iSign Solutions Inc. - Quarter Report: 2012 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, 2012
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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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(State or other jurisdiction of
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(I.R.S. Employer
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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)
(650) 802-7888
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Registrant's telephone number, including area code
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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).
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Yes
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No
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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 November 14, 2012: 224,503,503.
- 2 -
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Condensed Consolidated Balance Sheets at September 30, 2012 (unaudited) and December 31, 2011
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3
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Condensed Consolidated Statements of Operations for the Three and Nine Month
Periods Ended September 30, 2012 and 2011 (unaudited)
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4
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Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Nine Month
Period Ended September 30, 2012 (unaudited)
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6
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Condensed Consolidated Statements of Cash Flows for the Nine Month Periods
Ended September 30, 2012 and 2011 (unaudited)
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7
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Notes to Unaudited Condensed Consolidated Financial Statements
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9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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24
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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30
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Item 4. Controls and Procedures
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30
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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30
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Item 1A. Risk Factors
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30
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Item 2. Unregistered Sale of Securities and Use of Proceeds
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30
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Item 3. Defaults Upon Senior Securities
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30
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Item 4. Mine Safety Disclosures
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31
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Item 5. Other Information
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31
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Item 6. Exhibits
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Signatures
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33
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- 2 -
PART I–FINANCIAL INFORMATION
Item 1. Financial Statements.
Communication Intelligence Corporation
Condensed Consolidated Balance Sheets
(In thousands)
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September 30,
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December 31,
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|||||||
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2012
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2011
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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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||||||||
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Cash and cash equivalents
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$ | 566 | $ | 307 | ||||
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Accounts receivable, net of allowance of $27 at September 30, 2012 and $3 at December 31, 2011
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514 | 298 | ||||||
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Prepaid expenses and other current assets
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194 | 29 | ||||||
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Total current assets
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1,274 | 634 | ||||||
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Property and equipment, net
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28 | 32 | ||||||
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Patents, net
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1,746 | 2,020 | ||||||
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Capitalized software development costs, net
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- | 78 | ||||||
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Other assets
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29 | 29 | ||||||
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Total assets
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$ | 3,077 | $ | 2,793 | ||||
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Liabilities and Stockholders' Equity
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Current liabilities:
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Short-term notes payable
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$ | 3,168 | $ | 1,083 | ||||
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Accounts payable
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336 | 261 | ||||||
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Accrued compensation
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297 | 221 | ||||||
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Other accrued liabilities
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223 | 243 | ||||||
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Deferred revenue
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474 | 517 | ||||||
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Total current liabilities
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4,498 | 2,325 | ||||||
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Deferred revenue long-term
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304 | 397 | ||||||
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Deferred rent
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130 | 147 | ||||||
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Derivative liability
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182 | 281 | ||||||
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Total liabilities
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5,114 | 3,150 | ||||||
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Commitments and contingencies
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Stockholders' deficit:
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||||||||
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Series A-1 Preferred Stock, $.01 par value; 2,000 shares authorized; 934 and 880 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively, ($934 liquidation preference at September 30, 2012)
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934 | 880 | ||||||
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Series B Preferred Stock, $.01 par value; 14,000 shares authorized; 9,811 and 9,250 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively, ($14,717 liquidation preference at September 30, 2012)
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7,940 | 7,380 | ||||||
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Series C Preferred Stock, $.01 par value; 4,100 shares authorized; 4,073 and 3,547 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively, ($6,109 liquidation preference at September 30, 2012)
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4,652 | 3,569 | ||||||
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Common stock, $.01 par value; 1,050,000 shares authorized; 231,004 issued, 224,504 outstanding at September 30, 2012 and 198,188 shares issued and outstanding at December 31, 2011
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2,309 | 1,981 | ||||||
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Treasury shares, 6,500 and 0 shares at September 30, 2012 and December 31, 2011, respectively
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(325 | ) | − | |||||
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Additional paid-in capital
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96,706 | 97,715 | ||||||
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Accumulated deficit
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(114,215 | ) | (111,839 | ) | ||||
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Accumulated other comprehensive loss
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(38 | ) | (43 | ) | ||||
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Total stockholders' deficit
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(2,037 | ) | (357 | ) | ||||
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Total liabilities and stockholders' deficit
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$ | 3,077 | $ | 2,793 | ||||
See accompanying notes to these Condensed Consolidated Financial Statements
3
Communication Intelligence Corporation
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
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Three Months Ended
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Nine months Ended
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|||||||||||||||
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September 30,
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September 30,
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|||||||||||||||
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2012
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2011
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2012
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2011
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Revenue:
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Product
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$ | 355 | $ | 341 | $ | 1,231 | $ | 648 | ||||||||
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Maintenance
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161 | 171 | 477 | 467 | ||||||||||||
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Total Revenue
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516 | 512 | 1,708 | 1,115 | ||||||||||||
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Operating costs and expenses:
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Cost of sales:
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Product
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87 | 23 | 308 | 276 | ||||||||||||
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Maintenance
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9 | 63 | 48 | 239 | ||||||||||||
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Research and development
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441 | 370 | 1,247 | 1,063 | ||||||||||||
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Sales and marketing
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329 | 386 | 1,059 | 1,155 | ||||||||||||
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General and administrative
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426 | 540 | 1,388 | 1,624 | ||||||||||||
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Total operating costs and expenses
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1,292 | 1,382 | 4,050 | 4,357 | ||||||||||||
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Loss from operations
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(776 | ) | (870 | ) | (2,342 | ) | (3,242 | ) | ||||||||
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Other income (expense), net
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(3 | ) | (1 | ) | (9 | ) | (3 | ) | ||||||||
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Interest expense:
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Related party
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(30 | ) | (3 | ) | (88 | ) | (3 | ) | ||||||||
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Other
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(34 | ) | - | (57 | ) | - | ||||||||||
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Amortization of loan discount and deferred financing:
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Related party
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(5 | ) | – | (13 | ) | – | ||||||||||
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Other
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(7 | ) | – | (16 | ) | – | ||||||||||
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Gain (loss) on derivative liability
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43 | 30 | 149 | 24 | ||||||||||||
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Net loss
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(812 | ) | (844 | ) | (2,376 | ) | (3,224 | ) | ||||||||
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Accretion of beneficial conversion feature, Preferred shares:
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Related party (Note 6)
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(93 | ) | (17 | ) | (767 | ) | (119 | ) | ||||||||
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Other (Notes 6)
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(58 | ) | (11 | ) | (201 | ) | (811 | ) | ||||||||
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Preferred stock dividends:
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Related party
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(158 | ) | (203 | ) | (370 | ) | (556 | ) | ||||||||
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Other
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(51 | ) | (92 | ) | (121 | ) | (225 | ) | ||||||||
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Net loss attributable to commonstockholders
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$ | (1,172 | ) | $ | (1,167 | ) | $ | (3,835 | ) | $ | (4,935 | ) | ||||
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Basic and diluted loss per common share
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$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
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Weighted average common shares outstanding, basic and diluted
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224,492 | 191,229 | 222,198 | 191,254 | ||||||||||||
See accompanying notes to these Condensed Consolidated Financial Statements
4
Communication Intelligence Corporation
Condensed Consolidated Statements Comprehensive Loss
Unaudited
(In thousands, except per share amounts)
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Three Months Ended
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Nine months Ended
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|||||||||||||||
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September 30,
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September 30,
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|||||||||||||||
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2012
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2011
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2012
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2011
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Net loss:
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$ | (812 | ) | $ | (844 | ) | $ | (2,376 | ) | $ | (3,224 | ) | ||||
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Other comprehensive loss, net of tax:
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Foreign currency translation adjustment
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1 | - | 5 | (1 | ) | |||||||||||
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Total comprehensive loss
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$ | (811 | ) | (844 | ) | $ | (2,371 | ) | $ | (3,225 | ) | |||||
See accompanying notes to these Condensed Consolidated Financial Statements
5
Communication Intelligence Corporation
Consolidated Statement of Changes in Stockholders' Deficit
Nine months Ended September 30, 2012
(In thousands)
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Series A-1 Preferred
Shares
Outstanding
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Series A-1Preferred
Shares
Amount
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Series B Preferred
Shares
Outstanding
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Series B Preferred
Shares
Amount
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Series C Preferred
Shares
Outstanding
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Series C Preferred
Shares
Amount
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Common
