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, 1999
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 500, Redwood Shores, CA 94065-1413
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock,
as of November 12, 1999: 79,624,307.
This Quarterly Report on Form 10-Q contains 19 pages of which this is page 1.
<PAGE>
Communication Intelligence Corporation
and Subsidiary
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at September 30, 1999
(unaudited) and December 31, 1998.........................................3
Condensed Consolidated Statements of Operations for the three
and nine month periods ended September 30, 1999 and 1998 (unaudited).....4
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1999 and 1998 (unaudited)..............5
Notes to Unaudited Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................17
Item 2. Change in Securities..............................................17
Item 3. Defaults Upon Senior Securities...................................17
Item 4. Submission of Matters to a Vote of Security Holders...............17
Item 5. Other Information.................................................17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.................................................18
(b) Reports on Form 8-K......................................18
Signatures.................................................................19
-2-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 768 $ 795
Restricted cash - 250
Accounts receivable, net 911 1,146
Inventories 60 74
Other current assets 193 103
------------ -----------
Total current assets 1,932 2,368
Note receivable from officer (Note 4) 137 200
Property and equipment, net 388 539
Other assets 289 247
------------ -----------
Total assets $ 2,746 $ 3,354
============ ===========
Liabilities and stockholders' equity Current liabilities:
Short-term debt (Note 5) $ 846 $ 145
Accounts payable 480 473
Accrued compensation 249 229
Other accrued liabilities 491 524
Deferred revenue 78 651
------------ -----------
Total current liabilities 2,144 2,022
Commitments (Note 5)
Stockholders' equity:
Common stock 797 785
Additional paid-in capital 70,811 70,205
Accumulated deficit (70,798) (69,504)
Cumulative translation adjustment (208) (154)
------------- -----------
Total stockholders' equity 602 1,332
============= ===========
Total liabilities and stockholders'
equity (Note 5) $ 2,746 $ 3,354
============= ===========
</TABLE>
See accompanying notes.
-3-
<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,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product $ 1,200 $ 598 $ 2,760 $ 2,076
License and royalty 717 388 1,527 1,276
Development contracts 49 130 362 330
-------- -------- -------- --------
Total revenues 1,966 1,116 4,649 3,682
Operating costs and expenses:
Cost of sales:
Product 1,113 357 2,078 1,133
License and royalty 12 33 44 55
Development contracts 10 98 176 208
Research and development 333 344 1,014 1,409
Sales and marketing 504 591 1,335 1,872
General and administrative 419 437 1,321 1,403
-------- -------- ------- --------
Total operating costs
and expenses 2,391 1,860 5,968 6,080
-------- -------- ------- --------
Loss from operations (425) (744) (1,319) (2,398)
Interest income and other income
(expense), net (Note 7) 9 30 41 132
Interest expense (14) (2) (16) (18)
---------- -------- -------- -------
Net loss (430) (716) (1,294) (2,284)
Preferred stock
dividend (Note 7) - (125) - (435)
---------- -------- ------- --------
Net loss applicable to common
stockholders $ (430) $ (841) $ (1,294) $ (2,719)
========== ========= ========= =========
Basic loss per common $ (0.005) $(0.015) $ (0.016) $ (0.053)
========== ========= ========= =========
Diluted loss per common $ (0.005) $(0.015) $ (0.016) $ (0.053)
share (Note 8) ========== ========= ========= =========
Weighted average common
shares outstanding 79,586 54,544 79,410 51,298
========== ========= ========= =========
</TABLE>
See accompanying notes.
-4-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,294) $ (2,284)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities:
Depreciation and amortization 188 246
Non-cash compensation 62 32
Changes in operating assets and liabilities:
Accounts receivable 235 (437)
Inventories 15 (54)
Other current assets (91) 99
Other assets (56) (203)
Accounts payable 8 (882)
Accrued compensation 21 (188)
Other accrued liabilities (56) (171)
Deferred revenue (573) (452)
-------------- ------------
Net cash used in operating activities (1,541) (4,294)
-------------- ------------
Cash flows from investing activities:
Acquisition of property and equipment (66) (49)
Acquisition of property under capital lease 12 -
-------------- ------------
Net cash used in investing activities (54) (49)
-------------- ------------
Cash flows from financing activities:
Principal payments on short-term debt (145) (490)
Principal payments on capital lease obligations (2) (4)
Proceeds from issuance of short-term debt 847 145
Proceeds from issuance of common stock 618 527
Restricted cash related to short-term debt 250 -
------------- ------------
Net cash provided by financing activities 1,568 178
------------- ------------
Effect of exchange rate changes on cash - (6)
------------- ------------
Net decrease in cash and cash equivalents (27) (4,171)
Cash and cash equivalents at beginning of period 795 5,485
------------- ------------
Cash and cash equivalents at end of period $ 768 $ 1,314
============= ============
</TABLE>
See accompanying notes.
