | ) | (26 | ) | (12 | ) | (67 | ) | ||||||||
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Amortization
of loan discount and deferred financing:
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||||||||||||||||
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Related
party
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(549 | ) | (204 | ) | (1,062 | ) | (512 | ) | ||||||||
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Other
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(19 | ) | (23 | ) | (36 | ) | (131 | ) | ||||||||
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Loss
on extinguishment of long term debt
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− | − | (829 | ) | − | |||||||||||
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Loss
on derivative
liability
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(1,529 | ) | − | (2,505 | ) | − | ||||||||||
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Net
loss
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(2,561 | ) | (755 | ) | (6,632 | ) | (2,692 | ) | ||||||||
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Accretion
of beneficial conversion feature, Preferred shares:
|
||||||||||||||||
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Related
party
|
− | − | − | (273 | ) | |||||||||||
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Other
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− | − | − | (98 | ) | |||||||||||
|
Preferred
stock dividends:
|
||||||||||||||||
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Related
party
|
(10 | ) | (16 | ) | (34 | ) | (20 | ) | ||||||||
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Other
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(4 | ) | (5 | ) | (12 | ) | (7 | ) | ||||||||
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Net loss attributable to
commonstockholders
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$ | (2,575 | ) | $ | (776 | ) | $ | (6,678 | ) | $ | (3,090 | ) | ||||
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Basic
and diluted loss per common share
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$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.02 | ) | ||||
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Weighted
average common shares outstanding, basic and diluted
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131,379 | 129,057 | 131,134 | 129,057 | ||||||||||||
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 (Deficit)
Nine
Months Ended September 30, 2009
Unaudited
(In
thousands)
|
Preferred
Shares
Outstanding
|
Preferred
Shares
Amount
|
Common
Shares
Outstanding
|
Common
Stock Amount
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Accumulated
Other
Comprehensive
Income
|
Total
|
|||||||||||||||||||||||||
|
Balances
as of December 31, 2008
|
856 | $ | 856 | 130,374 | $ | 1,304 | $ | 95,174 | $ | (94,569 | ) | $ | 13 | $ | 2,778 | |||||||||||||||||
|
Cumulative
effect of change in accounting principle on January 1, 2009 –
Reclassification of equity linked financial instrument to derivative
liability
|
(3,510 | ) | 2,157 | (1,353 | ) | |||||||||||||||||||||||||||
|
Stock
based employee compensation
|
211 | 211 | ||||||||||||||||||||||||||||||
|
Conversion
of preferred shares
|
(146 | ) | (146 | ) | 1,005 | 10 | 136 | − | ||||||||||||||||||||||||
|
Cancellation
of warrants recorded as derivative liability
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875 | 875 | ||||||||||||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
|
Net loss
|
(6,678 | ) | (6,678 | ) | ||||||||||||||||||||||||||||
|
Foreign currency translation
adjustment
|
(4 | ) | (4 | ) | ||||||||||||||||||||||||||||
|
Total
comprehensive loss
|
(6,682 | ) | ||||||||||||||||||||||||||||||
|
Preferred
share dividends
|
46 | 46 | (46 | ) | − | |||||||||||||||||||||||||||
|
Balances
as of September 30, 2009
|
756 | 756 | 131,379 | $ | 1,314 | $ | 92,840 | $ | (99,090 | ) | $ | 9 | $ | (4,171 | ) | |||||||||||||||||
The
accompanying notes form an integral part of these Condensed Consolidated
Financial Statements
- 5
-
Communication
Intelligence Corporation
and
Subsidiary
Condensed
Consolidated Statements of Cash Flows
Unaudited
(In
thousands)
|
Nine
Months Ended
September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (6,678 | ) | $ | (2,692 | ) | ||
|
Adjustments to reconcile net
loss to net cash
used
for operating activities:
|
||||||||
|
Depreciation and
amortization
|
822 | 673 | ||||||
|
Amortization of debt discount and
deferred financing costs
|
1,098 | 643 | ||||||
|
Loss on extinguishment of
long-term
debt
|
829 | |||||||
|
Stock-based employee
compensation
|
211 | 128 | ||||||
|
Loss on derivative
liability
|
2,505 | − | ||||||
|
Changes in operating assets and
liabilities:
|
||||||||
|
Accounts
receivable,
net
|
46 | (129 | ) | |||||
|
Prepaid
expenses and other
assets
|
(2 | ) | (6 | ) | ||||
|
Accounts
payable
|
110 | 29 | ||||||
|
Accrued
compensation
|
(8 | ) | (26 | ) | ||||
|
Other accrued
liabilities
|
150 | (1 | ) | |||||
|
Deferred
revenue
|
363 | (165 | ) | |||||
|
Net cash used for
operating activities
|
(554 | ) | (1,546 | ) | ||||
|
Cash
flows from investing activities:
Acquisition of property and
equipment
|
(3 | ) | (14 | ) | ||||
|
Capitalized software development
costs
|
(654 | ) | (659 | ) | ||||
|
Net cash used for investing
activities
|
(657 | ) | (673 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Deferred financing
costs
|
(174 | ) | (452 | ) | ||||
|
Proceeds from issuance of
short-term
debt
|
− | 125 | ||||||
|
Proceeds from issuance of
long-term
debt
|
1,100 | 3,000 | ||||||
|
Principal payments on short term
debt
|
(45 | ) | (250 | ) | ||||
|
Principal payments on long term
debt
|
− | (37 | ) | |||||
|
Net cash provided by financing
activities
|
881 | 2,386 | ||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
32 | (35 | ) | |||||
|
Net
(decrease) increase in cash and cash equivalents
|
(298 | ) | 132 | |||||
|
Cash
and cash equivalents at beginning of period
|
929 | 1,144 | ||||||
|
Cash
and cash equivalents at end of
period
|
$ | 631 | $ | 1,276 | ||||
The
accompanying notes form an integral part of these Condensed Consolidated
Financial Statements
- 6
-
Communication
Intelligence Corporation
and
Subsidiary
Condensed
Consolidated Statements of Cash Flows (Continued)
Unaudited
(In
thousands)
|
Nine
Months Ended
September 30,
|
||||||||
|
Supplementary
disclosure of cash flow information
|
2009 | 2008 | ||||||
|
Interest
paid
|
$ | − | $ | 130 | ||||
|
Non-cash
financing and investing transactions
|
||||||||
|
Short-term notes and accrued
interest exchanged for convertible preferred stock
|
$ | − | $ | 1,040 | ||||
|
Dividends on preferred
shares
|
$ | 46 | $ | 21 | ||||
|
Short-term notes and accrued
interest exchanged for long-term notes
|
$ | − | $ | 638 | ||||
|
Accretion of beneficial
conversion feature and warrants
|
$ | − | $ | 371 | ||||
|
Conversion of preferred stock
to common stock
|
$ | 146 | $ | − | ||||
|
Issuance of long-term debt for
payment of interest in kind
|
$ | 254 | $ | − | ||||
|
Reclassification of equity linked
instrument to derivative liability
|
$ | 1,353 | $ | − | ||||
|
Debt discount and related
liability recorded in connection
with long-term
debt
|
$ | 3 , 347 | $ | − | ||||
|
Warrants issued for interest
recorded as derivative liability
|
$ | 205 | $ | − | ||||
The
accompanying notes form an integral part of these Condensed Consolidated
Financial Statements
- 7 -
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
|
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 for the year ended December 31, 2008.