Shares
Outstanding
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Common
Stock
Amount
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Treasury
Stock
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Additional
Paid-In
Capital
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Accumulated
Deficit
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Accumulated
Other
Comprehensive
Loss
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Total
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Balance as of December 31, 2011
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880 | $ | 880 | 9,250 | $ | 7,380 | 3,547 | $ | 3,569 | 198,188 | $ | 1,981 | $ | − | $ | 97,715 | $ | (111,839 | ) | $ | (43 | ) | $ | (357 | ) | |||||||||||||||||||||||||||
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Receipt of 6.5M Common Shares in settlement of the 16b action
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(6,500 | ) | (325 | ) | (325 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
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Series C Preferred Shares issued in settlement of an indemnification claim related to the 16b settlement
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278 | 417 | 417 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Stock-based employee compensation
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376 | 376 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Common shares issued in connection with the cashless exercise of warrants
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20,186 | 202 | (202 | ) |
─
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Common shares issued in connection with the exercise of warrants for cash
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7,439 | 74 | 138 | 212 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Common shares issued in connection with the exercise of stock options option for cash
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184 | 2 | 7 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Common stock issued as restricted stock
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46 | − | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Common shares issued in connection with the conversion of Series B Preferred Shares
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(140 | ) | (140 | ) | 3,232 | 33 | 107 | − | ||||||||||||||||||||||||||||||||||||||||||||
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Common shares issued in connection with the conversion of Series C Preferred Shares
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(39 | ) | (39 | ) | 1,729 | 17 | 22 | − | ||||||||||||||||||||||||||||||||||||||||||||
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Accretion of Beneficial Conversion Feature on Series C Preferred Shares issued in settlement of the indemnification claim
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417 | (417 | ) | − | ||||||||||||||||||||||||||||||||||||||||||||||||
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Accretion of Beneficial Conversion Feature on Preferred Shares dividends issued in kind
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263 | 288 | (551 | ) | − | |||||||||||||||||||||||||||||||||||||||||||||||
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Preferred share dividends, paid in kind
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54 | 54 | 701 | 437 | 287 | - | (491 | ) | − | |||||||||||||||||||||||||||||||||||||||||||
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Comprehensive loss:
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||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net loss
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(2,376 | ) | (2,376 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
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Foreign currency translation adjustment
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5 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Balances as of September 30, 2012
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934 | $ | 934 | 9,811 | $ | 7,940 | 4,073 | $ | 4,652 | 224,504 | $ | 2,309 | $ | (325 | ) | $ | 96,706 | $ | (114,215 | ) | $ | (38 | ) | $ | (2,037 | ) | ||||||||||||||||||||||||||
See accompanying notes to these Condensed Consolidated Financial Statements
6
Communication Intelligence Corporation
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
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Nine months Ended
September 30,
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||||||||
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2012
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2011
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|||||||
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Cash flows from operating activities:
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||||||||
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Net loss
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$ | (2,376 | ) | $ | (3,224 | ) | ||
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Adjustments to reconcile net loss to net cash
used for operating activities:
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||||||||
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Depreciation and amortization
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365 | 663 | ||||||
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Amortization of debt discount and deferred financing costs
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29 | − | ||||||
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Stock-based employee compensation
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376 | 613 | ||||||
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Restricted stock expense
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2 | 3 | ||||||
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Series C Preferred Shares issued for services
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− | 195 | ||||||
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Series C Preferred Shares issued in settlement of indemnity claim
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417 | − | ||||||
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Common Stock received as settlement of 16b claim
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(325 | ) | − | |||||
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Warrants issued for services
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3 | − | ||||||
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Gain on derivative liability
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(149 | ) | (24 | ) | ||||
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Forfeiture of restricted stock issued in lieu of salary
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− | (16 | ) | |||||
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Changes in operating assets and liabilities:
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||||||||
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Accounts receivable
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(216 | ) | (452 | ) | ||||
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Prepaid expenses and other assets
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(165 | ) | 12 | |||||
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Accounts payable
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75 | (197 | ) | |||||
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Accrued compensation
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76 | (197 | ) | |||||
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Other accrued liabilities
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(37 | ) | 39 | |||||
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Deferred revenue
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(136 | ) | (161 | ) | ||||
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Net cash used for operating activities
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(2,061 | ) | (2,746 | ) | ||||
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Cash flows from investing activities:
Acquisition of property and equipment
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(8 | ) | (13 | ) | ||||
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Capitalized software development costs
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− | (72 | ) | |||||
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Net cash used for investing activities
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(8 | ) | (85 | ) | ||||
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Cash flows from financing activities:
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||||||||
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Net proceeds from issuance of Series C preferred shares
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− | 686 | ||||||
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Proceeds from issuance of short-term debt
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2,328 | 600 | ||||||
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Proceeds from exercise of warrants for cash
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213 | − | ||||||
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Proceeds from exercise of stock options
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12 | − | ||||||
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Payment of short-term debt
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(225 | ) | − | |||||
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Net cash provided by financing activities
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2,328 | 1,286 | ||||||
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Effect of exchange rate changes on cash and cash equivalents
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− | − | ||||||
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Net increase (decrease) in cash and cash equivalents
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259 | (1,545 | ) | |||||
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Cash and cash equivalents at beginning of period
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307 | 1,879 | ||||||
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Cash and cash equivalents at end of period
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$ | 566 | $ | 334 | ||||
See accompanying notes to these Condensed Consolidated Financial Statements
7
Communication Intelligence Corporation
Condensed Consolidated Statements of Cash Flows (Continued)
Unaudited
(In thousands)
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Nine months Ended
September 30,
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||||||||
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2012
|
2011
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|||||||
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Supplementary disclosure of cash flow information
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||||||||
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Interest paid
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$ | − | $ | − | ||||
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Income tax paid
|
$ | − | $ | − | ||||
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Non-cash financing and investing transactions
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||||||||
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Series C preferred shares issued in separation agreement
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$ | - | $ | 36 | ||||
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Dividends on preferred shares
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$ | 491 | $ | 796 | ||||
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Accretion of beneficial conversion feature on preferred shares
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$ | 968 | $ | 929 | ||||
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Cashless exercise of warrants
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$ | 202 | $ | − | ||||
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Conversion of Series B Preferred Stock into Common Stock
|
$ | 140 | $ | − | ||||
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Conversion of Series C Preferred Stock into Common Stock
|
$ | 39 | $ | − | ||||
See accompanying notes to these Condensed Consolidated Financial Statements
8
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
1.
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Nature of business and summary of significant accounting policies
|
Basis of Presentation
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, 2011.
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 is a leading supplier of electronic signature products and the recognized leader in biometric signature verification. CIC enables companies to achieve truly paperless workflow in their electronic business processes by providing multiple signature technologies across virtually all applications. CIC’s solutions are available both in software as a service (“SaaS”) and on-premise delivery models and afford “straight-through-processing,” which can increase customer revenue by enhancing user experience and can also reduce costs through paperless and virtually error-free electronic transactions that can be completed significantly quicker than paper-based procedures. To date, the Company primarily has delivered biometric and electronic signature solutions to channel partners and end-user customers in the financial services industry.
The Company's research and development activities have given rise to numerous technologies and products. The Company's core technologies can be referred to as “transaction-enabling” technologies. These technologies include various forms of electronic signatures, such as handwritten biometric, click-to-sign and others, as well as signature verification, cryptography and the logging of audit trails to show signers’ intent. These technologies can enable secure, legal and regulatory compliant electronic transactions that can enhance customer experience at a fraction of the time and cost required by traditional, paper-based processes. The Company’s products include SignatureOne® Ceremony® Server™, SignatureOne® Console, Sign-it® and the iSign® suite of products.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2012, the Company’s accumulated deficit was approximately $114,215. The Company also has a working capital deficit at September 30, 2012. The Company has primarily met its working capital needs through the sale of debt and equity securities. As of September 30, 2012, the Company’s cash balance was approximately $566. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Historically, the Company raised needed capital through debt and equity financings and converted short-term notes payable to equity. The Company sold, for cash in a private placement, 1,440 additional shares of Series B Preferred Stock at a purchase price of $1.00 per share (Note 6 to the Condensed Consolidated Financial Statements).
9
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
1.
|
Nature of business and summary of significant accounting policies (continued)
|
In March 2011, the Company sold for cash in a private placement an additional 800 shares of Series C Preferred Stock at a purchase price of $1.00.
In September 2011, the Company borrowed $100 at 10% per annum in the form of two demand notes which were repaid in September 2012, and borrowed an additional $500 at 10% per annum in the form of an unsecured convertible promissory note due September 20, 2012, which was subsequently amended to extend the due date through December 31, 2012. In December 2011, the Company borrowed $500 at 10% per annum in the form of unsecured convertible promissory notes due December 2, 2012, which was subsequently amended to extend the due date through December 31, 2012 (Note 4 to the Condensed Consolidated Financial Statements). In February 2012, the Company borrowed $25 at 10% per annum in the form of a demand note and in March 2012, the Company borrowed $100 at 10% per annum in the form of a demand note. The February and March notes were repaid in September 2012. In April 2012 the Company borrowed $1,000 at 10% per annum in the form of convertible notes which are due in April 2013. In September 2012, the Company borrowed $1,103 at 10% per annum in the form of convertible notes. The Company is seeking shareholder approval to increase its authorized capital to complete a financing and issuance of Series D Preferred Shares. The above referenced convertible notes will be exchanged for shares of the Series D Preferred.
There can be no assurance that the Company will be successful in securing 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.
Comprehensive Income
On January 1, 2012, the Company adopted an accounting standard that modifies the presentation of comprehensive income in the consolidated financial statements. The standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company elected the latter presentation option upon adopting this accounting standard. The adoption of this guidance did not have a significant effect on the consolidated financial statements.
