UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
-------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
----------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 520, Redwood Shores, CA
94065-1413 (Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the Issuer's Common Stock, as of November, 7
1997: 47,057,433
This Quarterly Report on Form 10-Q contains 19 pages of which
this is page 1.
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at September 30, 1997 (unaudited)
and December 31, 1996.....................................................3
Condensed Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1997 and 1996 (unaudited)............4
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1997 and 1996(unaudited)......................5
Notes to Condensed Consolidated Financial Statements(unaudited)...........6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits...............................................18
(b) Reports on Form 8-K....................................18
Signatures...............................................................19
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
Assets (Unaudited)
------------ -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,392 $ 10,573
Short-term investments 703 752
Accounts receivable, net 515 376
Inventories 1,413 529
Other current assets 400 190
------------ -----------
Total current assets 4,423 12,420
Notes receivable from officers and employees 360 210
Property and equipment, net 994 537
Other assets 313 336
------------ -----------
Total assets $ 6,090 $ 13,503
============ ===========
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 917 $ 367
Accrued compensation 492 339
Short-term debt 83 -
Other accrued liabilities 719 578
Deferred revenue 973 2,006
Pre-petition liabilities - 878
------------ ----------
Total current liabilities 3,184 4,168
Redeemable convertible preferred stock (Note 5) - 9,417
Convertible preferred stock (Note 5) 4 -
Common stock 449 419
Additional paid-in capital 64,093 54,015
Accumulated deficit (61,537) (54,347)
Cumulative foreign currency translation adjustment (103) (169)
Commitments (Note 5)
------------ ----------
Total liabilities, redeemable securities,
convertible preferred and common
stockholders' equity (Note 5) $ 6,090 $ 13,503
============ ===========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
1997 1996 1997 1996
--------- -------- ------- --------
Revenues:
<S> <C> <C> <C> <C>
Product $ 576 $ 433 $ 2,336 $ 1,317
License and royalty 623 252 1,213 545
Development contracts 176 69 421 209
-------- -------- -------- --------
Total revenues 1,375 754 3,970 2,071
Operating costs and expenses:
Cost of sales:
Product 358 351 1,779 1,038
License, royalty and other costs 260 95 679 309
Development contracts 159 107 340 247
Research and development 585 389 1,656 1,176
Sales and marketing 1,723 833 4,703 2,350
General and administrative 544 454 1,663 1,483
-------- -------- -------- --------
Total operating costs
and expenses 3,629 2,229 10,820 6,603
-------- -------- -------- --------
Loss from operations (2,254) (1,475) (6,850) (4,532)
Interest income and other income
(expense) net, (Note 5) 56 78 (312) 233
Interest expense (7) (25) (28) (122)
-------- -------- -------- --------
Net loss $(2,205) $(1,422) $(7,190) $(4,421)
======== ======== ======== ========
Net loss per common share $ (0.05) $ (0.03) $ (0.16) $ (0.11)
======== ======== ======== ========
Weighted average common
shares outstanding 45,200 41,951 44,876 41,011
======== ======== ======== ========
</TABLE>
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1997 1996
---------- ----------
Cash flows used in operating activities:
<S> <C> <C>
Net loss $ (7,190) $ (4,421)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 183 271
Warrant issuance 484 -
Stock options issued for services 74 -
Changes in operating assets and liabilities:
Accounts receivable (139) (56)
Inventories (892) (442)
Other current assets (210) (5)
Other assets (234) 36
Accounts payable and accrued compensation 672 (390)
Other accrued liabilities (272) (193)
Deferred revenue (1,033) (182)
Pre-petition liabilities (878) (719)
---------- ----------
Net cash used in operating activities (9,435) (6,101)
---------- ----------
Cash flows used in investing activities:
Proceeds from sale of short-term investments 7,071 11,385
Purchase of short-term investments (7,022) (12,650)
Acquisition of property and equipment (584) (225)
---------- ----------
Net cash used in investing activities (535) (1,490)
---------- ----------
Cash flows from financing activities:
Principal payments on short-term debt (26) (30)
Principal payments on capital lease obligations (17) (26)
Proceeds from issuance of short-term debt 109 140
Proceeds from issuance of common stock 772 3,240
---------- ----------
Net cash provided by financing activities 838 3,324
---------- ----------
Effect of exchange rate changes on cash (49) (59)
---------- ----------
Net decrease in cash and cash equivalents (9,181) (4,326)
Cash and cash equivalents at beginning of period 10,573 5,924
---------- ----------
Cash and cash equivalents at end of period $ 1,392 $ 1,598
========== ==========
</TABLE>
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
<PAGE>
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements
of Communication Intelligence Corporation (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 GAAP for complete financial
statements. In the opinion of management, the financial statements
included in this report reflect all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for
a fair presentation of its financial position, results of operations
and cash flows for the periods presented. The interim results are not
necessarily indicative of the results to be expected for the entire
year.
