UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20082011
___ Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 For the transition period from ___ to ___
Commission File No. 000-19301
Communication Intelligence Corporation
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 94-2790442 (I.R.S. Employer Identification No.) |
275 Shoreline Drive, Suite 500 Redwood Shores, California (Address of principal executive offices) | | 94065 (Zip Code) |
Registrant’s telephone number, including area code: 650-802-7888
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes[ ] No. [ Yes __ No X ].
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No. [X ].__ No X
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 submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the act (check one): Large accelerated filer [ ]___ Accelerated filer [ ]___ Non-accelerated filer [ ]___ Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)
Yes [ ]__ No [ X ]
The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant as of June 30, 20082011, was approximately $20,105,160$3,796,067 based on the closing sale price of $0.20$0.0335 on such date, as reported by the Over-the-Counter Bulletin Board.OTC Markets Group Inc. The number of shares of Common Stock outstanding as of the close of business on March 6, 200920, 2012, was 130,516,981.228,974,338.
COMMUNICATION INTELLIGENCE CORPORATION
TABLE OF CONTENTS
| Page |
PART I | 3 |
Item 1. Business | 3 |
Item 1A. Risk Factors | 87 |
Item 1B. Unresolved Staff Comments | 97 |
Item 2. Properties | 97 |
Item 3. Legal Proceedings | 97 |
Item 4. Submission of Matters to a Vote of Security Holders | 9 |
PART II | 97 |
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 97 |
Item 6. Selected Financial Data | 108 |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations | 108
|
Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 2015 |
Item 8. Consolidated Financial Statements and Supplementary Data | 2016 |
Item 9. Changes in and Disagreements withWith Accountants on Accounting and Financial Disclosure | 2116
|
Item 9A. Controls and Procedures | 2116 |
Item 9B. Other Information | 2217 |
PART III | 2217 |
Item 10. Directors and Executive Officers and Corporate Governance | 2217 |
Item 11. Executive Compensation | 2520 |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 2722 |
Item 13. Certain Relationships and Related Transactions and Director Independence | 3026 |
Item 14. Principal Accountant Fees and Services | 3228 |
PART IV | 3329 |
Item 15. Exhibits, Financial Statement Schedules | 3329 |
___________
CIC® and itsCIC’s logo, Handwriter®, Jot®, iSign®, InkSnap®, InkTools®, RecoEcho® SIGVIEW®, Sign-On®, QuickNotes®, Sign-it®, WordComplete®, INKshrINK®, SigCheck®, SignatureOne®, Ceremony® and The Power To Sign Online® are registered trademarks of the Company. HRSä, PenXä, KnowledgeMatchä, and Spellerä are trademarks is a trademark of the Company. Applications for registration of various trademarks are pending in the United States, Europe and Asia. The Company intends to register its trademarks generally in those jurisdictions where significant marketing of its products will be undertaken in the foreseeable future.
Note Regarding Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K, 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 that may cause actual events to differ materially from expectations. Such factors include the following: (1) technological, engineering, 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 ability to protect its trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others or prevent others from infringing on the proprietary rights of the Company; and (4) general economic and business conditions and the availability of sufficient financing.
PART I
Item 1. Business
Unless otherwise stated all amounts in PartsPart I through Part IV are stated in thousands (“000s”).
General
Communication Intelligence Corporation (the “Company” or “CIC”) was incorporated in Delaware in October 1986. Communication Intelligence Corporation and its joint venture (the “Company” or “CIC”)CIC is a leading supplier of electronic signature solutions for business process automation in the financial industry as well asproducts and the recognized leader in biometric signature verification. CIC’s products enableCIC enables companies to achieve truly paperless workflow in their eBusinesselectronic business processes withby providing multiple signature technologies across virtually all applicationsapplications. CIC’s solutions are available both in SaaSsoftware-as-a-service (“SaaS”) and fully deployedon-premise delivery models. To date, the Company has delivered biometricmodels and electronic signature solutions to over 400 channel partners and enterprises worldwide, representing hundreds users, with over 500 million electronic signatures captured, eliminating the need for over a billion pieces of paper. These deployments are primarily in the financial industry and include AEGON/World Financial Group, AGLA, Allstate Insurance Company, Charles Schwab & Co., Prudential Financial, Inc., Snap-On-Credit, State Farm Insurance Co., Travelers Indemnity Company, and Wells Fargo Bank, NA. The Company provides the most comprehensive and scalable electronic signature solutions based on over 20 years ofafford “straight-through-processing,” which can increase customer revenue by enhancing user experience and significant input from CIC’s valued financial industry client base. The Company iscan also a leading supplier of natural input/text entry software for handheld computersreduce costs through paperless and smartphones. Major customers for natural input software are Palm Inc. and Sony Ericsson Corp.. CIC sells directly to enterprises and through system integrators, channel partners and OEMs.virtually error-free electronic transactions that can be completed significantly faster than paper-based procedures. The Company is headquartered in Redwood Shores, California and has a joint venture, Communication Intelligence Computer Corporation Limited ("CICC"), in Nanjing, China.California.
RevenueFor the year ended December 31, 2011 total revenue was $1,546, an increase of $695, or 82%, compared to total revenue of $851 in the prior year. For the year ended December 31, 2011, product revenue was $915, an increase of $718, or 364%, compared to product revenue of $197 in the prior year. Maintenance revenue for the year ended December 31, 2008211 was $2,401$631, a decrease of $23, or 4%, compared to $2,145maintenance revenue of $654 in the prior year. The increase in product revenue is due primarily to new product offerings and an increased demand for electronic signature solutions. The decrease in maintenance revenue is a reflection of the Company’s shift in focus from one-time, on-premise sales to a recurring revenue model.
For the year ended December 31, 2007 an increase of $256 or 12%. Revenue for 2008 was primarily attributable to AEGON/World Financial Group, AGLA, Allscripts-Misys, Allstate Insurance Company (“Allstate”), Charles Schwab & Co., Oracle Corporation, Palm Inc., Prudential Financial Inc., SnapOn Credit LLC, Sony Ericsson Corp., Tennessee Valley Authority, Travelers Indemnity Company (“Travelers”), and Wells Fargo Bank NA.
The insurance industry is focusing on its eBusiness strategies not only to reduce transaction costs but to forge closer relationships with their customers and agents. According to2011, the September 2008 Forrester Research report “North American Insurance IT Spending in 2008,” 49% of US insurance companies surveyed indicated that increasing or expanding their online presence and eCommerce capabilities was a critical or high priority for them. This shift to eBusiness is a fundamental change for the industry, since insurance is all about producing documents, whether the paper that document is “printed” on is real or virtual. Technologies like electronic signature figure prominently in successful eBusiness strategies, since they accelerate the quote to revenue process while fostering better customer experiences. Based upon prior large scale deployments at AEGON/World Financial Group, AGLA, Prudential, State Farm, and two recent wins with Travelers and Allstate in the last half of 2008, together with pending orders from other insurance carries, the Company believes CIC is emerging as the leading and preferred supplier of electronic signature solutions for property/casualty and life insurance applications.
Regarding the banking sector, according to the Forrester research entitled “Industry Essentials: US Retail Banking”, US banks and lenders are challenged with the need to increase revenue while improving the effectiveness and efficiency of their processes in the face of increased regulatory and compliance demands exacerbated by the recent subprime and credit crisis. This crisis is driving increased regulatory controls and the need to administer the billions of bailout dollars to settle troubled mortgages and CIC believes this will accelerate the deployment of electronic signature technology based solutions to address those challenges. In addition, regional and mid-size banks, unencumbered by the Troubled Asset Relief Program (“TARP”) related difficulties, appear to be pursuing automation more actively than in the past.
CIC was recently named to Forrester Research’s “Hot Companies to Watch in 2009” Report. The Company is pleased to be recognized for its contribution to automating the mortgage workout process. Partnering with Computer Sciences Corporation ("CSC") to integrate our technologies to deliver a "software as a service" ("SaaS")-based electronic signature solution reduces a very lengthy and painful
process involving many parties that can often take several months to less than three days, alleviating borrower stress along with significant expense reductions. This product offering reflects the timeliness and benefits of our technology coupled with our ability to effectively and efficiently integrate our technology with selected partner offerings to significantly enhance the value of the end solution.
Currently, the Company is experiencing what it believes are normal delays in IT orders consistent with standard procedure as enterprises enter a new year and budget period. Although the Company sees no significant indications suggesting that the adverse market conditions impacting our customer base of financial institutions have resulted in any delays or cancellation of IT spending that would significantly impact planned automation programs involving our technology, the elevated review and prioritization purchase processes have delayed anticipated early 2009 deployments. In recognition that such delays could result in the short-term need for additional funds, prior to achievement of cash flow positive operations, we are investigating alternative financing sources, including investments from selected strategic partners.
The net loss attributable to Common Stockholders forcommon stockholders was $6,663, an increase of $2,110, or 51%, compared to $4,553 in the prior year. For the year ended December 31, 2008 was $3,727 compared to $3,399 in the prior year. Non-cash2011, non-cash charges attributable to interest expense for deferred financing costs and loan discount amortization related to the Company’s debt and the accretion of the beneficial conversion feature of the shares of Series A-1 Preferred contributed $1,220 to that loss representing an increase of $251was $1,181 compared to $969$2,039 in the prior year. OperatingThere was a loss of $113 on the derivative liability value for the year ended December 31, 2011 compared to a gain of $3,136 in the prior year. For the year ended December 31, 2011, operating expenses, including amortization of software development costs, increased approximately 7%were $5,829, a decrease of $276, or 5%, or $307, from $4,338compared to operating expenses of $6,105 for the year ended December 31, 2007 to $4,645 for the year ended December 31, 2008.prior year. The increasedecrease in operating expense resulted primarily reflectsfrom a charge in the increases inprior year of $1,009 related to the accelerated amortization of certain capitalized software development costs, relatedoffset by a $700 increase in the amount of software development cost expensed in 2011 compared to product development and enhancements, and increaseswhat would have been capitalized in direct engineering costs, charged to cost of sales, related to meeting customer specific requirements associated with integration of our standard products into customer systems.the prior year.
Core Technologies
The Company's core technologies are classified into two broad categories: "transaction and communication enabling technologies" and "natural input technologies".can be referred to as "transaction-enabling” technologies. These technologies include multi-modalvarious forms of electronic signature technologies, such as handwritten, biometric, click-to-sign and others, as well as technologies related to signature verification, cryptography (Sign-it, iSign, and SignatureOne)the logging of audit trails to show signers’ intent. These technologies enable secure, legal and multilingual handwriting recognition software (Jot).
Transaction and Communication Enabling Technologies. The Company's transaction and communication enabling technologies are designed to provide a cost-effective means for securingregulatory compliant electronic transactions providing networkcompleted through an enhanced customer experience, all at a fraction of the time and device access control and enabling workflow automation ofcost required by traditional, paper form processing. The Company believes that these technologies offer more efficient methods for conducting electronic transactions while providing more functional user authentication and heightened data security. The Company's transaction and communication enabling technologies have been fundamental to its development of software for multi-modal electronic signatures, handwritten biometric signature verification, and data security.
Natural Input Technologies. CIC's 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. CIC's natural input offering includes multilingual handwriting recognition software for such devices as electronic organizers, pagers and smart cellular phones that do not have a keyboard. For such devices, handwriting recognition offers the most viable solutions for performing text entry and editing.paper-based processes.
Products
KeyThe Company’s enterprise-class SignatureOne® suite of electronic signature solutions enables businesses to implement truly paperless, electronic signature-driven business processes. Many applications provide electronic forms and allow users to fill in information, but most of these applications still require users to print out a paper copy for a handwritten, ink signature. Solutions powered by CIC products includeallow legally binding electronic signatures to be added to digital documents, eliminating the need for paper copies. This allows users to reduce transaction times and processing costs and to increase their time available for revenue generating activities.
The SignatureOne® suite of products includes the following:
| SignatureOne Profile Server | SignatureOne Profile Server is the server compliment to CIC's Sign-it software, which enables the real-time capture of electronic and digital signatures in various application environments. All user enrollment, authentication and transaction tracking in SignatureOne are based on data from the Sign-it client software. | |
| SignatureOne Ceremony ServerSignatureOne® Ceremony® Server™ | The SignatureOne SignatureOne® Ceremony® Server™ (“Ceremony ServerServer”) is a J2EEâ server product that provides the capability to define and manage an electronic signature process within a Service Oriented Architectureservice oriented architecture and that can be deployed both on-premise and in the Cloud as a SaaS solution. Application program interfaces, web services, notification services, reporting, tracking and flexible XML schema enable virtually seamless integration with most electronic content management, enterprise resource planning or other workflow, content management and storage/repository systems for the automation of any document process that requires signatures. |
iSign® Console™ | The iSign® Console™ (“Console”) product is a server-based offering that leverages CIC’s patented Ceremony® process and allows users to be implementedmanage and control the set up and delivery of documents for electronic signatures in an On-Premise Deployed Model easy and flexible way, and with a comprehensive audit trail for non-repudiation. The Console works independently from advanced document management systems and represents an intuitive front-end solution for small-to-medium enterprises to rapidly integrate electronic signatures in their business processes. Its principal features include the ability to upload multiple documents for review and/or through a Softwareexecution, to select an electronic signature method, such as a Service (SaaS) environment. This product enablesclick-to-sign or biometric, choose signature field placement, manage the use of web services to facilitate end to end management of multi-party approvals of documents.signature process via invites and pre-set email reminders, and secure the entire process with passcodes. | |
Sign-it® | iSign | A suiteSign-it® is a family of application development tools forsoftware products that enable the real-time capture of electronic digitizedand digital signatures, biometric signatureas well as their verification and cryptography for custom developedbinding within a standard set of applications, and web based development. | |
| Sign-it | Multi-modal electronic signature software for common applications including; Microsoft Word,including Adobe Acrobat AutoDesk AutoCAD,and Microsoft Word, web based applications using HTML, XML &and XHTML, and custom applications for .NET, C# and similar development environments for the enterprise market | market. The Sign-it® family of products combines the strengths of biometrics, and other forms of electronic signatures, with cryptography in a patented process that insures the creation of documents containing legally compliant electronic signatures. These signatures have the same legal standing as a traditional so-called wet signature on paper and are created pursuant to the Electronic Signature in National and Global Commerce Act, as well as other related legislation and regulations. With Sign-it® products, organizations wishing to process electronic forms, requiring varying levels of security, can reduce the cost and other inefficiencies inherent with paper documents by adding electronic signature technologies to their workflow solutions. |
iSign® Toolkits | Jot | Multi-lingual handwriting recognitionThe iSign® suite of application development tools for electronic signature capture, encryption and verification in custom applications and web-based processes captures and analyzes the image, speed, stroke sequence and acceleration of a person's handwritten electronic signature and can provide an effective and inexpensive solution for immediate authentication of handwritten signatures. iSign® toolkits also store certain forensic elements of an electronic signature for use in determining whether a person’s electronic signature is legally valid and include software | libraries for industry standard encryption and hashing to protect the sensitive nature of a user’s signature, as well as the data captured in the Ceremony® process. iSign® toolkits are used internally by the Company as an underlying technology for its SignatureOne® and Sign-it® suite of products. |
Products and upgrades that were introduced and first shipped in 20082011 include the following:
SignatureOne® Ceremony® Server v1.0iSign® for Windows®, Version 4.7 |
SignatureOne® Sign-it® v6.3 for Acrobat®iSign® Mobility Suite, Version 1.5 |
SignatureOne® Sign-it® v6.31 for Acrobat® |
SignatureOne® Sign-it® v7.0 for Acrobat® |
SignatureOne® Sign-it® v7.01 for Acrobat® |
SignatureOne® Sign-it® v7.02 for Acrobat® |
Sign-it® Viewer v2.0 for Acrobat® |
SignatureOne® Sign-it® v7.0 for Word |
SignatureOne® Profile Server v3.0iSign® Mobility Suite, Version 1.5.1 |
SignatureOne® Ceremony® Server, v1.1Version 2.4 |
SignatureOne® Ceremony® Server, v1.11Version 2.5 |
SignatureOne® Ceremony® Server, v1.2 |
iSign® v4.311Version 2.6 |
SignatureOne® Sign-it® XF v1.3.0.1Ceremony® Server, Version 2.6.1 |
SignatureOne® Sign-it® XF v1.3.0.2Ceremony® Server, Version 2.7 |
Sign-it Tools v7.0 for WordSignatureOne® Ceremony® Server, Version 3.0.4 |
SignatureOne® Ceremony® Server Migration Toolkit |
iSign ® Console™, Version 1.5 |
SignatureOne® Standard, Version 1.5 |
The SignatureOne Profile Server provides server-based enterprise administration and authentication of user eSignatures and maintenance of signature transaction logs for eSigned documents. The SignatureOne architecture implements a common process and methodology that provides a uniform program interface for multiple signature methods and multiple capture devices, simplifying enterprise wide integration of business process automation tasks requiring eSignature.