Revenue recognition
For products sold under perpetual license, the Company recognizes revenue upon shipment, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all non-recurring engineering work necessary to enable the Company's product to function within the customer's application has been completed and the Company's product has been delivered according to specifications. For software sold under a term license, the Company recognizes revenue over the term of the license granted. Revenue from customization of software is recognized when all engineering work necessary to enable the Company's products to function within the customer's application has been completed, and the Company has delivered its product according to specifications.
Software license agreements may contain multiple elements, including upgrades and enhancements, products deliverable on a when and if available basis and post contract support.
10
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
1.
|
Nature of business and summary of significant accounting policies (continued)
|
For arrangements with multiple deliverables the Company allocates consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, Management’s best estimate of the selling prices is used. For the Company’s tangible products containing software and hardware elements that function together and deliver the tangible products’ essential functionality, the Company allocates revenue under the multiple-element arrangements revenue recognition guidance discussed above.
Maintenance revenue is recorded for post-contract support and upgrades or enhancements, which is paid for in addition to license fees, and is recognized as costs are incurred or over the support period whichever is longer. For undelivered elements where objective and reliable evidence of fair value does not exist, revenue is deferred and subsequently recognized when delivery has occurred and when fair value has been determined.
Treasury Stock
Shares of common stock returned to, or repurchased by, the Company are recorded at cost and are included as a separate component of stockholders’ equity. The Company received 6,500 shares of its Common Stock having a fair value under the cost method of $325 in January 2012, in settlement of a 16b suit brought by a shareholder against Phoenix Venture Fund, LLC. At September 30, 2012, the total value of treasury stock was $325.
Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account entitled treasury stock. The equity accounts that were credited for the original share issuance (common stock, paid-in capital in excess of par, etc.) remain intact. When the treasury shares are reissued, proceeds in excess of cost are credited to a paid-in capital account. Any deficiency is charged to retained earnings (unless paid-in capital from previous treasury share transactions exists, in which case the deficiency is charged to that account, with any excess charged to retained earnings).
Accounting Changes and Recent Accounting Pronouncements
Accounting Standards Issued But Not Yet Adopted
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
In the first nine months of 2012, the adoption of other accounting standards had no material impact on the Company’s financial position, results of operations or cash flows.
|
2.
|
Accounts receivable and revenue concentrations
|
Four customers accounted for 10%, 13%, 22% and 37%, respectively, of gross accounts receivable as of September 30, 2012. Three customers accounted for 11%, 13% and 67%, respectively, of gross accounts receivable as of September 30, 2011.
Two customers accounted for 14% and 28% of total revenue for the three months ended September 30, 2012. One customer accounted for 66% of total revenue for the three months ended September 30, 2011.
Three customers accounted for 10%, 12% and 26% of total revenue for the nine months ended September 30, 2012. One customer accounted for 37% of total revenue for the nine months ended September 30, 2011.
11
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
3.
|
Patents
|
The Company performs intangible asset impairment analysis at least annually in accordance with the relevant accounting guidance. 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 taking into account the factors listed in Critical Accounting Policies in the Company’s Annual Report on Form 10-K.
Management completed an analysis of the Company’s patents as of December 31, 2011. 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 three and nine months ended September 30, 2012, and therefore concluded that no impairment in the carrying values of the patents existed at September 30, 2012.
Amortization of patent costs was $90 and $274 for the three and nine months ended September 30, 2012. Amortization of patent costs was $92 and $281 for the three and nine month periods ended September 30, 2011.
Intangible Assets
The following table summarizes intangible assets (in millions):
|
September 30, 2012
|
December 31, 2011
|
|||||||||||||||
|
Carrying Amount
|
Accumulated Amortization
|
Carrying Amount
|
Accumulative Amortization
|
|||||||||||||
|
Amortizable intangible assets:
|
||||||||||||||||
|
Patents
|
$ | 6,746 | $ | (5,000 | ) | $ | 6,746 | $ | (4,726 | ) | ||||||
|
Capitalized software
|
4,112 | (4,112 | ) | 4,112 | (4,034 | ) | ||||||||||
|
Total
|
$ | 10,858 | $ | (9,112 | ) | $ | 10,858 | $ | (8,760 | ) | ||||||
Amortization for intangible assets recorded as of September 30, 2012 is estimated to be (in thousands):
|
Remainder of 2012
|
$ | 91 | ||
|
2013
|
365 | |||
|
2014
|
357 | |||
|
2015
|
342 | |||
|
2016
|
322 | |||
|
Thereafter
|
269 | |||
|
Total
|
$ | 1,746 |
|
4.
|
Short-term notes payable
|
On September 14, 2012, the Company entered into subscription agreements (the “Subscription Agreements”) with certain investors (the “September 2012 Investors”). Under the terms of the Subscription Agreements, the September 2012 Investors purchased approximately $1,103,000 of unsecured convertible promissory notes (each a “September 2012 Note,” and, collectively, the “September 2012 Notes”), and, subject to the satisfaction of certain closing conditions, agreed to purchase at a subsequent closing (the “Final Closing”) approximately 1,103,000 shares of Series D-2 Preferred Convertible Stock (“Series D-2 Preferred Stock”) at a purchase price of $1.00 per share. The September 2012 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 31, 2012. The September 2012 Notes
12
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
4.
|
Short-term notes payable (continued)
|
will automatically convert into shares of Series D-2 Preferred Stock at a price of $1.00 per share upon the consummation of the Final Closing, provided such closing occurs prior to December 31, 2012. The Series D-2 Preferred Stock is convertible into shares of the Company’s common stock (“Common Stock”) at a conversion price of $0.05 per share (subject to adjustment). The Final Closing is presently expected to be consummated on or about November 15, 2012, and is subject to stockholder approvals and the satisfaction of customary closing conditions. The proceeds from the September 2012 Notes were used to repay approximately $225 in demand notes to a related party and an employee of the Company, and for working capital and general corporate purposes in the ordinary course of business
On April 23, 2012, the Company entered into a Note and Warrant Purchase Agreement (the “April 2012 Purchase Agreement”) with certain investors (the “April 2012 Investors”). Under the terms of the April 2012 Purchase Agreement, the Company received loans in the aggregate amount of $1,000,000 from the April 2012 Investors in exchange for the Company’s issuance to each of the April 2012 Investors an unsecured convertible promissory note equal to the principal amount of such April 2012 Investor’s loan to the Company (the “April 2012 Notes”). The April 2012 Notes bear interest at the rate of 10% per annum, and have a maturity date of April 22, 2013. The April 2012 Notes automatically convert into securities sold in the Company’s next equity financing. In connection with the issuance of the April 2012 Notes to the April 2012 Investors, the Company also issued to the April 2012 Investors warrants to purchase an aggregate of 5,000,000 shares of the Company’s Common Stock at an exercise price of $0.05 per share (the “April 2012 Warrants”). The company ascribed a value of $47 to the April 2012 Warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.40, expected life of three years, expected volatility of 213%, and a dividend yield of 0. This value was recorded as a discount to notes payable and as a derivative liability. The discount will be amortized over the life of the April 2012 Notes. The April 2012 Warrants are exercisable for a period of three years. The Company is using the funds received from the April 2012 Investors for working capital and general corporate purposes in the ordinary course of business, and to pay fees and expenses in connection with the Company’s entry into the April 2012 Purchase Agreement. As of September 30, 2012, the fair value of the warrants was $45. In connection with the April 2012 Purchase Agreement, the Company issued an aggregate of 349 warrants to two consultants on the financing at an exercise price of $0.05 per share. The Company ascribed a value of $2 to the warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.40, expected life of three years, expected volatility of 213%, and a dividend yield of 0. The warrant value was recorded as a professional service fee and as a derivative liability. The warrants are exercisable for a period of three years. As of September 30, 2012, the fair value of the warrants was $3.
On February 17, 2012 and March 5, 2012, the Company borrowed $25 and $100, respectively, from Phoenix, a related party, and issued unsecured demand notes. These notes were due on demand and bore interest at the rate of 10% per annum. The notes were repaid from the proceeds of the September 2012 Purchase Agreement. The Company used the net proceeds from the demand notes for working capital and general corporate purposes.
On December 2, 2011, the Company entered into a Note and Warrant Purchase Agreement (the “December 2011 Purchase Agreement”) with Philip Sassower, the Company’s Chairman and CEO, and other investors (the “December 2011 Investors”). Under the terms of the December 2011 Purchase Agreement, the Company issued unsecured convertible promissory notes in the aggregate amount of $500 (the “December 2011 Notes”) to the December 2011 Investors. The December 2011 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 20, 2012. The December 2011 Notes are also convertible at the option of the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the December 2011
13
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
4.
|
Short-term notes payable (continued)
|
Notes, the Company also issued to the December 2011 Investors warrants to purchase an aggregate of 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share (the “December 2011 Warrants”). The company ascribed a value of $13 to the December 2011 Warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.39, expected life of three years, expected volatility of 202%, and a dividend yield of 0. This value was recorded as a discount to notes payable and as a derivative liability. The discount will be amortized over the life of the December 2011 Notes. The December 2011 Warrants are exercisable for a period of three years. In February 2012, December 2011 Warrants for 5,000 shares were exercised, 4,889 in a cashless exercise and 111 for cash. The Company issued 4,043 shares of common stock related to the exercise and received $2 in cash. As of September 30, 2012, the fair value of the remaining 556 December 2011 Warrants was $1. The Company used the net proceeds from the December Notes for working capital and general corporate purposes.