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 reports results in one segment.
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 September
30, 2009, the Company’s accumulated deficit was approximately $99,090. At
September 30, 2009, the Company had a working capital deficit of $87, including
cash and cash equivalents of $631. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The
Company has primarily funded losses through the sale of debt and equity
securities.
In May
2009 and June 2008, the Company raised additional funds through debt and equity
financings and also converted short-term notes payable to equity (see notes 4
and 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
-
8 -
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
|
1
|
Nature of
business
|
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.
Recent
Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) approved its Accounting
Standards Codification (“Codification”) as the single source of authoritative
United States accounting and reporting standards applicable for all
non-governmental entities, with the exception of the SEC and its staff. The
Codification, which changes the referencing of financial standards, is effective
for interim or annual financial periods ending after September 15, 2009.
Therefore, in the third quarter of fiscal year 2009, all references made to US
GAAP will use the new Codification numbering system prescribed by the FASB. The
change in references to the new Codification did not have an impact on our
consolidated financial position or results of operations.
On
January 1, 2009, the Company adopted the guidance of the Derivatives and Hedging
topic, ASC 815-40-15, in the Codification, which requires that the
Company apply a two-step approach in evaluating whether an equity-linked
financial instrument (or embedded feature) is indexed to the Company’s stock,
including evaluation of the instrument’s contingent exercise and settlement
provisions. See Note 6 for the impact of the adoption of ASC
815-40-15 on our balance sheet and statement of operations.
2. Accounts receivable and
revenue concentration
Two
customers accounted for 91% of net accounts receivable as of September 30, 2009.
eCom Asia Pacific accounted for 13% and Wells Fargo Bank NA accounted for
78%. Four customers accounted for 82% of accounts receivable at
December 31, 2008. Allstate Insurance Company accounted for 37%, SHI
Inc. accounted for 18%, Travelers Indemnity Company accounted for 15% and eCom
Asia Pacific, Ltd accounted for 12%.
One
customer, Wells Fargo Bank NA, accounted for 75% of total revenues for the three
months ended September 30, 2009. Two customers in the aggregate
accounted for 60% of total revenues for the three months ended September 30,
2008: Altria Client Services (21%) and Travelers Insurance Company
(39%).
Two
customers in the aggregate accounted for 64% of total revenues for the nine
months ended September 30, 2009: American Family Insurance (14%) and Wells Fargo
Bank NA (50%). Three customers in the aggregate accounted for 45% of total
revenue for the nine months ended September 30, 2008: Altria Client Services
(10%), Access Systems Americas, Inc. (11%) and Travelers Insurance Company
(24%).
- 9
-
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
|
3.
|
Patents
|
The
Company performs intangible asset impairment analyses at least annually. 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
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 the
Company’s Annual Report on Form 10-K.
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, 2008. Based on that analysis, the Company
concluded that no impairment of the carrying value of the patents existed. The
Company believes that no events or circumstances occurred or changed during the
nine months ended September 30, 2009, and therefore concluded that no impairment
in the carrying values of the patents existed at September 30,
2009.
Amortization
of patent costs was $95 and $284 for the three and nine month periods ended
September 30, 2009 and $95 and $284 in the corresponding periods of the prior
year.
|
4.
|
Short-term
debt
|
Short-term
debt as of September 30, 2009 consists of a principal balance of $20, net of a
remaining debt discount. The note agreement, originally entered into in 2004,
was modified in October 2007. The modification extended the maturity of the note
through October 2009 and terminated the conversion feature of the note. In
addition, the note holder received warrants to purchase two shares per one
dollar of principal outstanding (234 warrants exercisable at $0.29 per share,
the 20 day volume weighted average price of the Company’s Common Stock ending on
October 25, 2007).
5. Long-term
debt
On May
28, 2009, the Company entered into a financing transaction (“New Financing
Transaction”) under which the Company raised capital through the issuance of new
secured indebtedness and modified the terms of the June 2008 credit agreement
(“Credit Agreement”). Certain parties Phoenix Venture Fund LLC
(“Phoenix”), Michael Engmann and certain entities related to Mr. Engmann) to the
New Financing Transaction had a pre-existing relationship with the Company. In the New
Financing Transaction, the Company received an aggregate of $1,100, which is due
on December 31, 2010, which accrues interest at 8% per annum, and which, at the
option of the Company, may be paid in cash or in kind. In conjunction with
the New Financing Transaction, the Company issued warrants to the lenders to
purchase an aggregate of 18,333 shares of common stock (exercisable through June
30, 2012 at $0.06 per share). Additionally, the Company issued a warrant
to SG Phoenix LLC, an affiliate of Phoenix, to purchase 3,948 shares of common
stock (exercisable through June 30, 2012 at $0.06 per share) and a warrant to
purchase 250 shares of common stock (exercisable through June 30, 2012 at $0.06
per share) to an unrelated third party in connection with administrative
services provided to the Company.
In
connection with the New Financing Transaction, the Company amended the Credit
Agreement such that the notes underlying the Credit Agreement were cancelled and
new notes were issued (principal amount of $3,709). In addition, warrants
to purchase 26,495 shares of common stock included in the June 2008 transaction
were cancelled and new warrants to purchase 61,821 shares of common stock were
issued. The note and warrants have identical terms to the terms outlined
in the New Financing Transaction above.