-5-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements of
Communication Intelligence Corporation and its subsidiary (collectively,
the "Company" or "CIC", and the subsidiary, individually, the "Joint
Venture") 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 quarterly report reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of its financial position at the dates
presented and the Company's results of operations and cash flows for the
periods presented. The Company's interim results are not necessarily
indicative of the results to be expected for the entire year.
The Company develops, markets and licenses pen-input and biometric
security software and technologies for the computer, consumer electronics
and communication markets. The Company's core software technologies
include multilingual handwriting recognition systems (Jot(R) and the
Handwriter(R) Recognition System, referred to as HRS(TM)), dynamic
signature verification and capture tools (InkTools(TM) and Sign-it(TM)),
ink compression (INKshrINK(R)) and operating system extensions that
enable pen input (PenX(TM)). Other consumer and original equipment
manufacturer ("OEM") products include electronic notetaking
(QuickNotes(TM)) and spell checking utilities (CIC Speller(TM)). CIC's
products are designed to increase the ease of use, functionality and
security of electronic devices ranging from PC peripherals to cellular
phones.
The Company offers a wide range of software products for pen-based
computing, based on the Company's core handwriting recognition and
related technologies. The Company's core technologies are classified into
two broad categories: "Natural Input Technologies" and "Transaction and
Communication Enabling Technologies." Natural input technologies are
designed to allow users to interact with a computer or handheld device by
using an electronic pen as the sole input device or in conjunction with a
keyboard. The pen eliminates the need for a mouse as a navigational
device. The Company believes that pen-input enhances productivity and
creativity because it is a more natural means of input, facilitates
editing and screen navigation and reduces the risk of repetitive stress
illness. The Company's transaction and communication enabling
technologies are designed to provide a cost-effective means for
protecting electronic transactions, electronic files and private
communications. CIC believes that these technologies offer more efficient
methods to conduct transactions and provide more functional user
authentication and heightened data security. The Company's transaction
and communication enabling technologies have been fundamental in its
development of software for signature verification, data security, data
compression and pen-based operating environments.
For the nine months ended September 30, 1999, the Company's cash and cash
equivalents decreased by $27 from $795 at the beginning of the period to
$768. The decrease is due primarily to cash of $1,541 used in operating
activities, and by $54 used in investing activities. This decrease was
offset by $1,568 provided by financing activities. The $1,568 provided by
financing activities consists primarily of $618 in proceeds from the
exercise of stock options by the Company's employees, and $750 in
proceeds from the issuance of short term debt to a charitable remainder
annuity trust, of which an officer and director of the Company is a
trustee. In addition, $105 was provided by the release of restricted cash
which previously secured a loan from a Chinese bank. The loan was repaid
in February 1999. On October 20, 1999, the Company entered into a loan
agreement with a charitable remainder annuity trust, of which a director
and officer of the Company is a trustee, whereby its existing short-term
Bridge Loan of $750 was converted into a long term loan in the amount of
$1,500 (the "1999 Loan"). On October 20, 1999 the Company received the
additional $750 in cash.
-6-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements (continued)
As of September 30, 1999, the Company's principal source of funds were
its cash and cash equivalents of $768. There can be no assurance that the
Company will have adequate capital resources to fund planned operations
in the near future. If the Company does not have adequate capital
resources to fund operations, it may be required to delay, scale back or
eliminate some or all of its operations, which could have a material
adverse effect on the Company's business, results of operations and
prospects.
There can be no assurance 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.
The financial information contained herein 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, 1998.
2. Cash and cash equivalents
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- -------------------
<S> <C> <C>
Cash in bank $ 765 $ 668
Commercial paper - 125
Money market accounts 3 2
--------------------- ------------------
$ 768 $ 795
===================== ==================
</TABLE>
3. Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At September 30,
1999, inventory is comprised primarily of finished goods.
4. Note receivable from officer
In April 1994, the Company loaned $210 to the Company's then Chief
Executive Officer in exchange for a note, secured by shares of the
Company's Common Stock. The note bore interest at the lesser of the
highest marginal rate per annum applicable to the Company's borrowings or
the highest rate allowable by law. On August 14, 1998, the Company
entered into an agreement (the "Agreement") with the former Chief
Executive Officer. Under the Agreement, the former officer has agreed to
provide consulting services to the Company through December 15, 2001. In
exchange for these services, an aggregate of $110 of the note receivable
from the officer will be forgiven on a monthly basis over the period
commencing August 15, 1998 and ending December 15, 2001. The remaining
$100 of the note receivable from the officer will be forgiven on December
15, 2001 if the officer has performed all the required services under the
Agreement. The Agreement will terminate on December 15, 2001.