On September 20, 2011, the Company entered into a Note and Warrant Purchase Agreement (the “September 2011 Purchase Agreement”) with Phoenix Banner Holdings, LLC (the “September 2011 Investor”), an entity affiliated with Phoenix, the Company’s largest stockholder. Under the terms of the September 2011 Purchase Agreement, the Company issued an unsecured convertible promissory note in the amount of $500 (the “September 2011 Note”) to the September 2011 Investor. The September 2011 Note bears interest at the rate of 10% per annum, and had a maturity date of September 20, 2012, which was subsequently amended to extend the due date through December 31, 2012. The September 2011 Note is also convertible at the option of the September 2011 Investor into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 Investor a warrant to purchase 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share (the “September 2011 Warrant”). On September 20, 2011, the Company ascribed a value of $13 to the September 2011 Warrant using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.42, expected life of three years, expected volatility of 204%, and a dividend yield of 0. This value was recorded as a discount to notes payable and as a derivative liability. The discount will be amortized over the life of the September 2011 Note. The September 2011 Warrant is exercisable for a period of three years. As of September 30, 2012, the fair value of the September 2011 Warrant was $12. The Company used the net proceeds from the September Notes for working capital and general corporate purposes.
On September 2, 2011, the Company borrowed an aggregate of $100 from Phoenix and an employee of the Company and issued unsecured demand notes to each. These notes were due on demand and bore interest at the rate of 10% per annum. The notes were repaid from the proceeds of the September 2012 Purchase Agreement. The Company used the net proceeds from the demand notes for working capital and general corporate purposes.
Interest expense associated with the Company’s debt for the three months ended September 30, 2012 and 2011, was $64 and $3, respectively, of which $30 and $3 was related party expense. Interest expense associated with the Company’s debt for the nine months ended September 30, 2012 and 2011, was $145 and $3, respectively, of which $88 and $3 was related party expense. Amortization of debt discount and deferred financing costs for the three months ended September 30, 2012, and 2011, was $12 and $0, respectively, of which $5 and $0 was related party expense. Amortization of debt discount and deferred financing costs included in interest expense for the nine months ended September 30, 2012, and 2011, was $29 and $0, respectively, of which $13 and $0 was related party expense.
14
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
4.
|
Short-term notes payable (continued)
|
Material commitments:
The Company had the following commitments at September 30, 2012:
|
Payments due by period−
|
||||||||||||||||||||||||||||
|
Contractual obligations
|
Total
|
2012
|
2013
|
2014
|
2015
|
2016
|
Thereafter
|
|||||||||||||||||||||
|
Short-term note payable
|
$ | 3,203 | $ | 2,203 | $ | 1,000 | $ | − | $ | − | $ | − | $ | − | ||||||||||||||
|
5.
|
Derivative liability
|
The Company has determined that certain warrants related to the Company’s financings and the embedded conversion feature on the Series A-1 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. The fair value of the embedded conversion feature for the Series A-1 Preferred Stock at September 30, 2012, and December 31, 2011, was insignificant.
The Company has issued a total of 9,811 shares of Series B Preferred Stock and 4,073 shares of Series C Preferred Stock, respectively. At December 31, 2010, the Company determined that the embedded conversion feature on these shares required liability classification due to the impact the anti-dilution provisions could have had on the number of shares issuable upon conversion. The fair value of the embedded conversion feature on the Series B Preferred Stock at December 31, 2010, was approximately $136, and the fair value of the embedded conversion feature on the Series C Preferred Stock was approximately $179. On March 31, 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock and its Certificate of Designation for its Series C Preferred Stock by amending the anti-dilution provisions (see Note 7 to the Condensed Consolidated Financial Statements). As a result of these amendments, the Series B Preferred Stock and Series C Preferred Stock no longer require liability classification.
In March 2011, the Company issued fee warrants to related parties to purchase 1,778 shares of common stock in connection with a private placement sale of 800 shares of Series C Preferred Stock and recorded a derivative liability of $4 as of March 31, 2011. The fair market value of the derivative liability at September 30, 2012, was $4 (Note 7 to the Condensed Consolidated Financial Statements).
In August 2011, the Company issued 1,000 warrants as part of consulting agreements. The Company ascribed a value of $1 to the warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.07, expected life of three years, expected volatility of 190%, and a dividend yield of 0. The warrants have a three year life and expire on August 11, 2014. As of September 30, 2012, the fair value of the warrants was $2.
In September 2011, the Company issued 5,556 warrants, the September 2011 Warrant, in connection with the September 2011 Purchase Agreement. The Company ascribed a value of $13 to the September 2011 Warrant using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.42, expected life of three years, expected volatility of 204%, and a dividend yield of 0. The September 2011 Warrant has a three year life and expires on August 11, 2014. As of September 30, 2012, the fair value of the September 2011 Warrant was $12.
15
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Derivative Liability (continued)
In December 2011, the Company issued 5,556 warrants, the December 2011 Warrants in connection with the December 2011 Purchase Agreement. The Company ascribed a value of $13 to the December 2011 Warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.39%, expected life of three years, expected volatility of 202%, and a dividend yield of 0. The December 2011 Warrants have a three year life and expire on August 11, 2014. In February 2012, 5,000 of the warrants were exercised, 4,889 in a cashless exercise and 111 for cash. The Company issued 4,043 shares of common stock related to the exercise and received $2 in cash. As of September 30, 2012, the fair value of the 556 remaining December 2011 Warrants was $1.
The Company issued 5,349 warrants in connection with the April 2012 notes. (See note 4 to the Condensed consolidated Financial Statements).
The fair value of the outstanding derivative liabilities at September 30, 2012, and December 31, 2011, was $182 and $281, respectively.
The Company uses the Black-Scholes pricing model to calculate fair value of its warrant derivative liabilities. Key assumptions used to apply these models are as follows:
|
September 30, 2012
|
December 31, 2011
|
|
|
Expected term
|
0.3 to 2.60 years
|
0.5 to 2.90 years
|
|
Volatility
|
203.6%
|
204.7% - 315.2%
|
|
Risk-free interest rate
|
1.65%
|
0.06% – 0.36%
|
|
Dividend yield
|
0.0%
|
0.0%
|
Fair value measurements:
Assets and liabilities measured at fair value as of September 30, 2012, are as follows:
|
Value at
|
Quoted prices in active markets
|
Significant other observable inputs
|
Significant unobservable inputs
|
||||
|
September 30, 2012
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||
|
Derivative liability
|
$ 182
|
$ −
|
$ −
|
$ 182
|
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 (Level 3) as of September 30, 2012, and December 31, 2011, respectively.
Changes in the fair market value of the Level 3 derivative liability for the nine-month period ended September 30, 2012, are as follows:
16
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
5.
|
Derivative liability (continued
|
|
Derivative Liability
|
||||
|
Balance at January 1, 2012
|
$ | 281 | ||
|
Additional liabilities recorded for warrants issued related to note financing
|
47 | |||
|
Additional liabilities recorded related to warrants issued for services
|
3 | |||
|
Gain on derivative liability
|
(149 | ) | ||
|
Balance at September 30, 2012
|
$ | 182 | ||
|
6.
|
Net loss per share
|
The Company calculates net loss per share 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, 2012, 46,080 shares of common stock issuable upon the exercise of outstanding options and 149,831 shares issuable upon the exercise of warrants and 414,273 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 months ended September 30, 2011, 47,229 shares of common stock issuable upon the exercise of outstanding options, 189,310 shares issuable upon the exercise of warrants and 368,371 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.
The following table is a reconciliation of the numerator (net loss) and the denominator (number of shares) used in the basic and diluted EPS calculations and sets forth potential shares of common stock that are not included in the diluted net loss per share calculation as the effect is antidilutive:
|
Three Months Ended
|
Nine months Ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
September 30,
|
September 30,
|
|||||||||||||
|
2012
|
2011
|
2012
|
2011
|
|||||||||||||
|
Numerator-basic and diluted net loss
|
$ | (1,172 | ) | $ | (1,167 | ) | $ | (3,835 | ) | $ | (4,935 | ) | ||||
|
Denominator-basic or diluted weighted average number of common shares outstanding
|
224,492 | 191,229 | 222,198 | 191,254 | ||||||||||||
|
Net loss per share – basic and diluted
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
|
7.
|
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 affected by its expiration), and has also granted options to employees, directors and consultants pursuant to individual plans. As of September 30, 2012, there are 1,155 options outstanding under these plans.
17
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
7.
|
Equity (continued)
|
The Company's Board of Directors adopted the 2009 Stock Compensation Plan on July 1, 2009, reserving 7,000 shares of Common Stock of the Company for issuance thereunder. As of September 30, 2012, there are 962 options outstanding pursuant to this plan.
The Company's Board of Directors adopted the 2011 Stock Compensation Plan on January 28, 2011, reserving 50,000 shares of Common Stock of the Company for issuance thereunder. As of September 30, 2012, there are 43,963 options outstanding pursuant to this 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 the estimates. The estimated average forfeiture rate for the nine months ended September 30, 2012 and 2011, was approximately 9.60% and 8.84%, respectively, based on historical data.
