iSign Solutions Inc. - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

                                        

FORM 10-Q

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMUNICATION INTELLIGENCE CORPORATION

(Exact name of registrant as specified in its charter)

          (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code

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.

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).

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.

Indicate by check mark whether the registrant is a shell company (as defined in Section 12b-2 of the exchange Act)

Number of shares outstanding of the issuer's Common Stock, as of November 14, 2014: 234,307,542.

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INDEX

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Item 1.  Financial Statements.

Communication Intelligence Corporation

Condensed Consolidated Balance Sheets

 (In thousands)

 

See accompanying notes to these Condensed Consolidated Financial Statements

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Communication Intelligence Corporation

Condensed Consolidated Statements of Operations

Unaudited

(In thousands, except per share amounts)

 

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Communication Intelligence Corporation

Condensed Consolidated Statements of Comprehensive Loss

Unaudited

(In thousands, except per share amounts)

 

See accompanying notes to these Condensed Consolidated Financial Statements

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Communication Intelligence Corporation

Condensed Consolidated Statements of Cash Flows

Unaudited

(In thousands)

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Communication Intelligence Corporation

Condensed Consolidated Statements of Cash Flows (Continued)

Unaudited

(In thousands)

 

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

1.	Nature of business and summary of significant accounting policies

The Company is a leading provider of digital transaction management (DTM) software enabling fully digital (paperless) business processes. The Company's solutions encompass a wide array of functionality and services, including electronic signatures, biometric authentication and simple-to-complex workflow management. These solutions are available across virtually all enterprise, desktop and mobile environments as a seamlessly integrated platform for both ad-hoc and fully automated transactions. The Company's platform can be deployed both on-premise and as a cloud-based service, with the ability to easily transition between deployment models. To date, the Company primarily has delivered its solutions to channel partners and end-user customers in the financial services industry. The Company's products include SignatureOne^® Ceremony™ Server, the iSign^® suite of products and services, including iSign^® Enterprise and iSign^® Console™, and Sign-it^® programs.

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, 2013.

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.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant cumulative losses since its inception and, at September 30, 2014, the Company's accumulated deficit was $122,323. The Company has primarily met its working capital needs through the sale of debt and equity securities. As of September 30, 2014, the Company's cash balance was $641. These factors raise substantial doubt about the Company's ability to continue as a going concern.

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

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

1.	Nature of business and summary of significant accounting policies

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 unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Reclassifications

Certain prior year amounts have been reclassified between Series C Preferred Stock, Series D-1 Preferred Stock, Series D-2 Preferred Stock and Additional paid in capital on the accompanying condensed consolidated balance sheet to properly reflect accretion of the beneficial conversion feature on certain issuances of the Company's Preferred Stock. These reclassifications do not impact the condensed consolidated statement of operations or the condensed consolidated statement of cash flows.

Accounting Changes and Recent Accounting Pronouncements

Accounting Standards Issued But Not Yet Adopted

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.

2.	Accounts receivable and revenue concentrations

The following table summarizes accounts receivable and revenue concentrations:

3.

Patents

The Company performs an intangible asset impairment analysis at least annually or whenever circumstances or events indicate such assets might be impaired. The Company would recognize an impairment charge in the event the net book value of such assets exceeded the future undiscounted cash flows attributable to such assets.

Management completed an analysis of the Company's patents as of December 31, 2013. 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 changed during the three and nine months ended September 30, 2014 that would impact this conclusion.

Amortization of patent costs was $90 and $270 for the three and nine-month periods ended September 30, 2014 and $92 and $275 for the three- and nine-month periods ended September 30, 2013.

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

3.

Patents

Intangible Assets

The following table summarizes intangible assets:

4.	Derivative liability

The Company has determined that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company's own stock and (b) classified in stockholders' equity in the consolidated balance sheet would not be considered a derivative financial instrument. The Company applies a two-step model in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the scope exception.

