<PAGE>
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, 2000
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
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of
November 10, 2000: 89,648,437.
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, 2000 (unaudited) and December 31,1999....................3
Condensed Consolidated Statements of Operations for
the Three and Nine month periods ended
September 30, 2000 and 1999(unaudited).................................4
Condensed Consolidated Statements of Changes
in Stockholders' Equity for the Nine month period
Ended September 30, 2000(unaudited)....................................5
Condensed Consolidated Statements of Cash Flows
for the Nine month periods ended
September 30, 2000 and 1999(unaudited).................................6
Notes to Unaudited Condensed Consolidated Financial
Statements.............................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................18
Item 2. Change in Securities..........................................18
Item 3. Defaults Upon Senior Securities...............................18
Item 4. Submission of Matters to a Vote of Security Holders...........18
Item 5. Other Information.............................................18
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,
2000 1999
------------- ------------
Unaudited
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,613 $ 2,374
Accounts receivable, net 1,167 1,575
Inventories 135 81
Prepaid expenses and other
current assets 318 175
------------- ------------
Total current assets 4,233 4,205
Note receivable from former officer 74 135
Property and equipment, net 267 344
Other assets 200 279
------------- ------------
Total assets $ 4,774 $ 4,963
============= ============
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ 121 $ 60
Accounts payable 275 288
Accrued compensation 218 268
Other accrued liabilities 400 500
Deferred revenue 48 35
------------ ------------
Total current liabilities 1,062 1,151
Long-term debt - related party 1,398 1,338
Minority interest 125 125
Commitments
Stockholders' equity:
Common stock 846 822
Additional paid-in capital 74,702 72,983
Accumulated deficit (73,153) (71,244)
Cumulative translation adjustment (206) (212)
------------ ------------
Total stockholders' equity 2,189 2,349
------------ ------------
Total liabilities and
stockholders' equity $ 4,774 $ 4,963
============ ============
</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,
--------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Product $ 968 $ 1,200 $ 3,042 $ 2,760
License and royalty 1,318 717 1,636 1,527
Development contracts 60 49 295 362
-------- -------- -------- --------
Total revenues 2,346 1,966 4,973 4,649
Operating costs and expenses:
Cost of sales:
Product 660 1,113 1,992 2,078
License and royalty 18 12 52 44
Development contracts 19 10 190 176
Research and development 399 333 1,216 1,014
Sales and marketing 537 504 1,717 1,335
General and administrative 548 419 1,589 1,321
-------- -------- -------- --------
Total operating costs
and expenses 2,181 2,391 6,756 5,968
-------- -------- -------- --------
Income (loss) from operations 165 (425) (1,783) (1,319)
Interest income and other income
(expense), net 20 9 66 41
Interest expense (78) (14) (192) (16)
Minority interest (1) - - -
-------- --------- -------- --------
Net income (loss) $ 106 $ (430) $(1,909) $(1,294)
======== ========= ======== ========
Income (loss) per share, basic $ 0.00 $ (0.01) $ (0.02) $ (0.02)
======== ========= ======== ========
Income (loss) per share, diluted $ 0.00 $ (0.01) $ (0.02) $ (0.02)
======== ========= ======== ========
Weighted average
shares outstanding, basic 84,538 79,586 83,970 79,410
======== ======== ======== ========
Weighted average
shares outstanding, diluted 90,759 79,586 83,970 79,410
======== ======== ======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Accumulated Comprehensive
Stock Capital Deficit Loss Total
------ -------- ------------ ------------- ------
<S> <C> <C> <C> <C> <C>
Balances as of
December 31, 1999........ $ 822 $ 72,983 $(71,244) $ (212) $ 2,349
Cashless Exercise of
300 warrants for 250
shares of Common Stock.. 3 - - - 3
Exercise of options
for 1,596 shares of
Common Stock........... 16 1,439 - - 1,455
Exercise of 106 warrants
for 106 shares of
Common Stock........... 1 - - - 1
Foreign currency
translation adjustment. - - - 2 2
Net loss................ - - (888) - (888)
---------------------------------------------------
Balances as
of March 31, 2000..... $ 842 $ 74,422 $(72,132) $ (210) $ 2,922
---------------------------------------------------
Exercise of options
for 208 shares of
Common Stock........... 2 156 - - 158
Foreign currency
translation adjustment. - - - 2 2
Net loss................ - - (1,127) - (1,127)
----------------------------------------------------
Balances as
of June 30, 2000...... $ 844 $ 74,578 $(73,259) $ (208) $ 1,955
====================================================
Exercise of options
for 188 shares of
Common Stock.......... 2 124 - - 126
Foreign currency
translation adjustment. - - - 2 2
Net income.............. - - 106 - 106
----------------------------------------------------
Balances as of
September 30, 2000..... $ 846 $ 74,702 $(73,153) $ (206) $ 2,189
====================================================
</TABLE>
See accompanying notes.