The SignatureOne Ceremony Server is a J2EE server product that provides the capability to define and manage an electronic signature process within a Service Oriented Architecture (SOA) to be implemented in an On-Premise Deployed Model or through a Software as a Service (SaaS) environment. This product enables the use of web services to pass documents and/or packages of documents and related XML data to a server that facilitates end to end management of multi-party approvals of documents.
iSign is an electronic signature and handwritten signature verification software developer’s kit for custom applications or Web based processes. It captures and analyzes the image, speed, stroke sequence and acceleration of a person's handwritten electronic signature. iSign provides an effective and inexpensive handwriting security check for immediate authentication. It also stores certain forensic elements of a signature for use in determining whether a person actually electronically signed a document. The iSign kit includes software libraries for industry standard encryption and hashing to protect the sensitive nature of a user signature and the data captured in association with that signature. This software toolkit is used internally by the Company as the underlying technology in its SignatureOne and Sign-it products.
Sign-it is a family of electronic signature products for recording multi-modal electronic signatures as they are being captured as well as binding and verifying electronic signatures within standard consumer applications. These products combine the strengths of biometrics, and electronic signatures and cryptography with a patented process to insure legally compliant electronic signatures to process, transact and create electronic documents that have the same legal standing as a traditional wet signature on paper in accordance with the Electronic Signature in National and Global Commerce Act, and other related legislation and regulations. Organizations wishing to process electronic forms, requiring varying levels of security, can reduce the need for paper forms by adding electronic signature technologies to their workflow solution. Currently, Sign-it is available for MS Word, AutoCAD, Adobe Acrobat, Web based transactions using common formats like XML, HTML, or XHTML, and custom application development with .NET, C# or similar development environments.
Jot software analyzes the individual strokes of characters written with a pen/stylus and converts these strokes into machine-readable text characters. Jot recognizes handwritten input and is specifically designed for small devices. Unlike many recognizers that compete in the market for handheld data input solutions, Jot offers a user interface that allows for the input of natural upper and lowercase letters, standard punctuation and European languages without requiring the user to learn and memorize unique characters or symbols. Jot has been ported to numerous operating systems, including Palm OS, Windows, Windows Mobile, VT-OS, UIO, QNX, Linux and OS/9. The standard version of Jot, which is available through OEM customers, recognizes and supports input of Roman-based Western European languages.
Copyrights, Patents and Trademarks
The Company relies on a combination of patents, copyrights, trademarks, trade secrets and contractual provisions to protect its software offerings and technologies. The Company has a policy of requiring its employees and contractors to respect proprietary information through written agreements. The Company also has a policy of requiring prospective business partners to enter into non-disclosure agreements before disclosure of any of its proprietary information.
Over the years, the Company has developed and patented major elements of its software offerings and technologies. In addition, in October 2000 the Company acquired, from PenOp, Inc. and its subsidiary, a significant patent portfolio relevant to the markets in which the Company sells its products. The Company’s patents and the years in which they each expire are as follows:
Patent No. | Expiration |
5544255 | 2013 |
5647017 | 2014 |
5818955 | 2015 |
5933514 | 2016 |
6064751 | 2017 |
6091835 | 2017 |
6212295 | 2018 |
6381344 | 2019 |
6487310 | 2019 |
The Company believes that these patents provide a competitive advantage in the electronic signature and biometric signature verification markets. The Company believes the technologies covered by the patents are unique and allow it to produce superior products. The Company also believes these patents are broad in their coverage. The technologies go beyond the simple handwritten signature and include measuring electronically the manner in which a person signs to ensure tamper resistance and security of the resultant documents and the use of other systems for identifying an individual and using that information to close avalidate the signer and the transaction. The Company believes that the patents are sufficiently broad in coverage that products with substantially similar functionality would infringe its patents. Moreover, because the majority of these patents do not expire for another four to 10, the Company believes that it has sufficient time to develop new related technologies, which may be patentable, and to establish CIC as market leader in these product areas. Accordingly, the Company believes that for a significant period of time its patents will deter competitors from introducing competing products without creating substantially different technology or licensing or infringing its technology.
The Company has an extensive list of registered and unregistered trademarks and applications in the United States and other countries. The Company intends to register its trademarks generally in those jurisdictions where significant marketing of its products will be undertaken in the foreseeable future.
Material Customers
Historically, the Company’s revenues haverevenue has been derived from hundreds of customers, however,but a significant percentage of the revenue has been attributable to a limited number of customers. Two customers accounted for 39%28% and 10%, respectively of total revenue for the year ended December 31, 2008. Allstate Insurance Company accounted for 19% and Travelers Indemnity Company accounted for 20%. Four customers accounted for 57% of total revenues in 2007. Access Systems Americas, Inc. (formerly PalmSource, Inc.) accounted for 24%, Tennessee Valley Authority accounted for 10%, World Financial Group accounted for 13% and Wells Fargo Bank, NA accounted for 10%.2011.
Seasonality of Business
The Company believes that its products are not subject to seasonal fluctuations.
Backlog
Backlog approximates $344was approximately $914 and $431$1,097 at December 31, 20082011 and 2007,2010, respectively, representing advanced payments on product and service maintenance agreements. In 2009, the Company negotiated several long term maintenance agreements, that areof which the remaining balance of approximately $397 will be recognized over one to two years. The remaining backlog is expected to be recognized over the next twelve months.
Competition
The Company faces competition at different levels.levels both domestically and internationally. The technology-neutral nature of the laws and regulations related to what constitutes an “electronic signature” and CIC’s multi-modal enterprise-wide suite of products causes the Company to compete with different companies depending upon the specific type of electronic signature sought by a prospective customer. Our principalCurrently, CIC’s primary competition for handwritten biometric signatures includes SoftPro, Wondernet, and low-end tablet vendors. CIC faces additional competition primarily fromis Silanis andand/or DocuSign when the application is click-wrap, voice, fingerprint, password, and basic clickclick-to-sign technology. Principal competition for handwritten biometric signatures includes SoftPro, Wondernet and signature pad vendors. The Company believes it has a competitive advantage by offering solutions with a multitude of different electronic signature methods that enable users to sign technology.
Certain of the Company’s significant competitorsvirtually any document format, in the natural input market segment include PenPower Groupany software environment, and Advanced Research Technology, Inc.on any hardware platform.
The Company believes that it has a competitive advantage, in part, due to CIC’s range of product offeringsclear differentiation from its competitors and enjoys certain advantages, including its patent portfolio. ThereHowever, there can be no assurance however, that competitors, including some with greater financial or other resources, will not succeed in developing products or technologies that are more effective, easier to use or less expensive than our products or technologies whichand that could render our products or technologies obsolete or non-competitive.
Employees
As of December 31, 2008,2011, the Company employed 2319 full-time employees 22 of which are in the United States and 1 of which is in China.two consultants. The Company as a strategy, has been focused for years on being at its core “lean and agile” while establishing long standingestablished long-standing strategic relationships that allow the Companyit to rapidly access product development and deployment capabilities that could be required to address virtually any business requirement. The company believes it has scalability to virtually any business requirement through existing agreements with specialized development teams (well versed in the area of signature technology and processes), mid-size vertical market IT services groups (with explicit knowledge of the intricacies of the financial services industry) and with tier one IT Services firms with virtually limitless resources available.most customer requirements. None of the Company’s employees are a party to aany collective bargaining agreement.agreements. We believe our employee relations are good.
Geographic Areas
For the years ended December 31, 2008,2011 and 2007, the Company’s2010, sales in the United States as a percentage of total sales were 96%,93% and 92%93%, respectively. For the years endedAt December 31, 2008,2011 and 2007, the Company’s export sales as a percentage of total revenues were approximately 4% and 8%, respectively. Foreign sales are based on the countries to which the Company’s products are shipped. Long lived2010, long-lived assets located in the United States were $4,603$2,159 and $4,714 for the years ended December 31, 2008 and 2007,$2,899, respectively. There were no long livedlong-lived assets located in China or elsewhere as of December 31, 20082011 and 2007, respectively.2010.
Segments
The Company reports its financial results in one segment.
Available Information
Our web site is located at www.cic.com.www.cic.com. The information on or accessible through our web sitessite is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available, free of charge, on our web site as soon as reasonably practicable after we electronically file with or furnish such material to the SEC. Further,Securities and Exchange Commission (“SEC”). Furthermore, a copy of this Annual Report on Form 10-K is locatedand other reports filed by CIC with the SEC may be read and copied by the public at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.20549 on official business days during the hours of 10 a.m. and 3 p.m. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filingsissuers, including CIC, that file electronically with the SEC at www.sec.gov.
Note Regarding Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K, 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 that may cause actual events to differ materially from expectations. Such factors include the following: (1) technological, engineering, 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 ability to protect its trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others or 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 1A Risk Factors
Not applicable.
Item 1B. Unresolved Staff Comments
NoneNone.
Item 2. Properties
The Company leases its principal facilities, consisting of approximately 9,600 square feet, in Redwood Shores, California, pursuant to a lease that expires in 2011. The Company’s China-based joint venture leases approximately 392 square feet in Nanjing, China. The Company believes that its current facilities are suitable for our current needs.2016.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
NoneNone.
PART II
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s Common Stock is listedquoted on OTC Markets Group Inc.’s OTCQB quotation system under the trading symbol CICI. Trading activity for the Company’s Common Stock can be viewed at www.otcmarkets.com. Prior to March 1, 2010, the Company’s Common Stock was also quoted on the Over the CounterOver-the-Counter Bulletin Board under the trading symbol CICI.OB. Prior to March 14, 2003 it was listed on the Nasdaq Capital Market (formerly known as the SmallCap Market) under the symbol CICI. The following table sets forth the high and low sale prices of the Common Stock for the periods noted.
| | | Sale Price Per Share | |
Year | Period | | High | | | Low | |
| | | | | | | |
2007 | First Quarter | | $ | 0.32 | | | $ | 0.20 | |
| Second Quarter | | $ | 0.27 | | | $ | 0.13 | |
| Third Quarter | | $ | 0.28 | | | $ | 0.15 | |
| Fourth Quarter | | $ | 0.42 | | | $ | 0.20 | |
2008 | First Quarter | | $ | 0.27 | | | $ | 0.13 | |
| Second Quarter | | $ | 0.27 | | | $ | 0.13 | |
| Third Quarter | | $ | 0.23 | | | $ | 0.10 | |
| Fourth Quarter | | $ | 0.16 | | | $ | 0.05 | |
| | Sale Price Per Share |
Year | Period | High | Low |
| | | |
2010 | First Quarter | $ 0.14 | $ 0.08 |
| Second Quarter | $ 0.14 | $ 0.05 |
| Third Quarter | $ 0.08 | $ 0.03 |
| Fourth Quarter | $ 0.06 | $ 0.03 |
2011 | First Quarter | $ 0.10 | $ 0.03 |
| Second Quarter | $ 0.07 | $ 0.03 |
| Third Quarter | $ 0.05 | $ 0.02 |
| Fourth Quarter | $ 0.06 | $ 0.02 |
Holders
As of March 3, 200920, 2012 there were approximately 931853 holders of record of our Common Stock.
Dividends
To date, the Company has not paid any dividends on its Common Stock and does not anticipate paying any such dividends in the foreseeable future. The declaration and payment of dividends on the Common Stock is at the discretion of the Board of Directors and will depend on, among other things, the Company's operating results, financial condition, capital requirements, contractual restrictions or such other factors as the Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
All securities sold during 20082011 by the Company were either previously reported on quarterly reportsa Quarterly Report on Form 10-Qs10-Q or in a Current Report on Form 8-K filed with the Securities and Exchange Commission or sold pursuant to registration statements filed under the Securities Act of 1933, as amended (the “Securities Act”).
The information required by Item 201(d) of Regulation S-K is incorporated by reference to Note 5 (“Stockholders Equity”) of the Notes to Consolidated Financial Statements for the Year Ended December 31, 2008, included on page F-20 on this report on Form 10-K.SEC.
Issuer Purchases of Equity Securities
NoneNone.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and related notes appearing elsewhere in this Form 10-K. The following discussion relating to projected growth and future results and events constitutes forward-looking statements. Actual results in future periods may differ materially from the forward-looking statements due to a number of risks and uncertainties. We cannot guarantee future results, levels of activity, performance or achievements. Except as otherwise required under applicable law, we disclaim any obligation to revise or update forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Unless otherwise stated herein, all figures in this Item 7, other than price per share data, are stated in thousands (“000s”).
Overview and Recent Developments
The Company is a leading supplier of electronic signature solutions for business process automation in the financial industry and is the recognized leader in biometric signature verification technology. Our products enable companies to achieve trulysecure paperless workflow in their eBusiness processesbusiness transactions with multiple signature technologies, across virtually all applications in SaaS and fully deployed delivery models.hardware platforms, and that are legally binding and compliant with applicable laws and regulations and that can provide a higher level of security than paper-based processes. The Company has been a leading supplier of electronic signature solutions within the financial services and insurance industries and has delivered significant expense reduction by enabling complete document and workflow automation.
The Company was incorporated in Delaware in October 1986. Except for the year ended December 31, 2004, in each year since its inception the Company has incurred losses. For the three-yeartwo-year period ended December 31, 2008,2011, net losses attributable to common stockholders aggregated approximately $10,412$11,216, and, at December 31, 2008,2011, the Company's accumulated deficit was approximately $95,000.$111,839.
For the year ended December 31, 2011, total revenue was $1,546, an increase of $695, or 82%, compared to total revenue of $851 in the prior year. The increase in product revenue is primarily due to new product offerings and an increased demand for electronic signature solutions.
For the year ended December 31, 2008, total revenues were $2,401, an increase of $256, or 12%, compared to total revenues of $2,145 in2011, the corresponding prior year.
The loss from operations for the year ended December 31, 2008 increased $51 to $2,244,was $4,283, a decrease of $971, or 18%, compared with a loss from operations of $2,193$5,254 in the prior year. The decrease in the operating loss is primarily attributable to a charge of $1,009 related to the acceleration of amortization of certain capitalized software development costs in the prior year. For the year ended December 31, 2011, operating expenses were $5,829, a decrease of $276, or 5%, compared to operating expense of $6,105 in the prior year. The decrease in operating expense resulted primarily from a charge in the prior year period. This increase, is primarily attributedof $1,009 related to the net effect of higher recorded revenues, offset by a $539 increase in cost of sales to $1,064 in the current period compared to $525 in the
prior year period. The increase in cost of sales is due to increasedaccelerated amortization of previouslycertain capitalized software development costs, related to product developments and enhancements and increases in direct engineering costs, charged to cost of sales, related to meeting customer specific requirements associated with the integration of our standard products into customer systems.