The corporate mission of CIC is to develop and market natural, pen
input, computer interfaces and handwriting recognition-based security
technologies and products to satisfy the emerging markets for pen-based
computing and electronic commerce. These emerging markets include all
areas of personal computing as well as electronic commerce and
communications.
The Company's research and development activities have given rise to
numerous technologies and products including: two pen-based operating
environments (PenDOS(R) and PenMAC(R)), its multi-lingual Handwriter(R)
Recognition System, and three desktop computing products, Handwriter(R)
for Windows(R), MacHandwriter(R), and its recently released
Handwriter(R) Manta(R). Additionally, CIC has developed products for
dynamic signature verification, electronic ink data compression,
encryption and a suite of development tools and applications which the
Company believes could increase the functionality of its core products
and could facilitate their integration into original equipment
manufacturers' ("OEM") hardware products and computer systems and
networks.
In June 1997, the Company contributed licensed technology and $900,000
in cash to the Company's joint venture in the People's Republic of
China (the "Joint Venture"), Communication Intelligence Computer
Corporation, Ltd. ("CICC"), which increased the Company's ownership of
CICC from 79% to 90%.
For the nine months ended September 30, 1997, the Company's cash and
cash equivalents decreased by approximately $9,181,000, from
approximately $10,573,000 at the beginning of the period to
approximately $1,392,000 due primarily to a cash used in operating
activities of approximately $9,435,000 for the nine months ended
September 30, 1997. As of September 30, 1997, the Company's cash, cash
equivalents and short-term investments was $2,095,000. Although there
is no assurance, the Company believes that the above mentioned funds,
are adequate to meet projected working capital and other cash
requirements for the next two months. The Company is currently seeking
to raise additional funds from financing sources in order to meet its
short-term requirements and expects to consummate a financing in
November 1997. There can be no assurance that such financing will
close, or if the financing does close, that such financing will be on
favorable terms.
This financial information should be read in conjunction with the
Company's audited financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 1996.
Certain prior period amounts in the accompanying financial statements
have been reclassified to conform with the current period presentation.
2. Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Short-term investments are classified as "available-for-sale" and are
stated at their fair value. Any unrealized gains or losses are reported
as a separate component of stockholders' equity, but, to date, have not
been significant. The cost of securities sold is determined based on
the specific identification method.
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------------- -------------------
(In Thousands)
<S> <C> <C>
Cash in bank $ 1,387 $ 9,483
Commercial paper - 1,088
Money markets 5 2
------------ ------------
$ 1,392 $ 10,573
============ ============
Short-term investments consist of the following available-for-sale
securities:
September 30, December 31,
1997 1996
--------------------- -------------------
(In Thousands)
U.S. Corporate securities $ 703 $ 252
Other debt securities - 500
----------- -----------
$ 703 $ 752
=========== ===========
</TABLE>
Corporate debt securities at September 30, 1997 mature in less than one
year.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. At September 30, 1997, inventory is comprised primarily of
finished goods.
4. Short-term debt
In May 1997, the Company purchased office furniture and a security
system with an approximate value of $209,000 from a third party. The
Company paid $100,000 in cash and signed an unsecured note for $109,000
due in monthly installments through May 1998. The note bears interest
on the unpaid balance at a rate of 10% per annum.
5. Convertible preferred stock
On December 31, 1996, the Company completed a private placement of
450,000 shares of redeemable convertible preferred stock (the "December
Private Placement") at $25.00 per share to certain institutional and
other investors. Of the aggregate 450,000 shares sold, 70,200 shares of
redeemable convertible preferred stock (the "Preferred Stock") were
issued to investors in exchange for 390,000 shares of common stock,
originally issued by the Company in a private placement of common stock
consummated in June 1996.