-5-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating
activities:
Net loss $ (1,909) $ (1,294)
Adjustments to reconcile net loss
to net cash provided by (used) in
operating activities:
Depreciation and amortization 207 188
Non-cash compensation 61 62
Changes in operating assets
and liabilities:
Accounts receivable 408 235
Inventories (54) 15
Other current assets (143) (91)
Other assets 69 (56)
Accounts payable (14) 8
Accrued compensation (49) 21
Other accrued liabilities (99) (56)
Deferred revenue 13 (573)
--------------- --------------
Net cash used in operating activities (1,510) (1,541)
--------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (50) (54)
--------------- --------------
Net cash used in investing activities (50) (54)
--------------- --------------
Cash flows from financing activities:
Principal payments on short-term debt (60) (145)
Principal payments on capital
lease obligations (6) (2)
Proceeds from issuance of short-term debt 121 847
Proceeds from issuance of common stock 1,744 618
Restricted cash related to short-term debt - 250
--------------- --------------
Net cash provided by financing activities 1,799 1,568
--------------- --------------
Effect of exchange rate changes on cash - -
--------------- --------------
Net increase (decrease) in cash
and cash equivalents 239 (27)
Cash and cash equivalents at beginning
of period 2,374 795
=============== ==============
Cash and cash equivalents at end of period $ 2,613 $ 768
=============== ==============
Interest paid in the period $ 132 $ 3
=============== ==============
</TABLE>
See accompanying notes.
-6-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
<S> <C> <C>
2000 1999
---------------- ---------------
Schedule of non-cash transactions, Investing
and financing activities
Acquisition of property under capital lease 3 12
================ ===============
</TABLE>
See accompanying notes.
-7-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars 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 (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 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 and markets natural input and electronic signature
solutions for wireless internet information devices and enterprise
applications including e-commerce, document automation and corporate
security. 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), Sign-it(TM), and Sign-On(TM)), ink
compression (INKshrINK(R)) and operating system extensions that enable
pen input (PenX(TM) and PenX(TM) VC). Other consumer and original
equipment manufacturer ("OEM") products include electronic notetaking
(QuickNotes(TM) and InkSnap(TM)) and predictive text input,
(WordComplete(TM)). CIC's products are designed to increase the ease of
use, functionality and security of electronic devices with a primary
focus on wireless internet and information devices such as smartphones,
electronic organizers ("PDA's") and portable web browsers.
The Company offers a wide range of multi-platform software products that
enable or enhance pen-based computing. 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 or "stylus" as the primary
input device or in conjunction with a keyboard. CIC's natural input
offerings include multilingual handwriting recognition systems, software
keyboards, predictive text entry, and electronic ink capture
technologies. Many small handheld devices such as electronic organizers,
pagers and smart cellular phones do not have a keyboard. For these types
of devices, handwriting recognition and software keyboards offer the most
viable solutions for performing text entry and editing. CIC's predictive
text entry technology simplifies data entry even further by reducing the
number of actual letters required to be entered. The Company's ink
capture technologies facilitate the capture of electronic ink for
notetaking, drawings or short handwritten messages. The Company's
transaction and communication enabling technologies are designed to
provide a cost-effective means for securing electronic transactions,
providing network and device access control, and enabling workflow
automation of traditional paper form processing. CIC believes that these
technologies offer more efficient methods for conducting electronic
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, and data compression.