- 10
-
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
5. Long-term debt
(continued)
The
Company recorded a loss on debt extinguishment in the amount of $829 related to
the cancellation of the notes, and recorded an increase to additional paid in
capital in the amount of $875 related to the cancellation of warrants that had
been recorded as a derivative liability.
The
Company ascribed the fair value of $3,178 to the new warrants, excluding the
warrants issued for administrative services, which is recorded as a discount to
Long-term debt in the balance sheet. The fair value of the warrants was
estimated on the commitment date using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 1.64%; expected term of 3
years; expected volatility of 137%; and expected dividend yield of 0%. The
Company may use the proceeds from the New Financing Transaction to pay the
Company’s indebtedness and accrued interest on that indebtedness, for working
capital and general corporate purposes, in each case in the ordinary course of
business, and to pay fees and expenses in connection with the New Financing
Transaction, which were $347, including $173 attributable to the warrants issued
for the administrative services. The fees and expenses are recorded as
deferred financing costs and are to be amortized over the life of the
loan.
In
connection with the New Financing Transaction, the Registration Rights Agreement
from the previous financing transaction was amended to provide the lenders
certain rights to demand registration of shares issuable upon exercise of the
new warrants.
The
Company exercised its option and made the second and third quarter interest
payment in kind. The Company issued new notes in the amount of $82 and
$99, respectively, and issued additional warrants to purchase 1,366 and 1,643
shares, respectively, of common stock with the same terms as those issued in the
New Financing Transaction. The Company ascribed the fair value of $69 and $112,
respectively, to the additional warrants, of which $69 and $100, respectively is
recorded as a discount to long-term debt in the balance sheet. The
fair value of the warrants was estimated on the commitment date using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 1.64% and 1.45%; expected term of 3 years; expected volatility of 137%
and 142%; and expected dividend yield of 0%.
Interest
expense associated with the Company’s debt for the three months ended September
30, 2009 and 2008 was $668 and $308, respectively. Included in interest
expense for the three months ended September 30, 2009 and 2008 was $568 and
$227, respectively, of amortization of the debt discount and deferred financing
costs. Interest expense for the nine months ended September 30, 2009 and
2008 was $1,353 and $857, respectively. Included in interest expense for
the nine months ended September 30, 2009 and 2008 was $1,098 and $643,
respectively, of amortization of the debt discount and deferred financing
costs.
6. Derivative
liability
The
Company follows the guidance found in the Derivative and Hedging, Contracts in Entity’s Own
Equity topic in the Codification, ASC 815-40-15. Paragraphs 15-5 through
15-8 specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and (b) classified
in stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. ASC 815-40-15 provides a two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
scope exception. The Company adopted ASC 815-40-15 effective January
1, 2009, and determined that certain warrants and the embedded conversion
feature on the preferred stock require liability classification
because of certain provisions that may result in an adjustment to the number of
shares upon settlement and an adjustment to their exercise or conversion price.
The fair value of the embedded conversion feature at January 1, 2009 and
September 30, 2009 was insignificant. The warrants were retroactively
reclassified as liabilities, the result was a decrease in paid in capital as of
January 1, 2009, of $3,510, a decrease in accumulative deficit
- 11
-
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
6. Derivative liability
(continued)
of
$2,157, and the recognition of a liability of $1,353. The liability, including
additional liabilities related to the New Financing Transaction, was further
adjusted to fair value as of September 30, 2009, resulting in an increase in the
liability and other expense of $2,505 for the nine months ended September 30,
2009 and $1,529 for the three months ended September 30, 2009.
The
Company uses the Black-Scholes pricing model to calculate fair value of its
warrant liabilities. Key assumptions used to apply these models are as
follows:
|
September 30, 2009
|
January 1, 2009
|
|
|
Expected
term
|
.08
to 3.00 years
|
.75
to 2.5 years
|
|
Volatility
|
142.4%
- 209.0%
|
141.9%
- 171.7%
|
|
Risk-free
interest rate
|
1.45%
|
1.14%
|
|
Dividend
yield
|
0%
|
0%
|
Fair
value measurements:
Assets
and liabilities measured at fair value as of September 30, 2009, are as
follows:
|
Value
at
|
Quoted
prices in active markets
|
Significant
other observable inputs
|
Significant
unobservable inputs
|
|||||||||||||
|
September
30, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
|
Derivative
liability
|
$ | 6,501 | $ | − | $ | − | $ | 6,501 | ||||||||
The fair
value framework requires a categorization of assets and liabilities into three
levels based upon the assumptions (inputs) used to price the assets and
liabilities. Level 1 provides the most reliable measure of fair value, whereas
Level 3 generally requires significant management judgment. The three levels are
defined as follows:
Level 1:
Unadjusted quoted prices in active markets for identical assets and
liabilities.
Level 2:
Observable inputs other than those included in Level 1. For example, quoted
prices for similar assets or liabilities in active markets or quoted prices for
identical assets or liabilities in inactive markets.
Level 3:
Unobservable inputs reflecting management’s own assumptions about the inputs
used in pricing the asset or liability.
There
were no financial assets or liabilities measured at fair value, with the
exception of cash and cash equivalents (level 1) and the above mentioned
derivative liability as of September 30, 2009 and December 31,
2008.
Changes
in the fair market value of the level 3 derivative liability for the nine month
period ended September 30, 2009 are as follows:
- 12
-
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
6. Derivative liability
(continued)
|
Derivative
Liability
|
||||
|
Balance
at January 1, 2009
|
$ | 1,353 | ||
|
Extinguishment
of derivative related to long term debt
|
(875 | ) | ||
|
Additional
liabilities recorded related to long-term debt, including paid in kind
interest
|
3,518 | |||
|
Loss
on derivative liability
|
2,505 | |||
|
Balance
at September 30, 2009
|
$ | 6,501 | ||
|
7.
|
Net (loss) per
share
|
The
Company calculates net loss per share under the provisions of the Codification
Topic ASC 260-10-55, Earnings
Per Share. ASC 260-10-55 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 nine month periods ended September 30, 2009, 9,694 and 102,511 shares
of common stock issuable upon the exercise of outstanding options and warrants,
respectively, and 5,400 shares of common stock issuable upon the conversion of
the convertible preferred stock were excluded from the calculation of dilutive
earnings per share because the exercise of such options and warrants and the
conversion of the preferred stock would be anti-dilutive.