The Company continues to experience demand for its electronic signature technology across the financial industry despite the turmoil and volatilityoffset by a $700 increase in the financial markets.
The insurance industry is focusing on its eBusiness strategies not onlyamount of software development cost expensed in 2011 compared to reduce transaction costs but to forge closer relationships with their customers and agents. According to the September 2008 Forrester Research report “North American Insurance IT Spending in 2008,” 49% of US insurance companies surveyed indicated that increasing or expanding their online presence and eCommerce capabilities was a critical or high priority for them. This shift to eBusiness is a fundamental change for the industry, since insurance is all about producing documents, whether the paper that document is “printed” on is real or virtual. Technologies like electronic signature figure prominently in successful eBusiness strategies, since they accelerate the quote to revenue process while fostering better customer experiences. Based upon prior large scale deployments at AEGON/World Financial Group, AGLA, Prudential, State Farm, and two recent wins with Travelers and Allstatewhat would have been capitalized in the last half of 2008, together with pending orders from other insurance carries, the Company believes CIC is emerging as the leading and preferred supplier of electronic signature solutions for property/casualty and life insurance applications.prior year.
In March 2011, the banking sector, accordingCompany sold 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $121 in expenses, of which $50 went to SG Phoenix, LLC, an affiliated entity of the Company’s largest stockholder Phoenix Venture Fund, LLC (“Phoenix”), in payment of an administrative fee and $71 in expenses to third parties in connection with the financing. The Company recorded a beneficial conversion feature of $800 related to the Forrester Research entitled “Industry Essentials: US Retail Banking”, US. banks and lenders are challenged withintrinsic value of the need to increase revenue while improvingconversion feature of the effectiveness and efficiencyshares of their processesSeries C Preferred Stock. The Company issued 305 shares of Series C Preferred Stock in payment of dividends for the face of increased regulatory and compliance demands exacerbated by the recent sub prime debt and credit crisis. This crisis is driving increased regulatory controls and the need to administer the billions of bailout dollars to settle troubled mortgages and CIC believes this will accelerate the deployment of electronic signature technology-based solutions to address those challenges. In addition, regional and mid-size banks, unencumbered by the Troubled Asset Relief Program (“TARP”) related difficulties; appear to be pursuing automation more actively than in the past. The Company’s joint solution with Computer Science Corporation (CSC) which automates the mortgage workout process, introduced in late 2008 with a webinar featuring Forrester Research, CSC and CIC, focused on the benefits of CSC’s EarlyResoltion platform with the added benefits of CIC’s electronic signature technology and has generated encouraging interest and anticipated 2009 revenue from the larger banks/mortgage companies.
So although the turmoil and volatility in the financial markets has resulted in higher level review purchase processes which have delayed IT purchases beyond the historic first quarter purchase delays associated with a New Year and budget process, it seems increasingly apparent that financial institutions recognize that CIC’s technology addresses those institutions needs for both revenue growth and expense reduction and we anticipate that the financial crises may well accelerate the adoption of electronic signature solutions in the overall financial industry and the Company believes 2009 revenue will exceed 2008.year ended December 31, 2011.
In June 2008, the Company closed a financing transaction under which it raised capital through the issuance of secured indebtedness and equity and restructured a portion of the Company’s existing debt. In connection with the transaction,September 2011, the Company borrowed an aggregate of $3,000$100 from Phoenix and refinanced $638an employee of existing indebtednessthe Company and accruedissued unsecured demand notes to each. These notes are due on demand and bear interest onat the Company’s existing indebtedness.rate of 10% per annum. In partial consideration foraddition the respective loans made as described above,Company entered into a Note and Warrant Purchase Agreement (the “September 2011Purchase Agreement”) with Phoenix Banner Holdings, LLC (the “September 2011 Investor”), an entity affiliated with Phoenix. Under the terms of the September 2011 Purchase Agreement, the Company issued an unsecured convertible promissory note in the amount of $500 (the “September 2011 Note”) to each creditorthe September 2011 Investor. The September 2011 Note bears interest at the rate of 10% per annum, and has a maturity date of September 20, 2012. The September 2011 Note is also convertible at the option of the September 2011 Investor into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 Investor a warrant to purchase up to the number of5,556 shares of itsthe Company’s Common Stock obtained by dividing the amount of such creditor’s loan by 0.14. A total of 25,982 shares of our Common Stock may be issued upon exercise of the warrants at an exercise price of $0.14$0.0225 per share.
Overview and Recent Developments (continued)
In December 2011, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Philip Sassower, the Company’s Chairman and CEO, and other investors (the “December 2011 Investors”). Under the terms of the Purchase Agreement, the Company issued unsecured convertible promissory notes in the aggregate amount of $500 (the “December 2011 Notes”) to the December 2011 Investors. The December 2011 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 20, 2012. The December 2011 Notes are also convertible at the option of the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the warrants was exempt from registration under Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
In June 2008, in connection with the closing of the financing transaction,December 2011 Notes, the Company also entered into a Securities Purchase Agreement and a Registration Rights Agreement. Under the Securities Purchase Agreement, in exchange for the cancellation of $995 in principal and $45 of interest accrued on our existing debt, the Company issued to the holders of such debtDecember 2011 Investors warrants to purchase an aggregate of 1,0405,556 shares of Series A Cumulative Convertible Preferred Stock
(“Series A Preferred”). The issuance and sale of such shares was exempt from registration under Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The shares of Series A Preferred were subsequently cancelled and exchanged for an equivalent number of shares of Series A-1 Cumulative Convertible Preferred Stock (“Series A-1 Preferred”). The outstanding shares of Series A-1 Preferred carry an 8% annual dividend, payable quarterly in arrears in cash or in additional shares of Series A-1 Preferred, have a liquidation preference over Common Stock of $1.00 per share, and, subject to further adjustment as provided in the Certificate of Designations, Powers, Preferences and Rights of the Series A-1 Cumulative Convertible Preferred Stock, are presently convertible into shares ofCompany’s Common Stock at a ratioan exercise price of one share of Series A-1 Preferred for 7.1429 shares of Common Stock.$0.0225 per share.
New Accounting Pronouncements
See Note 1, Notes to Consolidated Financial Statements included under Part IV, Item 15 of this report on Form 10-K.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s
consolidated financial statements and the accompanying notes. The amounts of assets and liabilities reported in its balance sheets and the amounts of revenuesrevenue and expenses reported for each period presented are affected by these estimates and assumptions that are used for, but not limited to, revenue recognition, allowance for doubtful accounts, intangible asset impairments, fair value of financial instruments, software development costs, research and development costs, foreign currency translation and net operating loss carryforwards.carry-forwards. Actual results may differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used by the Company’s management in the preparation of the consolidated financial statements.
Derivatives: The Company follows the relevant accounting guidance and records derivative instruments (including certain derivative instruments embedded in other contracts) in the balance sheet as either an asset or liability measured at their fair value, with changes in the derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. The Company values these derivative securities under the fair value method at the end of each reporting period (quarter), and their value is marked-to-market at the end of each reporting period with the gain or loss recognition recorded in earnings. The Company continues to revalue these instruments each quarter to reflect their current value in light of the current market price of our Common Stock. The Company utilizes a discounted Black-Scholes option-pricing model to estimate fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instrument’s expected remaining life. These assumptions require significant management judgment.
Revenue: Revenue is recognized when earned in accordance with the applicable accounting standards, including AICPA Statement of Position ("SOP") No. 97-2, “Software Revenue Recognition”, as amended, Staff Accounting Bulletin 104, “Revenue Recognition” ("SAB 104"), and the interpretive guidance issued by the Securities and Exchange Commission and EITF issue number 00-21, “Accounting for Revenue Arrangements with Multiple Elements”, of the FASB’s Emerging Issues Task Force.guidance. The Company recognizes revenuesrevenue from sales of software products upon shipment, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all non-recurring engineering work necessary to enable the Company's product to function within the customer's application has been completed and the Company's product has been delivered according to specifications. Revenue from service subscriptions is recognized as costs are incurred or over the service period, which-everwhichever is longer.
Software license agreements may contain multiple elements, including upgrades and enhancements, products deliverable on a when and if available basis and post contractpost-contract support. Revenue from software license agreements is recognized upon delivery of the software, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all nonrecurring engineering work necessary to enable the Company's products to function within the customer's application has been completed, and the Company has delivered its product according to specifications.
Maintenance revenue is recorded for post-contract support and upgrades or enhancements, which is paid for in addition to license fees, and is recognized as costs are incurred or over the support period, whichever is longer. For undelivered elements where objective and reliable evidence of fair value does not exist, revenue is deferred and subsequently recognized when delivery has occurred and when fair value has been determined.
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s
estimates of recoverability of amounts due could be affected and the Company would adjust the allowance accordingly.
Long-lived assets: The Company performs intangible asset impairment analyses in accordance with the guidance in Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” ("SFAS No. 142") and Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” ("SFAS No. 144").applicable accounting guidance. The Company uses SFAS 144the guidance in response to changes in industry and market conditions that affect its patents, the Company then determines if an impairment of its assets has occurred. The Company reassesses the lives of its patents and tests for impairment at least annually in order to determine whether the book value exceeds the fair value for each patent. Fair value is determined by estimating future cash flows from the products that are and will be protected by the patents and considering the following additional factors:
· | whether there are legal, regulatory or contractual provisions known to the Company that limit the useful life of any patent to less than the assigned useful life; |
· | whether the Company needs to incur material costs or make modifications in order for it to continue to be able to realize the protection afforded by the patents; |
· | whether any effects of obsolescence or significant competitive pressure on the Company’s current or future products are expected to reduce the anticipated cash flow from the products covered by the patents; |
· | whether demand for products utilizing the patented technology will diminish, remain stable or increase; and |
· | whether the current markets for the products based on the patented technology will remain constant or will change over the useful lives assigned to the patents. |
The Company had obtained an independent valuation from Strategic Equity Group of the carrying value of its patents as of December 31, 2005. The Company believes that the biometric market potential identified in current year market research has improved over the data used to validate the carrying value of the Company’s patents at the end of 2005. Management updated this analysis at December 31, 20082011 and believes that that no impairment of the carrying value of the patents exists at December 31, 2008.2011.
Customer Base: To date, the Company's eSignature revenues haveelectronic signature revenue has been derived primarily from financial service industry end-users and from resellers and channel partners serving the financial service industry primarily in North America, the ASEAN Region including China (PRC), and Europe. Natural Input (text entry) revenues have been derived primarily from hand held computer and smart phone manufacturers (OEMs) primarily in North America, Europe and the Pacific Rim. The Company performs periodic credit evaluations of its customers and does not require collateral. The Company maintains reserves for potential credit losses. Historically, such losses have been within management's expectations.
Software Development Costs: Software development costs are accounted for in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, capitalizationCapitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. The costs capitalized include the coding and testing of the product after technological feasibility has been established and ends upon the release of the product. The annual amortization is the greater of (a)equal to the straight-line amortization over the estimated useful life not to exceed three years or (b)lives of the amount based on the ratiosoftware and varies by type of current revenues to anticipated future revenues.software. The Company generally subdivides its software into product software, server software and Software-as-a-Service. The Company capitalized software development costs of $813,approximately $72 and $788$772 for the years ended December 31, 20082011 and 2007.2010, respectively. For the year ended December 31, 2010, the Company decided to accelerate the amortization of its software portfolio to better reflect the transition of its offering from being mostly product-based to becoming mostly server and service-based and to provide a closer match with the useful life of the development costs being capitalized. This acceleration resulted in an increase in amortization expense of $1,009.
Research and Development Costs: Research and development costs are charged to expense as incurred.
Net Operating Loss Carryforwards:Carry-forwards: Utilization of the Company's net operating losses may be subject to an annual limitation due to the ownership change limitations provided byunder Section 382 of the the Internal Revenue Code of 1986 and similar state provisions. As a result, a portion of the Company's net operating loss carryforwardscarry-forwards may not be
available to offset future taxable income. The Company has provided a full valuation allowance for deferred tax assets at December 31, 20082011 of approximately $27$27.4 million based upon the Company's history of losses.
Segments: The Company reports its financial results in one segment.
Results of Operations – Years Ended December 31, 20082011 and December 31, 20072010
RevenuesRevenue
Total revenue forFor the year ended December 31, 20082011, total revenue was $1,546, an increase of $2,401 increased $256,$695, or 11%82%, compared to revenuestotal revenue of $2,145$851 in the prior year. ProductFor the year ended December 31, 2011, product revenue reflectswas $915, an increase of $492,$718, or 54%364%, in eSignature revenues and a decrease of $254, or 30%, in natural input revenues compared to $197 in the prior year. The increase in revenuesproduct revenue is primarily due to the relative size of orders between the comparable years offset by lower reported royalties from a major natural input/Jot customer. Maintenance revenue of $715new product offerings and an increased 2%, or $18,demand for electronic signature solutions. For the year ended December 31, 20082011, maintenance revenue was $631, a decrease of $23, or 4%, compared to $697maintenance revenue of $654 in the prior year period. The increase wasyear. This decrease is primarily due to new maintenance contracts associated with new product revenues and renewal of maintenance contracts from ongoing customers.
The September 2008 Forrester Research report “North American Insurance IT Spending in 2008,” indicates 49% of U.S. insurance companies surveyed indicated that increasing or expanding their online presence and eCommerce capabilities was a critical or high priority for them. Based upon our prior large scale deployments at AEGON/World Financial Group, AGLA, Prudential, State Farm, and two recent wins with Allstate and Travelers in the last half of 2008, together with pending orders from other insurance carriers, we believe CIC is emerging as the leading and preferred supplier of electronic signature solutions for property/casualty and life insurance applications.
In addition, we believe U.S. banks and lenders are challenged with the need to increase revenue while improving the effectiveness and efficiency of their processes in the face of increased regulatory and compliance demands exacerbated by the recent subprime debt and credit crisis. This crisis is driving increased regulatory controls and the need to administer the billions of bailout dollars to settle troubled mortgages and we believe this will accelerate the deployment of electronic signature technology based solutions to address those challenges. Furthermore, regional and mid-size banks, unencumbered by TARP related difficulties, appear to be pursuing automation more actively than in the past.
Despite an extremely difficult economic environment, revenue of $1.6 million for the last half of 2008 was up 33% over the last half of 2007, which the Company believes reflects the sustained level of sales related activity we are experiencing going into 2009. We are encouraged by the increasing awareness and understandingreflection of the benefits associated with our technology andCompany’s shift in focus from one-time, on-premise sales to a heightened sense by financial institutions that they need to automate to survive.
Currently, we are experiencing what the Company believes are normal delays in IT orders consistent with standard procedure as enterprises enter a new year and budget period. Although the Company sees no significant indications suggesting that the adverse market conditions impacting financial institutions have resulted in delays or cancellation of IT expenditures that would significantly impact expenditures involving CIC technology, there can be no assurance that this will not occur. recurring revenue model.
Cost of Sales
CostFor the year ended December 31, 2011, cost of sales was $663, a decrease of $216, or 25%, compared to cost of sales of $1,064 increased 102%, or $539, for the twelve months ended December 31, 2008, compared to $525$879 in the prior year. The increase isdecrease resulted primarily due tofrom a $381 reduction in capitalized software amortization offset by an increase of $394, or 338%, to $450 ofin direct engineering costs related to meeting customer specific requirements associated with integration of our standard products into customer systems, compared to $56 in the prior year. In addition amortization of new and previously capitalized software development costs associated with the Company’s product and maintenance revenues increased $169, or 50%, to $504 compared to $335 in the prior year. Cost of sales is expected to increase near term as the Company closes additional contracts and capitalized engineering software development costs for new products are completed and amortization begins.contract services revenue.