For the nine months ended September 30, 2000, the Company's cash and cash
equivalents increased by $239 from $2,374 at the beginning of the period
to $2,613 at September 30, 2000. The increase is due primarily to cash of
$1,799 provided by financing activities. This increase was offset by cash
used in operating activities of $1,510 and cash used in investing
activities of $50. The $1,799 provided by financing activities consists
primarily of $1,744 in proceeds from the exercise of stock options and
warrants by the Company's employees and others, and by proceeds from
short-term debt of $121. These proceeds were offset by payments on
capital lease obligations of $6 and payment of short term debt of $60. As
of September 30, 2000, the Company's
-8-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars In thousands, except per share amounts)
FORM 10-Q
Interim financial statements (continued)
----------------------------------------
principal source of funds were its cash and cash equivalents aggregating
$2,613. The Company anticipates that it will have adequate capital to
fund its planned operations in the forseeable future. However, there can
be no assurance that the Company will have adequate capital resources to
fund planned operations or that any additional funds will be available to
the Company when needed, or if available, will be available on favorable
terms or in amounts required by the Company. If the Company is unable to
obtain adequate capital resources to fund operations, it may be required
to delay, scale back or eliminate some or all of its operations, which
may have a material adverse effect on the Company's business, results of
operations and prospects.
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, 1999.
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,
2000 1999
-------------------- -- -------------------
<S> <C> <C>
Cash in bank $ 550 $ 1,705
Commercial paper 644 11
Money market accounts 1,419 658
-------------------- ------------------
$ 2,613 $ 2,374
==================== ==================
</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,
2000, inventories consisted 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 with the former Chief Executive Officer (the
"Agreement"). Under the terms of the Agreement, the former officer agreed
to provide consulting services to the Company through December 15, 2001.
In exchange for these services, $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 former officer will be forgiven on December 15,
2001, if the former officer has performed all the required services under
the Agreement. The Agreement will terminate on December 15, 2001.
-9-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars In thousands, except per share amounts)
FORM 10-Q
5. Short-term debt
---------------
On September 1, and September 19, 2000, respectively, the Company's 90%
owned Joint Venture borrowed, in two transactions the aggregate
equivalent of $121, denominated in Chinese currency, from a Chinese bank.
The loans bear interest at 5.12% and are due on March 2, and March 19,
2001, respectively. The borrowings do not require a compensating balance.
6. Long-term debt related party
----------------------------
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, which provided for borrowings in the aggregate
amount of $1,500 (the "1999 Loan"). 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. The 1999 Loan bears interest at the
rate of 2% over the prime rate as published by Citibank from time to
time, 11.5% at September 30, 2000. The note is due January 31, 2002.
Interest on the principal amount under the 1999 Loan is payable
quarterly. The 1999 Loan 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.
7. Revenue recognition
-------------------
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.
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. Deferred revenue in the accompanying balance sheets
reflects advance service and non-recurring engineering fees received from
the Company's licensees in advance of revenue recognition.
8. Net loss per share
------------------
Basic net loss per share, is based on the weighted average number of
common shares outstanding during the period. The diluted net loss per
share calculation includes common stock equivalents consisting of common
shares issuable upon the exercise of stock options and warrants (using
the treasury stock method). For the three month period ended September
30, 2000, common stock equivalents are included as their effect upon net
loss per common share is dilutive. For the three month period ended
September 30, 1999, and the nine month periods ended September 30, 2000
and 1999, respectivley, potential common shares, including stock, stock
options and warrants, have been excluded from the calculation of diluted
earnings per share as their effect is anti-dilutive.