For the
three and nine month periods ended September 30, 2008, 7,616 and 41,131 shares
of common stock issuable upon the exercise of outstanding options and warrants,
respectively, and 7,429 shares of common stock issuable upon the conversion of
the convertible preferred stock were excluded from the calculation of dilutive
earnings per share because the exercise of such options and warrants and the
conversion of the preferred stock would be anti-dilutive.
|
8.
|
Equity
|
The
Company has granted stock options under its 1999 Option Plan which expired in
April of 2009 (options outstanding under that plan are not effected by its
expiration) and also granted options to employees, directors and consultants
pursuant to individual plans.
The
Company's Board of Directors adopted the 2009 Stock Compensation Plan on July 1,
2009, reserving 7,000,000 shares of Common Stock of the Company for issuance
thereunder. The Board has granted 1,897,922 options pursuant to the
plan.
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. Forfeitures of share-based payment
awards are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. The estimated average forfeiture rate for the three and
nine months ended September 30, 2009 was approximately 19%, and for the
comparable three and nine months in 2008 was approximately 27%, based on
historical data.
-
13 -
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
|
8.
|
Equity
(continued)
|
ASC
718-10-50 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 nine month
periods ending September 30, 2009 and 2008.
Valuation
and Expense Information:
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:
|
Nine
Months Ended
September
30, 2009
|
Nine
Months
Ended
September
30, 2008
|
||
|
Risk
free interest rate
|
1.45%
– 5.11%
|
3.32%
- 5.11%
|
|
|
Expected
life (years)
|
3.21
– 6.88
|
3.21
– 6.86
|
|
|
Expected
volatility
|
80.96%
– 131.35%
|
80.96%
– 104.57%
|
|
|
Expected
dividends
|
None
|
None
|
|
The
following table summarizes the allocation of stock-based compensation expense
related to stock option grants for the three and nine months ended September 30,
2009 and 2008. The Company granted 1,898 and 3,098 stock options during the
three and nine months ended September 30, 2009, respectively, and no stock
options were exercised. There were 1,775 stock options granted during the three
and nine months ended September 30, 2008 and no options were
exercised.
|
Three
Months Ended September 30,
|
Nine
months Ended September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Research
and development
|
$ | 28 | $ | 25 | $ | 43 | $ | 27 | ||||||||
|
Sales
and marketing
|
44 | 7 | 57 | 27 | ||||||||||||
|
General
and administrative
|
65 | 57 | 91 | 59 | ||||||||||||
|
Director
options
|
20 | − | 20 | 16 | ||||||||||||
|
Stock-based
compensation expense
|
$ | 157 | $ | 89 | $ | 211 | $ | 129 | ||||||||
- 14
-
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
|
8.
|
Equity
(continued)
|
A summary
of option activity under the Company’s plans as of September 30, 2009 and 2008
is as follows:
|
As
of September 30,
|
||||||||||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||||||||||
|
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,
|
7,608 | $ | 0.48 | 6,036 | $ | 0.59 | ||||||||||||||||||||||||||
|
Granted
|
3,098 | $ | 0.09 | $ | 127 | 1,875 | $ | 0.15 | ||||||||||||||||||||||||
|
Exercised
|
− | − | ||||||||||||||||||||||||||||||
|
Forfeited
or expired
|
(1,012 | ) | $ | 0.43 | (295 | ) | $ | 0.55 | ||||||||||||||||||||||||
|
Outstanding
at September 30
|
9,694 | $ | 0.36 | 4.06 | $ | − | 7,616 | $ | 0.48 | 4.2 | $ | − | ||||||||||||||||||||
|
Vested
and expected to vest at September 30
|
9,694 | $ | 0.36 | 4.06 | $ | − | 7,616 | $ | 0.48 | 4.2 | $ | − | ||||||||||||||||||||
|
Exercisable
at September 30
|
7,745 | $ | 0.42 | 3.50 | $ | − | 5,929 | $ | 0.57 | 4.63 | $ | − | ||||||||||||||||||||
The
following tables summarize significant ranges of outstanding and exercisable
options as of September 30, 2009 and 2008:
|
As
of September 30, 2009
|
||||||||||||||||||||||
|
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
|
|||||||||||||||||
| $ | 0.07 – $0.50 | 6,665 | 4.6 | $ | 0.17 | 4,717 | $ | 0.19 | ||||||||||||||
| 0.51 – 1.00 | 2,941 | 3.0 | $ | 0.72 | 2,940 | $ | 0.72 | |||||||||||||||
| 1.01 – 2.00 | 73 | 2.5 | $ | 1.66 | 73 | $ | 1.66 | |||||||||||||||
| 2.01 – 3.00 | − | − | $ | − | − | $ | − | |||||||||||||||
| 3.01 – 7.50 | 15 | 0.7 | $ | 3.56 | 15 | $ | 3.56 | |||||||||||||||
| 9,694 | 4.1 | $ | 0.42 | 7,745 | $ | 0.42 | ||||||||||||||||
- 15
-
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
|
8.
|
Equity
(continued)
|
|
As
of September 30, 2008
|
||||||||||||||||||||||
|
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 | 4,187 | 5.4 | $ | 0.25 | 2,500 | $ | 0.30 | ||||||||||||||
| 0.51 – 1.00 | 3,341 | 3.6 | $ | 0.73 | 3,341 | $ | 0.73 | |||||||||||||||
| 1.01 – 2.00 | 73 | 3.5 | $ | 1.66 | 73 | $ | 1.66 | |||||||||||||||
| 2.01 – 3.00 | − | − | $ | − | − | $ | − | |||||||||||||||
| 3.01 – 7.50 | 15 | 1.7 | $ | 3.56 | 15 | $ | 3.56 | |||||||||||||||
| 7,616 | 4.60 | $ | .48 | 5,929 | $ | 0.57 | ||||||||||||||||
A summary
of the status of the Company’s non-vested shares as of September 30, 2009 is as
follows:
|
Nonvested
Shares
|
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
||||||
|
Nonvested
at January 1, 2009
|
1,565 | $ | 0.16 | |||||
|
Granted
|
3,098 | $ | 0.07 | |||||
|
Forfeited
|
(1,012 | ) | $ | 0.09 | ||||
|
Vested
|
(1,702 | ) | $ | 0.08 | ||||
|
Nonvested
|
1,949 | $ | 0.22 | |||||
As of
September 30, 2009, there was $104 of total unrecognized compensation expense
related to non-vested share-based compensation arrangements granted under the
plans. The unrecognized compensation expense is expected to be
realized over a weighted average period of 2.5 years.