Operating Expenses
Research and Development Expenses
Research and development expenses decreased approximately 58%, or $278, to $198 forFor the year ended December 31, 20082011, research and development expenses were $1,498, an increase of $1,067, or 248%, compared to $476research and development expenses of $431 in the prior year. Research and development expenses consist primarily of salaries and related costs, outside engineering as required, maintenance items, and allocated facilitiesfacility expenses. The most significant factor contributing to the $278 decreaseincrease in these expenses was an increase in the transferamount of $454 in direct engineering expenses associated with the contract revenues to cost of sales. In addition salaries and related expenses increased 13%software development costs expensed compared to what would have been capitalized in the prior year due to the addition of one engineer. The stock based compensation expense increased 105%, or $19, foryear. For the year ended December 31, 2008. The increase was due to options issued in July of 20082011, total research and vesting in the current year period. Totaldevelopment expenses, before capitalization of software development costs and other allocations was $1,712 for the year ended December 31, 2008were $2,055, an increase of $659, or 47%, compared to $1,507 in the prior year. Research$1,396 of total research and development expenses before capitalization of software development costs as well as the amounts to be capitalized on future product development are expected to remain consistent with the 2008 amountand other allocations in the near term.prior year. The increase is due primarily to an increase in salaries and related expenses, including stock compensation expense and contracted engineering expense.
Sales and Marketing Expenses
SalesFor the year ended December 31, 2011, sales and marketing expenses increased 6%,were $1,500, a decrease of $31, or $77, to $1,353 for the twelve months ended December 31, 2008,2%, compared to $1,276sales and marketing expenses of $1,531 in the prior year. The increasedecrease was primarily attributable to an increasedecreases in attendance at health caresalaries and insurance industry summits,general overhead expenses caused by the reallocation of the sales engineering function to research and increaseddevelopment, offset by increases in commissions and allocated charges from engineering for sales support associated with increased proposal activities. Thesethe increases were off set by a decrease in salary and related expense, including stock based compensation, resulting from the reduction of the sales and marketing staff by two. The Company expects sales and marketing expenses to increase in the near term as sales related activities increase.sales.
General and Administrative Expenses
GeneralFor the year ended December 31, 2011, general and administrative expenses for the twelve months ended December 31, 2008 decreased 1%were $2,168, a decrease of $87, or 4%, or $31, to $2,030 from $2,061general and administrative expenses of $2,255 in the prior year. The decrease iswas primarily due to a reduction of $95decrease in the Company’s doubtful accountsinvestor relations expense compared to the prior year due to the collectionoffset by an increase in the current year of previously reserved accounts and the net effect of the following items. Salaries and related expense were consistent with the prior year. Stock based compensation, excluding director options, increased $62, or 476%, from $13 in the prior year to $76 due to options issued in July of 2008. Other general and administrative expenses have for the most part remained relatively consistent when compared to the prior year. The Company anticipates that this trend in general and administrative expense will remain consistent over the near term.professional service fees, including legal expenses.
Interest Income and Other Income (Expense), Net
Interest income and other income, (expense), net, increased $98 to incomewas $79, an increase of $72,$77, compared to an expense of $26$2 in the prior year. The increase is due to the increase in cash balances during most of the current year,interest and cash payments received for interest on aged accounts receivable. There was no disposal of fixed assets and inventory by the joint venture as had occurred in the prior year.
Interest Expense
Interest expense related party increased $108 to $243 for the year ended December 31, 2008, compared to $135 in the prior year. The increaseother income, net was due to the financingsettlement of a Section 16b related lawsuit filed on behalf of a stockholder in June of 2008. Interest expense-other for the year ended December 31, 2008 decreased 63%, or $94, to $45, compared to $149 in the prior year period. The decrease was primarily due to the June financings mentioned above. See Notes 3 and 4April 2011. (See Note 13 in the Consolidated Financial Statements of this report on Form 10-K.10-K).
Interest Expense
AmortizationFor the year ended December 31, 2011, related party interest expense was $21, a decrease of $234, or 92%, compared to related party interest expense of $255 in the prior year. The decrease was due to the restructuring of the Company’s debt in the August 5, 2010 Recapitalization through the issuance of Series B Preferred Stock in exchange for all outstanding secured indebtedness. For the year ended December 31, 2011, interest expense-other was $3, a decrease of $5, or 63%, compared to interest expense-other of $8 in the prior year. The decrease was primarily due to the factors discussed above. For the year ended December 31, 2011, amortization of related party loan discount related party,and deferred financing, which includes warrant and beneficial conversion feature costs associated with the Company’s debt and deferred financing costs associated with the notes and warrant purchase agreements dividendswas $3, a decrease of $1,716, or 99%, compared to amortization of related party loan discount and deferred financing of $1,719 in the prior year. The decrease was primarily due to the restructuring of the Company’s debt. (See Note 7 to the Consolidated Financial Statements of this report on the shares of Series A-1 Preferred and beneficial conversion feature increased 228%, orForm 10-K.)
$698, to $1,003 forFor the year ended December 31, 2008, compared to $305 in the prior year period. The increase was primarily due to the June 2008 financing.
Amortization2011, amortization of loandebt discount and deferred financing-other, which includes warrant beneficial conversion feature and deferred financing costs associated with the notes and warrant purchase agreements decreased 67%,$57, or $447, for the year ended December 31, 2008 compared to $664 in the prior year period. The decrease was due to the decrease in borrowings from other than related parties during the year ended December 31, 2008100%, compared to the prior year. SeeThe decrease was primarily due to the factors discussed in interest expense above. (See Note 3 and 4 in7 to the Consolidated Financial Statements of this report on Form 10-K.)
The Companychange in the fair value of the derivative liabilities resulted in a non-cash loss of $113, an increase of $3,249 compared to a gain of $3,136 in the prior year that resulted from the revaluation of the Company’s derivatives at December 31, 2010. The loss recorded at December 31, 2011, is the result of an increase in the price of the Company’s Common Stock at December 31, 2011, compared to December 31, 2010. The fair value of the Company’s derivative instruments is based on the fair value of our stock as such gain/loss is dependent upon our stock price and will amortize an additional $878 of warrant cost and $301 in deferred financing costs related to the note and warrant purchase agreements entered into June 2008 to interest expense through June 2010.fluctuate accordingly.
Liquidity and Capital Resources
Cash and cash equivalents totaled $307 at December 31, 2008 totaled $929,2011, compared to cash and cash equivalents of $1,144$1,879 at December 31, 2007. This2010. The decrease is primarily attributable to $1,774$3,255 of funds used inby operating activities and $840$96 of funds used in investing activities. These amountsuses of funds were offset by $2,398$1,779 of funds provided by financing activities.activities in the form of short-term notes and the sale of additional shares of Series C Preferred s Stock.
The cash used by operations was primarily attributable to athe net loss of $3,309. Other net$4,502, and changes in operating assets and liabilities accounted for uses of $425. The cash used in operations was$697. These amounts were offset by non-cash charges of depreciation and amortization of $951, amortization$838, loss on derivative liabilities of the loan discount, deferred financing and warrant costs of $848, and stock based113, stock-based employee compensation of $161.$807, restricted stock expense and stock issued for services of $195.
The cash used in investing activities of $840$96 was primarily due to the capitalized software development costs of $813$72 and the acquisition of office and computer equipment of $27.$24.
Proceeds from financing activities consisted primarily of $2,575$1,100 in net proceeds from the issuance of long-termshort-term debt, and $125$679 in proceeds from short term debt with an employee of the Company (see “Financing” below). Thenet proceeds from the issuance of short-term notes and long term debtSeries C Preferred Stock. These proceeds were offset by the payment of $302$121 related to the debt.Series C Preferred Stock issued in March 2011.
Accounts receivable increased 55%, or $248, to $700were $298 at December 31, 2008,2011, an increase of $195, or 189%, compared to $452accounts receivable of $103 at December 31, 2007.2010. Accounts receivable at December 31, 20082011 and 20072010, are net of $104$3 and $117,$9, respectively, in reservesallowances provided for potentially uncollectible accounts. Sales in the Company’s fourth quarter of 20082011 were 5%60% higher than 2007. The Company expects that there will be fluctuations in accounts receivable in the foreseeable future due to volumes and timing of revenues from quarter to quarter.
The deferred financing costs increased by $425 associated with the June 2008 financing. Deferred financing costs expensed amounted to $124 through December 31, 2008. The remaining $301 will be charged to operations through June 2010 (see “Financing” below).2010.
Prepaid expenses and other current assets decreased 40%, or $55, to $80were $29 at December 31, 20082011, a decrease of $15, or 34%, compared to $135prepaid expenses and other current assets of $44 at December 31, 2007.2010. The decrease is primarily due to the timing of the billings and payments of annual
maintenance and other prepaid contracts. Prepaid expenses generally fluctuate due to the timing of annual insurance premiums and maintenance and support fees, which are prepaid in December and June of each year.
Accounts payable decreased 32%were $261 at December 31, 2011, a decrease of $189, or 42%, or $43,from accounts payable of $450 at December 31, 2010. The decrease in accounts payable is primarily due to reductionsdecreases in liabilities associated with prepaid duesprofessional fees incurred in connection with the Recapitalization, Series B Financing, and fees for programs that occur inSeries C Financing during the first partsecond half of the year.2010.
Other current liabilities, which include accrued compensation of $221, were $464 at December 31, 2011, a decrease of $141, or 23%, compared to other current liabilities of $605 at December 31, 2010. The decrease is primarily due to the payment in 2011 of severance pay for three senior level executives that left the company in December 2010.
Deferred revenue was $914 at December 31, 2011, a decrease of $192, or 17%, compared to deferred revenue of $343 and notes of $60, becoming due in October, of 2009, were $1,100$1,106 at December 31, 2008, compared to $2,598 at December 31, 2007, a net increase of $1,498. Deferred revenue decreased $88, to $343, at December 31, 2008, compared to $431 at December 31, 2007.2010. The decrease in current liabilities is due to primarily to the refinancing oflong-term maintenance contracts that were renewed at a discount compared to the related party notes as part of the June 2008 financing (see Financing below).annual renewal amounts.
Financing Transactions
Note FinancingsIn March 2011, the Company sold 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $121 in expenses, of which $50 went to SG Phoenix, LLC in payment of an administrative fee and $71 in expenses to third parties in connection with the financing. In connection with the sale of the shares of Series C Preferred Stock, the Company issued warrants to purchase an aggregate of 35,556 shares of Common Stock with an exercise price of $0.0225 per share, which warrants are exercisable for a period of three years from the date of issuance. The Company recorded a beneficial conversion feature of $800 related to the intrinsic value of the conversion feature of the shares of Series C Preferred Stock. The Company issued 305 shares of Series C Preferred Stock in payment of dividends for the year ended December 31, 2011.
On June 5, 2008,In September 2011, the Company effected a financing transaction under which the Company raised capital through the issuanceborrowed an aggregate of new secured indebtedness$100 from Phoenix and equity, and restructured a portionan employee of the Company’s existing short-term debt (collectively, the “Financing Transaction”). Certain parties to the Financing Transactions (Phoenix Venture Fund LLC and Michael Engmann) had a pre-existing relationship with the Company and with respectissued unsecured demand notes to such parties,each. These notes are due on demand and bear interest at the Financing Transaction may be considered a related party transaction.
Under the Financing Transaction,rate of 10% per annum. In addition the Company entered into a Creditthe September 2011 Purchase Agreement (the “Credit Agreement”) and a Pledge and Security Agreement (the “Pledge Agreement”), each dated as of June 5, 2008, with Phoenix Venture Fund LLC (“Phoenix”), Michael Engmann and an unrelated creditor (collectively with Phoenix, the “Creditors,” and each individually a “Creditor”).September 2011 Investor. Under the terms of the CreditSeptember 2011 Purchase Agreement, the Company received an aggregate of $3,000 and refinanced $638 of existing indebtedness and accrued interest on that indebtedness (individually, a “Loan” and collectively,issued the “Loans”).September 2011 Note to the September 2011 Investor. The Loans, which are represented by secured promissory notes (each a “Note” and collectively, the “Notes”), bearSeptember 2011 Note bears interest at eight percent (8%)the rate of 10% per annum, which,and has a maturity date of September 20, 2012. The September 2011 Note is also convertible at the option of the Company, may be paidSeptember 2011 Investor into securities sold in cash or in kind and mature June 5, 2010. The Company used a portion of the proceeds from the Loans to pay the Company’s existing indebtedness and accrued interest on that indebtedness that was not exchanged for preferred stock as described below, and may usenext equity financing with gross proceeds to the remaining proceeds for working capital and general corporate purposes,Company in each case in the ordinary courseexcess of business; and to pay fees and expenses in$100. In connection with the Financing Transaction, which were approximately $475. Additionally, a portionissuance of the proceeds of the Loans were used to repay a short term loan from a Company employee in the amount of $125, plus accrued interest, that was made prior to and in anticipation of the closing of the Financing Transaction. Under the terms of the Pledge Agreement,September 2011 Note, the Company and its subsidiary, CIC Acquisition Corp., granted the Creditors a first priority security interest in and a lien upon all of the assets of the Company and CIC Acquisition Corp.
Under the terms of the Credit Agreement and in partial consideration for the Creditors’ respective Loans made pursuantalso issued to the terms of the Credit Agreement as described above, the Company issued to each CreditorSeptember 2011 Investor a warrant to purchase up to the number of5,556 shares of the Company’s Common Stock obtained by dividingat an exercise price of $0.0225 per share. The Company ascribed a value of $7 to the amountwarrants, which was recorded as a discount to short-term debt in the balance sheet.
In December 2011, the Company entered into a the December 2011 Purchase Agreement with the December 2011 Investors. Under the terms of such Creditor’s Loan by 0.14 (eachthe December 2011 Purchase Agreement, the Company issued the December 2011 Notes to the December 2011 Investors. The December 2011 Notes bear interest at the rate of 10% per annum, and have a “Warrant” and collectively,maturity date of December 20, 2012. The December 2011 Notes are also convertible at the ‘Warrants”). A totaloption of 25,982the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the December 2011 Note, the Company also issued to the December 2011 Investors warrants to purchase an aggregate of 5,556 shares of the Company’s Common Stock may be issued upon exercise of the Warrants. The Warrants are exercisable beginning June 30, 2008 until their expiration on June 30, 2011. The Warrants haveat an exercise price of fourteen cents ($0.14)$0.0225 per share. Additional Warrants may be issued if the Company exercises its option to make interest payments on the Loans in kind. The Company ascribed the relative faira value of $1,231$13 to the warrants, which iswas recorded as a discount to “Long-term debt”short-term debt in the balance sheet. The fair value of
During the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 2.73%; expected life of 3 years; expected volatility of 82.3%; and expected dividend yield of 0%.
In connection with the closing of the Financing Transaction,year ended December 31, 2011, the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008, (See Note 4 in Notesexercised its option related to the Consolidated Financial Statements).
The offerterms of its classes of preferred stock and salemade dividend payments in kind. For the year ended December 31, 2011, the Company issued an aggregate of the Warrants and67 shares of Series A-1 Preferred Shares as detailed above, including the Common Stock, issuable upon exercise or conversion thereof, was made in reliance upon exemptions from registration afforded by Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D, as promulgated by the Securities and Exchange Commission under the Securities Act and under exemptions from registration available under applicable state securities laws.