The Company agreed to register the common stock issuable upon
conversion of the Preferred Stock by filing a Registration Statement on
Form S-3 by March 31, 1997 and by using its best efforts to cause such
Registration Statement to be declared effective within 180 days from
December 31, 1996 (the "Declaration Date"). In the event that the
Registration Statement was not declared effective within 180 days from
December 31, 1996, the Company was required to pay to each holder a
default payment (the "Default Payment") in an amount equal to 3% of the
liquidation preference for the Preferred Stock held for any part of
each 30-day period subsequent to the Declaration Date that the
Registration Statement was not declared effective. The Registration
Statement was declared effective in April 1997. A similar Default
Payment must be made by the Company to the holders of the Preferred
Stock in the event that (i) the Company fails, refuses or is unable to
cause the securities covered by the Registration Statement to be listed
on the exchange on which the Company's common stock is traded, (ii) any
holder's ability to sell the securities covered by the Registration
Statement is suspended for more than 60 days, or at any time during the
twelfth or thirteenth fiscal month following December 31, 1996, or
(iii) the Company does not have a sufficient number of shares of common
stock available to effect conversion of the Preferred Stock. The
Company has not been liable for any payments through September 30,
1997.
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the issued and outstanding Preferred Stock
executed a waiver to certain provisions of the Registration Rights
Agreement (the "Agreement") entered into in connection with the
December Private Placement, which irrevocably waived such holders'
rights to any redemption of the preferred stock, and in exchange
therefor the holders received 300,000 warrants to purchase the
Company's common stock, allocated amongst the holders on a pro-rata
basis. The warrants expire five years from the date of issuance and
have an exercise price of $2.00 per share, subject to adjustments for
antidilution. The Company ascribed a value of $484,000 to these
warrants, which was recorded as an expense in the Company's statement
of operations for the quarter ended March 31, 1997. The fair value
ascribed to the warrants was estimated on the date of issuance using
the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 6.60%; expected life of 5 years; expected
volatility of 104%; and expected dividend yield of 0%. As a result of
the waiver, the shares of Preferred Stock were reclassified as
convertible preferred stock after December 31, 1996 and, as such, are
included in stockholders' equity for such periods subsequent to
December 31, 1996.
During the quarter ending September 30, 1997, 27,600 shares of
convertible preferred stock were exchanged for 699,465 shares of the
Company's Common Stock.
6. Recent accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". This Statement is effective for the Company's year ending
December 31, 1997 and redefines earnings per share under generally
accepted accounting principles. Under the new standard, primary
earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced with diluted earnings per share.
If the Company had adopted this statement for the quarter and nine
months ended September 30, 1997 and for the comparable periods in the
prior year, the Company's loss per share would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------------------ -----------------
<S> <C> <C> <C> <C>
Basic loss per share $(0.05) $(0.03) $(0.16) $(0.11)
Diluted loss per share $(0.05) $(0.03) $(0.16) $(0.11)
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting
of comprehensive income and its components in a full set of
general-purpose financial statements for periods beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods for comparative purposes is required. The Company will adopt
SFAS 130 in 1998 and does not expect such adoption to have a material
effect on its consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments
of An Enterprise and Related Information" ("SFAS 131"). SFAS 131
revises information regarding the reporting of operating segments and
is required to be adopted in periods beginning after December 15, 1997.
It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company will
adopt SFAS 131 in 1998 and does not expect such adoption to have a
material effect on its consolidated financial statements.
In October 1997, the Accounting Standards Executive Committee of The
American Institute of Certified Public Accountants issued Statement of
Practice 97-2 "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2
provides guidance on generally accepted accounting principles for
recognition of revenue on software transactions. This SOP supersedes
SOP 91-1 and is effective for fiscal years beginning after December 15,
1997. The Company will adopt SOP 97-2 in 1998 and does not expect such
adoption to have a material effect on its consolidated financial
statements.
7. Subsequent event
On October 16, 1997 the Company entered into an Account Receivable
Financing Agreement whereby the Company may factor its Accounts
Receivable. The maximum credit available to the Company under the
agreement is $1,500,000 with an advance rate of 80% of eligibleaccounts
receivable less than 90 days old. The term of the agreement is
twelve months with annual renewals. A financing fee of 2.5% per month
applies to the outstanding balance based on the face value of each
invoice. The line of credit is secured by a blanket first priority lien
on all Company assets with the exception of intellectual property. As
of November 7, 1997, the Company had financed approximately $396,000 of
accounts receivable under this agreement and has
approximately $1,100,000 of additional financings available for future
use.