The Company issued certain warrants in connection with financing transactions from 2010 through 2012 that require liability classification because of certain provisions that may have resulted in an adjustment to the number of shares issued upon settlement and an adjustment to their exercise price. The Company classifies these warrants on its balance sheet as a derivative liability which is fair valued at each reporting period subsequent to the initial issuance. The Company used a simulated probability valuation model to value these warrants. Determining the appropriate fair-value model and calculating the fair value of warrants requires considerable judgment. Any change in the estimates (specifically, probabilities) used may cause the value to be higher or lower than that reported. The assumptions used in the model required significant judgment by management and include the following: volatility, expected term, risk-free interest rate, dividends, and warrant holders' expected rate of return, reset provisions based on expected future financings, projected stock prices, and probability of exercise. The estimated volatility of the Company's common stock at the date of issuance, and at each subsequent reporting period, is based on historical volatility. The risk-free interest rate is based on rates published by the government for bonds with a maturity similar to the expected remaining life of the warrants at the valuation date. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. Dividends are estimated at 0% based on the Company's history of no common stock dividends.

The fair value of the outstanding derivative liabilities at September 30, 2014, and December 31, 2013, was $20 and $25, respectively.

Fair value measurements:

The following table summarizes assets and liabilities measured at fair value as of September 30, 2014 and December 31, 2013:

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

4.	Derivative Liability

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: Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2: Applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3: Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company's assets and liabilities measured at fair value, whether recurring or non-recurring, at September 30, 2014, and December 31, 2013, and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category.

Changes in the fair market value of the Level 3 derivative liability for the nine-month periods ended September 30, 2014 and September 30, 2013 are as follows:

5.	Net loss per share

The Company calculates basic net loss per share, 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 potential dilutive shares outstanding.

The following table lists shares and warrants that were excluded from the calculation of dilutive earnings per share as the exercise of such options and warrants and the conversion of such preferred shares would be anti-dilutive:

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

5.	Net loss per share

The following table is a reconciliation of the numerator (net loss attributable to common stockholders) and the denominator (number of shares) used in the basic and diluted EPS calculations:

6.	Line of Credit

On May 6, 2014, the Company entered into a $2 million Credit Agreement with Venture Champion Asia Limited, an affiliate of ICG Global Limited (the "Lender").  Under the terms of the Credit Agreement, for a period of 18 months, the Company is permitted to borrow up to $2 million in unsecured indebtedness from the Lender. Each draw is subject to a 15% original issue discount, so that borrowing the full $2 million would result in an aggregate of $2.352 million in debt with fifty percent (50%) warrant coverage. The debt may be converted at the Lender's option into shares of the Company's Common Stock at an initial conversion price of $0.0275 per share.

In connection with the Company's entry into the Credit Agreement, the Company issued to the Lender warrants to purchase 10,909 shares of Common Stock. In addition the Company issued to a third party warrants to purchase 655 shares of Common Stock for assisting in the closing of the Credit Agreement. The warrants have a three year life and an exercise price of $0.0275 per share. The Company ascribed a value of $258 using the Black Scholes Pricing Model. The warrants valuation was charged to interest expense during the three -month period ended June 30, 2014 as the company concluded it did not have the intent nor the need to draw funds under the line during the term of the agreement (See Note 7).

7.  Equity

Stock-based compensation expense is based on the estimated grant date fair value of the portion of stock-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 valuation model.

Forfeitures of stock-based payment awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated average forfeiture rate for the three months ended September 30, 2014 and 2013, was approximately 9.75% and 9.73%, 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 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:

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

7.

Equity

The following table summarizes the allocation of stock-based compensation expense related to stock option grants for the three- and nine-month periods ended September 30, 2014 and 2013.

A summary of option activity under the Company's plans as of September 30, 2014 and 2013 is as follows:

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

7.

Equity

The following table summarizes significant ranges of outstanding and exercisable options as of September 30, 2014:

The following table summarizes the Company's unvested shares as of September 30, 2014:

As of September 30, 2014, there was $142 of total unrecognized compensation expense related to non-vested stock-based compensation arrangements granted under the plans.  The unrecognized compensation expense is expected to be realized over a weighted average period of 3.56 years.

Information with respect to the class of Preferred Stock at September 30, 2014 is as follows:

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

7.

Equity

Information with respect to dividends issued on the Company's Preferred stock for the three and nine-month periods ended September 30, 2014 and September 30, 2013 is as follows:

The shares of Series A-1 Preferred Stock are convertible at any time and are subordinate to the Series B, Series C and Series D Preferred Stock.

The shares of Series B Preferred Stock are convertible at any time and are subordinate to the Series C and Series D Preferred Stock.

The shares of Series C Preferred Stock are convertible into Common Stock at any time and are subordinate to the Series D Preferred Stock.