Preferred
Shares
In
connection with the closing of the June 2008 Financing Transaction (see Note 5,
Long-term debt), the Company also entered into a Securities Purchase Agreement
(the “Purchase Agreement”) and a Registration Rights Agreement (the
“Registration Rights Agreement”) each dated as of June 5, 2008. Under
the Purchase Agreement, in exchange for the cancellation of $995 in principal
amount and $45 of interest accrued thereon of the Company’s aggregate
outstanding $2,071 in existing debt and interest accrued thereon through May 31,
2008, the Company issued to the holders of such debt an aggregate of 1,040
shares of the Company’s Series A-1 Cumulative Convertible Preferred Stock (the
“Preferred Shares”), As of September 30, 2009, there are 756 Preferred Shares
outstanding. The Preferred Shares carry an eight percent (8%) annual
dividend, payable quarterly in arrears in cash or in additional Preferred
Shares, have a liquidation preference over Common Stock of one dollar ($1.00)
per share and are convertible into shares of Common Stock at the conversion
price of fourteen cents ($0.14) per share. If the outstanding
“Preferred Shares” are converted in their entirety, the Company would issue
5,400 shares of common stock. The shares of Preferred Stock are convertible any
time after June 30, 2008. The preferred stock transaction resulted in a
beneficial conversion feature of $371, of which $273 is attributable to Michael
Engmann and $98 to the other creditors. The beneficial conversion
feature was recorded as a charge to loss applicable to common stockholders for
the quarter ended June 30, 2008. The Company has accrued dividends on the
preferred shares of $73. As of September 30, 2009, $27 of accrued
dividends had been paid in cash.
- 16
-
Communication
Intelligence Corporation
and
Subsidiary
Notes
to Unaudited Financial Statements
(In
thousands, except share and per share amounts)
|
8.
|
Equity
(continued)
|
During
the nine months ended September 30, 2009, 146 Preferred Shares were converted
into 1,005 shares of the Company’s common stock. The Company paid the
first, second and third quarter dividends due on the Preferred Shares by issuing
an additional 46 Preferred Shares which are convertible into 329 shares of
common stock, included in the total below. At September 30, 2009
there are 756 preferred shares outstanding, that if converted, the Company would
issue 5,400 shares of the Company’s common stock.
|
9.
|
Subsequent
events
|
The
Company evaluated events through October 28, 2009 for consideration as a
subsequent event to be included in its September 30, 2009 financial statements,
issued October 29, 2009.
On
October 9, 2009, a related party exercised 300,000 warrants issued under the May
2009 Financing, and a former employee exercised 72,985 stock
options. The Company issued a total 372,985 shares of common stock
for the aforementioned transactions and received approximately $24 in
cash.
On
October 22 and 23, a former employee exercised an aggregate of 8,340 stock
options. The Company issued a total 8,340 shares of common stock for
the aforementioned transaction and received approximately $1 in
cash.
On
October 27, 2009, a related party executed a cashless exercise for 60,978,223
warrants issued under the May 2009 Financing. The Company will issue
43,130,939 shares, net, of its Common Stock.
- 17
-
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
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, 2008,
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, 2008.
Overview
The
Company is a leading supplier of electronic signature solutions for business
process automation serving primarily the financial services industry and is the
acknowledged leader in biometric signature verification technology. Its products
enable companies to achieve secure paperless business transactions with multiple
signature technologies across virtually all applications and hardware
platforms.
The
Company was 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, 2008, net losses aggregated
approximately $12,800 and at December 31, 2008, the Company's accumulated
deficit was approximately $94,600. At September 30, 2009, its accumulated
deficit was approximately $99,090.
Total
revenues were was $1,527 for the nine months ended September 30, 2009 compared
to revenue of $1,558 in the corresponding nine months of the prior
year. First quarter revenue of $246, reflected primarily the freeze
in IT spending resulting from the meltdown in the financial
market. Second quarter revenue increased to $404, with orders of
$930, $526 higher than revenue recognizable for that period. Revenues were
primarily attributable to American Family Insurance, American General Life &
Accident, Charles Schwab, Misys Healthcare, Prudential Insurance, Snap-On Credit
and Wells Fargo Bank. Total revenues for the three months ended September 30,
2009 were $877, more than double second quarter 2009 revenue of $404, and up 22%
compared to the corresponding prior year quarter of $721. Orders received during
the three months period ended September 30, 2009 were $1.7 million, up 31 % over orders received of $1.3 million for the third
quarter 2008. Revenues were primarily attributable to Wells Fargo,
Prudential and Snap-On-Credit. Based on third quarter orders,
together with current sales related activity, the Company projects fourth
quarter cash flow positive operations, and anticipates that 2009 revenues will
exceed 2008 with the potential for continued and sustained cash flow positive
operation.
-
18 -
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
Based on
the significant order related to a top-three US bank deployment and three recent
successive wins with top tier insurance companies; Travelers, Allstate and
American Family, the Company believes this suggests evidence that in
both insurance and banking applications, when leading financial industry firms
engage in a thorough competitive analysis, including product differentiation,
legal/compliance competence, overall support, on-time delivery and proven
installed base reliability, CIC has emerged as the preferred
supplier.
The
Company further believes that its organizational, product and expense structure
positions CIC to deliver and support high quality successful deployments while
being capable of achieving sustained cash flow positive operations on relatively
low levels of revenue. CIC has, as a strategy, focused for years on
developing a “lean and agile” team with exceptional core competence capable of
establishing long standing strategic partner relationships that allow CIC to
rapidly access the product development and/or deployment capabilities required
to address virtually any business requirement.
The
operating loss for the three months ended September 30, 2009, before interest
expense and amortization of the loan discount and deferred financing cost, was
$365 compared to $487 in the prior year, a decrease of 25%. The
decrease in the loss from operations is due to the increased revenues for the
comparable three month periods. The Company’s net loss for the three
month period ended September 30, 2009 was $2,575 compared to a net loss of $776,
for the corresponding prior year period. Non-operating expense for
the three months ended September 30, 2009 was $2,210, an increase of $1,921,
compared to $289 for the corresponding prior year period. This increase is
primarily attributable to non-cash loan amortization and deferred financing cost
associated with the warrants issued in May 2009, and a $1,529 loss related to
the derivative liability due to an increase in the market price of the Company’s
common shares from June 30, 2009 through September 30, 2009.