In 2006 and 2007, the Company entered into long-term financing agreements with Michael Engmann, a stockholder of the Company owning approximately 7% of the Company’s then outstanding870 shares of CommonSeries B Preferred Stock and with unrelated third parties. The cash received from the financing agreements aggregated $1,720. Each financing included a Note and Warrant Purchase Agreement and a Registration Rights Agreement. The notes bore interest at a
rate of 15% per annum, payable quarterly in cash. The proceeds from these financings were used for working capital purposes. As part of the 2006 and 2007 financings the Company issued 10,012 warrants, 3,168 warrants with an exercise price of $0.25, and 6,585 warrants with an exercise price of $0.51. The fair value ascribed to the warrants issued in connection with the financings created a debt discount that was amortized to interest expense over the life of the respective loans. All of the shares underlying the warrants discussed above were registered with the Company’s Form S-1/A, which was declared effective December 28, 2007. See Note 4 in Notes to the Consolidated Financial Statements.
A portion of the above referenced debt held by Michael Engmann, including accrued and unpaid interest through May 31, 2008, was exchanged for Series A-1 Preferred (See Note 3 in the Notes to Consolidated Financial Statements included with this report on Form 10-K ). The remainder of the debt held by Michael Engmann, and part of the debt held by certain third parties, including accrued and unpaid interest through May 31, 2008, was refinanced pursuant to the Credit Agreement (See Note 4 in the Notes to Consolidated Financial Statements included with this report on Form 10-K). The related Note and Warrant Purchase Agreements were terminated in connection with the June 2008 Financing Transactions. The warrants to acquire 10,012305 shares of the Company’s CommonSeries C Preferred Stock issued as partin payment of the above reference financings remain outstanding. These warrants are exercisable until June 30, 2010. The remaining $125 debt plus accrued but unpaid interest was paid on September 30, 2008.
The warrants to purchase 4,850 shares of the Company’s Common Stock issued under the 2004 Purchase Agreement expire on October 28, 2009. The Company may call the warrants if the Company’s Common Stock trades at $1.00 or above for 20 consecutive trading days after the date that is 20 days following the effectiveness of a registration statement providing for the resale of the shares issued upon exercise of the warrants. The placement agent in connection with this financing will be paid approximately $28 in the aggregate if all of the investor warrants are exercised. The Company will receive additional proceeds of approximately $1,845 if all of the investor warrants are exercised.dividends.
Interest expense associated with the Company’s short and long-term debtindebtedness for the yearyears ended December 31, 20082011 and 20072010, was $1,137$27 and $1,253,$2,039, respectively, of which $973$24 and $440$1,974, respectively, was related party expense. Amortization of debt discount and deferred financing costs included in interest expense for the year ended December 31, 20082011 and 20072010, was $849$3 and $969,$1,776, respectively, of which $730$3 and $305$1,719, respectively, was related party expense.
The Company accrued $47 in dividends related to the preferred shares issued as part of the June 2008 financing. At December 31, 2008 approximately $19 of the accrued dividends are payable.
August 2007 Private Placement
On August 24, 2007, the Company entered into a Securities Purchase and Registration Rights Agreement (the “August 2007 Purchase Agreement”) with Phoenix Venture Fund LLC (the “Purchaser”). On September 14, 2007, the transactions closed and the Company issued to the Purchaser 21,500 shares of the Company’s Common Stock (the “Shares”) at a price per share of approximately $0.14, for an aggregate purchase price of $3,000. An advisory fee of $250 was paid to the managing member of the Purchaser for services rendered in connection with the sale of the Shares and $61 to the Purchaser’s legal counsel for services associated with the financing transactions. In addition the Company paid $87 in professional fees associated with the sale of the shares. The Company used the proceeds of the sale of the Shares for payment of outstanding indebtedness and additional working capital. The Company was permitted under the terms of the Purchase Agreement to use up to $1,400 of the net proceeds to repay outstanding indebtedness. Under the August 2007 Purchase Agreement, so long as the Purchaser holds shares of Common Stock of the Company representing at least fifty-percent of the Shares purchased pursuant to the August 2007 Purchase Agreement and at least five-percent of the outstanding capital stock of the Company, the managing
member of the Purchaser is entitled to a right of first offer to exclusively provide debt or equity financing to the Company prior to the Company’s pursuing debt or equity financing from another party, subject to certain conditions and exclusions. Additionally, provided the Purchaser meets the foregoing ownership requirements, the managing member of the Purchaser is permitted to designate up to two non-voting observers to attend meetings of the Company’s board of directors and, for a period of twenty-four months following the date a registration statement pertaining to the Shares is first declared effective by the Securities and Exchange Commission (the “Commission”), the Company is prohibited from selling or otherwise disposing of material properties, assets or rights of the Company without the consent of the managing member of the Purchaser.
The Company was obligated under the Purchase Agreement to use its best efforts to prepare and file with the Commission a registration statement covering the resale of the securities sold pursuant to the Purchase Agreement. The registration statement provides for the offering to be made on a continuous basis pursuant to Rule 415 under the Securities Act. The Company filed the registration statement on November 15, 2007, and an amended registration statement on December 20, 2007. The revised registration statement was declared effective on December 28, 2007. The Company must also use its best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144(k). The Company was obligated to pay the costs and expenses of such registration, which were $147.
The August 2007 Purchase Agreement provides for certain registration rights whereby the Company could be required to make liquidated damages payments if a registration statement is not filed or declared effective by the SEC within a specified timeframe and if after being declared effect the registration statement is not kept effective. The Company filed the registration statement within the required timeframe and it is currently effective. Should the Company fail to keep the registration statement effective, it will upon that event and each thirty days thereafter until the registration statement is again effective, be subject to making payments to the Purchaser in an amount equal to one and a half percent (1.5%) of the greater of: (i) the weighted average market price of the Shares during such 30-day period, or (ii) the market price of the Shares five (5) days after the closing (the “Closing Market Price”), until the registration statement is again declared effective, or as to any Shares, until such Shares can be sold in a single transaction pursuant to SEC Rule144; provided, however, that the liquidated damages amount under this provision shall be paid in cash and the total amount of payments shall not exceed, when aggregated with all such payments, ten percent (10%) of the Closing Market Price. The Company has not recorded a liability in connection with the liquidated damages provisions of the August 2007 Purchase Agreement because it believes that it is not probable that an event will occur which will trigger a liquidated damages payment under the agreement.
Contractual Obligations
The Company had the following material commitments as of December 31, 2008:2011:
| | Payments due by period | |
Contractual obligations | | Total | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | Thereafter | |
Short-term debt related party (1) | | $ | 65 | | | $ | 65 | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | |
Long-term debt related party (2) | | | 3,638 | | | | – | | | | 3,638 | | | | – | | | | – | | | | – | | | | – | |
Operating lease commitments (3) | | | 792 | | | | 272 | | | | 280 | | | | 240 | | | | – | | | | – | | | | – | |
Total contractual cash obligations | | $ | 4,495 | | | $ | 337 | | | $ | 3,918 | | | $ | 240 | | | $ | – | | | $ | – | | | $ | – | |
| | Payments due by period | |
Contractual obligations | | Total | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | |
Short-term note payable (1) | | | 1,100 | | | | 1,100 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Operating lease commitments (2) | | | 1,366 | | | | 267 | | | | 275 | | | | 283 | | | | 292 | | | | 249 | | | | - | |
Total contractual cash obligations | | $ | 2,466 | | | $ | 1,367 | | | $ | 275 | | | $ | 283 | | | $ | 292 | | | $ | 249 | | | $ | - | |
1. | Short-term debt reportedThe Company extended the lease on the balance sheet is net of approximately $5its offices in discounts representing the fair value of warrants issued in connection with the Company’s debt financings. |
2. | Long-term debt related party reported on the balance sheet is net of approximately $873 in discounts representing the fair value of warrants issued to the debt holders. |
3. | The operating lease commenced on November 1, 2002. The lease was renegotiated in December 2005 and extended for an additional 60 months.April 2010. The base rent decreased by approximately 6% in November 2011 and will increase by approximately 3% per annum over the term of the new lease, which expires on October 31, 2011.2016. |
As of December 31, 2008,2011, the Company leased facilities in the United States and China totaling approximately 10,1009,600 square feet. The Company’s rental expense was $271 and $281 for the years ended December 31, 20082011 and 2007 was approximately $279, and $333,2010, , respectively. In December 2005 the Company extended its existing lease in Redwood Shores an additional 60 months. In addition to the base rent, in the United States, the Company pays a percentage of the increase, if any, in operating cost incurred by theits landlord in such year, over the operating expenses incurred by theits landlord in the base year. The Company believes the leased offices in the United States and China will be adequate for the Company’s needs over the term of the leases.
As of December 31, 2008,2011, the Company's principal source of liquidity was its cash and cash equivalents of $929. With$307. Revenues increased in 2011 compared to 2010. Delays in closing new sales at the exception of 2004, in each year since the Company’s inception the Company has incurred losses. Currently, the Company is experiencing what it believes are normal delays in IT orders consistent with standard procedure as enterprises enter a new year and budget period. Although the Company sees no significant indications suggesting that the adverse market conditions impacting our customer base of financial institutions have resulted in delays or cancellation of IT expenditures that would significantly impact planned automation programs involving our technology, the elevated review and prioritization purchase processes have delayed anticipated early 2009 deployments. In recognition that such delaysvolumes required could result in the short-term need for additional funds, prior to achievement of cash flow positive operations, the Company is investigating various alternative financing sources, including investments from selected strategic partners.
funds. However, there can be no assurance that additional funds will be available when needed or, if available, will be on favorable terms or in the amounts the Company may require. If adequate funds are not available when needed, the Company may be required to delay, scale back or eliminate some or all of its marketing and development efforts or other operations, which could have a material adverse effect on the Company's business, results of operations and prospects. In addition, as a result of the 2008 financing transaction, the holders of the Company’s debt that matures in 2011 hold a first position security interest in all of the assets. As a result of this uncertainty, our auditors have expressed substantial doubt abouton our ability to continue as a going concern.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. The Company has an investment portfolio ofAny investments in 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. The Company did not enter into any short-term security investments during the twelve months ended December 31, 2008.2011.
Foreign Currency Risk. The Company operates a joint venture in China and from time to time makestime-to-time could make certain capital equipment or other purchases denominated in foreign currencies. As a result, the Company's cash flows and earnings arecould be exposed to fluctuations in interest rates and foreign currency exchange rates. The Company attemptswould attempt to limit these exposuresany such exposure through operational strategies and generally has not hedged currency exposures.exposure.
Future Results and Stock Price Risk. 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 computer industry or the global
economy generally, or market volatility unrelated to the Company's business and operating results. The impact and severity of the above factors could be exacerbated by the Company’s small public float and a lack of market liquidity for its Common Stock.
Item 8. Consolidated Financial Statements and Supplementary Data
The Company's audited consolidated financial statements for the years ended December 31, 20082011 and 2007,2010, and for each of the years in the two-year period ended December 31, 20082011, begin on page F-1 of this Annual Report on Form 10-K, and are incorporated into this item by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
NoneNone.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
UnderThe Company carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of the Company’sour management, including the Company’sour Chief Executive Officer and our Chief Financial Officer, the Company has evaluatedof the effectiveness of the design and operation of itsour disclosure controls and procedures pursuant to applicable rulesparagraph (b) of Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, as of December 31, 2008.Act. Based on that evaluation,review, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded that theseour disclosure controls and procedures are effective.effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedures are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The Company considered these limitations during the development of its disclosure controls and procedures, and will continually reevaluate them to ensure they provide reasonable assurance that such controls and procedures are effective.
Internal Controls and ProceduresControl over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management including our CEOChief Executive Officer and our CFO,Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its internal controls and procedurescontrol over financial
reporting pursuant to applicable rules under the Securities Exchange Act of 1934, as amended. In making this assessment, the Company’s management used the criteria established in “Internal Control, Integrated Framework” issued by the Committee Sponsoring Organization of the Treadway Commission (COSO). AsBased on this evaluation, the Company’s management has concluded that, as of December 31, 2008, and based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the internal controls and procedures are effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding2010, our internal control over financial reporting. Management’s reportreporting was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
effective.There are inherent limitations to the effectiveness of any system of internal control over financial reporting. Accordingly, even an effective system of internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation and presentation in accordance with accounting principles generally accepted in the United States of America. Our internal controls over financial reporting are subject to
various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this reportquarter ended December 31, 2011 that haveour certifying officers concluded materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table sets forth certain information concerning the Directors:Company’s directors and executive officers:
Name | Age | Year First Elected or Appointed |
| | |
Guido D. DiGregorio (5) | 70 | 1997 |
Garry Meyer (5) | 59 | 2007 |
Louis P. Panetta (1), (2), (3), (4) (5) | 59 | 2000 |
Chien-Bor Sung (1), (2), (3), (4) | 84 | 1986 |
David E. Welch (1), (4), (3) | 62 | 2004 |
1.Member of the Audit Committee (Chairman David E. Welch)
2.Member of the Finance Committee (Chairman Chien-Bor. Sung)
3.Member of the Compensation Committee (Chairman Louis P. Panetta)
4.Member of the Nominating Committee (Chairman Chien-Bor Sung)
5.Member of the Best Practices Committee (Chair Garry Meyer)Name | Age | Positions with the Company |
Philip S. Sassower, Chairman | 72 | Chairman and Chief Executive Officer |
Andrea Goren | 44 | Director and Chief Financial Officer |
William Keiper | 61 | President and Chief Operating Officer |
Stanley Gilbert | 71 | Director |
Jeffrey Holtmeier | 54 | Director |
David E. Welch | 63 | Director |
The business experience of each of the directors and executive officers for at least the past five years includes the following:
Guido D. DiGregorioPhilip S. Sassower has served as the Company’s Chairman and Chief Executive Officer since August 2010. Mr. Sassower is a Managing Director of SG Phoenix LLC, a private equity firm, and has served in that capacity since May 2003. Mr. Sassower has also been Chief Executive Officer of Phoenix Enterprises LLC, a private equity firm, and has served in that capacity since 1996. In addition, Mr. Sassower has served as Chief Executive Officer of Xplore Technologies Corp. (OTCQB: XLRT) since February 2006 and has been a director of Xplore Technologies Corp. and served as Chairman of its board of directors since December 2004. On May 13, 2008, Mr. Sassower was electednamed Chairman of the Board of The Fairchild Corporation (NYSE: FA), a motorcycle accessories and aerospace parts and services company. On March 18, 2009, The Fairchild Corporation and 61 subsidiaries filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in Februarythe U.S. Bankruptcy Court, District of Delaware. On January 7, 2010, The Fairchild Corporation’s plan of liquidation was declared effective and the company’s board of directors was relieved of its duties. Mr. Sassower also served as Chairman of the Board of the Company from 1998 to 2002 Chiefand as Co-Chief Executive Officer of the Company from 1997 to 1998. Mr. Sassower is co-manager of the managing member of Phoenix
Venture Fund LLC. Mr. Sassower’s qualifications to serve on the Board of Directors include more than 40 years of business and investment experience. Mr. Sassower has developed extensive experience working with management teams and boards of directors, and in acquiring, investing in and building companies and implementing changes.
Andrea Goren has served as a director since August 2010. Mr. Goren was appointed the Company’s Chief Financial Officer in December 2010. Mr. Goren is a Managing Director of SG Phoenix LLC, a private equity firm, and has served in that capacity since May 2003 and has been associated with Phoenix Enterprises LLC since January 2003. Prior to that, Mr. Goren served as Vice President of Shamrock International, Ltd., a private equity firm, from June 1999 to December 2002. Mr. Goren has been a director of Xplore Technologies Corp. (OTCQB: XLRT) since December 2004 and of The Fairchild Corporation (NYSE: FA) from May 2008 to January 2010. On March 18, 2009, The Fairchild Corporation and 61 subsidiaries filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court, District of Delaware. Mr. Goren is co-manager of the managing member of Phoenix Venture Fund LLC. Mr. Goren’s qualifications to serve on the Board of Directors include his experience and knowledge acquired in approximately 12 years of private equity investing. Mr. Goren has played a significant role in SG Phoenix LLC’s private equity investments and has developed extensive experience working with management teams and boards of directors, including at numerous public companies affiliated with SG Phoenix LLC.