-10-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars In thousands, except per share amounts)
FORM 10-Q
9. Comprehensive income
--------------------
Total comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
----------- -------------
<S> <C> <C>
Net loss $ (1,909) $ (1,294)
Other comprehensive income:
Cumulative translation adjustment 6 (54)
----------- -------------
Total comprehensive loss $ (1,903) $ (1,348)
=========== =============
</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
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" set forth
in the Company's Annual Report on Form 10-K for the year ended December
31, 1999. 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,
------------------------------------------------------------
2000 1999
----------------------------- ------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ----- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 3,657 $ 1,316 $ 4,973 $ 3,372 $ 1,277 $ 4,649
Loss from
Operations $(1,779) $ (4) $(1,783) $(1,305) $ (14) $ (1,319)
Significant
change in
Total assets
from Year End $ - $ - $ - $ - $ - $ -
</TABLE>
-11-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars In thousands, except per share amounts)
FORM 10-Q
11. Subsequent event - Acquisition Of PenOp Assets
----------------------------------------------
On October 6, 2000, the Company acquired certain assets of PenOp Limited
("PenOp UK") and its subsidiary PenOp Inc. ("PenOp US" and collectively
with PenOp UK, "PenOp") pursuant to an asset purchase agreement dated as
of September 29, 2000, by and among Buyer and the Sellers in exchange for
4.7 million shares (the "Transaction Shares") of common stock of the
Company (the "Acquisition"). Out of the 4.7 million shares issued to
PenOp in connection with the Acquisition, approximately 940,000 shares
are being held in escrow to cover indemnification claims.
The acquired assets will be stated at cost and cost will be determined by
the fair-value of the consideration given or by the fair-value of the
property acquired, which ever is more clearly evident. As of the date of
this filing, the Company has not determined the purchase price for
accounting purposes. However, the subsequent accounting for the assets,
will be to depreciate, amortize, or otherwise match the asset cost with
revenues.
In connection with the Acquisition, the Company filed a Registration
Statement with the SEC covering the sale of the Transaction Shares and
agreed to use reasonable efforts to have the Registration Statement
declared effective as soon as practicable thereafter.
In connection with the Acquisition, a director and officer of the
Company, and his designees, purchased in a private transaction an
aggregate of 1,713,728 shares of common stock received by PenOp in
connection with the Acquisition for $3.3 million.
-12-
<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 year ended December
31, 1999.
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,
2000, total revenues increased by 19% to $2,346 from $1,966, and for the nine
months revenue increased 7% to $4,973 from $4,649 for the comparable three and
nine month periods ended September 30, 1999 as discussed below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 968 $ 1,200 $ 3,042 $ 2,760
License and royalty fees 1,318 717 1,636 1,527
Development contracts 60 49 295 362
--------- -------- --------- --------
Total revenues $ 2,346 $ 1,966 $ 4,973 $ 4,649
========= ======== ========= ========
</TABLE>
Product sales for the three months ended September 30, 2000 decreased $232 or
19% to $968 from $1,200 in the comparable prior year period. This decrease is
due to a decrease of $216 or 42% in aftermarket consumer software sales via the
Company's website to $297 compared to $513 in the prior year. The decrease in
aftermarket consumer software sales resulted from decreased availability of new
names to be used in direct mail campaigns as compared to the 1999 comparable
quarter. Product sales by the Company's 90% owned joint venture in The People's
Republic of China (the "Joint Venture") decreased $103 or 15% to $580 for the
three month period ended September 30, 2000 compared to $683 during the same
period last year. The decrease is primarily due to one time large orders
received during the prior year period. The sales of electronic signature
software increased $87 to $91 compared to $3 the same three month period last
year.
Product sales for the nine months ended September 30, 2000 increased $282 or 10%
to $3,042 from $2,760 in the comparable prior year period. This increase was due
to the increase of $622 or 809% in the Company's electronic signature software.
The product revenue increase reflects a breakthrough order for electronic
signature software from Charles Schwab & Co in 2000. Aftermarket consumer
software sales via the Company's website declined $387 or 27% to $1,026 compared
to $1,413 in the prior year. The decrease in aftermarket consumer software sales
resulted from decreased availability in names used in direct mail campaigns as
compared to the 1999 nine month period. Product sales by the Joint Venture
increased $47 or 4% to $1,316 from $1,269 for the nine month period ended
September 30, 2000 compared to the same period last year. The increase is
primarily due to increased sales activity during the nine months of 2000 as
compared to the prior year period.
