| 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 28, 2011. 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 190,776,482 shares of Common Stock outstanding as of March 31, 2010.
(1) | Represents (a) 143,900 shares held by Mr. DiGregorio and (b) 2,739,077 shares issuable upon the exercise of stock options and warrants exercisable within 60 days hereof.of March 28, 2011, or securities convertible into Common Stock within 60 days of March 28, 2011 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 191,489,901 shares of Common Stock, 813,311 shares of Series A-1 Preferred Stock, 8,380,547 shares of Series B Preferred Stock and 2,308,000 shares of Series C Preferred Stock outstanding as of March 28, 2011. 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. | Each 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 813,311 shares of Series A-1 Preferred Stock outstanding as of March 28, 2011. |
| 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 8,380,547 shares of Series B Preferred Stock outstanding as of March 28, 2011. |
| 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 2,308,000 shares of Series C Preferred Stock outstanding as of March 28, 2011. |
| 5. | 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. Along with Mr. Goren, 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 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. Sassower’s address is 110 East 59th Street, Suite 1901, New York, NY 10022. |
| 6. | 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. Along with Mr. Sassower, Mr. Goren 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. 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. In addition to the shares beneficially owned by Phoenix, Mr. Goren beneficially owns 19,000 shares of Common Stock. Mr. Goren’s address is 110 East 59th Street, Suite 1901, New York, NY 10022. |
| 7. | Represents 75,000158,333 shares issuable upon the exercise of options exercisable within 60 days hereof. |
(3)8. | Represents 250,00083,333 shares issuable upon the exercise of options exercisable within 60 days hereof. |
(4)9. | Represents 225,000308,333 shares issuable upon the exercise of stock options exercisable within 60 days hereof. |
(5)10. | Represents (a) 2124,333,333 shares issuable upon the conversion of 97,500 shares of Series C Preferred Stock, and (b) an aggregate of 4,333,333 shares issuable upon exercise of warrants exercisable within 60 days hereof beneficially owned by FirstGlobal Partners LLC (“FirstGlobal”). Mr. Keiper is the manager of FirstGlobal, which has the power to vote and dispose of the shares of Common Stock held by FirstGlobal and, accordingly, Mr. DaneKeiper 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 (b) 735,948Mr. Goren are the co-managers 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 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 716,665 shares issuable upon the exercise of stock options exercisable within 60 days hereof.of March 28, 2011. |
(6)12. | Represents 921,529(a) 62,283,625 shares held by Phoenix Venture Fund LLC ( “Phoenix”), (b) 2,792,429 shares held by SG Phoenix LLC, Phoenix’s management company and (c) 72,485,207 shares issuable upon the exercise of warrants, 113,140,069 shares issuable upon the conversion of 4,898,965 shares of Series B Preferred stock options within 60 days hereof. |
(7) | Represents (a) 65,076,054 shares held by SG Phoenix Ventures LLC and (b) 1,363,28853,333,333 shares issuable upon the exercise of warrants.1,200,000 shares of Series C Preferred Stock. SG Phoenix Ventures LLC is the Managing Member of Phoenix, Venture Fund LLC (the “Phoenix Fund”), with the power to vote and dispose of the shares of Common Stock held by the Phoenix Fund.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.and by SG Phoenix LLC, of which he is a member. 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 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 LLC, except to the extent of their respective pecuniary interests therein. The address of these stockholders is 110 East 59th Street, Suite 1901, New York, NY 10022. |
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. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by the Phoenix Fund, except to the extent of their respective pecuniary interests therein. The address of such stockholder is 110 East 59th Street, Suite 1901, New York, NY 10022.