William Keiper was appointed the Company’s President &and Chief Operating Officer in NovemberDecember 2010. Mr. Keiper is Managing Partner of First Global Partners LLC where he specializes in working with investors and Boards of Directors in resolving issues related to business continuity, performance and sustainable value creation. Mr. Keiper has over 30 years of business experience, more than 18 of which have been in the management of software, technology and IT product distribution and services organizations. He was President and Chief Executive Officer of Hypercom Corporation (NYSE: HYC) from 2005 to 2007 and served as a member of its Board of Directors from 2000 to 2007. He was Chairman and Chief Executive Officer of Arrange Technology LLC, a software development services outsourcing company, from 2002 to 2005. From 1997 to 2002, he served as a principal in mergers and acquisitions firms serving middle market software and IT services companies. He was Chief Executive Officer of Artisoft, Inc., a public networking and communications software company, from 1993 to 1997, and its Chairman from 1995 to 1997. He held several executive positions, including President and Chief Operating Officer, of MicroAge, Inc., an indirect sales-based IT products distribution and services company, from 1986 to 1993, where he was a key executive in helping to profitably drive more than a billion dollar revenue increase over the course of his tenure with the company.
Stanley L. Gilbert has served as a director since October 2011. Mr. DiGregorio beganGilbert has more than 45 years experience as a lawyer with primary specialties in wills, trusts, estate planning and administration, as well as tax planning. Mr. Gilbert is Founder, and, has been President of Stanley L. Gilbert PC since 1982. Mr. Gilbert has also been a partner of a number of law firms, including Nager Korobow, Bell Kallnick Klee and Green, and Migdal Pollack Rosenkrantz and Sherman. Mr. Gilbert has served as a Director of Planned Giving at Columbia University Medical Center’s Nathaniel Wharton Fund, which supports a broad variety of projects in basic research, clinical care and teaching since 2001. Mr. Gilbert was elected by a majority of CIC’s Series C and Series B Preferred stockholders voting together as a separate class on an as converted to common stock basis, and serves on CIC’s audit and compensation committees. Mr. Gilbert’s qualifications to serve on the Board of Directors include his career with General Electric, from 1966 to 1986, where after successive promotions in product development, sales, strategic marketingsignificant tax and venture management assignments, he rose to the positionaccounting expertise acquired through his years of General Manager of an industrial automation business. Prior to joining CIC, Mr. DiGregorio was recruited as CEO of several companies to position those businesses for sustained sales and earnings growth. Those companies include Exide Electronics, Maxitron Corp., Proxim and Display Technologies Inc.practicing law.
Garry S. MeyerJeffrey Holtmeier was elected has served as a director in November 2007. Dr. Meyer since August 2011. Mr. Holtmeier has more than 25 years of experiencesuccessful entrepreneurship in the financial services industry,technology and is currentlycommunications fields. As CEO of GENext from 2001 to present, and through its subsidiary China US Business Development, LLC, Mr. Holtmeier has assisted many US companies in establishing relationships in China, where he also co-founded Koncept International, Inc., a Principal of GSMeyer & Associates LLC,Chinese-based VoIP and digital media technology company. Prior to his involvement in the Chinese market, Mr. Holtmeier founded, built over seventeen years and successfully sold InfiNET in 2001 to Teligent, a private equity and technology consulting firm. From 2006 to 2007, he was the Chief Information Officer of Agency and Personal Markets at Liberty Mutual Insurance. From 1998 to 2006, Dr. Meyer was Senior Vice President & Global IT Quality Leader for General Electric. At General Electric he developed and implemented a strategy of core technology platforms and methods to enable leverage in multiple businesses andNASDAQ listed company. Mr. Holtmeier was a key contributor to LEAN Six Sigma new product introductions and best practice processes. Previously, Dr. Meyer was Managing Director, Trusted Services at SafeNet, Vice President at Marsh & McLennan, Principal & CIO at Smart Card International, Inc., Director, Information Technology at Citicorp
POS Information Services, Inc., and Vice President, Management Information System at Standard & Poor’s. Dr. Meyer holds a M.S. in electrical engineering and computer science from the Massachusetts Institute of Technology (M.I.T.), a B.S. and Ph.D. from the State University of New York, and is certified in Six Sigma.
Louis P. Panetta was elected a directorrecipient of the Company in October 2000. Mr. Panetta is currently the principal of Louis Panetta Consulting, a management consulting firm, and also teaches at the school of business at California State University, Monterey Bay. He served as Vice President-Client Services for Valley Oak Systems from September 2003 to December 2003. From November 2001 to September 2003 Mr. Panetta was a memberprestigious Ernst & Young, NASDAQ/USA Today “Entrepreneur of the BoardYear” award in 1999, and has served on the boards of Directors of Active Link.numerous corporations and non-profit organizations. He was Vice President of Marketingwill serve on CIC’s audit and Investor Relations with Mobility Concepts, Inc. (a wireless Systems Integrator), a subsidiary of Active Link Communications from February 2001compensation committees. Mr. Holtmeier’s qualifications to April 2003. He was President and Chief Operating Officer of PortableLife.com (eCommerce products provider) from September 1999 to October 2000 and President and Chief Executive Officer of Fujitsu Personal Systems (a computer manufacturer) from December 1992 to September 1999. From 1995 to 1999, Mr. Panetta servedserve on the Board of Directors of Fujitsu Personal Systems. Mr. Panetta’s prior positions include Vice President-Sales for Novell, Inc. (the leading supplier of LAN network software)his experience as a successful entrepreneur and Director-Product Marketing for Grid Systems (a leading supplier of Laptop & Pen Based Computers).his experience in establishing business relationships in China.
C.B. Sung was elected a director of the Company in 1986. Mr. Sung has been the Chairman and Chief Executive Officer of Unison Group, Inc. (a multi-national corporation involved in manufacturing, computer systems, international investment and trade) since 1986 and Unison Pacific Corporation since 1979. Unison Group manages investment funds specializing in China-related businesses and is a pioneer in investing in China. Mr. Sung’s background includes over twenty years in various US high technology operating assignments during which time he rose to the position of Corporate Vice President-Engineering & Development for the Bendix Corporation. Mr. Sung was recently acknowledged and honored for his contributions by his native China (PRC) with a documentary produced by China’s National TV focusing on his life and career as an entrepreneurial scholar, successful US high technology executive and for his pioneering and continuing work in fostering capital investment and economic growth between the US and China.David E. Welch was electedhas served as a director insince March 2004 and serves as the financial expert on the Audit Committee.2004. From July 2002 to present Mr. Welch has been the principal of David E. Welch Consulting, a financial consulting firm,firm. Mr. Welch has also been Vice President and Chief Financial Officer of American Millennium Corporation, Inc., a provider of satellite based asset tracking and reporting equipment, from April 2004 to present. Mr. Welch was Vice President and Chief Financial Officer of Active Link Communications, a manufacturer of telecommunications equipment, from 1999 to 2002. Mr. Welch has held positions as Director of Management Information Systems and Chief Information Officer with Micromedex, Inc. and Language Management International from 1995 through 1998. Mr. Welch is a member of the Board of Directors ofother directorships have been with AspenBio Pharma, Inc., from 2004 to present, PepperBall Technologies, Inc. from January 2007 to January 2009 and AspenBio Pharma,Advanced Nutraceuticals, Inc., from 2003 to 2006. Mr. Welch is a Certified Public Accountant licensed in the state of Colorado.
Executive Officers
The following table sets forth the name and age of each executive officer of the Company, or named executive officers, and all positions and offices of the Company presently held by each of them.
| Name
| Age
| Positions Currently Held
| |
| | | | |
| Guido D. DiGregorio | 70 | Chairman of the Board,
Chief Executive Officer and President
| |
| Francis V. Dane | 57 | Chief Legal Officer,
Secretary and Chief Financial Officer
| |
| Russel L. Davis | 44 | Chief Technology Officer & Vice President, Product Development | |
The business experience of each of the executive officers for at least the past five years includes the following:
Guido D. DiGregorio – see above under the heading “Directors and Executive Officers of the Company – Directors.”
Francis V. Dane was appointed the Company's Secretary in February of 2002, its Chief Financial Officer in October 2001, and its Human Resources Executive in September 1998, and he assumed the position of Chief Legal Officer in December of 1997. From 1991 Mr. Welch’s qualifications to 1997 he served as a Vice President and Secretary of the Company, and from 1988 to 1992 as its Chief Financial Officer and Treasurer. Since July of 2000, Mr. Dane has also been the Secretary and Treasurer of Genyous Biomed International Inc. (including its predecessors and affiliates) a company in the biopharmaceutical field focusedserve on the developmentBoard of medical productsDirectors include his significant accounting and services for the prevention, detection and treatment of chronic illnesses such as cancer. From October 2000 to April 2004, Mr. Dane served as a director of Perceptronix Medical, Inc. and SpectraVu Medical Inc., two companies focused on developing improved methods for the early detection of cancer. From October 2000 to June 2003 Mr. Dane was a director of CPC Cancer Prevention Centers Inc., a company focused on developing a comprehensive cancer prevention program based upon the detection of early stage, non-invasive cancer. Prior to this Mr. Dane spent over a decade with PricewaterhouseCoopers, his last position was that of Senior Manager, Entrepreneurial Services Division. Mr. Dane is a member of the State Bar of California and has earned a CPA certificate from the states of Connecticut and California.
Russel L. Davis rejoined the Company as Chief Product Officer in August of 2005 and now serves as its Chief Technology Officer and Vice President of Product Development. He served as CTO of SiVault Systems, from November of 2004 to August of 2005. Mr. Davis originally joined CIC in May of 1997 and was appointed Vice President of Product Development & Support in October of 1998. Prior to this, Mr. Davis served in a number of technical management roles including; Director of Service for Everex Systems, Inc., a Silicon Valley based PC manufacturer and member of the Formosa Plastics Group, managing regional field engineering operations for Centel Information Systems, which was acquired by Sprint. He also served in the United States Navy supervising shipboard Electronic Warfare operations.financial expertise.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company's officers, directors and persons who own more than ten percent of a registered class of the Company's equity securities to file certain reports with the Securities and Exchange Commission (the "SEC") regarding ownership of, and transactions in, the Company's securities. These officers, directors and stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) reports that are filed with the SEC. Based solely on a review of copies of such forms received by the Company and written representations received by the Company from certain reporting persons, the Company believes thatThe following Section 16 filings were not timely filed for the year ended December 31, 2008 all Section 16(a) reports required to be filed by2011: the Company's executive officers, directorsForm 3 for MDNH Partners LP dated January 20, 2011, the three Form 4s for MDNH Partners LP dated January 20, 2011, the Form 4 for former director Francis Elenio dated February 4, 2011, the Form 4 for former director Kurt Amundson dated February 4, 2011, the Form 4 for Andrea Goren dated February 4, 2011, the Form 4 for Philip Sassower dated February 4, 2011, the Form 4 for David Welch dated February 4, 2011 the two Form 4s for William Keiper dated April 13, 2011, the Form 4 for Andrea Goren dated August 17, 2011, the Form 3 for Stan Gilbert dated November 3, 2011, the Form 3 for Jeffrey Holtmeier dated November 4, 2011, and 10% stockholders were filed on a timely basis.
the Form 4 for William Keiper dated November 4, 2011.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics, referred to as our Code of Business Conduct and Ethics, which applies to all of our directors, officers, and employees, including our principal executive officer, our principal financial and accounting officer, and our Chief productTechnology officer. A copy of the Code of Business Conduct and Ethics is posted on the Company’s web site, at www.cic.com.www.cic.com.
Audit Committee Financial Expert
Mr. Welch serves as the Audit Committee’s financial expert. Each member of the Audit Committee is independent as defined under the applicable rules and regulations of the SEC and the director independence standards of the NASDAQ Stock Market, (“NASDAQ”), as currently in effect.
Item 11. Executive Compensation
Summary Compensation Table (in dollars)
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) (3)(4) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value And Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) |
Guido DiGregorioPhilip S
President &Sassower
Chairman and CEO | 2008
2007
| 2011 2010 | 285,000(1)−(1)
200,000(1)−(1)
| − − | − − | −$27,315 − | − − | − − | 40,200
−
| −
−
| −
−
| 10,055
9,486
| 335,255
209,486
|
Frank Dane
CLO & CFO
| 2008
2007
| 160,000
160,000
| −
−
| −
−
| 20,100
1,875
| −
−
| −
−
| − − | $27,315 − |
William Keiper, President | 2011 2010 | −(2) −(2) | − − | − − | $74,148 − 180,100 | − − 161,875 | − − | − − | $74,148 − |
Russel Davis
CTOAndrea Goren, CFO
| 20082011
20072010
| -(3) -(3) | | | 165,000$59,615 165,000 | | | 25,000(2) −
| $59,615 − −
|
| 30,150
−
| −
−
| −
−
| −
−
| 220,150
165,000
| | | | |
1. | Mr. DiGregorio 2008 salary includes $85,000, paid in March 2008 that he voluntarily deferred from his 2007 salary. Mr. DiGregorio has deferred receiptSassower was appointed Chairman of his 2008 deferred salary, payable in March 2009, intending to receive such payment when the company achieves quarterly cash flow positive operations. In addition, $85,000 of his 2009 salary is being voluntary deferred to March of 2010.Board and Chief executive officer on August 5, 2010, and receives no compensation. |
2. | Bonus payment for leadingMr. Keiper was appointed President and Chief Operating Officer on December 7, 2010. Mr. Keiper receives no salary compensation from the design and development effort and delivery ahead of scheduled of the SignatureOne Ceremony Server product which was the basis for closing 2 orders with top-tier insurance companies which contributed over $1,000,000 to last half of 2008 revenue.Company. |
3. | On January 1, 2006,Mr. Goren was appointed Chief Financial Officer on December 7, 2010. Mr. Goren receives no compensation from the Company adopted SFAS No. 123(R), “Share-Based Payment” Share-based compensation expense is based onCompany. |
4. | The amounts provided in this column represent the estimatedaggregate grant date fair value of the portion of share-based paymentoption awards that are ultimately expectedgranted to vest during the period. The grant date fair value of stock-based awards toour officers, employees and directors isas calculated using the Black-Scholes option pricing model.in accordance with FASB ASC Topic 718, Stock Compensation. Mr. DiGregorioSassower has 2,181,818333,600 options that are vested and exercisable within sixty days of December 31, 2008.2011. Mr. DaneKeiper has 559,8521,999,996 options that are vested and exercisable within sixty days of December 31, 2008.2011. Mr. DavisGoren has 673,8631,168,600 options that are vested and exercisable within sixty days of December 31, 2007.2011. In accordance with applicable regulations, the value of such options does not reflect an estimate for features related to service-based vesting used by the Company for financial statement purposes. See footnote 610 in the Notes to Consolidated Financial Statements included with this report on Form 10-K. |
There are no employment agreementsMr. Keiper is retained by the Company through an Advisory Services Agreement (“Agreement”) with First Global Partners, LLC (“FGP’). Mr. Keiper is Managing Partner of FGP. The term of the agreement is two years unless terminated earlier and will automatically renew for additional one year periods upon the same terms and conditions unless either party notifies the other in writing of its intent to terminate at least 90 days prior to the then-current term. FGP receives a cash sum payment of $20,000 (“Cash Fee”) per month. In addition, FPG is eligible for, but not entitled to receive, an annual cash performance fee of up to thirty-five percent (35%) of the Cash Fee during a given year or prorated portion thereof. Such performance fee, if any, named executives, eitherwill be awarded based upon the sole discretion of the Company’s Board of Directors. No performance fee was paid to FGP in 2011. FGP shall furnish, at FGP's own expense, all materials and equipment necessary to carry out the terms of this Agreement. The Company agrees to pay FGP for reasonable and documented out of pocket expenses incurred for Services rendered by FGP during the term of the Agreement. FGP shall obtain written or oral. All employment is at will.approval of the Company prior to incurring any significant expense.