-7-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Short-term debt
On June 16, 1999, the Company obtained a bridge loan, (the "Bridge Loan")
in the amount of $500 from a charitable remainder annuity trust, of which
a director and officer of the Company is a trustee. The Bridge Loan was
increased by $150 and $100 in August and September 1999, respectively.
The Bridge Loan bears interest at the prime rate plus 2%. At September
30, 1999, the Bridge Loan bore interest at 9.75% per annum. The loan is
secured by the Company's cash, accounts receivable and other receivables
as now owned or hereafter acquired by the Company. The Bridge Loan plus
accrued interest is due December 31, 1999.
(See Note 11).
In June 1998, the Company's 90% owned Joint Venture borrowed the
equivalent of $145, denominated in Chinese currency, from a Chinese bank.
The loan bore interest at 9% and was due on June 30, 1999. The note was
repaid in February 1999. The borrowings were secured by a $250 US dollar
denominated deposit held by the bank.
On September 3, 1999, the Company's 90% owned Joint Venture borrowed the
equivalent of $96, denominated in Chinese currency, from a Chinese bank.
The loan bears interest at 5.12% and is due on March 2, 2000. The
borrowings do not require a compensating balance.
6. Revenue recognition
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which the Company has adopted, without
material effect, for transactions entered into during the fiscal year
beginning January 1, 1998. SOP 97-2 provides guidance for recognizing
revenue on software transactions and supersedes Statement of Position No.
91-1, "Software Revenue Recognition". In March 1998, the AICPA issued
Statement of Position No. 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP
98-4 defers, for one year, the application of certain passages in SOP
97-2 which limit what is considered vendor-specific objective evidence
("VSOE") necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. In
December 1998, the AICPA issued Statement of Position No. 98-9 ("SOP
98-9") "Modifications of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 extends the effective date of
SOP 98-4 and provides additional interpretative guidance. SOP 98-9 is
effective for fiscal years beginning after March 15, 1999. The Company
will determine the impact, if any, of SOP 98-9 on current revenue
recognition practice when adopted. Adoption of the remaining provisions
of SOP 97-2 should not have a material impact on revenue recognition
during 1999.
Revenue from retail product sales is recognized upon sell through, while
revenue from other product sales is recognized upon shipment provided
that no significant obligations remain and the collection of the
resulting receivable is probable. The Company provides for estimated
sales returns at the time of shipment.
License revenues are recognized when the software has been delivered and
when all significant obligations have been met. Royalty revenues are
recognized as products are licensed/sold by licensees. Deferred revenue
in the accompanying balance sheets reflects advance royalty fees received
from the Company's licensees in advance of revenue recognition.
Development contracts revenue is generated primarily from non-recurring
engineering activities and research grants from government agencies.
Revenue is recognized in accordance with the terms of the grants and
agreements, generally when collection is probable and related costs have
been incurred.
-8-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
7. Convertible preferred stock
In December 1996, the Company completed a private placement (the
"December Private Placement") of 450 shares of redeemable convertible
preferred stock (the "Series A Preferred Stock") at $25.00 per share to
certain institutional and other investors. On March 28, 1997, and
effective as of December 31, 1996, holders of 100% of the then issued and
outstanding Series A Preferred Stock executed a waiver of certain
provisions of the Registration Rights Agreement (the "Agreement") entered
into in connection with the December Private Placement. Under the waiver,
these holders irrevocably waived any redemption obligations of the
Company with respect to the Series A Preferred Stock in exchange for the
issuance to such holders of 300 warrants to purchase the Company's Common
Stock, allocated amongst the holders on a pro-rata basis. The warrants
expire five years from the effective date of issuance and have an
exercise price of $2.00 per share, subject to adjustments for
anti-dilution. On November 26, 1997, the Company completed a private
placement of 240 shares of Series B Preferred Stock (the "November
Private Placement") at $25.00 per share to certain investors.
Each holder of outstanding shares of Series A Preferred Stock and Series
B Preferred Stock was entitled to receive, out of funds legally available
therefor, cumulative dividends on each share at the rate of $1.25 per
share per annum, compounded semi-annually and quarterly, respectively,
when payable (whether or not declared). The dividends could have been
paid in cash or additional shares of preferred stock (with each
additional share valued at $25.00 per share), at the Company's option.