The material terms of the Series D-1 and Series D-2 Preferred Stock, other than the initial conversion price, are essentially the same. The shares of Series D Preferred Stock are convertible at any time and rank senior to the Company's outstanding shares of Series A-1, Series B and Series C Preferred Stock, and of Common Stock with respect to dividend rights and liquidation preferences.

In May 2013, the Company completed a private placement of 230 units of Series D Preferred Stock consisting of one (1) share of Series D-1 Preferred Stock and four (4) shares of Series D-2 Preferred Stock. The private placement provided $1,150 in proceeds to the Company.

On December 31, 2013, the Company converted approximately $1,179 of short-term debt plus accrued interest into 786 shares of Series D-1 Preferred Stock and 393 shares of Series D-2 Preferred Stock. The investors can receive up to one hundred percent (100%) warrant coverage. These warrants are immediately exercisable and expire three (3) years from the date of issuance. See the warrant table below for more detail. The warrants are exercisable in whole or in part and contain a cashless exercise provision.

On December 31, 2013, the Company sold for $870 in cash, net of $40 administrative fee paid to SG Phoenix, 607 Shares of Series D-1 preferred Stock and 303 shares of Series D-2 Preferred Stock. The investors can receive up to one hundred percent (100%) warrant coverage. These warrants are immediately exercisable and expire three (3) years from the date of issuance. See the warrant table below for more detail. The warrants are exercisable in whole or in part and contain a cashless exercise provision.

In connection with the December 31, 2013 offering, the Company adjusted the number of shares of Series D-1 Preferred Stock and Series D-2 Preferred Stock issued to investors in the May 2013 offering described above,

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

7.

Equity

in order to give such investors shares of Series D-1 Preferred Stock and Series D-2 Preferred Stock in the same ratio as offered to Investors in the December 31, 2013 offering. This resulted in an exchange of 537 shares of Series D-2 Preferred into Series D-1 Preferred. The Company also issued warrants to purchase Common Stock in the same manner as offered to investors in the December 31, 2013 offering.

On February 7, 2014, the Company sold for $733 in cash, net of $47 administrative fee paid in cash to SG Phoenix and a nonrelated third party, 520 shares of Series D-1 preferred Stock and 260 shares of Series D-2 Preferred Stock. The investors can receive up to one hundred percent (100%) warrant coverage. These warrants are immediately exercisable at $0.0275 per share and expire December 31, 2016. See the warrant table below for more detail. The warrants are exercisable in whole or in part and contain a cashless exercise provision.

On March 6, 2014, the Company sold for $406 in cash, net of $4 in administrative fees paid in cash to an unrelated third party, 273 Shares of Series D-1 Preferred Stock and 137 shares of Series D-2 Preferred Stock. The investors can receive up to one hundred percent (100%) warrant coverage. These warrants are immediately exercisable at $0.0275 per share and expire December 31, 2016. See the warrant table below for more detail. The warrants are exercisable in whole or in part and contain a cashless exercise provision.

On August 5, 2014, the Company sold for $1,070 in cash, net of $50 in administrative fees paid in cash to SG Phoenix, 1,120 Shares of Series D-1 Preferred Stock.

SG Phoenix received warrants to purchase 3,000 shares of Common stock, and two unrelated parties received warrants to purchase an aggregate of 1,600 shares of Common Stock in payment of administrative and finder's fees associated with the financings, in addition to the cash payments discussed above. These warrants are immediately exercisable and expire three (3) years from the date of issuance. The warrants are exercisable in whole or in part and contain a cashless exercise provision.

Generally, the Company's Preferred Stock votes together on an as converted basis with the holders of Common Stock. In addition, the Company's Preferred Stock enjoys certain protective provisions, a liquidation preference and anti-dilution protection that are similar to one another.

A summary of the warrant activity is as follows:

 

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Communication Intelligence Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

FORM 10-Q

7.