<PAGE>
COMMUNICATION INTELLIGENCE CORPORATION
AND SUBSIDIARY
FORM 10-Q
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Revenues. Revenues for the three and nine months ended September 30, 1997
increased by 82% and 92%, respectively, from the comparable three and nine month
periods of the prior year to $1,375,000 and $3,970,000, respectively. Revenues
are comprised of product sales, license and royalty fees, and development
contract revenues. The increases are principally due to higher product sales and
license and royalty fees as discussed in more detail below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
(In Thousands)
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Product sales $ 576 $ 433 $ 2,336 $ 1,317
License and royalty fees 623 252 1,213 545
Development contracts 176 69 421 209
-------- -------- -------- --------
Total Revenues $ 1,375 $ 754 $ 3,970 $ 2,071
======== ======== ======== ========
</TABLE>
Product sales increased to $576,000 and $2,336,000, respectively, for the three
and nine month periods ended September 30, 1997 from $433,000 and $1,317,000,
respectively, in the comparable prior year periods. This increase was due
primarily to introduction of Handwriter products into the retail channel through
CompUSA in 1997 and an increase in Handwriter sales to the corporate market.
Handwriter product sales increased $287,000 and $1,168,000, respectively, to
$337,000 and $1,406,000, respectively, during the three and nine month periods
ended September 30, 1997 compared to $50,000 and $238,000, respectively, in the
comparable periods in 1996. Product sales by the Company's 90% owned Joint
Venture were $241,000 and $930,000, respectively, for the three and nine month
periods ended September 30, 1997 compared to $382,000 and $1,079,000,
respectively, during the same periods last year.
Revenues from license and royalty fees for the three and nine month periods
ended September 30, 1997 increased to $623,000 and $1,213,000, respectively,
from $252,000 and $545,000, respectively, in the comparable prior periods in
1996. This increase was due to the release of deferred royalty revenues of
approximately $519,000 and $902,000, respectively, for the three and nine month
periods ended September 30, 1997, recognized on licensing agreements for which
the Company had no further obligation to deliver additional software or
services. In the comparable prior year periods, licensing and royalty revenues
of approximately $164,000 and $250,000, respectively, were recognized on
licensing agreements for which the Company had no further obligation to deliver
additional software or services. Royalty revenues recognized on current product
shipments by the Company's licensees increased by 17% and 5% to $104,000 and
$311,000, respectively, for the three and nine month periods ended September 30,
1997 from $88,000 and $295,000, respectively, in the comparable prior year
periods..
Development contract revenues for the three and nine month periods ended
September 30, 1997 increased 155% and 101% to $176,000 and $421,000,
respectively, compared to $69,000 and $209,000, respectively, in the comparable
prior year periods. This increase was primarily due to $98,000 and $174,000 in
development contracts revenues other than grant revenues received during the
three and nine months ended September 30, 1997, respectively, compared to
$10,000 in development contract revenues other than grant revenues earned during
the nine month period of the prior year. Grant revenues from The National
Science Foundation for basic research for the three and nine month periods ended
September 30, 1997 was $79,000 and $247,000, respectively, compared to $59,000
and $155,000, respectively, during the comparable periods of the prior year.
Grant revenues from the US Government's National Institute of Standards and
Technology ("NIST") was $90,000 in 1996. The NIST grant expired in April 1996.