The Company paid the required dividends in additional shares of preferred
stock.
Each share of Series A Preferred Stock and Series B Preferred Stock was
convertible by the holders into shares of the Company's Common Stock. All
of the outstanding shares of Series A Preferred Stock and Series B
Preferred Stock were converted into shares of common stock by November
1998.
8. Net loss per share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 requires the disclosure of both basic earnings per
share, which is based on the weighted average number of common shares
outstanding, and diluted earnings per share, which is based on the
weighted average number of common shares and dilutive potential common
shares outstanding. All prior year earnings per share data have been
restated to reflect the provisions of SFAS 128. Potential common shares,
including then outstanding convertible preferred stock and stock options
and warrants, have been excluded from the calculation of diluted earnings
per share for all periods presented as their effect is anti-dilutive. Per
share results of operations are reduced by the amortization of the
beneficial conversion rate on the Series A Preferred Stock and the
cumulative dividend requirements earned by the preferred stockholders for
periods during which preferred stock was outstanding.
9. Comprehensive income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). The Company adopted SFAS 130 effective January 1,
1998. SFAS 130 requires that all items recognized under accounting
standards as components of comprehensive earnings be reported in an
annual statement that is displayed with the same prominence as other
annual financial statements. SFAS 130 also requires that an entity
classify items as other comprehensive earnings by their nature in an
annual financial statement. For example, other comprehensive
-9-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
9. Comprehensive income (continued)
earnings may include foreign currency translation adjustments, minimum
pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required.
Total comprehensive loss was as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------- -----------------
1999 1998
---------------- -----------------
<S> <C> <C>
Net loss $ (1,294) $ (2,284)
Other comprehensive income:
Cumulative translation adjustment (54) (52)
---------------- -----------------
Total comprehensive loss $ (1,348) $ (2,336)
================ =================
</TABLE>
10. Segment Information
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 was
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 adopted SFAS
131 for the year ended December 31, 1998 and the Company's information
concerning segment reporting has been broken down into two segments,
handwriting recognition software and systems integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment
data includes revenues, as well as allocated corporate-headquarters costs
charged to each of the operating segments.
The Company identifies reportable segments by classifying revenues into
two categories: handwriting recognition and system integration.
Handwriting recognition software is an aggregate of five revenue
categories. All handwriting recognition software is developed around the
company's core technology. System integration represents the sale and
installation of third party computer equipment and systems that utilize
the Company's products. All sales above represent sales to external
customers.
The table below presents information about reporting segments for the
periods indicated:
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
----------------------------- ------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
--------- --------- ----- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 3,372 $ 1,277 $ 4,649 $ 2,283 $ 1,399 $ 3,682
Loss from Operations$(1,305) $ (14) $ (1,319) $(1,821) $ (577) $(2,398)
Significant change
in Total assets
from Year End $ - $ - $ - $ - $ - $ -
</TABLE>
-10-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
11. Subsequent event
On October 20, 1999, the Company entered into a loan agreement with a
charitable remainder annuity trust, of which a director and officer of
the Company is a trustee, whereby its existing short-term Bridge Loan
of $750 was converted into a long term loan in the amount of $1,500
(the "1999 Loan"). On October 20, 1999, the Company received the
additional $750 in cash. The long-term loan is secured by a first
priority security interest in all of the Company's assets as now owned
or hereafter acquired by the Company The 1999 Loan bears interest at
the rate of 2% over the prime rate as published by Citibank from time
to time, and is due January 31, 2002. Interest is payable quarterly.
The funds can be re-paid in whole at any time or in part at any time
without penalty. Any partial payment must be in the principal amount of
$100 or a multiple thereof.
On October 20, 1999, in connection with the 1999 Loan the Company
issued to the charitable remainder annuity trust warrants to purchase
300 shares of the Company's common stock. The warrants expire two years
from the effective date of issuance and have an exercise price of $1.09
per share. The Company ascribed a value of $179 to these warrants,
which will be amortized to the company's results of operations over the
life of the warrant. 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 5.50%;
expected life of 2 years; expected volatility of 99%; and expected
dividend yield of 0%.
-11-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Company's unaudited condensed consolidated financial statements and notes
thereto included in Part I - Item 1 of this 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, 1998.