The
operating loss for the nine months ended September 30, 2009, before interest
expense and amortization of the loan discount, and deferred financing cost, was
$1,947 compared to $1,880 in the prior year. The increase in the loss
from operations is due primarily to the $31 decrease in revenues and an increase
in operating expense for the comparable nine month periods. The net loss for the
nine months ended September 30, 2009 was $6,678, compared with a net loss of
$3,090 in the prior year period. The increase in the net loss is due
primarily to the factors stated above for the three month period ended September
30, 2009 and a $829 charge to expense of the remaining unamortized non-cash loan
amortization and deferred financing cost associated with the cancellation of the
June 2008 notes and warrants, in exchange for the new debt and associated
warrants issued in May 2009 and a $2,505 loss related to the derivative
liability due to an increase in the market price of the Company’s common shares
from January 1, 2009 to September 30, 2009. (see Note 5 and 6 to the Condensed
Consolidated Financial Statements). Cost of sales increased 3% or $17 and
operating expenses increased approximately $19, for the nine months ended
September 30, 2009, compared to the prior year period. The increase
in cost of sales was due to additional amortization of capitalized software
development from projects completed since September of the prior year,
pertaining to direct engineering costs related to meeting customer specific
requirements associated with integration of our standard products into customer
systems. The increase in operating expenses is primarily due to employee stock
compensation expense during the nine months ended September 30, 2009 compared to
the prior year.
The
Company achieved cash flow positive operations for the third quarter ended
September 30, 2009 and projects cash flow positive operations for the fourth
quarter and for the six month period ending December 31, 2009.
Critical
Accounting Policies and Estimates
Derivatives.
The
Company follows the provisions of ASC 815-10, Derivatives and Hedging,
along with related interpretations ASC 815-15, Embedded Derivatives and ASC
815-40, Contracts
in Entity’s Own Equity. ASC 815 requires every derivative instrument
(including certain derivative instruments embedded in other contracts) to be
recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the derivative’s fair value recognized currently in
earnings unless specific hedge accounting criteria are met. The Company values
these derivative securities under the fair value method at the end of each
reporting period (quarter), and their value is marked to market at the end of
each reporting period with the gain or loss recognition recorded against
earnings. The
-
19 -
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
Company continues to revalue these instruments each quarter to reflect their
current value in light of the current market price of our common stock. The
Company utilizes the Black-Scholes option-pricing model to estimate fair value.
Key assumptions of the Black-Scholes option-pricing model include applicable
volatility rates, risk-free interest rates and the instrument’s expected
remaining life. These assumptions require significant management
judgment.
Refer to
Item 7, “Management Discussion and Analysis of Financial Condition and Results
of Operations” in the Company’s 2008 Form 10-K.
Results
of Operations
Revenue
Product
revenue for the three-month period ended September 30, 2009 increased 26%, or
$142, to $688, compared to revenues of $546 in the prior year
period. The increase in revenue is primarily due to a follow on sale
of additional licenses to a top-three banking
institution. Maintenance revenue increased 8%, or $14, for the
three-month period ended September 30, 2009 to $189, compared to revenues of
$175 in the prior year period. This increase is primarily due to
maintenance renewals from existing eSignature customers.
Product
revenue for the nine-month period ended September 30, 2009 decreased 4%, or $38,
to $968, compared to revenue of $1,006 in the prior year period. The
decrease in revenue is primarily due to a 97%, or $277 decrease in royalties
from the Company’s natural input/jot product to $7, compared to $285 in the
prior year period. Royalty from the Company’s natural input products is expected
to remain at the lower volume due to changes in OEM product and operating system
offerings which do not include the Company’s natural input/jot
product. Maintenance revenue increased 1%, or $7, for the nine-month
period ended September 30, 2009 to $559, compared to revenues of $552 in the
prior year period. This increase is primarily due to maintenance
renewals from existing eSignature customers which was offset by the decline in
natural input/jot maintenance.
Cost
of Sales
Cost of
sales decreased $33, or 13%, to $230, for the three-month period ended September
30, 2009, compared to $263 in the prior year period. The decrease in cost of
sales was due to a reduction in direct engineering costs related to meeting
customer specific requirements associated with integration of our standard
products into customer systems offset by additional capitalized software
development amortization from projects completed since September of the prior
year. For the nine month period ended September 30, 2009, cost of
sales increased $17, or 3% to $680, compared to $663 in the prior year
period. The increase was due to an increase in direct engineering
costs related to meeting customer specific requirements associated with
integration of our standard products into customer systems and additional
capitalized software development cost amortization. Cost of sales is expected to
increase near term as previously capitalized software development costs begin to
be amortized once new products and enhancements are completed and
released.
Operating
expenses
Research
and Development Expenses
Research
and development expenses decreased approximately 18%, or $13, for the
three-month period ended September 30, 2009, compared to the prior year
period. Research and development expenses consist primarily of
salaries and related costs, outside engineering, maintenance items, and
allocated facilities expenses. The most significant factor in the $13
decrease was the higher levels of software development costs capitalized during
the three months ended September 30, 2009, as compared to the prior year
period. For the nine-month period ended September 30,
2009 research and development expenses increased 10%, or $17 to $186,
compared to $169 in the prior year period. The increase was primarily due to a
lower capitalization of software development costs over the nine-month
-
20 -
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
Sales
and Marketing Expenses
Sales and
marketing expenses increased 21%, or $70, for the three months ended September
30, 2009, compared to the prior year period. The increase was primarily
attributable to increases in travel and related costs, engineering sales support
costs and commissions brought about by the increase in sales. Offsetting the
above mentioned increases were reductions in salaries compared to the prior year
period.
For the
nine months ended September 30, 2009, sales and marketing expense increased 5%,
or $52, to $1,104, compared to $1,052 in the prior year period. The
increase is due in part to the reasons discussed above. In addition
salary and related expenses decreased 19% due to the reduction of two sales
persons during the period.