(1)13. | Represents (a) 8,852,8535,956,197 shares beneficially owned by Mr. Engmann, of which 585,808743,128 are held by MDNH Partners, L.P. and 1,171,617 are held by KENDU Partners Company, (b) 7,687,003an aggregate of 22,158,341 shares issuable upon exercise of warrants beneficially owned by Mr. Engmann, of which 1,228,18010,630,772 are held by MDNH Partners, L.P. and 1,739,638150,435 are held by KENDU Partners Company, and (c) 3,820,6714,135,593 shares of Common Stock issuable upon the conversion of shares of Series A-1 Preferred Stock beneficially owned by Mr. Engmann, of which 1,159,7451,255,366 are issuable to MDNH Partners, L.P. and 2,628,7602,845,450 are issuable to KENDU Partners Company.Company, (d) 31,733,880 shares of Common Stock issuable upon the conversion of shares of Series B Preferred Stock beneficially owned by Mr. Engmann, holds outstanding warrantsof which 7,362,286 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 405,999 shares of the Company’s Common Stock at $0.06 per share. MDNH Partners, L.P. holds outstanding warrants to purchase 1,659,200 shares of the Company’s Common Stock at $0.51 per share, warrants to purchase 1,187,962 shares of the Company’s Common Stock at $0.25 per share, and warrants to purchase 40,218 shares of the Company’s Common Stock at $0.06 per share. KENDU Partners Company holds outstanding warrants to purchase 1,659,200 shares of the Company’s Common Stock at $0.51 per share, and warrants to purchase 80,438 shares of the Company’s Common Stock at $0.06 per share. In addition, Mr. Engmann, MDNH Partners, L.P. and 2,642,379 are issuable to KENDU Partners Company converted a portionCompany; and (e) 8,888,888 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. In addition, the Company has paid the 2009 interest in kind, which resulted in the issuance of additional shares of Series A-1 Preferred to Mr. Engmann, MDNH Partners, L.P. and KENDU Pa rtners Company. Each share of Series A-1 Preferred heldStock beneficially owned by Mr. Engmann, of which 4,444,444 are issuable to MDNH Partners, L.P. and KENDU Partners Company is presently convertible into 7.1429 shares of Common Stock. Mr. Engmann holds 4,503 shares of Series A-1 Preferred that can be converted into 32,166 shares of Common Stock. MDNH Partners, L.P. holds 162,364 shares of Series A-1 Preferred that are convertible into 1,159,745 common shares at $0.14 per share. KENDU Partners Company holds 368,026 shares of Series A-1 Preferred that are convertible into 2,628,760 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, 2009,2010, 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, 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 | | | Equity Compensation Plans Approved by Security Holders | | | | | | | | | | | 1999 Stock Option Plan | 2,448 | $ 0.58 | − | | | 2,154 | | | $ | 0.61 | | | | − | | Equity Compensation Plans Not Approved by Security Holders | 7,783 | $ 0.27 | 4,262 | | | 7,874 | | | $ | 0.26 | | | | 3,182 | | | | | | | | | | | | | | | | | | Total: | 10,231 | $ 0.34 | 4,262 | | | 10,028 | | | $ | 0.38 | | | | 3,182 | | | | | |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Procedures for Approval of Related Person Transactions
In accordance with our Code of Business Conduct and Ethics, we submit all proposed transactions involving our officers and directors and related parties, and other transactions involving conflicts of interest, to the Board of Directors or the Audit Committee for approval. Each of the related party transactions listed below that were submitted to our board were approved by a disinterested majority of our Board of Directors after full disclosure of the interest of the related party in the transaction.
Director Independence
The Board of Directors has determined that Messrs. Amundson, Panetta,Elenio and Welch are “independent,” as defined under and required by the federal securities laws and the rules of the NasdaqNASDAQ Stock Market.
Related Party Transactions
SG Phoenix Venture Fund LLC (“Phoenix”) is the beneficial owner of approximately 32%70.6% of the Company’s common stock.Common Stock of the Company when calculated in accordance with Rule 13d-3, and Michael W. Engmann, together with his affiliates,two affiliated entities, is the beneficial owner of approximately 11%25.6% of the Company’s common stock.Common Stock of the Company when calculated in accordance with Rule 13d-3.
On May 28, 2009,April 26, 2010, the Company entered into a letter agreement (the “Phoenix Letter”) with Phoenix and SG Phoenix LLC, an affiliated entity of Phoenix, and a term sheet relating to certain bridge financing transaction (“New Financing Transaction”) under whichdescribed below, the Recapitalization, and the Series B Financing. Under the Phoenix Letter, the Company raised capital through the issuance of new secured indebtednessagreed to pay SG Phoenix LLC an administrative fee as follows: $20,000 upon execution and modified the termsdelivery of the June 2008 credit agreement (“Credit Agreement”). Certain parties (Phoenix Venture Fund LLC (“Phoenix”), Michael EngmannPhoenix Letter and certain entities relatedan additional amount equal to Mr. Engmann) to2% of the New Financing Transaction had a pre-existing relationship withnew capital invested or arranged by Phoenix in the Company.offering of Series B Preferred Stock at the closing of such offering. In the New Financing Transaction,addition, the Company received an aggregate of $1,100, which is due on December 31, 2010, accrues interest at 8% per annum, and which, at the option of the Company, may be paid in cash or in kind. In conjunction with the New Financing Transaction, the Company issued warrantsagreed to the lenders to purchase an aggregate of 18,333 shares of common stock (exercisable through June 30, 2012 at $0.06 per share). Additionally, the Company issued a warrantissue to SG Phoenix LLC an affiliate of Phoenix, to purchase 3,948 shares of common stock (exercisable through June 30, 2012 at $0.06 per share) and a warrant to purchase 250 shares of common stock (exercisable through June 30, 2012 at $0.06 per share) to an unrelated third party in connection with administrative services provided to the Company.