Cost of Sales. Cost of sales comprises costs from product sales, licensing,
royalty and other costs and costs from development contracts. Cost of product
sales for the three and nine months ended September 30, 1997, consists primarily
of cost of materials, approximately $134,000 and $692,000, respectively, of
which is related to the hardware and software components involved in the system
integration activities of the Joint Venture, compared to approximately $291,000
and $858,000, respectively, in the comparable prior year periods, with the
remainder being related to costs of Handwriter product sales. Handwriter product
cost of materials was approximately $279,000 and $1,221,000, respectively, for
the three and nine months ended September 30, 1997 compared to approximately
$46,000 and $180,000, respectively, in the comparable prior year periods. This
increase in Handwriter product cost of sales is due to the increase in sales of
the Handwriter products as mentioned above. Handwriter product gross margin
increased to 17% during the three months ended September 30, 1997 from 8% in the
comparable period of the prior year. This increase resulted from an increase in
sales of the Company's new higher margin Handwriter Manta product by the retail
channel in the third quarter of 1997. The Manta product was not available in
quantity in 1996. For the nine month period ended September 30, 1997, Handwriter
products gross margin decreased to 13% from 24% in the comparable period of the
prior year. The decrease is due to the lower selling price experienced on
Handwriter Classic products in the retail channel. The Handwriter Classic was
not sold in the Retail Channel during 1996. Gross margin on product sales
activities of the Joint Venture was 44% and 25%, respectively, during the three
and nine months ended September 30, 1997 compared to 24% and 20%, respectively,
in the prior year. License, royalties and other costs, which include
procurement, warehousing, and related personnel in connection with sales of the
Company's products, increased to $260,000 and $679,000, respectively, for the
three and nine months ended September 30, 1997 compared to $95,000 and $309,000,
respectively, for the comparable 1996 periods. This increase in License, royalty
and other costs for the three and nine months ended September 30, 1997 related
primarily to additional personnel costs of $70,000 and $188,000, respectively,
and product fulfillment and other costs of $90,000 and $215,000, respectively,
in connection with the launch and ongoing support of the Company's Handwriter(R)
for Windows(R) product in the retail market in 1997. There were no comparable
activities in the prior year. Costs incurred in connection with development
contract revenue are expensed as incurred and increased 49% and 38% during the
three and nine months ended September 30, 1997, respectively, as compared to the
comparable periods of the prior year, commensurate with the increase in contract
development revenues in 1997.
Research and development. Research and development expenses for the three and
nine month periods ended September 30, 1997 increased by 50% and 41% to $585,000
and $1,656,000, respectively, as compared to $389,000 and $1,176,000,
respectively, in the comparable periods of the prior year. The increases were
primarily attributable to increases of approximately $155,000 and $337,000,
respectively, in payroll and related costs, and $30,000 and $156,000,
respectively, in professional services, facilities and other costs compared to
the prior year. These increases are commensurate with the increase in personnel
and the continued development of the Chinese recognizer and the development of
the Handwriter MX and Handwriter fx products introduced into the retail channel
late in the third quarter of the current year. The Company did not capitalize
any software development costs in the three and nine month periods ended
September 30, 1997 or 1996, respectively.
Sales and marketing. Sales and marketing expenses for the three and nine month
periods ended September 30, 1997 increased 107% and 100% to $1,723,000 and
$4,703,000, respectively, as compared to $833,000 and $2,350,000, respectively,
in the comparable periods of the prior year. The increases were primarily due to
increases of $250,000 and $979,000 respectively, in advertising and related
expenses, and $314,000 and $666,000, respectively, in payroll and related
expenses. Other costs, including facilities and related expenses, consulting
services and other costs increased $326,000 and $708,000, respectively, during
the three and nine month periods ended September 30, 1997 commensurate with
additions in staffing. The increases in staffing and advertising expenses were
primarily due to the introduction and ongoing support of the Company's
Handwriter products in the retail channel during 1997, and continued marketing
and sales efforts in the corporate channel.
General and administrative. General and administrative expenses for the three
and nine month periods ended September 30, 1997 increased 20% and 12%,
respectively, to $544,000 and $1,663,000, respectively, as compared to $454,000
and $1,483,000, respectively, in the comparable periods of the prior year. The
increases were primarily attributable to increases of approximately $100,000 and
$314,000, respectively, in professional fees and services related to the
Company's financing activities and related obligations. These increases were
partially offset by reductions in payroll and related costs of $57,000 and
$161,000, respectively, during the three and nine month periods ended September
30, 1997 compared to the same periods in the prior year. These reductions were
associated with the transfers of general and administrative staff to sales and
marketing activities.
Interest income and other income (expense). Interest income and other income
(expense) increased for the nine months ended September 30, 1997 due to a one
time non-cash charge to expense of $484,000 for 300,000 warrants issued on March
28, 1997, and effective as of December 31, 1996, to holders constituting 100% of
the issued and outstanding redeemable convertible preferred stock in exchange
for the execution of a waiver to certain provisions of the registration rights
agreement entered into in connection with the private placement of Preferred
Stock in December 1996 (Note 5).
Interest expense. Interest expense decreased for the three and nine month
periods ended September 30, 1997 compared to the prior year due to the pay-off
of the pre-petition liabilities in the first quarter of 1997.