General
and Administrative Expenses
General
and administrative expenses increased 2%, or $10, for the three months ended
September 30, 2009, compared to the prior year period. For the nine-month period
ended September 30, 2009, general and administrative expenses decreased 3%, or
$50, to $1,504 compared to $1,554 in the prior year. The decrease was primarily
due to reductions in salaries and general corporate expenses. These decreases
were offset by an increase in stock based compensation. The Company anticipates
that general and administrative expense will remain relatively consistent with
the amounts incurred in the prior year in the near term.
Interest
income and other income, net
Interest
income and other income, net was $1 and $2 for the three and nine months ended
September 30, 2009, compared to $40 and $45 in the prior year. The
decrease is due to an interest payment received in 2008 for delinquent accounts
receivable from one customer. There were no such receipts in
2009.
Interest
expense
Interest
expense, related party increased 75%, or $41, to $96 for the three months ended
September 30, 2009, compared to $55 in the prior year period. The increase was
primarily due to the New Financing Transaction. Interest expense-other for the
three months ended September 30, 2009 decreased $22, to $4, compared to $26 in
the prior year period. The decrease was primarily due to the
conversion in June 2008 of non-related party debt into Preferred
Shares. See Notes 5 and 8 in the Condensed Consolidated Financial
Statements of this report on Form 10-Q.
Interest
expense, related party increased 65%, or $96, to $243 for the nine months ended
September 30, 2009, compared to $147 in the prior year period. The increase was
primarily due to the New Financing Transaction. Interest expense-other for the
nine months ended September 30, 2009 decreased $55, to $12, compared to $67 in
the prior year period. The decrease was due to the same factors
discussed above for the three month period.
Amortization
of loan discount and deferred financing expense-related party increased $345, or
169%, to $549 for the three months ended September 30, 2009, compared to $204 in
the prior year period. The increase was primarily due to the New
Financing Transaction. For the nine months ended September 30, 2009, deferred
financing expense-related party increased $550, or 108%, to $1,062 compared to
$512 in the prior year period. The increase was primarily due to the same
factors discussed above.
-
21 -
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
For the
nine months ended September 30, 2009, the Company expensed the remaining
unamortized debt discount and deferred financing costs, aggregating $829, as the
result of the debt extinguishment associated with the cancelled notes and
warrants which were replaced with new notes and warrants as a condition of the
New Financing Transaction in the second quarter of 2009.
The
Company expects to amortize an additional $2,666 of debt discount related to the
New Financing Transaction to interest expense through December
2010.
Liquidity
and Capital Resources
At
September 30, 2009, cash and cash equivalents totaled $631 compared to cash and
cash equivalents of $929 at December 31, 2008. The decrease in cash was
primarily due to cash used by operations of $554, cash used in investing
activities of $657, including $654 in capitalization of software development
costs, and $3 in the acquisition of property and equipment. The cash
used by operations and investing activities were offset by $881 provided by
financing activities. Total current assets were $1,367 at September 30, 2009,
compared to $1,709 at December 31, 2008. As of September 30, 2009, the Company's
principal sources of funds included its cash and cash equivalents aggregating
$631.
Accounts
receivable net decreased $46 for the nine months ended September 30, 2009,
compared to the December 31, 2008 balance, due primarily to the increase in
collections of amounts receivable. Billed but unpaid maintenance
contracts that are offset against accounts receivable and deferred revenue were
$745 at September 30, 2009, compared to $39 for the fourth quarter of
2008. These amounts have been collected in the fourth
quarter. 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 increased by $2 for the nine months ended
September 30, 2009, compared to December 31, 2008, due primarily to increases in
prepaid insurance and annual fees on maintenance and support costs added to
prepaid expenses over the nine months ended September 30, 2009.
Accounts
payable increased $110 for the nine months ended September 30, 2009, compared to
December 31, 2008, due primarily to an increase in professional service
fees. Accrued compensation decreased $8 during the nine months ended
September 30, 2009, compared to the December 31, 2008 balance. The
balance may fluctuate in the future due to increases or decreases in the number
of personnel and utilization of, or increases to, the accrued vacation
balance.
Total
current liabilities were $1,454 at September 30, 2009, compared to $1,100 at
December 31, 2008. Deferred revenue, totaling $706 at September, 2009, compared
to $343 at December 31, 2008, 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 advance payment from its
customers.
On May
28, 2009, the Company entered into a financing transaction (“New Financing
Transaction”) under which the Company raised capital through the issuance of new
secured indebtedness and modified the terms of the June 2008 credit agreement
(“Credit Agreement”). Certain parties (Phoenix Venture Fund LLC
(“Phoenix”), Michael Engmann and certain entities related to Mr. Engmann) to the
New Financing Transaction had a pre-existing relationship with the
Company. In the New Financing Transaction, the Company received an
aggregate of $1,100, which is due on December 31, 2010, accrues interest at 8%
per annum, and which, at the option of the Company, may be paid in cash or in
kind. In conjunction with the New Financing Transaction, the Company
issued warrants to the lenders to purchase an aggregate of 18,333 shares of
common stock (exercisable through June 30, 2012 at $0.06 per share).
Additionally, the Company issued a warrant to SG Phoenix LLC, an affiliate of
Phoenix, to purchase 3,948 shares of common stock (exercisable through June 30,
2012 at $0.06 per share) and a warrant to purchase 250 shares of common stock
(exercisable through June 30, 2012 at $0.06 per share) to an unrelated third
party in connection with administrative services provided to the
Company.
-
22 -
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
In
connection with the New Financing Transaction, the Company amended the Credit
Agreement such that the notes underlying the Credit Agreement were cancelled and
new notes were issued (principal amount of $3,709). In addition, warrants
to purchase 26,495 shares of common stock included in the June 2008 transaction
were cancelled and new warrants to purchase 61,821 shares of common stock were
issued. The note and warrants have identical terms to the terms outlined
in the New Financing Transaction above. The Company recorded a loss on debt
extinguishment in the amount of $829 related to the cancellation of the notes,
and recorded an increase to additional paid in capital in the amount of $875
related to the cancellation of warrants that had been recorded as a derivative
liability.
The
Company ascribed the fair value of $3,178 to the new warrants, excluding the
warrants issued for administrative services, which is recorded as a discount to
Long-term debt in the balance sheet. The fair value of the warrants was
estimated on the commitment date using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 1.64%; expected term of 3
years; expected volatility of 137%; and expected dividend yield of 0%. The
Company may use the proceeds from the New Financing Transaction to pay the
Company’s indebtedness and accrued interest on that indebtedness, for working
capital and general corporate purposes, in each case in the ordinary course of
business, and to pay fees and expenses in connection with the New Financing
Transaction, which were $347, including $173 attributable to the warrants issued
for the administrative services. The fees and expenses are recorded as
deferred financing costs and are to be amortized over the life of the
loan.