Results of Operations
Revenues. The Company's revenues are derived from product sales, license and
royalty fees and development contracts. For the three months ended September 30,
1999, total revenues increased by 76% to $1,966 from $1,116, and for the nine
months revenue increased 26% to $4,649 from $3,682 for the comparable three and
nine month periods ended September 30, 1998 as discussed below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------------
1999 1998 1999 1998
--------------------- ------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 1,200 $ 598 $ 2,760 $ 2,076
License and royalty fees 717 388 1,527 1,276
Development contracts 49 130 362 330
-------- -------- -------- --------
Total revenues $ 1,966 $ 1,116 $ 4,649 $ 3,682
======== ======== ======== ========
</TABLE>
Product sales for the three months ended September 30, 1999 increased to $1,200
or by 101% from $598 in the comparable prior year period. Handwriter(R) and
other product sales for the three months ended September 30, 1999 decreased $104
or 98% to $2 from $106 in the prior year period. The decline in Handwriter(R)
and other product sales resulted from the Company's decision in 1997 to focus on
software sales and discontinue hardware sales. This decrease was offset by the
increase of $437 or 567% in aftermarket consumer software sales via the
Company's website to $514, compared to $77 in the prior year. The increase in
aftermarket consumer software sales resulted from increased direct mail
campaigns as compared to the 1998 comparable quarter. Product sales by the
Company's 90% owned joint venture in The People's Republic of China (the "Joint
Venture") increased 65% to $685 for the three month period ended September 30,
1999 compared to $415 during the same period last year. The increase primarily
resulted from the increase in system integration business compared to the same
period last year.
Product sales for the nine months ended September 30, 1999 increased to $2,760
or by 33% from $2,076 in the comparable prior year period. This increase was due
to the increase of $1,254 or 786% in aftermarket consumer software sales via the
Company's website to $1,414, compared to $160 in the prior year. The increase in
aftermarket consumer software sales resulted from increased direct mail
campaigns as compared to the 1998 nine month period. Handwriter(R) and other
product sales for the nine months ended September 30, 1999 decreased $448 or 87%
to $70 from $518 in the prior year period. The decline in Handwriter(R) and
other product sales resulted from the Company's decision in 1997 to focus on
software sales and discontinue hardware sales. Product sales by the Company's
90% owned joint venture in The People's Republic of China (the "Joint Venture")
were down 9% to $1,277 from $1,399 for the nine month period ended September 30,
1999 compared to the same period last year. The decrease was primarily due to
the absence of two large orders of $112 and $247 in the first and second
quarters of 1998, respectively.
-12-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Revenues from license and royalty fees for the three month period ended
September 30, 1999 increased $329 or 85% to $717 from $388 in the comparable
prior year period. This increase is primarily attributable to the recognition of
the $500 of deferred revenue from Ericsson for 1,250 software licenses, which
offset lower product shipments by four OEM's bundling the Company's handwriting
recognition software during the three months ended September 30, 1999 compared
to the same period last year. For the nine month period ended September 30,
1999, revenues from license and royalty fees increased $251 or 20% to $1,527
from $1,276 in the comparable prior year period. This increase was primarily the
result of new OEM agreements, the recognition of the Ericsson deferred revenue,
and increased OEM product shipments bundling the Company's handwriting
recognition software over the nine months ended September 30, 1999 compared to
the same period last year.
Development contract revenues for the three month period ended September 30,
1999 decreased 62% to $49 from $130 in the comparable prior year period. This
decrease resulted from reduced grant revenue from the National Science
Foundation. For the nine months ended September 30, 1999, development contract
revenue increased 10% to $362 from $330 in the comparable prior year period. The
increase is due to increases in non-recurring engineering revenues other than
grant revenues compared to the prior year period.
Cost of sales. Cost of product sales for the three and nine month periods ended
September 30, 1999 increased 133% and 65%, respectively, to $1,135 and $2,298,
respectively, from $488 and $1,396, respectively, in the comparable prior year
periods. Cost of product sales for the three and nine month periods ended
September 30, 1999 includes approximately $541 and $922, respectively, of
hardware and software components related to the system integration activities of
the Joint Venture, compared to approximately $309 and $1,018, respectively, in
the prior year periods. The increase in systems integration costs of product
sales for the three month period ended September 30, 1999 is due to the increase
in sales of such products and their higher material content. For the nine months
ended September 30, 1999 the decrease in system integration costs 9 was due to
lower sales during the comparable period of 1998. The cost of sales via the
company's website for three and nine month periods ending September 30, 1999
increased $572 and $1,156 respectively. The increase in website cost of sales is
due to increased direct mail campaigns as compared to the three and nine months
ended September 30, 1998. License and royalty cost of sales decreased
approximately $21 and $11, respectively, to $12 and $44, respectively, for the
three and nine months ended September 30, 1999, compared to $33 and $55,
respectively, for the comparable 1998 periods. The decrease is due to decreased
technology import tax on the Japanese OEM shipments bundling the Company's
handwriting recognition software. Costs incurred in connection with development
contract revenues decreased 90% to $10 for the three months ended September 30,
1999 as compared to $98 in the prior period, commensurate with the decrease in
contract development revenues. For the nine months ended September 30, 1999,
contract development costs decreased 15% to $176 as compared to $208 in the
prior period. The decrease is due to a reduction in grant related revenues over
the nine months ended September 30, 1999 compared to the same nine month period
last year.