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 that 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, 2012
|
Nine months Ended
September 30, 2011
|
||
|
Risk free interest rate
|
0.62% – 5.11%
|
1.12% – 5.11%
|
|
|
Expected life (years)
|
2.82 – 7.00
|
2.82 – 7.00
|
|
|
Expected volatility
|
91.99% – 180.36%
|
91.99% – 147.41%
|
|
|
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, 2012 and 2011. The Company granted 2,000 stock options during the three and nine months ended September 30, 2012, and 184 stock options were exercised for $12 in cash. The Company issued 46 restricted shares of Common Stock valued at $2. The Company granted 24,496 stock options during the three and nine months ended September 30, 2011, and no stock options were exercised.
|
Three Months Ended September 30,
|
Nine months Ended September 30,
|
|||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
|||||||||||||
|
Research and development
|
$ | 45 | $ | 78 | $ | 166 | $ | 284 | ||||||||
|
Sales and marketing
|
27 | 37 | 70 | 128 | ||||||||||||
|
General and administrative
|
30 | 70 | 117 | 129 | ||||||||||||
|
Director options
|
7 | 22 | 23 | 72 | ||||||||||||
|
Stock-based compensation expense
|
$ | 109 | $ | 207 | $ | 376 | $ | 613 | ||||||||
18
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
7.
|
Equity (continued)
|
A summary of option activity under the Company’s plans as of September 30, 2012, is as follows:
|
September 30, 2012
|
||||||||||||||||
|
Options
|
Shares
(000)
|
Weighted Average Exercise Price
|
Weighted average Remaining Contractual Term
|
Aggregate Intrinsic Value
|
||||||||||||
|
Outstanding at January 1,
|
51,353 | $ | 0.09 | 4,449 | ||||||||||||
|
Granted
|
2,000 | $ | 0.06 | $ | 120 | |||||||||||
|
Exercised
|
(184 | ) | $ | 0.07 | $ | 2 | ||||||||||
|
Forfeited or expired
|
(7,089 | ) | $ | 0.26 | $ | 1,830 | ||||||||||
|
Outstanding at September 30
|
46,080 | $ | 0.06 | 5.38 | $ | 2,727 | ||||||||||
|
Vested and expected to vest at September 30
|
46,080 | $ | 0.06 | 5.38 | $ | 2,727 | ||||||||||
|
Exercisable at September 30
|
21,411 | $ | 0.07 | 4.96 | $ | 1,603 | ||||||||||
The following tables summarize significant ranges of outstanding and exercisable options as of September 30, 2012:
|
As of September 30, 2012
|
||||||||||||||||||||||
|
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
|
|||||||||||||||||
| $ | 0.02 – $0.50 | 45,604 | 5.4 | $ | 0.05 | 20,935 | $ | 0.06 | ||||||||||||||
| 0.51 – 1.00 | 464 | 0.3 | $ | 0.75 | 464 | $ | 0.75 | |||||||||||||||
| 1.01 – 2.00 | 12 | 0.5 | $ | 1.75 | 12 | $ | 1.75 | |||||||||||||||
| 46,080 | 5.4 | $ | 0.06 | 21,411 | $ | 0.07 | ||||||||||||||||
A summary of the status of the Company’s non-vested shares as of September 30, 2012, is as follows:
|
Nonvested Shares
|
Shares
|
Weighted Average
Grant-Date
Fair Value
|
||||||
|
Non-vested at January 1, 2012
|
36,814 | $ | 0.04 | |||||
|
Granted
|
2,000 | $ | 0.06 | |||||
|
Exercised
|
(184 | ) | $ | 0.05 | ||||
|
Forfeited
|
(7,089 | ) | $ | 0.14 | ||||
|
Vested
|
(6,872 | ) | $ | 0.06 | ||||
|
Non-vested at September 30, 2012
|
24,669 | $ | 0.04 | |||||
As of September 30, 2012, there was $252 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 2.3 years.
19
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
7.
|
Equity (continued)
|
Preferred Shares
Series A-1
In May 2008, the Company issued an aggregate of 1,040 shares of the Company’s Series A Cumulative Convertible Preferred Stock in exchange for certain debt. The Series A Cumulative Convertible Preferred Stock was subsequently exchanged in October 2008 for an equivalent number of shares of Series A-1 Cumulative Convertible Preferred Stock (the “Series A-1 Preferred Stock”). During 2009, 146 shares of Series A-1 Preferred Stock were converted into 1,005 shares of the Company’s Common Stock. As of September 30, 2012, there are 934 shares of Series A-1 Preferred Stock outstanding. The shares of Series A-1 Preferred Stock carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional shares of Series A-1 Preferred Stock, 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. The shares of Series A-1 Preferred Stock are convertible at any time. The Company issued 18 and 54 shares of Series A-1 Preferred Stock in payment of dividends for the three and nine months ended September 30, 2012, respectively. If the outstanding shares of Series A-1 Preferred Stock had been converted in their entirety as of September 30, 2012, the Company would have issued 6,672 shares of Common Stock.
Series B
On August 5, 2010, the Company completed the conversion of all of the Company’s outstanding indebtedness and issued 6,608 shares of Series B Participating Convertible Preferred Stock (the “Series B Preferred Stock”) in accordance with an executed Exchange Agreement entered into with Phoenix Venture Fund LLC and certain other holders of the Company’s indebtedness (the “Recapitalization”). In accordance with the executed Series B Preferred Stock Purchase Agreement the Company issued 1,440 shares of Series B Preferred Stock for proceeds of $1,440, net of expenses of $437 (the “Series B Financing”). In addition, the Company paid approximately $143 in expenses to a third party in connection with the financing. The expenses were recorded as a charge to additional paid in capital. The proceeds were used for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses associated with the Recapitalization and Series B Financing.
The shares of Series B Preferred Stock carry a ten percent (10%) annual dividend, payable quarterly in arrears in cash or in additional shares of Series B Preferred Stock, and have a liquidation preference over shares of Series A-1 Preferred Stock and Common Stock of $1.50 per share. The shares of Series B Preferred Stock were initially convertible into shares of Common Stock at an initial conversion price of six cents ($0.06) per share. However, the Company issued additional preferred stock, the Series C Participating Convertible Preferred Stock (the “Series C Preferred Stock”), at a price less than the original conversion price of $0.06, which resulted in a downward adjustment in the conversion price of the Series B Preferred Stock to $0.0433 per share and an increase in the number of shares of Common Stock that would be issued upon conversion of the outstanding shares of Series B Preferred Stock. The shares of Series B Preferred Stock are convertible at any time.
The conversion feature was determined to be a derivative liability in the amount of $2,000 of which $1,498 was attributable to related parties and $502 to the other owners of Series B Preferred Stock. Due to the decline in the price of the Company’s Common Stock and the issuance of the Series C Preferred Stock, the fair value of the embedded conversion feature on the Series B Preferred Stock was reduced to approximately $130 at December 31, 2010.
In January and March 2012, a total of 140 shares of Series B Preferred Stock were converted into 3,232 shares of the Company’s Common Stock. The Company issued 241 and 701 shares of Series B Preferred Stock in payment of dividends for the three and nine months ended September 30, 2012, respectively. The
20
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
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7.
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Equity (continued)
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Company recorded a beneficial conversion feature associated with the issuance of the Series B Preferred dividends of $51 and $263, for the three and nine months ended September 30, 2012, respectively. As of September 30, 2012, there are 9,811 shares of Series B Preferred Stock outstanding. If the outstanding Series B Preferred Stock had been converted in its entirety on September 30, 2012, the Company would have issued 226,434 shares of Common Stock.
Series C
On December 31, 2010, the Company completed the sale of 2,211 shares of Series C Preferred Stock through a Securities Purchase Agreement with Phoenix Venture Fund LLC and certain other investors, which sale provided proceeds to the Company of $2,211 net of approximately $422 in expenses to third parties in connection with the financing. The expenses were recorded as a charge to additional paid-in capital. The proceeds are being used for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses associated with the sale of the Series C Preferred Stock.
The shares of Series C Preferred Stock carry a ten percent (10%) annual dividend, payable quarterly in arrears in cash or in additional Series C Preferred Stock, and have liquidation preference that is senior to all other shares of the Company’s capital stock, pursuant to which holders of shares of Series C Preferred Stock will receive liquidating distributions in the amount of $1.50 per share plus any accrued dividends. The shares of Series C Preferred Stock are convertible into Common Stock at any time at an initial conversion price of $0.0225 per share, subject to adjustment for stock dividends, splits, combinations and similar events and, with certain exceptions, the issuance of additional securities at a purchase price less than the then current conversion price of the Series C Preferred Stock.
On December 31, 2010, the Series C Preferred Stock’s conversion feature was determined to be a derivative liability in the amount of $179, of which $113 was attributable to related parties and $66 to other holders. After receipt of the liquidation preference, the shares of Series C Preferred Stock and Series B Preferred Stock are entitled to participate pro rata on an as-converted basis with the shares of Common Stock in any remaining liquidation proceeds (after payment of the liquidation preference on the Series C Preferred Stock, Series B Preferred Stock and Series A-1 Preferred Stock).