Liquidity and Capital Resources
At September 30, 1997, cash, cash equivalents and short-term investments totaled
$2,095,000 compared to cash, cash equivalents and short-term investments of
$11,325,000 at December 31, 1996. This decrease was primarily the result of
$9,435,000 used in operating activities which included a net loss of $7,190,000
for the nine months ended September 30, 1997. Total current assets were
$4,423,000 at September 30, 1997 compared to $12,420,000 at December 31, 1996.
Current liabilities, which include deferred revenue, were $3,184,000 at
September 30, 1997. Deferred revenue, totaling $973,000 at September 30, 1997,
primarily reflects nonrefundable advance royalty fees received from the
Company's licensees which are generally recognized as revenue by the Company in
the period in which licensees report that products incorporating the Company's
software have been shipped or for which the Company has no further obligation to
deliver additional software or services. As such, the period over which such
deferred revenue will be recognized as revenue is uncertain because the Company
cannot presently determine either the timing or volume of future shipments by
its licensees.
For the nine months ended September 30, 1997, the Company's cash and cash
equivalents decreased by approximately $9,181,000, from approximately
$10,573,000 at the beginning of the period to approximately $1,392,000 due
primarily to a cash used in operating activities of approximately $9,435,000 for
the nine months ended September 30, 1997. As of September 30, 1997, the
Company's cash, cash equivalents and short-term investments was $2,095,000.
Although there is no assurance, the Company believes that the above mentioned
funds, are adequate to meet projected working capital and other cash
requirements for the next two months. The Company is currently seeking to raise
additional funds from financing sources in order to meet its short-term
requirements and expects to consummate a financing in November 1997. There can
be no assurance that such financing will close, or if the financing does close,
that such financing will be on favorable terms.
On October 16, 1997 the Company entered into an Account Receivable Financing
Agreement whereby the Company may factor its Accounts Receivable. The maximum
credit available to the Company under the agreement is $1,500,000 with an
advance rate of 80% of eligible accounts receivable less than 90 days old. The
term of the agreement is twelve months with annual renewals. A financing fee of
2.5% per month applies to the outstanding balance based on the face value of
each invoice. The line of credit is secured by a blanket first priority lien on
all Company assets with the exception of intellectual property. As of November
7, 1997, the Company had financed approximately $396,000 of accounts receivable
under this agreement and has approximately.$1,100,000 of additional financings
available for future use.
In 1993, the Company formed the Joint Venture with The Ministry of Electronic
Industries of Jiangsu Province (the "Ministry") of The People's Republic of
China. The Joint Venture, Communication Intelligence Computer Corporation, Ltd.
("CICC"), is 90% owned by the Company at September 30, 1997. Under the
provisions of the joint venture agreement, the Company may be required to
contribute up to $5.4 million in cash to the Joint Venture and is required to
provide it with nonexclusive licenses to technologies and certain distribution
rights. The Ministry is required to contribute certain land use rights and
provide other services to the Joint Venture. During the second quarter of 1997
the Company contributed technology licenses and $900,000 in cash to CICC. This
contribution will help fund CICC's new Software Development Division, which was
formed to create pencentric applications initially for the Chinese market. As of
September 30, 1997, the Company had contributed a total of $1,800,000 in cash
and had provided non-exclusive licenses to technology and certain distribution
rights, while the Ministry had contributed certain land use rights and
equipment. There can be no assurance that the Company will be able to fund the
balance of any required cash contributions to the Joint Venture, that the Joint
Venture will be successful in developing or selling integrated computer systems
or other Company products to the Chinese market or that the Company will realize
any significant benefits from its contributions to the Joint Venture.
Convertible Preferred Financing. In December 1996, the Company completed a
private placement of 450,000 shares of Preferred Stock at $25.00 per share for
$11,250,000. In connection with the transaction, the Company received $9,495,000
in cash and accepted for exchange, in lieu of cash, 390,000 shares of Common
Stock for 70,200 shares of Preferred Stock. Each share of Preferred Stock is
convertible by the holder into shares of Common Stock at any time after July 1,
1997, pursuant to a conversion formula based upon a discount from the effective
market price of the Common Stock. In addition, all outstanding shares of
Preferred Stock will automatically convert into shares of Common Stock on
December 31, 1999, subject to the satisfaction of certain conditions, or later
under certain circumstances. There is no limitation on the number of shares of
Common Stock that the Company may be required to issue in connection with the
Preferred Stock.