Equity

A summary of the status of the warrants outstanding and exercisable as of September 30, 2014 is as follows:

On May 6, 2014, the Company entered into a $2 million Credit Agreement with Venture Champion Asia Limited, an affiliate of ICG Global Limited (the "Lender"). In connection with the Company's entry into the Credit Agreement, the Company issued the Lender a warrant to purchase approximately 10,909 shares of Common Stock. In addition the company issued to a third party a warrant to purchase 655 shares of Common Stock for assisting in the closing of the Credit Agreement. The warrant has a three year life and an exercise price of $0.0275 per share. The Company ascribed a value of $258 to the warrant using the Black Scholes Pricing Model. The warrant's valuation was charged to interest expense during the three -month period ended June 30, 2014 as the company concluded it did not have the intent nor the need to draw funds under the line during the term of the agreement (See Note 6).

Investors that received warrants in connection with the Company's financing transactions in closings that occurred on December 13, 2013, February 7, 2014 and March 6, 2014, may receive additional warrants to purchase up to an aggregate of 120,786 shares of Common Stock, if the Company does not achieve certain revenue targets in the first three quarters of 2014. The Company ascribed a value of $566 to the warrants issued at closing, including the contingent warrants, using a Black Sholes valuation model. The Company also recorded a beneficial conversion feature of $305 related to the shares of Series D Preferred Stock issued in the February 7, 2014 and March 6, 2014 closings, based on the accounting conversion price of the shares of Series D Preferred Stock issued in those closings.

On May 14, and August 14, 2014 the Company issued 40,262 and 40,262 of contingent warrants in connection with the Company's financing transactions referenced above as a result of the Company not achieving its revenue targets in the quarters ending March 31, and June 30, 2014.

Since the Company did not achieve the revenue target for the three- months ended September 30, 2014, the Company will issue warrants to purchase a total of 40,262 shares of common stock promptly after filing of this Form 10-Q.

At September 30, 2014, 173,814 shares of common stock were reserved for issuance upon exercise of outstanding warrants.

8.	Subsequent event

On October 31, 2014, one of the Company's Preferred Shareholders converted 238 shares of Series A-1 Convertible Preferred Stock into 1,701shares of the Company's Common Stock. Each share of the Series A-1 Preferred is convertible into 7.1428 shares of Common Stock.

 

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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, 2013, including the following:

·	Technological, engineering, manufacturing, quality control or other circumstances that could delay the sale or shipment of products;

·	Economic, business, market and competitive conditions in the software industry and technological innovations that could affect the Company's business;

·	The Company's inability to protect its trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on the proprietary rights of the Company; and

·	General economic and business conditions and the availability of sufficient financing.

Except as otherwise required by applicable laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, as a result of new information, future events or otherwise.

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, 2013.

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, 2013, net losses attributable to common stockholders aggregated approximately $14,845, and, at September 30, 2014, the Company's accumulated deficit was approximately $122,323.

During the nine months ended September 30, 2014, the Company completed three private placements of its Series D-1 and Series D-2 Preferred Stock aggregating $2,208 in net proceeds. The proceeds are being used for general working capital purposes (See Liquidity and Capital Resources).

For the three months ended September 30, 2014, total revenue was $285, a decrease of $85, or 23%, compared to total revenue of $370 in the prior year period. For the nine months ended September 30, 2014, total revenue was $1,059, an increase of $192, or 22%, compared to total revenue of $867 in the prior year period. The decrease in total revenue for the three months ended September 30, 2014 was primarily due to lower product revenue. The increase in revenue over the nine- month period is primarily attributable to greater product sales.

For the three months ended September 30, 2014, the loss from operations was $950, an increase of $45, or 5%, compared with a loss from operations of $905 in the prior year period. For the nine months ended September 30, 2014,

 

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the loss from operations was $2,937, a decrease of $406, or 12%, compared with a loss from operations of $3,343 in the prior year period. The increase in the loss from operations for the three months ended September 30, 2014, is primarily attributable to the above mentioned decrease in sales offset by a decrease of $40 in operating expenses including cost of sales compared to the prior year period. The decrease in the loss from operations for the nine months ended September 30, 2014 is primarily attributable to the above mentioned increase in sales and a decrease of $214, or 5%, in operating expenses including cost of sales compared to the prior year period.

Non-operating income for the three months ended September 30, 2014 was $38, an increase of $20, or 111%, compared to non-operating income of $18 in the prior year period. The increase in non-operating income for the three-months ended September 30, 2014, was primarily due to the sale of one of the Company's unused trademarks to a third party. Non-operating expense for the nine months ended September 30, 2014 was $202, an increase of $281, or 256%, compared to non-operating income of $79 in the prior year period. The increase in non-operating expenses for the nine months ended September 30, 2014, was primarily due to the valuation of warrants issued to a third party in connection with the closing in May 2014 of a $2 million line of credit (See Liquidity and Capital Resources).