On March 31, 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock and its Certificate of Designation for its Series C Preferred Stock to modify the anti-dilution provisions. Under the amendments, in the event additional stock is issued at a price lower than the conversion price then in effect, the new conversion price of the Series B Preferred Stock or Series C Preferred Stock cannot be (A) lower than the average closing market price for the Common Stock for the twenty (20) trading days prior to the closing date of a transaction requiring an adjustment in the conversion price (the “Market Price”) or (B) greater than the conversion price then in effect. The amendments were approved by the Company’s Board of Directors and the necessary majorities of the Company’s Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, and were filed with the Delaware Secretary of State on March 31, 2011. As a result of the amendments, the Company reclassified $362 from derivative liabilities to equity on March 31, 2011 (Note 4) and recorded a beneficial conversion feature of $3,501 related to the intrinsic value of the conversion feature on March 31, 2011.
On March 6, 2011, the Company issued 97 shares of its Series C Preferred Stock and warrants to purchase 4,311 shares of Common Stock to its Acting President as part of a professional service agreement. The shares of Series C Preferred Stock and warrants are convertible into Common Stock under the same terms discussed above.
On March 31, 2011, the Company sold an additional 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $110 in expenses to third parties in connection with the financing.
On March 9, 2012, the Company issue 278 shares of Series C Preferred Stock valued at $417 in settlement of
21
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
|
7.
|
Equity (continued)
|
the indemnification claim brought by Phoenix Venture Fund LLC, resulting from the settlement of a 16b claim in January 2012 brought by a Company shareholder against Phoenix Venture Fund LLC, certain affiliates and the Company as a nominal defendant. The Company booked a $418 accretion amount for the beneficial conversion feature on the 278 shares of Series C Preferred Stock at March 31, 2012.
On September 25, 2012, an investor converted 39 shares of Series C Preferred Stock into 1,729 shares of the Company’s Common Stock.
The Company issued 100 and 287 shares of Series C Preferred Stock in payment of dividends for the three and nine months ended September 30, 2012. The Company recorded a beneficial conversion feature associated with the issuance of the Series C Preferred dividends of $100 and $287, for the three and nine months ended September 30, 2012, respectively. As of September 30, 2012, there are 4,073 shares of Series C Preferred Stock outstanding. If the outstanding shares of Series C Preferred Stock were converted in their entirety, the Company would issue 181,010 shares of Common Stock.
Warrants
Series C Warrants
Each investor who purchased shares of Series C Preferred Stock in the financing transactions which closed on December 31, 2010, and March 31, 2011, received a warrant to purchase a number of shares of Common Stock equal to the aggregate number of shares of Series C Preferred Stock purchased by the investor divided by 0.0225. Each warrant issued in connection with the Series C Financing has an exercise price of $0.0225 per share and is exercisable in whole or in part, including by means of cashless exercise, for a period of three years from the date of issuance. In February and March 2012, 27,625 warrants were exercised by holders of the Series C Preferred Stock warrants. Of these warrants exercised, 7,439 were exercised for cash for which the Company received $140 and 20,186 warrants were exercised on a cashless basis. The Company issued 23,929 shares of Common Stock related to these exercises.
Other Warrants
In February and March 2012, 6,484 warrants were exercised by the holders of other warrants, mainly related to indebtedness that converted to Series B Preferred Stock in the Recapitalization. Of these warrants exercised, 1,217 were exercised for cash, for which the Company received $73, and 5,267 were exercised on a cashless basis. The Company issued 3,696 Shares of Common Stock related to these exercises.
On April 23, 2012, the Company issued 5,349 warrants in connection with the $1M bridge financing. Each warrant issued in connection with the financing has an exercise price of $0.05 per share and is exercisable in whole or in part, including by means of cashless exercise, for a period of three years from the date of issuance. (See note 5 to the Condensed Consolidated Financial Statements).
On June 30, 2012, 2,916 warrants with a derivative value of $18 expired. The $18 was recorded as a gain in derivative liabilities in the Statement of Operations at June 30 2012.
At September 30, 2012, 149,831 shares of Common Stock were reserved for issuance upon exercise of outstanding warrants.
22
Communication Intelligence Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
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7.
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Equity (continued)
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A summary of the warrants issued are as follows:
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September 30, 2012
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December 31, 2011
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|||||||||||||||
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Warrants
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Weighted Average Exercise Price
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Warrants
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Weighted Average Exercise Price
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|||||||||||||
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Outstanding at beginning of period
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182,644 | $ | 0.0261 | 135,131 | $ | 0.0274 | ||||||||||
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Issued
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5,349 | $ | 0.0500 | 59,735 | $ | 0.0064 | ||||||||||
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Exercised
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(35,162 | ) | $ | 0.0264 | (12,222 | ) | $ | 0.0225 | ||||||||
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Expired
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(3,000 | ) | $ | 0.0433 | − | − | ||||||||||
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Outstanding at end of period
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149,831 | $ | 0.0254 | 182,644 | $ | 0.0261 | ||||||||||
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Exercisable at end of period
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149,831 | $ | 0.0254 | 182,644 | $ | 0.0261 | ||||||||||
A summary of the status of the warrants outstanding as of September 30, 2012, is as follows:
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September 30, 2012
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||||||||||
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Number of Warrants Outstanding and Exercisable
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Weighted Average Remaining Life
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Weighted Average Exercise Price Per Share
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||||||||
| 14,073 | 0.71 | 0.0433 | ||||||||
| 130,409 | 1.30 | 0.0225 | ||||||||
| 5,349 | 2.83 | 0.0500 | ||||||||
| 149,831 | 1.24 | 0.0254 | ||||||||
Restricted Share Grants
In connection with the Recapitalization, the Company issued restricted shares to employees in exchange for reductions in their respective salaries. The number of shares issued was calculated based on the amount of the annual salary reduction divided by $0.06 per share. Fifty percent of the shares vested on December 31, 2010, and the remaining 50% vested on September 30, 2011, subject to continued employment through such vesting dates. The Company has recognized $45 in expense associated with 496 restricted shares granted of which 46 shares were issued during the nine months ended September 30, 2012 for $2. As of September 30, 2012, the Company has issued all of the restricted shares granted.
23
Communication Intelligence Corporation
(In thousands, except 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, 2011, including the following:
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·
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Technological, engineering, manufacturing, quality control or other circumstances that could delay the sale or shipment of products;
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·
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Economic, business, market and competitive conditions in the software industry and technological innovations that could affect the Company’s business;
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·
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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
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·
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General economic and business conditions and the availability of sufficient financing.
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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, 2011.
Overview
The Company is a leading supplier of electronic signature products and the recognized leader in biometric signature verification. CIC enables companies to achieve truly paperless workflow in their electronic business processes by providing multiple signature technologies across virtually all applications. CIC’s solutions are available both in SaaS and on-premise delivery models and afford “straight-through-processing,” which can increase customer revenue by enhancing user experience and can also reduce costs through paperless and virtually error-free electronic transactions that can be completed significantly faster than paper-based procedures. To date, the Company primarily has delivered biometric and electronic signature solutions to channel partners and end-user customers in the financial services industry.
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 two-year period ended December 31, 2011, net losses attributable to common stockholders aggregated approximately $11,216, and, at September 30, 2012, the Company's accumulated deficit was approximately $114,215.
For the three months ended September 30, 2012, total revenue was $516, an increase of $4, or 1%, compared to total revenue of $512 in the prior year period. The increase in revenue is primarily attributable to the closing of several new software orders and nonrecurring engineering (“NRE”) revenue compared to the prior year period. For the nine months ended September 30, 2012, total revenue was $1,708, an increase of $593, or 53%, compared to total revenue of $1,115 in the prior year period. The increase in revenue is primarily attributable to the closing of a greater number of new software orders compared to the prior year period.
For the three months ended September 30, 2012, the loss from operations was $776, a decrease of $94, or 11%, compared with a loss from operations of $870 in the prior year period. For the nine months ended September 30, 2012, the loss from operations was $2,342, a decrease of $900, or 28%, compared with a loss from operations of $3,242 in the prior year period. The decrease in the loss from operations for the nine months ended September 30, 2012, is primarily attributable to an increase in sales of $593, or 54%, and a decrease of $307, or 7%, in operating expenses including cost of sales compared to the prior year period.
24
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
Non-operating expense for the three months ended September 30, 2012 was $36, an increase of $62, compared to non-operating income of $26 in the prior year period. Non-operating expense for the nine months ended September 30, 2012 was $34 and increase of $52, compared to non-operating income of $18, in the prior year. The increase in the non-operating loss for the three and nine-month periods was due to an increase in interest expense and amortization of loan discount related to the increase in the Company’s’ short-term debt compared to the prior year.
Critical Accounting Policies and Estimates
Refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2011 Form 10-K.
Effect of Recent Accounting Pronouncements
In the third quarter of fiscal 2012, the adoption of accounting standards had no material impact on our financial position, results of operations or cash flows.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on our financial position, results of operations and cash flows.