Mr. Goren is retained by the Company through an Advisory Services Agreement (“Agreement”) with SG Phoenix, LLC (“SGP”). Mr. Goren and Mr. Sassower are managing members of SGP. The term of the agreement is two years unless terminated earlier and will automatically renew for additional one year periods upon the same terms and conditions unless either party notifies the other in writing of its intent to terminate at least 90 days prior to the then-current term. SGP receives a cash sum payment of $15,000 (“Cash Fee”) per month. In addition, SGP is eligible for, but not entitled to receive, an annual cash performance fee of up to thirty-five percent (35%) of the Cash Fee during a given year or prorated portion thereof. Such performance fee, if any, will be awarded based upon the sole discretion of the Company’s Board of Directors. No performance fee was paid to SGP in 2011. SGP shall furnish, at SGP's own expense, all materials and equipment necessary to carry out the terms of this Agreement. The Company agrees to pay SGP for reasonable and documented out of pocket expenses incurred for Services rendered by SGP during the term of the Agreement. SGP shall obtain written approval of the Company prior to incurring any significant expense.
Outstanding Equity Awards at Fiscal 20082011 Year End
The following table summarizes the outstanding equity award holdings held by our named executive officers. The amounts are not stated in thousands.
| Name and Principal Position | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date |
| Philip S. Sassower, Chairman and CEO | 250,300(1) | 749,700(1) | $0.0649 | 01/28/2018 |
| William Keiper, President | 1,333,330(2) | 6,666,670(2) | $0.0250 | 08/11/2018 |
| Andrea Goren, Chief Financial Officer | 250,300(3) 418,500(4) | 749,700(3) 4,581,500(4) | $0.0649 $0.0250 | 01/28/2018 08/11/2018 |
| Name(1)Mr. Sassower’s 1,000,000 options were granted on January 28, 2011, vest pro rata quarterly over three years, and
Principal
Position
| Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
| Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
| Option
Exercise
Price ($) (4)
| Option
Expiration
Date (5)
|
| ��
Guido DiGregorio, President & CEO (1)
| 190,909
250,000
425,000
1,275,000
| 409,091
−
−
−
| $0.15
$0.79
$0.39
$0.75
| 2015
2009
2012
2012
|
| Frank Dane, CLO & CFO (2)
| 95,454
100,000
100,000
100,000
35,985
107,958
| 204,546
−
−
−
−
−
| $0.15
$0.79
$0.33
$0.55
$0.39
$0.75
| 2015
2009
2010
2011
2012
2012
|
| Russel Davis, CTO (3)
| 143,181
125,000
375,000
| 306,819
−
−
| $0.15
$0.57
$0.75
| 2015
2012
2012 expire on January 28, 2018. |
(1) Mr. DiGregorio’s options vest as follows: 600,000 options will vest pro rata quarterly over three years, 250,000 options vested pro rata quarterly over three years; 425,000 options vested on the date of grant; and 1,275,000 options vested on the date of grant. | (2)Mr. Keiper's 8,000,000 options were granted on August 11, 2011, vest pro rata quarterly over three years, and expire on August 11, 2018. |
(2) Mr. Dane’s options vest as follows: 300,000 options will vest pro rata quarterly over three years, 100,000 options vested pro rata quarterly over three years; 100,000 options vested pro rata quarterly over three years; 100,000 options vested pro rata quarterly over three years; 35,985 options vested on the date of grant; and 107,958 options vested on the date of grant. | (3)Mr. Goren's 1,000,000 options were granted on January 28, 2011, vest pro rata quarterly over three years, and expire on January 28, 2018. |
(3) Mr. Davis’s options vest as follows: 112,500 options vested on the date of grant and 337,500 options will vest pro rata quarterly over three years, 125,000 options vested on the date of grant; and 375,000 options vested on the date of grant.
(4) Mr. DiGregorio holds options to acquire 250,000 shares granted under the 1999 Option Plan and options to acquire 1,700,000 shares under Individual Plans. Mr. Dane holds 300,000 options to acquire shares granted under the 1999 Option Plan and options to acquire 143,943 shares granted under Individual Plans. Mr. Davis holds options to acquire 500,000 shares granted under the 1999 Option Plan.
(5) All options granted will expire seven years from the date of grant, subject to continuous employment with the Company. | (4) Mr. Goren's 5,000,000 options were granted on August 11, 2011, vest pro rata quarterly over three years, and expire on August 11, 2018. |
Option Exercises and Stock Vested
In 2008,There were no stock options were exercised and 95,454 and 143,181 and 190,909 options to purchase stock granted to Mr. Dane, Mr. Davis and Mr. DiGregorio, respectively, vested during the period. The Company does not grant or issue restricted stock or other equity-based incentives.in 2011.
Director Compensation
For their services as directors of the Company, all non-employee directors receive a fee of $1,000 for each board of directors meeting attended and all directors are reimbursed for all reasonable out-of-pocket expenses incurred in connection with attending such meetings. First time directors receive options to acquire 50,000 shares of the Company’s Common Stock upon joining the board and options to acquire 25,000 shares each time they are elected to the board thereafter. The exercise prices of all options granted to directors are equal to the market closing price on the date of grant, vest immediately and have a seven year life.
In June 2008, Garry Meyer, Louis Panetta, C. B. Sung and David Welch were each granted immediately exercisable non-qualified options to purchase 25,000 shares of Common Stock at an exercise price of $0.20 per share (the then current market price of the Company’s stock), which options expire on June 30, 2015.
The following table sets forth a summaryprovides information regarding the compensation of the compensation paid to ourCompany’s non-employee directors during 2008.for the year ended December 31, 2011:
Name | Fees Earned Or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) |
Garry Meyer (1) | $ 2,000 | $ − | $ 3,995 | $ − | $ − | $ − | $5,995 |
Louis P. Panetta (2) | $ 2,000 | $ − | $ 3,995 | $ − | $ − | $ − | $5,995 |
C. B. Sung (3) | $ 2,000 | $ − | $ 3,995 | $ − | $ − | $ − | $5,995 |
David E. Welch (4) | $ 2,000 | $ − | $ 3,995 | $ − | $ − | $ − | $5,995 |
Name | Fees Earned or Paid in Cash | Stock Awards | Option Awards (1) | Non-Equity Incentive Plan Compensation | Non-qualified Deferred Compensation Earnings | All Other Compensation | Total |
Current Directors | | | | | | | |
Stanley Gilbert (2) | $ 1,000 | $ ─ | $ 17,900 | $ ─ | $ ─ | $ ─ | $ 18,900 |
Jeffrey Holtmeier(3) | $ 1,000 | $ ─ | $ 19,900 | $ ─ | $ ─ | $ ─ | $ 20,900 |
David Welch (4) | $ 1,000 | $ ─ | $ 50,500 | $ ─ | $ ─ | $ ─ | $ 51,500 |
| | | | | | | |
Former Directors | | | | | | | |
Kurt Amundson (5) | $ ─ | $ ─ | $ 50,500 | $ ─ | $ ─ | $ ─ | $ 50,500 |
Francis Elenio (6) | $ ─ | $ ─ | $ 50,500 | $ ─ | $ ─ | $ ─ | $ 50,500 |
(1) | 1. The amounts provided in this column represent the aggregate grant date fair value of option awards granted to the Companies’ directors in the fiscal year ended December 31, 2011 as calculated in accordance with FASB ASC Topic 718, Stock Compensation. The aggregate number of option awards outstanding for each director as of December 31, 2011 is as follows: |
(2) | Mr. Meyer holds optionsGilbert received a stock option grant on November 7, 2011, to acquire 75,000purchase 1,000,000 shares of stockthe Company’s Common Stock at December 31, 2008, allan exercise price of which were vested.$0.023 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant. |
(3) | 2. Mr. Panetta holds options Holtmeier received a stock option grant on August 11, 2011,to acquire 225,000purchase 1,000,000 shares of stockthe Company’s Common Stock at December 31, 2008, allan exercise price of which were vested.$0.025 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant. |
(4) | 3. Mr. Sung holds optionsWelch received a stock option grant on January 28, 2011 to acquire 210,000purchase 1,000,000 shares of stockthe Company’s Common Stock at December 31, 2008, allan exercise price of which were vested.$0.06 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant. |
(5) | 4. Mr. Welch holds optionsAmundson received a stock option grant on January 28, 2011 to acquire 175,000purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $0.06 per share. Mr. Amundson resigned from the Board on July 10, 2011. |
(6) | Mr. Elenio received a stock option grant on January 28, 2011 to purchase 1,000,000 shares of the Company’s Common Stock at December 31, 2008, allan exercise price of which were vested.$0.06 per share. Mr. Elenio resigned from the Board on October 19, 2011. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of March 15, 2012, with respect to the beneficial ownership of (i) any person known to be the beneficial owner of more than 5% of any class of voting securities of the Company, (ii) each director and director nominee of the Company, (iii) each of the current executive officers of the Company named in the Summary Compensation Table under the heading "Executive Compensation" and (iv) all directors and executive officers of the Company as a group. Except as indicated in the footnotes to this table (i) each person has sole voting and investment power with respect to all shares attributable to such person and (ii) each person’s address is c/o Communication Intelligence Corporation, 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065-1413. The amounts are not stated in thousands.
| Common Stock | | Series A-1 Preferred Stock | | Series B Preferred Stock | | Series C Preferred Stock |
Name of Beneficial Owner | Number of Shares (1) | Percent Of Class (1) | | Number of Shares (2) | Percent Of Class (2) | | Number of Shares (3) | Percent Of Class (3) | | Number of Shares (4) | Percent Of Class (4) |
Andrea Goren (5) | 341,687,228 | 66.7% | | − | − | | 5,430,521 | 59.6% | | 1,651,610 | 43.2% |
Philip S. Sassower (6) | 340,204,822 | 66.9% | | − | − | | 5,407,422 | 59.4% | | 1,640,237 | 42.8% |
Stanley Gilbert (7) | 39,130,028 | 15.0% | | − | − | | 115,494 | 1.3% | | 328,488 | 8.6% |
Jeffrey Holtmeier (8) | 1,250,300 | * | | − | − | | − | − | | − | − |
David E. Welch (9) | 591,900 | * | | − | − | | − | − | | − | − |
| | | | | | | |
| | Common Stock |
| Name of Beneficial Owner | Number of Shares** | Percent of Class** |
| Guido DiGregorio (1) | 2,325,718 | 1.78% |
| C. B. Sung (2) | 1,844,420 | 1.41% |
| Louis P. Panetta (3) | 225,000 | * |
| David E. Welch, (4) | 175,000 | * |
| Garry Meyer (5) | 75,000 | * |
| Francis V. Dane (6) | 560,064 | * |
| Russel L. Davis (7) | 673,863 | * |
| All directors and executive officers as a group (6 persons) | 5,879,065 | 4.50% |
| 5% Shareholders | | |
| Phoenix Venture Fund LLC (8) | 41,714,286 | 31.96% |
| Michael W. Engmann (9) | 14,611,241 | 11.19% |
| | | | | | | |
| Common Stock | | Series A-1 Preferred Stock | | Series B Preferred Stock | | Series C Preferred Stock |
Name of Beneficial Owner | Number of Shares (1) | Percent Of Class (1) | | Number of Shares (2) | Percent Of Class (2) | | Number of Shares (3) | Percent Of Class (3) | | Number of Shares (4) | Percent Of Class (4) |
William Keiper (10) | 20,870,128 | 8.4% | | | − | | − | − | | 207,078 | 5.8% |
| | | | | | | | | | | |
All directors and executive officers as a group (6 persons) (11) | 406,002,039 | 71.7% | | − | − | | 5,546,015 | 60.0% | | 2,187,176 | 57.2% |
| | | | | | | | | | | |
5% Shareholders | | | | | | | | | | | |
Phoenix Venture Fund LLC (12) | 337,731,632 | 66.5% | | − | − | | 5,407,422 | 59.4% | | 1,640,237 | 42.9% |
Michael W. Engmann (13) | 61,034,902 | 22.0% | | 523,987 | 59.5% | | 1,502,612 | 16.5% | | 220,764 | 6.2% |
___________
* Less than 1%.
** Shares of Common Stock beneficially owned and the respective percentages of beneficial ownership of Common Stock assumes the exercise or conversion of all options, warrants and other securities convertible into Common Stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of the date hereof.1. | Shares of Common Stock beneficially owned and the respective percentages of beneficial ownership of Common Stock assumes the exercise or conversion of all options, warrants and other securities convertible into Common Stock, including shares of Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of March 20, 2012. Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days, or securities convertible into Common Stock within 60 days are deemed outstanding and held by the holder of such shares of Common Stock, options, warrants, or other convertible securities for computing the percentage of outstanding Common Stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding Common Stock beneficially owned by any other person. The percentage of beneficial ownership of Common Stock beneficially owned is based on 130,516,981 shares of Common Stock outstanding as of March 6, 2009.