Critical Accounting Policies and Estimates

 

Refer to Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2013 Form 10-K.

Effect of Recent Accounting Pronouncements

In the third quarter of fiscal 2014, 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, 2014, product revenue was $85, a decrease of $110, or 56%, compared to product revenue of $195 in the prior year period. The decrease in product revenue is primarily attributable to the timing of the Company's sales opportunities during the quarter and of the ramp for certain recurring revenue contracts. For the three months ended September 30, 2014, maintenance revenue was $200, an increase of $25, or 14%, compared to maintenance revenue of $175 in the prior year period. The increase in maintenance revenue is primarily due to new maintenance contracts associated with the increase in product sales in the current and prior year.

For the nine months ended September 30, 2014, product revenue was $491, an increase of $133, or 37%, compared to product revenue of $358 in the prior year period.  The increase in product revenue is primarily due to availability of new products in the first nine months of 2014.  For the nine months ended September 30, 2014, maintenance revenue was $568, an increase of $59, or 12%, compared to maintenance revenue of $509 in the prior year period. The increase in maintenance revenue is primarily due to new maintenance contracts associated with the increase in product sales in the current and prior year.

Cost of Sales

For the three months ended September 30, 2014, cost of sales was $46, a decrease of $53, or 54%, compared to cost of sales of $99 in the prior year period. The decrease in cost of sales was due to a decrease in direct labor related to maintenance and revenue generating contracts recognized during the three months ended September 30, 2014, compared to the prior year period.

For the nine months ended September 30, 2014, cost of sales was $180, a decrease of $77, or 30%, compared to cost of sales of $257 in the prior year period. The decrease in cost of sales was due to a decrease in direct labor related

 

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Operating expenses

Research and Development Expenses

For the three months ended September 30, 2014, research and development expense was $476, an increase of $5, or 1%, compared to research and development expense of $471 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 factors in the $5 increase was a $76, or 19%, decrease in total salaries and related expense due to the reduction of one test engineer in the quarter ended September 30, 2014, compared to the same period of the prior year, offset by a decrease in allocations to cost of sales and marketing of $83, or 58%, resulting from the above mentioned decrease in maintenance activity and revenue generating contracts. Total expenses, before allocations for the three months ended September 30, 2014, was $536, a decrease of $77, or 13%, compared to $613 in the prior year period. The decrease in gross expenses is primarily due to the factors discussed above. 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, 2014, research and development expense was $1,549, a decrease of $14, or 1%, compared to research and development expense of $1,563 in the prior year period.  Total expenses, before capitalization of software development costs and other allocations, for the nine- months ended September 30, 2014, were $1,756, a decrease of $188, or 10%, compared to $1,944 in the prior year period. The decrease in research and development expense for the nine months ended September 30, 2014, compared to the prior year period, is due to the reduction of two test engineers in the second quarter of the prior year and from the same factors discussed above for the three-month period.

Sales and Marketing Expense

For the three months ended September 30, 2014, sales and marketing expense was $303, an increase of $12, or 4%, compared to sales and marketing expense of $291 in the prior year period. For the nine- months ended September 30, 2014, sales and marketing expenses was $942, an increase of $58, or 7%, compared to sales and marketing expense of $884 in the prior year period. The increases were primarily attributable to increases in salaries and related expenses resulting from the addition of a new sales person in the first quarter of 2014.

General and Administrative Expense

For the three months ended September 30, 2014, general and administrative expense was $410, a decrease of $4, or 1%, compared to general and administrative expense of $414 in the prior year period. The decrease was primarily due to a decrease of $48, or 37%, in salaries and related expense including, stock option compensation expense of $46, or 62%, partially offset by an increase in professional fees of $44, or 15%.

For the nine months ended September 30, 2014, general and administrative expense was $1,325, a decrease of $181, or 12%, compared to general and administrative expense of $1,506 in the prior year period. The decrease was primarily due to the same factors discussed for the three-month period above.