Results of Operations
Revenue
For the three months ended September 30, 2012, product revenue was $355, an increase of $14, or 4%, compared to product revenue of $341 in the prior year period. The increase in revenue is primarily attributable to closing a number of new software orders compared to the prior year period. For the three months ended September 30, 2012, maintenance revenue was $161, a decrease of $10, or 6%, compared to maintenance revenue of $171 in the prior year period. This decrease is primarily due to the accelerated recognition in the prior year of revenue from a late maintenance renewal by one of the Company’s customers.
For the nine months ended September 30, 2012, product revenue was $1,231, an increase of $583, or 90%, compared to product revenue of $648 in the prior year period. The increase in product revenue is due primarily to the same reasons specified above for the increase in product revenue for the three months ended September 30, 2012. For the nine months ended September 30, 2012, maintenance revenue was $477, an increase of $10, or 2%, compared to maintenance revenue of $467 in the prior year period. The increase in maintenance revenue is primarily due to new maintenance contracts associated with the increase in product sales.
Cost of Sales
For the three months ended September 30, 2012, cost of sales was $96, an increase of $10, or 11%, compared to cost of sales of $86 in the prior year period. The increase in cost of sales was due to an increase in direct labor from NRE contracts recognized during the three months ended September 30, 2012, in comparison to the prior year period.
For the nine months ended September 30, 2012, cost of sales was $356, a decrease of $159, or 31%, compared to cost of sales of $515 in the prior year period. The decrease in cost of sales was due primarily to reduced amortization of previously capitalized software development costs, compared to the prior year period.
25
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
Operating expenses
Research and Development Expenses
For the three months ended September 30, 2012, research and development expense was $441, an increase of $71, or 19%, compared to research and development expense of $370 in the prior year period. Research and development expenses consist primarily of salaries and related costs, outside engineering, maintenance items, and allocated facilities expenses. The most significant factor in the $71 increase was the addition of three new employees for the full three-month period, plus associated hiring costs, compared to the prior year period. Total expenses, before capitalization of software development costs and other allocations, for the three months ended September 30, 2012, was $569, an increase of $100, or 21%, compared to $469 in the prior year period. The increase in gross expenses is primarily due to the additional headcount and related costs and outside services associated with the Company’s new product offerings. 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 in the near term.
For the nine months ended September 30, 2012, research and development expense was $1,247, an increase of $184, or 17%, compared to research and development expense of $1,063 in the prior year period. Total expenses, before capitalization of software development costs and other allocations, for the nine-months ended September 30, 2012, were $1,656, compared to $1,504 in the prior year period. The increase in research and development expense for the nine-months ended September 30, 2012, resulted primarily from the reasons discussed for the three month period above.
Sales and Marketing Expense
For the three months ended September 30, 2012, sales and marketing expense was $329, a decrease of $57, or 15%, compared to sales and marketing expense of $386 in the prior year period. For the nine months ended September 30, 2012, sales and marketing expenses was $1,059, a decrease of $96, or 8%, compared to sales and marketing expense of $1,155 in the prior year period. The decrease in expenses for three and nine month periods ended September 30, 2012, was primarily attributable to lower stock option compensation expense and other general marketing expenses.
General and Administrative Expense
For the three months ended September 30, 2012, general and administrative expense was $426, a decrease of $114, or 21%, compared to general and administrative expense of $540 in the prior year period. The decrease was primarily due to reductions in travel and related expenses, professional service expenses and other general corporate expenses.
For the nine months ended September 30, 2012, general and administrative expense was $1,388, a decrease of $236, or 15%, compared to general and administrative expense of $1,624 in the prior year period. The decrease was primarily due to reductions in travel and related expenses, professional service fees, investor relation expenses and other general corporate expenses.
Interest expense
For the three months ended September 30, 2012, interest expense was $64, an increase of $61, or 2033%, compared to interest expense of $3 in the prior year period. For the nine months ended September 30, 2012, interest expense was $145, an increase of $142, or 4733%, compared to interest expense of $3 in the prior year period. The increase is the result of the issuance of certain demand notes and convertible notes in September and December, 2011, as well as April 2012 and September 2012 (See Note 6 to the Condensed Consolidated Financial Statements).
For the three months ended September 30, 2012, amortization of loan discount and deferred financing expense was $12, an increase of $12, or 100%, compared to amortization of loan discount and deferred financing expense of $0 in the prior year period. For the nine months ended September 30, 2012, amortization of loan discount and deferred financing expense was $29, an increase of $29, or 100%, compared to amortization of loan discount and deferred financing expense of $0 in the prior year period. The increase is the result of amortizing the cost of warrants issued with the above mentioned convertible notes (See Note 6 to the Condensed Consolidated Financial Statements).
26
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
For the three months ended September 30, 2012, the gain on derivative liability was $43, an increase of $13, or 43%, compared to the gain on derivative liability of $30 in the prior year period. For the nine months ended September 30, 2012, the gain on derivative liability was $149, an increase of $125, or 521%, compared to a gain on derivative liability of $24 in the prior year period. The decrease in the loss on derivative liability is primarily due to the exercise and conversion of warrants and shares of Series B and Series C Preferred Stock during the first quarter of 2012 (See Note 6 to the Condensed Consolidated Financial Statements).
For the three months ended September 30, 2012, the Company paid dividends on shares of its Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in kind. The Company recorded accretion of the beneficial conversion feature on the dividends of its Series B Preferred Stock and Series C Preferred Stock of $151, compared to $28 in the prior year period. For the nine months ended September 30, 2012, the Company paid dividends on shares of the its Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in kind. The Company recorded accretion of the beneficial conversion feature on shares of the Company’s Series B and Series C Preferred Stock of $968, compared to $930 in the prior year period. (See Notes 5 and 6 to the Condensed Consolidated Financial Statements).
Liquidity and Capital Resources
At September 30, 2012, cash and cash equivalents totaled $566 compared to cash and cash equivalents of $307 at December 31, 2011. The increase in cash was primarily due to cash flows from financing activities of $2,328 offset by cash used for operations of $2,061, and cash used in investing activities of $8. At September 30, 2012, total current assets were $1,274, compared to total current assets of $634 at December 31, 2011. At September 30, 2012, the Company's principal sources of funds included its cash and cash equivalents aggregating $566.
At September 30, 2012, accounts receivable net, was $514, an increase of $216, or 72%, compared to accounts receivable net of $298 at December 31, 2011. The increase is due primarily to the increase in the current quarter billings. At September 30, 2012, billed but unpaid maintenance contracts, which are offset against accounts receivable and deferred revenue, were $0, compared to $85 at December 31, 2011.
At September 30, 2012, prepaid expenses and other current assets were $194, an increase of $165, or 568%, compared to prepaid expenses and other current assets of $29 at December 31, 2011. The increase is due primarily to the renewal of annual insurance policies and payment of certain deferred financing costs.
At September 30, 2012, accounts payable were $336, an increase of $75, or 28%, compared to accounts payable of $261 at December 31, 2011. The increase is due primarily to increases in professional fees related to current financing activities. At September 30, 2012, accrued compensation was $297, an increase of $76, or 34%, compared to accrued compensation of $221 at December 31, 2011. The increase is due to an increase of accrued but unpaid commissions and changes in head count and salaries compared to December 31, 2011.
At September 30, 2012, total current liabilities were $4,498, an increase of $2,173, or 93%, compared to total current liabilities of $2,325 at December 31, 2011. The increase in total current liabilities is due primarily to the addition of convertible notes aggregating $2,103 associated with the April 2012 Purchase Agreement and the September Subscription Agreements. At September 30, 2012, current deferred revenue was $474, a decrease of $43, or 8%, compared to current deferred revenue of $517 at December 31, 2011. Deferred revenue 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 September 14, 2012, the Company entered into Subscription Agreements with the September 2012 Investors. Under the terms of the Subscription Agreements, the September 2012 Investors purchased approximately $1,103,000 of September 2012 Notes, and, subject to the satisfaction of certain closing conditions, agreed to purchase at the Final Closing approximately 1,103,000 shares of Series D-2 Preferred Stock at a purchase price of $1.00 per share. The September 2012 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 31, 2012. The Notes will automatically convert into shares of Series D-2 Preferred Stock at a price of $1.00 per share upon the consummation of the Final Closing provided such closing occurs prior to December 31, 2012. The Series D-2 Preferred Stock is convertible into
27
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
shares of the Company’s Common Stock at a conversion price of $0.05 per share (subject to adjustment). The Final Closing is presently expected to be consummated no later than November 15, 2012, and is subject to stockholder approvals and the satisfaction of customary closing conditions. The proceeds from the September 2012 Notes were used to repay approximately $225 in demand notes to a related party and an employee of the Company, and for working capital and general corporate purposes in the ordinary course of business. In connection with the Subscription Agreements, the Company expects to issue promptly after the Final Closing, an aggregate of 294 warrants to four consultants on the financing at an exercise price of $0.05 per share.
In August and September 2012, the Company borrowed $50 and $50, respectively, from Phoenix and issued unsecured demand notes to each. These notes are due on demand and bear interest at the rate of 10% per annum. The notes were repaid in September 2012, out of the proceeds from the September 2012 Subscription Agreements.