(1) | Represents (a) 143,900 shares held by Mr. DiGregorio and (b) 2,181,818 shares issuable upon the exercise of stock options and warrants exercisable within 60 days hereof.of March 20, 2012, or securities convertible into Common Stock within 60 days of March 20, 2012 are deemed outstanding and held by the holder of such shares of Common Stock, options, warrants, or other convertible securities, including shares of Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, for purposes of computing the percentage of outstanding Common Stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding Common Stock beneficially owned by any other person. The percentage of beneficial ownership of Common Stock beneficially owned is based on 228,974,338 shares of Common Stock, 880,352 shares of Series A-1 Preferred Stock, 9,110,618 shares of Series B Preferred Stock and 3,824,788 shares of Series C Preferred Stock outstanding as of March 15, 2012. The shares of Common Stock beneficially owned and the respective percentages of beneficial ownership of Common Stock stated in these columns assume conversion of shares of Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. |
(2)2. | IncludesEach outstanding share of Series A-1 Preferred Stock is presently convertible into 7.1429 shares of Common Stock. The shares of Series A-1 Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series A-1 Preferred Stock stated in these columns reflect ownership of shares of Series A-1 Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series A-1 Preferred Stock at this ratio. The percentage of beneficial ownership of Series A-1 Preferred Stock beneficially owned is based on 880,353 shares of Series A-1 Preferred Stock outstanding as of March 20, 2012. |
3. | Each outstanding share of Series B Preferred Stock is presently convertible into 23.0947 shares of Common Stock. The shares of Series B Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series B Preferred Stock stated in these columns reflect ownership of shares of Series B Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock at this ratio. The percentage of beneficial ownership of Series B Preferred Stock beneficially owned is based on 9,110,618 shares of Series B Preferred Stock outstanding as of March 20, 2012. |
4. | Each outstanding share of Series C Preferred Stock is presently convertible into 44.444 shares of Common Stock. The shares of Series C Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series C Preferred Stock stated in these columns reflect ownership of shares of Series C Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series C Preferred Stock at this ratio. The percentage of beneficial ownership of Series C Preferred Stock beneficially owned is based on 3,824,789 shares of Series C Preferred Stock outstanding as of March 20, 2012. |
5. | Represents (a) 1,631,05119,000 shares of Common Stock held by Mr. Goren (b) 1,668,400 shares issuable to Mr. Goren upon the Sung Family Trust,exercise of which Mr. Sung is a trustee, (b) 3,369options exercisable within 60 days here of, (c) 533,464 shares of Common Stock issuable upon the conversion of 23,099 shares of Series B Preferred Stock held by Andax LLC (d) 544,533 share of Common Stock issuable upon the Sung-Kwok Foundation,conversion of which Mr. Sung is the Chairman, and (c) 210,00012,252 shares of Series C Preferred Stock held by Andax LLC, (e) 1,189,464 shares of Common Stock issuable upon the exercise of stockwarrants held by Andax LLC and (f) includes Company securities beneficially owned by Phoenix. Please see footnote 12 below for information concerning Phoenix’s beneficial ownership. Mr. Goren is managing member Andax LLC and disclaims beneficial ownership of the shares except to the extent of his pecuniary interest therein. Along with Mr. Sassower, Mr. Goren is the co-manager of SG Phoenix Ventures LLC, which has the power to vote and dispose of the shares held by Phoenix and, accordingly, Mr. Goren may be deemed to be the beneficial owner of the shares owned by Phoenix. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix, except to the extent of their respective pecuniary interests therein. Mr. Goren’s address is 110 East 59th Street, Suite 1901, New York, NY 10022. |
6. | Represents (a) 2,055,556 shares of Common Stock held by Mr. Sassower (b) 416,900 shares issuable to Mr. Sassower upon the exercise of options exercisable within 60 days hereof.here of, and (c) includes shares of Common Stock Company securities beneficially owned by Phoenix. Please see footnote 12 below for information concerning shares of Common Stock beneficially owned by Phoenix’s beneficial ownership. Along with Mr. SungGoren, Mr. Sassower is the co-manager of SG Phoenix Ventures LLC, which has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, accordingly, Mr. Sassower may be deemed to beneficially ownbe the beneficial owner of the shares heldowned by Phoenix. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the Sung Family Trust andshares owned by Phoenix, except to the Sung-Kwok Foundation.extent of their respective pecuniary interests therein. In addition to the shares beneficially owned by Phoenix, Mr. Sassower owns 2,055,556 shares of Common Stock. Mr. Sassower’s address is 110 East 59th Street, Suite 1901, New York, NY 10022. |
(3)7. | Represents 225,000(a) 3,734,749 shares of Common Stock held by Mr. Gilbert, (b) 28,485 shares of Common Stock held by Stanley Gilbert P.C., (c) 1,783,035 shares of Common Stock held by Galaxy LLC, (d) 2,147,117 shares of Common Stock held by Mrs. Stanley Gilbert, (e) 14,002,877 shares of Common Stock issuable upon the exercise of warrants held by Mr. Gilbert, (f) 167,000 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereof held by Mr. Gilbert, (g) 2,667,298 shares of Common Stock issuable upon the conversion of 115,494 shares of Series B Preferred Stock held by Mr. Gilbert, and (h) 14,599,467 shares of Common Stock issuable upon the exercise of 328,488 shares of Series C Preferred Stock held by Mr. Gilbert. As manager of Galaxy LLC, Mr. Gilbert has the power to vote and dispose of the shares of Common Stock held by Galaxy LLC, and, accordingly, Mr. Gilbert may be deemed to be the beneficial owner of the shares owned by Galaxy LLC. |
8. | Represents (a) 250,300 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereof and (b) 1,000,000 shares of Common Stock issuable upon the exercise of warrants exercisable within 60 days hereof beneficially owned by China U.S. Business Development, LLC (“CUBD”). As manager of CUBD, Mr. Holtmeier has the power to vote and dispose of the shares of Common Stock held by CUBD and, accordingly, Mr. Holtmeier may be deemed to be the beneficial owner of the shares owned by CUBD. |
9. | Represents 591,900 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereof. |
(4)10. | Represents 175,000(a) 2,999,994 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days hereof. |
(5) | Represents 75,000hereof (b) 9,203,467 shares issuable upon the conversion of 207,078 shares of Series C Preferred Stock, and (b) an aggregate of 8,666,667 shares of Common Stock issuable upon exercise of stock optionswarrants exercisable within 60 days hereof. |
(6) | Represents (a) 212 shares heldhereof beneficially owned by FirstGlobal Partners LLC (“FirstGlobal”). As manager of FirstGlobal, Mr. Dane and (b) 559,852 shares issuable upon the exercise of stock options exercisable within 60 days hereof. |
(7) | Represents 673,863 shares issuable upon the exercise of stock options within 60 days hereof. |
(8) | Represents (a) 21,500,000 shares held by SG Phoenix Ventures LLC and (b) 20,214,286 shares issuable upon the exercise of warrants. SG Phoenix Ventures LLC is the Managing Member of Phoenix Venture Fund LLC (the “Phoenix Fund”), withKeiper has the power to vote and dispose of the shares of Common Stock held by FirstGlobal and, accordingly, Mr. Keiper may be deemed to be the beneficial owner of the shares owned by FirstGlobal. |
11. | Includes shares of Common Stock beneficially owned by Phoenix. Please see footnote 12 below for information concerning shares of Common Stock beneficially owned by Phoenix. Mr. Sassower and Mr. Goren are the co-managers of SG Phoenix Fund.Ventures LLC, which has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, accordingly, Mr. Sassower and Mr. Goren may be deemed to be the beneficial owner of the shares owned by Phoenix. SG Phoenix Ventures LLC, Mr. Sassower and Mr. Goren each disclaim beneficial ownership of the shares owned by Phoenix, except to the extent of their respective pecuniary interests therein. The amount stated above includes 2,085,300 shares issuable upon the exercise of options within 60 days of March 15, 2011. |
12. | Represents (a) 58,576,054 shares of Common Stock, (b) 81,374,096 shares of Common Stock issuable upon the conversion of warrants (c) 124,882,789 share of Common Stock issuable upon the conversion of 5,407,422 shares of Series B Preferred stock and (d) 72,898,693 shares of Common Stock issuable upon the conversion of 1,640,237 shares of Series C Preferred Stock. See the following table for more detail. |
| Common Shares | Warrants | Series B Preferred Stock As If Converted to Common Stock | Series C Preferred Stock As If Converted to Common Stock | Series B Preferred Stock | Series C Preferred Stock | Phoenix Venture Fund LLC | 55,783,562 | 63,548,571 | 124,882,789 | 71,222,977 | 5,407,422 | 1,602,533 | SG Phoenix Ventures LLC | 2,792,492 | 10,714,414 | | | | | Phoenix Enterprises Family Fund LLC | | 1,555,556 | | 1,675,717 | | 37,704 | Phoenix Banner Holdings LLC | | 5,555,555 | | | | | | 58,576,054 | 81,374,096 | 124,882,789 | 72,898,694 | 5,407,422 | 1,640,237 |
SG Phoenix Ventures LLC is the Managing Member of Phoenix, with the power to vote and dispose of the shares of Common Stock held by Phoenix. Accordingly, SG Phoenix Ventures LLC may be deemed to be the beneficial owner of such shares. Andrea Goren is the co-manager of SG Phoenix Ventures LLC, has the shared power to vote and dispose of the shares of Common Stock held by the Phoenix Fund and, as such, may be deemed to be the beneficial owner of the common shares owned by the Phoenix Fund. Philip Sassower is the co-manager of SG Phoenix Ventures |
LLC, has the shared power to vote and dispose of the shares of Common Stock held by the Phoenix Fund and, as such, may be deemed to be the beneficial owner of the common shares owned by Phoenix and by SG Phoenix LLC, of which he is a member. Philip Sassower is the co-manager of SG Phoenix Fund.Ventures LLC, has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, as such, may be deemed to be the beneficial owner of the common shares owned by Phoenix and by SG Phoenix LLC, of which he is a member. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix, and Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by SG Phoenix Fund,LLC, except to the extent of their respective pecuniary interests therein. The address of such stockholderthese stockholders is 110 East 59th Street, Suite 1901, New York, NY 10022.
(9)13. | Represents (a) 10,575,527 warrants12,778,049 shares of Common Stock beneficially owned by Mr. Engmann, of which 1,187,9624,041,140 are held by MDNH Partners, L.P. and 1,659,2001,243,564 are held by KENDU Partners Company, (b) 3,742,764 shares of which Mr. Engmann is a partner and (b) 4,750,000 sharesCommon Stock issuable upon the conversion of shares of Series A-1 Preferred Stock beneficially owned by Mr. Engmann, of which 1,138,393621,350 are issuable to MDNH Partners, L.P. and 2,248,5713,083,743 are issuable to KENDU Partners Company, (c) 34,702,356 shares of Common Stock issuable upon the conversion of shares of Series B Preferred Stock beneficially owned by Mr. Engmann, of which Mr. Engmann is a partner. Mr. Engmann was issued warrants8,126,582 are issuable to purchase 2,333,250 shares of the Company’s Common Stock at $0.51 per share, warrants to purchase 1,979,936 shares of the Company’s Common Stock at $0.25 per share and warrants to purchase 3,415,179 shares of the Company’s Common Stock at $0.14 per share. MDNH Partners, L.P. was issued warrants to purchase 1,659,200 shares of the Company’s Common Stock at $0.51 per share, and MDNH Partners, L.P. was issued warrants to purchase 1,187,962 shares of the Company’s Common Stock at $0.25 per share. Such warrants were issued in connection with notes issued in 2006 and 2007. In addition, Mr. Engmann, MDNH Partners, L.P. and 2,916,697 are issuable to KENDU Partners Company converted a portionCompany; and (d) 9,811,733 shares of outstanding indebtedness and interest accrued thereon intoCommon Stock issuable upon the conversion of shares of Series A-1C Preferred in connection with the Company’s June 2008 financing transaction. Each share of Series A-1 Preferred heldStock beneficially owned by Mr. Engmann, of which 4905867 are issuable to MDNH Partners, L.P. and KENDU Partners Company is presently convertible into 7.1429 shares of Common Stock. Mr. Engmann has 65,250 shares of Series A-1 Preferred that can be converted into 466,071 shares of Common Stock. MDNH Partners, L.P. refinanced their existing debt and unpaid interest into 159,375 shares of Series A-1 Preferred that are convertible into 1,138,393 common shares at $0.14 per share. KENDU Partners, Company refinanced their existing debt and unpaid interest into 340,000 shares of Series A-1 Preferred that are convertible into 2,428,571 common shares at $0.14 per share Mr. Engmann’s address is 220 Bush Street, No. 660, San Francisco, CA 94104. (See note 5 to the Consolidated Financial Statements). |
Equity Compensation Plan Information
The following table provides information as of December 31, 2008,2011, regarding our compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance:
| Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price Of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans | Number of Securities To Be Issued Upon Exercise of Outstanding Options and Rights | Weighted-Average Exercise Price Of Outstanding Options and Rights | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans |
Equity Compensation Plans Approved by Security Holders | | |
1999 Stock Option Plan | 3,543 | $ 0.54 | 72 | 924 | $ 0.56 | − |
Equity Compensation Plans Not Approved by Security Holders | 4,065 | $ 0.42 | − | |
| | |
2009 Stock Compensation Plan | | 2,379 | 0.10 | 4,548 |
Non Plan Stock Options | | 3,479 | 0.50 | − |
2011 Stock Compensation Plan | | 44,571 | $ 0.05 | 5,429 |
Total: | 7,608 | $ 0.48 | 72 | 51,353 | $ 0.09 | 9,977 |
| | |
The Board of Directors has determined that Messrs. Panetta, Sung,Gilbert, Holtmeier, and Welch and Meyer are “independent,” as defined under and required by the federal securities laws and the rules of the NasdaqNASDAQ Stock Market.Market relating to director independence, and that Messrs. Sassower and Goren are not independent under such rules. Messrs. Welch, Gilbert, and Holtmeier serve on the Compensation Committee of the Board of Directors. Each of the members of the Compensation Committee are independent under the rules of the NASDAQ Stock Market relating to director independence. Messrs. Welch, Gilbert and Holtmeier serve on the Audit Committee of the Board of Directors. Under the applicable rules of the NASDAQ Stock Market and the SEC relating to independence of Audit Committee members, the Board of Directors has determined that Mr. Welch is independent and that Mr. Gilbert and Mr. Holtmeier are not. Mr. Gilbert’s lack of independence stems solely from his beneficial ownership of 15.0% of the Company’s common stock, when such beneficial ownership is calculated in accordance with Exchange Act Rule 13d-3. When calculated on a fully diluted basis, Mr. Gilbert beneficially owns only approximately 5% of the Company’s common stock. For this reason, the Board of Directors has determined that Mr. Gilbert remains well suited to serving on the Company’s Audit Committee. Mr. Holtmeier's lack of independence stems solely from the fact that he was party to a consulting agreement under which he was paid $15,000 in the year ended December 31, 2011. The Board has determined that the amount paid to Mr. Holtmeier under this contract is not material, and thus Mr. Holtmeier remains well suited to serving on the Audit Committee.
The Audit Committee has considered whether the provision of non-audit services has impaired the independence of GHP Horwath, P. C. and PMB Helin Donovan has concluded that GHP Horwath, P.C. isand PMB Helin Donovan are independent under applicable SEC and NasdaqNASDAQ rules and regulations.
Item 15. Exhibits, Financial Statement Schedules.
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Redwood Shores, State of California, on March 10, 2009.California.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communication Intelligence Corporation and its subsidiary as of December 31, 2008 and 2007,2010, and the results of their operations and their cash flows for each of the two years in the periodyear ended December 31, 2008,2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s significant recurring operating losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ GHP Horwath, P.C.
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company maintains its cash and cash equivalents with
various financial institutions. This diversification of risk is consistent with Company policy to maintain liquidity, and mitigate risk of loss as to principal. At December 31, 2008, the Joint Venture had approximately $1 in cash accounts held by a financial institution in the People's Republic of China.
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s estimates of recoverability of amounts due could be affected and the Company will adjust the allowance accordingly.
Deferred financing costs include costs paid in cash, such as professional fees and commissions. The costs are amortized to interest expense over the life of the notes or upon early payment using the effective interest method. The costs amortized to interest expense amounted to $124$0 and $75,$218 for the years ended December 31, 20082011 and 2007,2010, respectively.
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized over their estimated useful lives, not to exceed the term of the related lease. The cost of additions and improvements is capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation expense was $66$17 and $78$19 for the years ended December 31, 20082011 and 2007,2010, respectively. The Chinese Joint Venture disposed of certain assets at net book value of $3 in 2007.
Patents are stated at cost less accumulated amortization that, in management’s opinion, does not exceed fair value. Amortization is computed using the straight-line method over the estimated lives of the related assets, ranging from five to seventeen years. Amortization expense was $379$372 and $378$379 for the years ended December 31, 20082011 and 2007,2010, respectively. Amortization expense is estimated to be $379 for each of the five years through December 31, 2013. The estimated remaining weighted average useful lives of the patents are 85 years. The patents identified
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):
The Company evaluates the recoverability of its long-lived assets at least annually or whenever circumstances or events indicate such assets might be impaired. The Company would recognize an impairment charge in the event the net book value of such assets exceeded the future undiscounted cash flows attributable to such assets. No such impairment charges have been recorded in the two years ended December 31, 2008.2011.
The capitalized costs are amortized to cost of sales. At December 31, 2008, and 2007 the Company had capitalized approximately $813, and $788 of software development costs, respectively. Amortization of capitalized software development costs for the years ended December 31, 2008 and 2007 was $504 and $335, respectively.
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Research and development costs are charged to expense as incurred.
The Company expenses advertising (marketing) costs as incurred. These expenses are outbound marketing expenses associated with participation in industry events, related sales collateral and email campaigns aimed at generating customer participation in webinars. The expense for the years ended December 31, 20082011 and 20072010 was $180$15 and $100,$20, respectively.
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts and for tax loss and credit carryforwards.carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003,2004, and state tax examinations for years before 2002.2003. Management does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, there was no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the twelve month period ended December 31, 2008.
The Company expects to make additional option grants in future years. The options issued to employees and directors will be subject to the same provisions of FASB Statement 123(R),outlined above, which may have a material impact on the Company’s financial operations.statements.