Interest expense

For the three months ended September 30, 2014, interest expense was $13, an increase of $7, or 117%, compared to interest expense of $6 in the prior year period. For the nine months ended September 30, 2014, interest expense was $258, an increase of $249, or 2,767%, compared to interest expense of $9 in the prior year period. The increase resulted from expensing the valuation of the warrants issued to third parties in connection with the closing of a $2 million line of credit in May 2014 (see Liquidity and Capital Resources).

 

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Communication Intelligence Corporation

 (In thousands, except per share amounts)

FORM 10-Q

Other income and expenses

For the three months ended September 30, 2014, other income increased $51, or 2,550%, compared to a loss of $2 in the prior year period. For the nine -months ended September 30, 2014 other income increased $54, or 1,800% compared to $3 in the prior year period. The increases were primarily due to the sale of one of the Company's unused trademarks to a third party in the third quarter of 2014.

For the three months ended September 30, 2014, the gain on derivative liability was $2, a decrease of $24, or 92%, compared to the gain on derivative liability of $26 in the prior year period. For the nine months ended September 30, 2014, the gain on derivative liability was $5, a decrease of $86, or 95%, compared to a gain on derivative liability of $91 in the prior year period. The decreases in the gains on derivative liability are primarily due to the exercise and expiration of warrants and a minimal change in the closing price of the Company's Common Stock at September 30, 2014.

For the three months ended September 30, 2014, accretion of the beneficial conversion feature on the Company's Preferred Stock with an exercise price less than the closing market price on September 30, 2014 (Series C and Series D-1 Preferred Stock) was $171, an increase of $134, or 362%, compared to $37 in the prior year period. The increase is primarily due to the issuance of Series D-1 Preferred Stock in private placements closed in February, March and August 2014, and the increase in the closing price of the Company's Common Stock compared to the prior year.

For the nine months ended September 30, 2014, accretion of the beneficial conversion feature on the Company's Preferred Stock with an accounting conversion price less than the closing market price on the issuance date (Series C and Series D-1 Preferred Stock) that was issued in the financings in February, March  and August 2014 (see Liquidity and Capital Resources), as well as dividends issued in kind, was $602, an increase of $243, or 68%, compared to $359 in the prior year period. The increase is primarily due to the same factors discussed for the three -month period.

The Company recorded dividends in kind on shares of its Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. For the three months ended September 30, 2014, dividends on shares of Preferred Stock were $708, an increase of $165, or 30% compared to $543 in the prior year period. The increase was primarily due to the issuances of shares of Series D Preferred Stock discussed above.

For the nine months ended September 30, 2014, dividends on shares of Preferred Stock were $1,989, an increase of $458, or 30%, compared to $1,531 in the prior year period. The increase was primarily due to the issuances of shares of Series D Preferred Stock discussed above.

Liquidity and Capital Resources

At September 30, 2014, cash and cash equivalents totaled $641, compared to cash and cash equivalents of $945 at December 31, 2013. The decrease in cash was primarily due to net cash used in operating activities of $2,508 and investing activities of $4. These uses of cash were offset by cash provided by financing activities of $2,208.  At September 30, 2014, total current assets were $944, compared to total current assets of $1,412 at December 31, 2013. At September 30, 2014, the Company's principal sources of funds included its aggregated cash and cash equivalents of $641.

At September 30, 2014, accounts receivable net, was $215, a decrease of $195, or 48%, compared to accounts receivable net of $410 at December 31, 2013. The decrease is due primarily to the collection of accounts receivable from the fourth quarter 2013 billings and timely collection of sales billings during the nine months ended September 30, 2014.

At September 30, 2014, prepaid expenses and other current assets were $88, an increase of $31, or 54%, compared to prepaid expenses and other current assets of $57 at December 31, 2013. The increase is due primarily to the prepayment of the Company's annual D&O insurance policy, offset by the amortization of the prepaid annual insurance premiums at December 31, 2013.

 

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Communication Intelligence Corporation

 (In thousands, except per share amounts)

FORM 10-Q

At September 30, 2014, accounts payable were $221, a decrease of $106, or 32%, compared to accounts payable of $327 at December 31, 2013. The decrease is due primarily to payment of outstanding accounts payable from the proceeds of the February, March and August 2014 financing proceeds. At September 30, 2014, accrued compensation was $265, a decrease of $50, or 16%, compared to accrued compensation of $315 at December 31, 2013. The decrease is due primarily to the payment of accrued sales commissions from the timely receipt of outstanding accounts receivable and reduction of accrued vacation expense related to one sales and one engineering employee that left the Company September 30, 2014.