The exact number of shares of Common Stock issuable upon conversion of all of
the outstanding Preferred Stock cannot currently be determined but, generally,
such issuance's of Common Stock will vary inversely with the market price of the
Common Stock. On November 7, 1997, the last reported sales price of the Common
Stock on the Nasdaq SmallCap Market was $1.62. per share. If the effective
market price of the Common Stock on November 7, 1997 of $1.48 per share (as
determined pursuant to the terms of the Preferred Stock) were used to determine
the number of shares of Common Stock issuable upon the conversion of the
outstanding Preferred Stock, the Company would be obligated to issue a total of
approximately 7,043,152 shares of Common Stock assuming all of such currently
outstanding shares of Preferred Stock were converted at such time. To the extent
the effective market price per share of the Common Stock is lower or higher than
$ 1.48 as of any date on which shares of Preferred Stock are converted, the
Company would issue more or less shares of Common Stock than reflected in such
estimate, and such difference could be material. As of November 7, 1997, a total
of 109,730 shares of Preferred Stock have been converted in to an aggregate of
2,079,671 shares of the Company's Common Stock and an aggregate of 340,270
shares of Preferred Stock were outstanding.
Restrictions in Investor Agreement. In connection with the private placement in
December 1996, the Company entered into an investor agreement with the
purchasers of the Preferred Stock (the "Investor Agreement"). Subject to certain
exceptions, until the Restrictive Covenant Termination Date (as defined below),
the Investor Agreement prohibits or restricts the Company from, among other
things, declaring or paying dividends or making distributions to holders of the
Common Stock, repurchasing any Common Stock or other equity junior or on parity
with the Preferred Stock, authorizing or issuing other equity securities senior
to the Preferred Stock and incurring indebtedness other than for trade payables
or a working capital facility not exceeding $10 million. In addition, until the
Restrictive Covenant Termination Date, the Company is prohibited from offering
or selling debt, shares of Common Stock or other equity securities (including
convertible securities) other than in a bona-fide underwritten public offering,
or from obtaining any financing from a third party, unless such transaction has
been first offered to the holders of the Convertible Preferred. The term
"Restrictive Covenant Termination Date" means, generally, the date which is the
earlier of (a) January 31, 1998 or (b) the date on which all of the Preferred
Stock has been converted.
Registration Rights; Default Payments. In connection with the Company's December
1996 private placement, the Company entered into a registration rights agreement
with the holders of the Preferred Stock (the "Registration Rights Agreement")
pursuant to which the Company agreed to file a Registration Statement on Form
S-3 relating to the shares of Common Stock issuable upon conversion of the
Preferred Stock by March 31, 1997 (the "1997 Registration Statement") and to use
its best efforts to cause the 1997 Registration Statement to be declared
effective by June 29, 1997 (the "Declaration Date"). In April 1997, the
Company's 1997 Registration Statement on Form S-3 for the offering by selling
security holders of shares of Common Stock issuable upon conversion of or
otherwise in respect to 450,000 shares of the Company's Preferred Stock and the
exercise of warrants to purchase an aggregate of 637,000 shares of Common Stock
was declared effective by the Securities and Exchange Commission. Beginning in
July 1997, the Preferred Stock became eligible to be converted by the holders
into shares of Common Stock. As of November 7, 1997, a total of 109,730 shares
of Preferred Stock have been converted in to an aggregate of 2,079,671 shares of
the Company's Common Stock and an aggregate of 340,270 shares of Preferred Stock
were outstanding.
In the event the 1997 Registration Statement was not declared effective by the
Declaration Date, the Company agreed to pay to each holder of Preferred Stock a
default payment in cash (the "Default Payment") in an amount equal to 3% of the
liquidation preference for the Preferred Stock held for any part of each 30-day
period subsequent to the Declaration Date until the 1997 Registration Statement
was declared effective. The Company also agreed to make a similar Default
Payment to the holders of Preferred Stock in the event that (i) the Company
fails, refuses or is unable to cause the securities covered by the 1997
Registration Statement to be listed on the exchange on which the Common Stock is
then traded, (ii) any holder's ability to sell the securities covered by the
1997 Registration Statement is suspended for more than 60 days in the aggregate,
or at any time during the months of December 1997 or January 1998, or (iii) the
Company does not have a sufficient number of shares of Common Stock available to
effect conversion of the Preferred Stock. The Default Payments must be made by
the Company each month until the condition or event causing the payment to be
made no longer exists.
Dividends. The Preferred Stock entitles the holders thereof to receive
cumulative dividends on each share at the rate of $1.25 per share per annum,
compounded semi-annually, when payable, whether or not declared. Dividends may
be paid at the Company's option in cash or additional shares of Preferred Stock.