Revenues from license and royalty fees for the three month period ended
September 30, 2000 increased $601 or 84% to $1,318 from $717 in the comparable
prior year period. This increase is primarily attributable to the recognition of
$1,000 in the third quarter of 2000 in connection with a license agreement with
Ericsson. For the nine month period ended September 30, 2000, revenues from
-13-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
license and royalty fees increased $109 or 7% to $1,636 from $1,527 in the
comparable prior year period. This increase was primarily the result of the
event described above, and was offset by the decrease in reported OEM product
shipments bundling the Company's handwriting recognition software during the
nine months ended September 30, 2000 compared to the same period last year.
Development contract revenues for the three month period ended September 30,
2000 increased $11 or 22% to $60 from $49 in the comparable prior year period.
This increase resulted from non recurring engineering fees received from
Ericsson and others for porting of the Company's software to their respective
operating platforms and grant revenue from the National Science Foundation
("NSF"). For the nine months ended September 30, 2000, development contract
revenue decreased $67 or 19% to $295 from $362 in the comparable prior year
period. The decrease is due to the higher engineering revenues recognized from
Ericsson during the same nine month period in the prior year.
Cost of sales. Cost of total product sales for the three and nine month periods
ended September 30, 2000 decreased 41% and 4%, respectively, to $660 and $1,992,
respectively, from $1,113 and $2,078, respectively, in the comparable prior year
periods. Cost of product sales for the three and nine month periods ended
September 30, 2000 includes approximately $433 and $959, respectively, of
hardware and software components related to the system integration activities of
the Joint Venture compared to approximately $541 and $922, respectively, in the
prior year periods. The decrease in systems integration costs of product sales
for the three month period ended September 30, 2000 is due to the decrease in
sales of such products as discussed above. The increase in systems integration
costs of product sales for the nine month period ended September 30, 2000 is due
to the increase in sales of such products. Web sale costs over the three and
nine month periods ending September 30, 2000 decreased $346 and $234,
respectively, to $226 and $897, respectively, compared to $572 and $1,131 in the
comparable period of the prior year. The decrease in web product cost of sales
is due to elimination of certain non productive banner advertising on the web as
well as a decrease in direct mail campaign costs due the fewer number of names
available over the three and nine month periods ended September 30, 2000
compared to the same prior year periods. No banner advertising was done over the
three and nine months ended September 30, 1999.
License and royalty cost of sales increased approximately $6 to $18 for the
three months ended September 30, 2000 compared to $12 during the prior year
period. For the nine months ended September 30, 2000, license and royalty cost
of sales increased $8 to $52 compared to $44 in the comparable 1999 period. The
change is due to the technology import tax on the Company's Japanese OEM
shipments bundling the Company's handwriting recognition software.
Costs incurred in connection with development contract revenues increased 90% to
$19 for the three months ended September 30, 2000 as compared to $10 in the
prior period, due to the costs associated with the NSF grant. For the nine
months ended September 30, 2000, contract development costs increased 8% to $190
as compared to $176 in the prior period. The increase is due to the higher costs
associated with the NSF grant over the nine months ended September 30, 2000
compared to the same period last year.
Gross profit. Gross profit increased to $1,649 and $2,739 or 70% and 55% of
sales, respectively, for the three and nine month periods ended September 30,
2000 compared to $831 and $2,351 or 42% and 51% of sales, respectively, for the
comparable period in the prior year. This increase was due primarily to the
increase in licensing and royalty revenues compared to the prior year as a
result of the recognition of $1,000 of revenues in connection with a license
agreement with Ericsson. Product gross margins increased to $308 and $1,050
compared to $86 and $681 in the prior year. This increase was due to the
breakthrough order of the Company's electronic signature solution software to
Charles Schwab & Co in 2000. License and royalty gross profit increased to
$1,300 and $1,584 for the three and nine month period ended September 30, 2000
compared to $705 and 1,483 for the same period last year. The higher license and
royalty gross margins were primarily due to the recognition of licensing
revenues from Ericsson of $1,000. Development contract gross profit increased to
$41 for the three months ended September 30, 2000 compared to $39 for the
comparable periods last year. For the nine months ended September 30, 2000,
-14-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
development contract gross margins decreased to $105 compared to $186 in the
comparable prior year period. The changes are due to costs associated with the
NSF grant, and lower revenues as discussed above.