Research and development expenses. Research and development expenses for the
three and nine month periods ended September 30, 1999 decreased by 3% and 28%,
respectively, to $333 and $1,014, respectively, as compared to $344 and $1,409
in the comparable period of the prior year. The decreases were primarily due to
reductions of approximately $11 and $211, respectively, in payroll and related
costs attributable to a decrease in the number of U.S. based personnel for the
three and nine month periods ended September 30, 1999 compared to the same three
and nine month prior year periods. Other costs, including facilities and related
costs, increased approximately $9 and $184, respectively, for the three and nine
month periods ended September 30, 1999 from the comparable prior year periods.
The Company did not capitalize any significant software development costs in the
three and nine month periods ended September 30, 1999, and 1998.
Sales and marketing expenses. Sales and marketing expenses for the three and
nine month periods ended September 30, 1999 decreased 15% and 29% to $504 and
$1,335, respectively, as compared to $591 and $1,872 in the comparable periods
of the prior year. The decreases were primarily due to decreases of $199 and
$426 in salaries and related costs due to reductions in U.S. based personnel
associated with the Joint Venture operations in the first and second quarters of
the prior year. Other costs increased $112 for the three months ended September
30, 1999 as compared to the same period last year. The increase is primarily due
-13-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
to an increase in professional services in connection with a marketing study of
the Company's Web Sales strategies. For the nine months ended September 30,
1999, other costs declined $111, compared to the same periods last year, due
primarily to reductions in staffing in the first and second quarters of 1998.
General and administrative expenses. General and administrative expenses for the
three and nine month period ended September 30, 1999 decreased 4% and 6%
respectively, to $419 and $1,321, respectively, as compared to $437 and $1,403,
respectively, in the comparable period of the prior year. This decrease for the
three months ended September 30, 1999 was primarily attributable to a decrease
in payroll and related costs due to a reduction in personnel associated with the
Joint Venture operations. The decrease for the nine months ended September 30,
1999, was due primarily to a reduction of $100 in payroll and related expenses,
offset by increases in professional service expenses.
Interest and other income (expense), net. Interest and other income (expense),
net, decreased for the three and nine months ended September 30, 1999 due to the
increase in credit card processing fees associated with internet sales. The
decrease was offset by the extinguishment of debt and associated interest
related to the factoring of accounts receivable and equipment purchased in 1997.
The associated debt was paid off in January and June of 1998, respectively.
Interest expense. Interest expense increased $12 to $14 during the three months
ended September 30, 1999 as compared to $2 in the comparable prior year period.
The increase is due to the accrual of interest on the Bridge Loan. For the nine
months ended September 30, 1999, interest expense decreased 11% to $16 from $18
in the comparable prior year period.
Preferred stock dividend. The preferred stock dividend relates to cumulative
dividends of $1.25 per share, per annum, compounded quarterly and semi-annually,
respectively, whether or not declared, on the convertible preferred stock
outstanding during the three and nine month periods ended September 30, 1998.
All Series A Preferred and Series B Preferred Stock was converted into shares of
common stock by November 1998. Accordingly, no preferred stock dividends were
paid in 1999.
Liquidity and Capital Resources
At September 30, 1999, cash and cash equivalents totaled $768 compared to cash
and cash equivalents of $795 at December 31, 1998. The decrease is due primarily
to cash used in operating activities of $1,541 and $54 used in investing
activities These decreases were offset by $1,568 provided by financing
activities consisting of $618 in proceeds from the exercise of stock options by
the Company's employees and $750 from the Bridge Loan obtained from a charitable
remainder annuity trust, of which a director and officer of the Company is a
trustee. Total current assets were $1,932 at September 30, 1999 compared to
$2,368 at December 31, 1998, and total current liabilities were $2,144 compared
to $2,022 for the same periods
As of September 30, 1999, the Company's principal source of liquidity was its
cash and cash equivalents of $768. Although there can be no assurance, the
Company believes that its cash and cash equivalents together with cash provided
from the 1999 Loan discussed below and projected revenues will be sufficient to
fund planned operations for the near future. However, if, among other things,
the Company is unable to generate adequate cash flows from sales, or if
expenditures required to achieve the Company's plans are greater than expected,
the Company may need to obtain additional funds or reduce discretionary
spending. There can be no assurance that additional funds will be available when
needed or if available, will be available on favorable terms or in the amounts
required by the Company. If adequate funds are not available when needed, the
Company may be required to delay, scale back or eliminate some or all of its
operations, which will have a material adverse effect on the Company's business,
results of operations and prospects.