At September 30, 2014, total current liabilities were $1,167, a decrease of $197, or 14%, compared to total current liabilities of $1,364 at December 31, 2013. At September 30, 2014, current deferred revenue was $399, a decrease of $91, or 19%, compared to current deferred revenue of $490 at December 31, 2013. Deferred revenue is recorded when the Company receives advance payment from its customers and 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.

For the three and nine months ended September 30, 2014, the Company exercised its option to pay in kind the accrued dividends on Preferred Stock as follows:

On February 7, 2014, the Company sold for $733 in cash, net of $47 administrative fee paid in cash to SG Phoenix and a nonrelated third party, 520 shares of Series D-1 Preferred Stock and 260 shares of Series D-2 Preferred Stock. The investors can receive up to one hundred percent (100%) warrant coverage. These warrants are immediately exercisable at $0.0275 per share and expire on December 31, 2016. The warrants are exercisable in whole or in part and contain a cashless exercise provision.

On March 6, 2014, the Company sold for $406 in cash, net of $4 in administrative fees paid in cash to an unrelated third party, 273 Shares of Series D-1 Preferred Stock and 137 shares of Series D-2 Preferred Stock. The investors can receive up to one hundred percent (100%) warrant coverage. These warrants are immediately exercisable at $0.0275 per share and expire on December 31, 2016. The warrants are exercisable in whole or in part and contain a cashless exercise provision.

The Company is using the funds received from the above financings for working capital and general corporate purposes.

On May 6, 2014, the Company entered into a Credit Agreement with Venture Champion Asia Limited, an affiliate of ICG Global Limited (the "Lender").  Under the terms of the Credit Agreement, for a period of 18 months, the Company is permitted to borrow up to $2 million in unsecured indebtedness from the Lender.  Each draw is subject to a 15% original issue discount, so that borrowing the full $2 million would result in an aggregate of $2.352 million in debt with fifty percent (50%) warrant coverage and also may be converted at the Lender's option into shares of the Company's Common Stock at an initial conversion price of $0.0275 per share.

In connection with the Company's entry into the Credit Agreement, the Company issued to the Lender 10,909 warrants to purchase 10,909 shares of Common Stock. In addition, the Company issued to a third party 655 warrants for assisting in the closing of the Credit Agreement. The warrants have a three-year life and an exercise price of $0.0275 per share. The Company ascribed a value of $258 using the Black Scholes Pricing Model. The warrants valuation was charged to interest expense.

 

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Communication Intelligence Corporation

 (In thousands, except per share amounts)

FORM 10-Q

In July 2014, the Company received $50 from a third party for the sale of a trademark related to one of its discontinued products.

On August 5, 2014, the Company sold for $1,070 in cash, net of $50 in administrative fees paid in cash to SG Phoenix, 1,120 Shares of Series D-1 Preferred Stock.

The Company had the following material commitments as of September 30, 2014:

1.	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 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.

Interest Rate Risk

The Company did not enter into any short-term security investments during the three and nine months ended September 30, 2014.

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, 2014 and 2013, foreign currency translation gains and losses were insignificant.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company carried out an evaluation as of the end of the 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 of 1934 (the "Exchange Act"). Based on that evaluation and because of the material weaknesses in our internal control over financial reporting described below, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were not 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 SEC's rules and forms, and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Management identified the following control deficiencies that constitute material weaknesses that are not fully remediated as of the filing date of this report:

 

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Communication Intelligence Corporation

 (In thousands, except per share amounts)

FORM 10-Q

As a small company with limited resources that are mainly focused on the development and sales of software products and services, CIC does not employ a sufficient number of staff in its finance department to possess an optimal segregation of duties or to provide optimal levels of oversight. This has resulted in certain audit adjustments and management believes that there may be a possibility for a material misstatement to occur in future periods while it employs the current number of personnel in its finance department.

The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedures are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The Company considered these limitations during the development of its disclosure controls and procedures, and will continually reevaluate them to ensure they provide reasonable assurance that such controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

None.

Not applicable.

None.

None.

Not applicable.

None.

 

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Communication Intelligence Corporation

 (In thousands, except per share amounts)

FORM 10-Q

(a)

Exhibits.

 

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*	Filed herewith.

 

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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.

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