Research and development expenses. Research and development expense increased
$66 or 20% to $399 for three months ended September 30, 2000 compared to $333
for the same period last year. The increase is primarily due to the reduction in
direct expenses transferred to costs of sales associated with development
contract revenue during the three months ended September 30, 2000 which was $19
compared to $76 in the comparable prior year period. Other engineering costs
increased $21, including costs associated with the engineering effort at the
Company's Joint Venture. These increases were offset by a reduction of $12 in
engineering salaries and related expenses to during the three months ended
September 30, 2000 to $283 compared to $295 in the prior year. Transfer of
personnel and attrition is the reason for the reduction in salary and related
costs.
Research and development expense for the nine months ended September 30, 2000
increased 20% or $202 to $1,216 compared to $1,014 during the prior year period.
Salaries and related expenses increased $43 or 5% compared to the prior year.
Other costs including facilities expenses, travel, and other services increased
$117 compared to the prior year. These expenses are associated with the
development of products by the Company's Joint venture. In addition the
reduction in the transferred costs associated with development contract revenue
discussed above accounted for $42 of the increase.
Sales and marketing expenses. Sales and marketing expenses increased $33 or 7%
to $537 for the three months ended September 30, 2000 compared to $504 in the
prior year period. Salaries and wages increased $26 during the three months
ended September 30, 2000 compared to last year. This increase is due to the
hiring of a marketing executive late in the second quarter of 2000. Other costs,
including travel and related, dues and advertising and promotion, increased $80
compared to the same period last year. These increases were offset by reductions
primarily in professional services and recruiting of $73.
Sales and marketing expenses increased $382 or 29% to $1,717 for the nine months
ended September 30, 2000 compared to $1,335 in the comparable period last year.
Salaries and related expenses increased $117 compared to the same period last
year. This increase was due to additions to the marketing and sales force
personal since the fourth quarter of 1999. Other costs including recruiting,
travel and related expense and professional services increased $128 during the
nine months ended September 30, 2000. These increases are due to the additional
marketing personal hired since the fourth quarter of 1999. Advertising and
promotion expense increased $141 compared to the same nine month period last
year. The increase is primarily due to increased presents at trade shows and
improvements to the Company's promotional literature. These increases were
offset by net reductions in other expenses, primarily outside service and
support, over the nine months ended September 30, 2000 of $4 as compared to the
same nine month period last year.
General and administrative expenses. General and administrative expenses for the
three and nine month period ended September 30, 2000 increased $129 and $268,
respectively, or 31% and 20% to $548 and $1,589 as compared to $419 and $1,321
in the comparable three and nine month period of the prior year. This increase
was primarily attributable to an increase of $87 and $205, respectively, in
investor relations and legal expenses due to the costs associated with
disseminating information to the substantially increased number of shareholders
over the prior year period. In addition, salaries and related expenses for the
three and nine month period, increased $36 and $90, respectively. This increase
was due to an increase in the number of administrative personnel late in the
fourth quarter of 1999. Other costs such as recruiting, professional service and
facilities related costs increased $6 during the three months ended September
30, 2000 compared to the same period of the prior year. For the nine month
period ended September 30, 2000, other net costs, primarily patent amortization
cost and professional services, decreased $27 compared to the nine month period
in the prior year.
Interest and other income (expense), net. Interest and other income (expense),
net, increased $11 and $25, respectivley, to $20 and $66, respectively, for the
-15-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
three and nine months ended September 30, 2000 compared to $9 and $41,
respectively, in the comparable prior year period. The increase is due to the
increase in interest income from the higher cash and equivalents compared to the
prior year. The increase in interest income is offset by credit card processing
fees associated with internet sales.
Interest expense. Interest expense increased $64 and $176, respectively, to $78
and $192, respectively over the three and nine months ended September 30, 2000
compared to $14 and $16, respectively, in the comparable period of the prior
year. The increase is the due to interest on the $1,500 long term note issued in
October of the prior year and the amortization of the loan discount associated
with warrants issued in connection with the long term loan.