-14-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Current liabilities, which include deferred revenue, were $2,144 at September
30, 1999. Deferred revenue, totaling $78 at September 30, 1999, primarily
reflects nonrefundable advance non-recurring engineering fees received from the
Company's licensees, which are generally recognized as revenue by the Company as
the projects are completed. In addition, current liabilities include a Bridge
Loan of $750 from a charitable remainder annuity trust, of which a director and
officer of the Company is a trustee. On October 20, 1999, the Company entered
into a loan agreement with a charitable remainder annuity trust, of which a
director and officer of the Company is a trustee, whereby its existing
short-term Bridge Loan of $750 was converted into a long term loan in the amount
of $1,500 (the "1999 Loan"). On October 20, 1999, the Company received the
additional $750 in cash. The 1999 Loan is secured by a first priority security
interest in all of the Company's assets as now owned or hereafter acquired by
the Company 1999 Loan bears interest at the rate of 2% over the prime rate as
published by Citibank from time to time, and is due January 31, 2002. Interest
is payable quarterly. The funds can be re-paid in whole at any time or in part
at any time without penalty. Any partial payment must be in the principal amount
of $100 or a multiple thereof. At November 12, 1999, there was $1,500
outstanding under the 1999 Loan, which bore interest at 9.75 per annum.
The Company currently owns 90% of a joint venture with the Ministry of
Electronic Industries of the Jiangsu Province, a provincial agency of the
People's Republic of China (the "Agency"). In June 1998, the registered capital
of the Joint Venture was reduced from $10,000 to $2,550. As of September 30,
1999, the Company had contributed an aggregate of $1,800 in cash to the Joint
Venture and provided it with non-exclusive licenses to technologies and certain
distribution rights and the Agency had contributed certain land use rights.
Following the reduction in registered capital of the Joint Venture, neither the
Company nor the Agency are required to make further contributions to the Joint
Venture. Prior to the reduction in the amount of registered capital, the Joint
Venture was subject to the annual licensing requirements of the Chinese
government. Concurrent with the reduction in registered capital, the Joint
Venture's business license has been renewed through October 18, 2043. The
Company's investment in the Joint Venture is subject to risks of doing business
abroad, including fluctuations in the value of currencies, export duties, import
controls and trade barriers (including quotas), restrictions on the transfer of
funds, longer payment cycles, greater difficulty in accounts receivable
collections, burdens of complying with foreign laws and political and economic
instability.
In December 1996, the Company completed a private placement (the "December
Private Placement") of 450 shares of redeemable convertible preferred stock (the
"Series A Preferred Stock") at $25.00 per share to certain institutional and
other investors. On March 28, 1997, and effective as of December 31, 1996,
holders of 100% of the then issued and outstanding Series A Preferred Stock
executed a waiver of certain provisions of the Registration Rights Agreement
(the "Agreement") entered into in connection with the December Private
Placement. Under the waiver, these holders irrevocably waived any redemption
obligations of the Company with respect to the Series A Preferred Stock in
exchange for the issuance to such holders of 300 warrants to purchase the
Company's Common Stock, allocated amongst the holders on a pro-rata basis. The
warrants expire five years from the effective date of issuance and have an
exercise price of $2.00 per share, subject to adjustments for anti-dilution. On
November 26, 1997, the Company completed a private placement of 240 shares of
Series B Preferred Stock (the "November Private Placement") at $25.00 per share
to certain investors.
Each holder of outstanding shares of Series A Preferred Stock and Series B
Preferred Stock was entitled to receive, out of funds legally available
therefor, cumulative dividends on each share at the rate of $1.25 per share per
annum, compounded semi-annually and quarterly, respectively, when payable
(whether or not declared). The dividends could have been paid in cash or
additional shares of preferred stock (with each additional share valued at
$25.00 per share), at the Company's option. The Company paid the required
dividends in additional shares of preferred stock. Each share of Series A
Preferred Stock and Series B Preferred Stock was convertible by the holders into
shares of the Company's Common Stock. All of the outstanding shares of Series A
Preferred Stock and Series B Preferred Stock were converted into shares of
common stock by November 1998.