Waiver; Additional Warrant Issuance. In March 1997, the Company and all of the
holders of the Preferred Stock executed a waiver (the "Waiver") in connection
with the Company's obligations to comply with redemption provisions contained in
the Registration Rights Agreement. Pursuant to the Waiver, each holder of the
Preferred Stock irrevocably waived the Company's obligations to comply with
provisions in the Registration Rights Agreement which would have obligated the
Company to redeem the Preferred Stock (or shares of Common Stock issuable upon
conversion of, or otherwise in respect to, the Preferred Stock) and, in
consideration therefor, the Company (a) issued to the holders (on a pro rata
basis) in accordance with the terms thereof, warrants to purchase 300,000 shares
of Common Stock (subject to adjustments), with an exercise price of $2.00 per
share, (b) waived its rights to request that the holders of the Preferred Stock
receive any Default Payments in additional shares of Preferred Stock and (c)
agreed that the holders of Preferred Stock may convert their shares into shares
of Common Stock at approximately 72% of the effective market price of the Common
Stock in the event a change in control transaction occurs prior to February
1998, or later under certain circumstances. As a result of the Waiver, the
shares of Preferred Stock which were classified as redeemable securities at
December 31, 1996 were reclassified as Preferred Stock commencing as of March
31, 1997 and, as such, were included in stockholders' equity commencing as of
March 31, 1997.
The Company has ascribed a value of $484,000 to these warrants, which
was recorded as an expense in the Company's statement of operations for the
quarter ended March 31, 1997. The fair value ascribed to the warrants was
estimated on the date of issuance using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 6.60%; expected life of 5
years; expected volatility of 104%; and expected dividend yield of 0%. As a
result of the waiver, the shares of redeemable convertible preferred stock have
been reclassified as convertible preferred stock and, as such, are included in
stockholders' equity.
Future Results and Stock Price
The Company's future earnings and stock price may be subject to significant
volatility. The stock markets have experienced significant volatility in stock
prices in recent years. The stock prices of technology companies have
experienced particularly high volatility, including at times severe price
changes that are unrelated or disproportional to the operating performance of
such companies. The trading price of the Company's Common Stock could be subject
to wide fluctuation in response to, among other factors, quarter-to-quarter
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, announcements of new strategic
relationships by the Company or its competitors, general conditions in the
computer industry or the global economy generally, or market volatility
unrelated to the Company's business and operating results.
Certain statements contained in this 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 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 the following (1) technological, engineering, manufacturing,
quality control or other circumstances which could delay the sale or shipment of
the Company's products; (2) economic, business, market and competitive
conditions in the software industry and technological innovations which could
affect the Company's business; (3) the Company's 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 (4) General economic and business
conditions and the availability of sufficient financing.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K:.
(c) On September 22, 1997, the Company filed a Current Report on Form
8-K(dated September 11, 1997) under Item 5, Other Events, reporting the
engagement of Gerard Klauer Mattison & Co., Inc. ("GKM') to provide
financial advisory services to the Company on an exclusive basis for a
one year period, and the engagement of Swartz & Associates, Inc. to
assist in the Company's in its search for a new Chief Executive Officer
and Chief Financial Officer.
<PAGE>
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 13, 1997 /s/ Francis V. Dane
- --------------------------- -----------------------------------------------
Date Francis V. Dane
Vice President, Secretary and Treasurer
(Principal Financial Officer and Officer
Authorized to Sign on Behalf of the Registrant)
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,392,000
<SECURITIES> 703,000
<RECEIVABLES> 1,135,000
<ALLOWANCES> (620,000)
<INVENTORY> 1,413,000
<CURRENT-ASSETS> 4,423,000
<PP&E> 3,115,000
<DEPRECIATION> 2,121,000
<TOTAL-ASSETS> 6,090,000
<CURRENT-LIABILITIES> 3,184,000
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0
4,000
<COMMON> 449,000
<OTHER-SE> 64,093,000
<TOTAL-LIABILITY-AND-EQUITY> 6,090,000
<SALES> 2,336,000
<TOTAL-REVENUES> 3,970,000
<CGS> 2,798,000
<TOTAL-COSTS> 10,820,000
<OTHER-EXPENSES> (312,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (28,000)
<INCOME-PRETAX> (7,190,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,190,000)
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