In April 2012, the Company entered into the April 2012 Purchase Agreement with the April 2012 Investors. The Company issued $1,000 in notes, the April 2012 Notes, and received $983 in cash, net of expenses. The April 2012 Notes bear interest at the rate of 10% per annum, and have a maturity date of April 22, 2013. The April 2012 Notes automatically convert into securities sold in the Company’s next equity financing. In connection with the issuance of the April 2012 Notes to the April 2012 Investors, the Company also issued 5,000 warrants to purchase 5,000 shares of Common Stock at an exercise price of $0.05 per share to the April 2012 Investors. The warrants are exercisable for a period of three years from the date of issue. The company ascribed a value of $47 to the April 2012 Warrants, which was recorded as a discount to notes payable and as a derivative liability.
In connection with the April 2012 Purchase Agreement, the Company paid $17 in consulting fees associated with the April 2012 Purchase agreement and issued an aggregate of 349 warrants at an exercise price of $0.05 per share to two consultants. The warrants are exercisable for three years from the date of issue. The Company ascribed a value of $2 to the warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.40, expected life of three years, expected volatility of 213%, and a dividend yield of 0. The warrant value was recorded as expense professional service fee and as a derivative liability. The warrants are exercisable for a period of three years
In February 2012, the Company borrowed $25 in the form of a demand note from Phoenix, its largest investor. The note bears interest at the rate of 10% per annum. In March 2012, the Company borrowed $100 in the form of a demand note from Phoenix under the same terms described above. The notes were repaid in September 2012.
During the months of January, February and March 2012, six investors exercised 7,439 warrants for cash, providing the Company $212 in cash. In addition, in February, March and May 2012 two employees exercised 153 stock options providing an additional $9 in cash.
In December 2011, the Company entered into the December 2011 Purchase Agreement with the December 2011 Investors, (See Note 4 to the Condensed Consolidated Financial Statements). Under the terms of the December 2011 Purchase Agreement, the Company issued the December 2011 Notes aggregating $1,000 to the December 2011 Investors. The December 2011 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 20, 2012. The December 2011 Notes are also convertible at the option of the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the December 2011 Notes, the Company also issued to the December 2011 Warrants at an exercise price of $0.0225 per share. The Company ascribed a value of $13 to the December 2011 Warrants, which was recorded as a discount to short-term debt in the balance sheet.
In September 2011, the Company borrowed an aggregate of $100 from Phoenix and an employee of the Company and issued unsecured demand notes to each. These notes are due on demand and bear interest at the rate of 10% per annum. In addition the Company entered into the September 2011 Purchase Agreement with the September 2011 Investor. Under the terms of the September 2011 Purchase Agreement, the Company issued the September 2011 Note to the September 2011 Investor. The September 2011 Note bears interest at the rate of 10% per
28
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
annum, and had a maturity date of September 20, 2012, which was subsequently amended to extend the due date through December 31, 2012. The September 2011 Note is also convertible at the option of the September 2011 Investor into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the September 2011 Note, the Company also issued the September 2011 Warrant at an exercise price of $0.0225 per share. The Company ascribed a value of $13 to the warrants, which was recorded as a discount to short-term debt in the balance sheet.
In March 2011, the Company sold 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $121 in expenses, of which $50 went to SG Phoenix LLC in payment of an administrative fee and $71 in expenses to third parties in connection with the financing. In connection with the sale of the shares of Series C Preferred Stock, the Company issued warrants to purchase an aggregate of 35,556 shares of Common Stock with an exercise price of $0.0225 per share, which warrants are exercisable for a period of three years from the date of issuance. The Company recorded a beneficial conversion feature of $800 related to the intrinsic value of the conversion feature of the shares of Series C Preferred Stock. The Company issued 305 shares of Series C Preferred Stock in payment of dividends for the year ended December 31, 2011.
For the three and nine months ended September 30, 2012, the Company exercised its option related to the terms of its classes of preferred stock and made dividend payments in kind as follows:
|
Three Months Ended
September 30, 2012
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Nine months Ended
September 30, 2012
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|||||
|
Series A-1
|
Series B
|
Series C
|
Series A-1
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Series B
|
Series C
|
|
|
Dividends
|
$18
|
$241
|
$100
|
$54
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$701
|
$287
|
Interest expense associated with the Company’s indebtedness for the three months ended September 30, 2012 and 2011, was $64 and $3, respectively, of which $30 and $0, respectively, was related party expense. Amortization of debt discount and deferred financing costs for the three months ended September 30, 2012 and 2011 was $12 and $0, respectively, of which $5 and $0, respectively, was related party expense.
Interest expense associated with the Company’s indebtedness for the nine months ended September 30, 2012 and 2011, was $145 and $3, respectively, of which $88 and $0, respectively, was related party expense. Amortization of debt discount and deferred financing costs for the nine months ended September 30, 2012 and 2011 was $29 and $0, respectively, of which $13 and $0, respectively, was related party expense.
The Company had the following material commitments as of September 30, 2012:
|
Payments due by period
|
||||||||||||||||||||||||||||
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Contractual obligations
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Total
|
2012
|
2013
|
2014
|
2015
|
2016
|
Thereafter
|
|||||||||||||||||||||
|
Short-term note payable (1)
|
3,103 | $ | 2,103 | $ | 1,000 | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
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Operating lease commitments (2)
|
1,167 | 68 | 275 | 283 | 292 | 249 | - | |||||||||||||||||||||
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Total contractual cash obligations
|
$ | 4,270 | $ | 2,171 | $ | 1,275 | $ | 283 | $ | 292 | $ | 249 | $ | - | ||||||||||||||
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1.
|
The short-term notes payable in the balance sheet are shown net of $35 in loan discounts, which will be recognized as expense over the life of the loans.
|
|
2.
|
The Company extended the lease on its offices in April 2010. The base rent decreased by approximately 6% in November 2011 and will increase by approximately 3% per annum over the term of the new lease, which expires on October 31, 2016.
|
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, 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.
29
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The Company did not enter into any short-term security investments during the three months ended September 30, 2012.
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, 2012 and 2011, foreign currency translation gains and losses were insignificant.
Item 4. Controls and Procedures.
We carried out an evaluation as of the end of period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to paragraph (b) of Rule 13a-15 and 15d-15 under the Exchange Act. Based on that review, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
30
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
Item 4. Mine Safety Disclosures
Not applicable
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).
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|
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).
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|
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).
|
|
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.
|
31
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
|
Exhibit Number
|
Document
|
|
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, incorporated herein by reference to Exhibit 3.13 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009.
|
|
3.14
|
Amendment No. 1 to By-laws dated June 17, 2010, incorporated herein by reference to Exhibit 3.14 to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2010.
|
|
3.15
|
Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.15 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010.
|
|
3.16
|
Amended and Restated Certificate of Designation of Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.16 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010.
|
|
3.17
|
Certificate of Designation of Series B Participating Convertible Preferred Stock filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.17 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010.
|
|
3.18
|
Certificate of Amendment to Amended And Restated Certificate of Incorporation filed with the Delaware Secretary of State on December 31, 2010, incorporated herein by reference to Exhibit 3.18 to the Company’s Annual Report on Form 10-K filed on March 30, 2011.
|
|
3.19
|
Second Amended and Restated Certificate of Designation of Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010, incorporated herein by reference to Exhibit 3.19 to the Company’s Annual Report on Form 10-K filed on March 30, 2011.
|
|
3.20
|
Second Amended and Restated Certificate of Designation of Series B Participating Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010, incorporated herein by reference to Exhibit 3.20 to the Company’s Annual Report on Form 10-K filed on March 30, 2011.
|
|
3.21
|
Certificate of Designation of Series C Participating Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010, incorporated herein by reference to Exhibit 3.21 to the Company’s Annual Report on Form 10-K filed on March 30, 2011.
|
|
3.22
|
Amendment to the Amended And Restated Certificate of Designation of the Series B Participating Convertible Preferred Stock, incorporated herein by reference to Exhibit 10.59 to the Company’s Current Report on Form 8-K filed March 31, 2011.
|
|
3.23
|
Amendment to the Amended And Restated Certificate of Designation of the Series C Participating Convertible Preferred Stock, incorporated herein by reference to Exhibit 10.60 to the Company’s Current Report on Form 8-K filed March 31, 2011.
|
|
*10.64
|
Form of Subscription Agreement dated September 14, 2012.
|
|
*10.65
|
Form of Unsecured Convertible Promissory Note dated September 14, 2012
|
|
*31.1
|
Certification of Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
*31.2
|
Certificate of Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
*32.1
|
Certification of Chief Executive Officer pursuant to 18 USC Section 1750, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*32.2
|
Certification of Chief Financial Officer pursuant to 18 USC Section 1750, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*
|
Filed herewith.
|
32
Communication Intelligence Corporation
(In thousands, except per share amounts)
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
COMMUNICATION INTELLIGENCE CORPORATION
|
||
|
Registrant
|
||
|
November 14, 2012
|
/s/ Andrea Goren
|
|
|
Date
|
Andrea Goren
|
|
|
(Principal Financial Officer and Officer Duly Authorized to Sign on Behalf of the Registrant)
|
33