-15-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
In October 1997, the Company entered into an accounts receivable financing
agreement under which the Company has the ability to factor its accounts
receivable in accordance with the terms of the agreement. The maximum credit
available to the Company under the agreement is $1,500, with an advance rate of
80% of the eligible accounts receivable which are less than 90 days old. The
term of the agreement is twelve months with annual renewals. A financing fee of
2.1% per month applies to the outstanding balance based on the face value of
each invoice. As of September 30, 1999, the Company had no outstanding financed
accounts receivable under this agreement. It is unlikely that the Company will
finance additional accounts receivable under this agreement due to the cessation
of the sale of the Company's hardware products in the retail market.
The Company leases facilities in the United States and China. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $603, $620, and $558 for the years ending December 31, 1999, 2000,
and 2001, respectively. The Company's rent expense is expected to be reduced by
approximately $129 in 1999 in connection with the subleases it has granted on
excess office space in the United States.
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.
Year 2000
Year 2000 issues arise because most computer systems and programs were designed
to handle only a two-digit date code for the year, not a four-digit code. Thus,
the Year 2000 could be interpreted as the year 1900 by such computer systems and
programs, resulting in the incorrect processing of data. CIC's software products
as developed and distributed by CIC are not date sensitive and therefore Year
2000 issues are not applicable to such products. The Company has evaluated its
internal software programs and equipment to ascertain the readiness of computer
software and operating systems for the Year 2000. Management of the Company
believes that its internal software programs are Year 2000 compliant. The
Company replaced older desktop PC's which were not, and could not be upgraded to
be, Year 2000 compliant. The replacement of such older computer equipment has
been completed. The cost of replacing these desktop systems was not significant.
The Company is not aware of any other hardware related problems.
The Company is in the process of analyzing the readiness of third parties with
which it does business. The Company believes that the only potentially
significant Year 2000 problems it may experience will result from Year 2000
issues affecting its website or its banks. The Company generates a significant
percentage of revenues from sales made via its website. If the Company's website
were to go off-line for an extended period of time, income would be
significantly impacted until service was restored. The Company has received
assurances that its website is Year 2000 compliant; however, it has not received
any information regarding the phone carrier that links the website server to the
internet. The Company believes that it is not possible to develop a contingency
plan at this time for dealing with the potential effects of such an event. If
banking systems were to fail due to Year 2000 problems, the Company may be cut
off from access to some of its funds for a period of time. The Company maintains
its cash with various financial institutions so that an incident at any one bank
would not have a material adverse impact on the Company's cash availability.
Future Results and Stock Price
The Company's stock price may be subject to significant volatility. The public
stock markets have experienced significant volatility in stock prices in recent
years. The stock prices of technology companies have experienced particularly
high volatility, including, at times, severe price changes that are unrelated or
disproportionate to the operating performance of such companies. The trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to, among other factors, quarter-to-quarter variations in operating
-16-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
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 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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
Part II-Other Information
Item 1. Legal Proceedings
None
Item 2. Change in Securities
During the nine months ended September 30, 1999, the Company has
granted stock options to employees and directors for services rendered as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employees (5) Sept. 7,1999 275,000 $ 1.1875 Quarterly Sept. 7,2006
over three
years
Employees (1) Sept.30,1999 10,000 $ 1.3125 Quarterly Sept. 30,2006
over three
years
-----------------------------------------------------------------------------
</TABLE>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
-17-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K
None
-18-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
---------------------------------------------------
Registrant
November 19, 1999 //Guido Di Gregorio
- ------------------------------- ---------------------------------------------
Date Guido DiGregorio
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-19-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000727634
<NAME> Communication Intelligence Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 768
<SECURITIES> 0
<RECEIVABLES> 1,088
<ALLOWANCES> (177)
<INVENTORY> 60
<CURRENT-ASSETS> 1932
<PP&E> 1,795
<DEPRECIATION> (1,407)
<TOTAL-ASSETS> 2,746
<CURRENT-LIABILITIES> 2,144
<BONDS> 0
0
0
<COMMON> 797
<OTHER-SE> (195)
<TOTAL-LIABILITY-AND-EQUITY> 2,746
<SALES> 2,760
<TOTAL-REVENUES> 4,649
<CGS> 2,078
<TOTAL-COSTS> 2,298
<OTHER-EXPENSES> 3,670
<LOSS-PROVISION> 16
<INTEREST-EXPENSE> (16)
<INCOME-PRETAX> (1,294)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,294)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,294)
<EPS-BASIC> (0.015)
<EPS-DILUTED> (0.015)
</TABLE>