The
Company exercised its option and made the second and third quarter 2009 interest
payment in kind. The Company issued new notes in the amount of $82 and
$99, respectively, and issued additional warrants to purchase 1,366 and 1,643
shares, respectively, of common stock with the same terms as those issued in the
New Financing Transaction. The Company ascribed the fair value of $69 and $112,
respectively to the new warrants of which $69 and $100, respectively, is
recorded as a discount to Long-term debt in the balance sheet. The fair value of
the warrants was estimated on the commitment date using the Black-Scholes
pricing model with the following assumptions: risk-free interest rate of 1.64%
and 1.45%; expected term of 3 years; expected volatility of 137% and 142%; and
expected dividend yield of 0%.
In
connection with the New Financing Transaction, the Registration Rights Agreement
from the previous financing transaction was amended to provide the lenders
certain rights to demand registration of shares issuable upon exercise of the
new warrants.
Interest
expense associated with the Company’s debt for the three months ended September
30, 2009 and 2008 was $668 and $308, respectively. Included in interest
expense for the three months ended September 30, 2009 and 2008 was $568 and
$227, respectively, of amortization of the debt discount and deferred financing
costs. Interest expense for the nine months ended September 30, 2009 and 2008
was $1,353 and $857, respectively. Included in interest expense for the nine
months ended September 30, 2009 and 2008 was $1,098 and $643, respectively, of
amortization of the debt discount and deferred financing costs.
The
Company has the following material commitments as of September 30,
2009:
|
Payments
due by period
|
||||||||||||||||||||||||||||
|
Contractual
obligations
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
|||||||||||||||||||||
|
Short-term
debt (1)
|
$ | 20 | $ | 20 | $ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||||||
|
Long-term
debt (2)
|
4,990 | – | 4,990 | – | – | – | – | |||||||||||||||||||||
|
Operating
lease commitments (3)
|
591 | 71 | 280 | 240 | – | – | – | |||||||||||||||||||||
|
Total
contractual cash obligations
|
$ | 5,601 | $ | 91 | $ | 5,270 | $ | 240 | $ | – | $ | – | $ | – | ||||||||||||||
|
1.
|
Short-term
debt reported on the balance sheet is net of the remaining discount
representing the fair value of warrants issued in connection with the
Company’s debt financings.
|
-
23 -
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
|
2.
|
Long-term
debt reported on the balance sheet is net of approximately $2,666 in
discounts representing the fair value of warrants issued to the debt
holders.
|
|
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.
|
The
Company has experienced recurring losses from operations that raise a
substantial doubt about its ability to continue as a going concern. There can be
no assurance that the Company will have adequate capital resources to fund
planned operations or that any additional funds will be available to it when
needed, or if available, will be available on favorable terms or in amounts
required by it. If the Company is unable to obtain adequate capital resources to
fund operations, it may be required to delay, scale back or eliminate some or
all of its operations, which may have a material adverse effect on its business,
results of operations and ability to operate as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Item
3. Quantitative and Qualitative
Disclosures About Market Risk.
Interest Rate
Risk
The
Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if 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 months ended September 30,
2009.
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 nine months ended September 30, 2009 and 2008, 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.
- 24-
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
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
Not applicable.
Item
2. Unregistered Sale of
Securities and Use of Proceeds.
None.
Item
3. Defaults Upon Senior
Securities.
None.
Item
4. Submission of Matters to a
Vote of Security Holders.
None
Item
5. Other
Information.
None.
Item
6. Exhibits.
(a) Exhibits.
|
Exhibit
Number
|
Document
|
|
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).
|
-
25 -
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
|
Exhibit
Number
|
Document
|
|
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.
|
|
3.7
|
Certificate
of Amendment to the Company’s Amended and Restated Certificate of
Incorporation filed with the Delaware Secretary of State August 17, 2007,
incorporated herein by reference to Exhibit 3.7 to the Company’s
Registration Statement on Form S/1 filed on December 28,
2007.
|
|
3.8
|
Amended
and Restated Certificate of Incorporation of the Company filed with the
Delaware Secretary of State on May 18, 1995, incorporated herein by
reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q
filed on August 14, 2008.
|
|
3.9
|
Certificate
of Designations, Powers, Preferences and Rights of the Series A Cumulative
Convertible Preferred Stock filed with the Delaware Secretary of State on
June 4, 2008, incorporated herein by reference to Exhibit 4.23 to the
Company’s Quarterly Report on Form 10-Q filed on August 14,
2008.
|
|
3.10
|
Certificate
of Amendment to the Company’s Amended and Restated Certificate of
Incorporation filed with the Delaware Secretary of State on June 30, 2008,
incorporated herein by reference to Exhibit 3.7 to the Company’s Quarterly
Report on Form 10-Q filed on August 14, 2008.
|
|
3.11
|
Certificate
of Designations, Powers, Preferences and Rights of the Series A-1
Cumulative Convertible Preferred Stock filed with the Delaware Secretary
of State on October 30, 2008., incorporated herein by reference to Exhibit
3.11 to the Company’s Annual Report on Form 10-K filed on March 12,
2009.
|
|
3.12
|
Certificate
of Elimination of the Company’s Series A Cumulative Convertible Preferred
Stock filed with the Delaware Secretary of State on December 30, 2008,
incorporated herein by reference to Exhibit 3.12 to the Company’s Annual
Report on Form 10-K filed on March 12, 2009.
|
|
3.13
|
Certificate
of Amendment to the Company’s Amended and Restated Certificate of
Incorporation filed with the Delaware Secretary of State on June 30,
2009.
|
|
*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.
|
- 26
-
Communication
Intelligence Corporation
and
Subsidiary
(In
thousands, except share and per share amounts)
FORM
10-Q
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
COMMUNICATION
INTELLIGENCE CORPORATION
|
||
|
Registrant
|
||
|
October
28, 2009
|
/s/
Francis V. Dane
|
|
|
Date
|
Francis
V. Dane
|
|
|
(Principal
Financial Officer and Officer Duly Authorized to Sign on Behalf of the
Registrant)
|