Liquidity and Capital Resources
-------------------------------
At September 30, 2000, cash and cash equivalents totaled $2,613 compared to cash
and cash equivalents of $2,374 at December 31, 1999. The increase is due
primarily to cash of $1,799 provided by financing activities. This increase was
offset by cash used in operating activities of $1,510 and cash used in investing
activities of $50. The $1,799 provided by financing activities consists
primarily of $1,744 in proceeds from the exercise of stock options and warrants
by the Company's employees and others, and by proceeds from short-term debt of
$121. These proceeds were off set by payments on capital lease obligations of $6
and payment of short term debt of $60. Total current assets were $4,233 at
September 30, 2000 compared to $4,205 at December 31, 1999.
As of September 30, 2000, the Company's principal source of liquidity was its
cash and cash equivalents of $2,613. Although there can be no assurance, the
Company believes that its cash and cash equivalents together with cash provided
from projected revenues will be sufficient to fund planned operations for at
least the next twelve months. However, if 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.
Current liabilities, which include deferred revenue, were $1,062 at September
30, 2000. Deferred revenue, totaling $48 at September 30, 2000, primarily
reflects advance service and non-recurring engineering fees for the Company's
licensees which are generally recognized as revenue by the Company in the period
in which the related service and engineering work is completed.
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, which provides for borrowings in the aggregate amount of $1,500 (the
"1999 Loan"). Borrowings under 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. 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 on the principal amount under the 1999 Loan is payable quarterly.
The 1999 Loan 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. The interest rate at September 30, 2000 was 11.5%, and the
outstanding amount was $1,500.
On October 6, 2000, the Company acquired certain assets of PenOp Limited ("PenOp
UK") and its subsidiary PenOp Inc. ("PenOp US" and collectively with PenOp UK,
"PenOp") pursuant to an asset purchase agreement dated as of September 29, 2000,
by and among Buyer and the Sellers in exchange for 4.7 million shares (the
"Transaction Shares") of common stock of the Company (the "Acquisition"). Out of
the 4.7 million shares issued to PenOp in connection with the Acquisition,
approximately 940,000 shares are being held in escrow to cover indemnification
claims.
-16-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
The acquired assets will be stated at cost and cost will be determined by the
fair-value of the consideration given or by the fair-value of the property
acquired, which ever is more clearly evident. As of the date of this filing, the
Company has not determined the purchase price for accounting purposes. However,
the subsequent accounting for the assets, will be to depreciate, amortize, or
otherwise match the asset cost with revenues.
In connection with the Acquisition, the Company filed a Registration Statement
with the SEC covering the sale of the Transaction Shares and agreed to use
reasonable efforts to have the Registration Statement declared effective as soon
as practicable thereafter.
In connection with the Acquisition, a director and officer of the Company, and
his designees, purchased in a private transaction an aggregate of 1,713,728
shares of common stock received by PenOp in connection with the Acquisition for
$3.3 million.
The Company leases facilities in the United States and China. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $517, and $431, respectivley, excluding sub-lease income for the
years ending December 31, 2000, and 2001. The Company's rent expense is expected
to be reduced by approximately $98 in 2000 in connection with the subleases on
excess office space in the United States.
The Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short-term securities.
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.
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
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 technology sector or the
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 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.
-17-
<PAGE>
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
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 three months ended September 30, 2000, the Company has
granted stock options to employees and directors for services
rendered as follows:
Item 2. Change in Securities (continued)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employees (1) 07/13/00 10,000 $ 3.5625 Quarterly 07/13/10
over three
years
Employees (1) 07/31/00 10,000 $ 3.7188 Quarterly 07/31/10
over three
years
Employees (1) 09/29/00 50,000 $ 2.2500 Monthly over 09/29/10
six months
------------------------------------------------------------------------------
</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
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>
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 10, 1999 /S/ Guido Di Gregorio
----------------------- -----------------------------------------------
Date Guido DiGregorio
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-19-