In connection with the New Financing Transaction, the Company amended the Credit Agreement such that the notes underlying the Credit Agreement were cancelled and new notes were issued (principal amount of $3,709). In addition,three-year warrants to purchase 26,495 shares of common stock includedCommon Stock at an exercise price of $0.06 per share. The number of warrant shares was determined by dividing 3% of the sum of the indebtedness converted in the June 2008 transaction were cancelledrecapitalization and the new warrants to purchase 61,821 shares of common stock were issued. The note and warrants have identical terms to the terms outlinedcapital raised in the New Financing Transaction above.offering by $0.06. The Company recorded a loss on debt extinguishment in the amount of $829 relatedalso agreed to the cancellationindemnify Phoenix and SG Phoenix for breaches of the notes, and recorded an increase to additional paid in capital in the amount of $875 related to the cancellation of warrants that had been recorded as a derivative liability.Phoenix Letter.
The Company ascribed the fair value of $3,178 to the new warrants, excluding the warrants issued for administrative services, which is recorded as a discount to Long-term debt in the balance sheet. The fair value of the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 1.64%; expected term of 3 years; expected volatility of 137%; and expected dividend yield of 0%. The Company may use the proceeds from the New Financing Transaction to pay the Company’s indebtedness and accrued interest on that indebtedness, for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses in connection with the New Financing Transaction, which were $347, including $173 attributabl e to the warrants issued for the administrative services. The fees and expenses are recorded as deferred financing costs and are to be amortized over the life of the loan.
TheOn May 4, 2010, the Company exercisedentered into a second amendment to the Credit Agreement dated June 5, 2008 (‘‘Amendment No. 2 to the Credit Agreement’’). Under Amendment No. 2 to the Credit Agreement, until August 31, 2010, upon submission of a written request by the Company and the approval of Phoenix in its option and made all interest payments forsole discretion, the four quartersCompany had the ability to receive up to an aggregate of $1.0 million in 2009 “in kind”. Theadditional funding through the issuance of additional secured promissory notes to Phoenix and/or its designees. In connection with the issuance of any additional secured promissory notes to Phoenix and/or its designees, the Company issued new notes in the amount of $72, $82, $99 and $101, respectively, and issued additionalwas obligated to issue warrants to purchase 512, 1,366, 1,643shares of Common Stock. Under Amendment No. 2 to the Credit Agreement the Company had received an aggregate amount of $960 and 1,677 shares, respectively, of common stock with the same terms as those issued in the New Financing Transaction except for the 512 warrantsand issued in the first quarter of 2009.promissory notes therefore. The Company ascribed the fair valuealso issued warrants to purchase 16,000 shares of $24, $69, $112 and $86, which was recorded as a discount to Long-term debt in the balance sheet. The fair valueCommon Stock at an exercise price of the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate between 1.15% to 1.70%; expected term of 3 years; expected volatility of 137% to 182.0%; and expected dividend yield of 0%.$0.06 per share.
In connection with the New Financing Transaction, the Registration Rights Agreement from the previous financing transaction was amended to provide the lenders certain rights to demand registration of shares issuable upon exercise of the new warrants.
On June 5, 2008, the Company effected a financing transaction under which the Company raised capital through the issuance of new secured indebtedness and equity, and restructured a portion of the Company’s existing short-term debt (collectively, the “Financing Transaction”). Certain partiesAmendment No. 2 to the Financing Transactions (Phoenix Venture Fund LLC and Michael Engmann) had a pre-existing relationship with the Company and with respect to such parties the Financing Transaction may be considered a related party transaction.
Under the Financing Transaction, the Company entered into a Credit 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 Ronald Goodman (collectively with Phoenix, the “Creditors,” and each individually a “Creditor”). Under the terms of the Credit 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, the “Loans”). The Loans, which are represented by secured promissory notes (each a “Note” and collectively, the “Notes”), bear interest at eight pe rcent (8%) per annum which, at the option of the Company, may be paid 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 use the remaining proceeds for working capital and general corporate purposes, in each case in the ordinary course of business; and to pay fees and expenses in connection with the Financing Transaction, which were approximately $452. Additionally, a portion 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, the Company and its subsidiary, CIC Acquisition Corp., granted the Creditors a first priority security interest in and 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 pursuant to the terms of the Credit Agreement as described above, the Company issued to each Creditor a warrant to purchase up to the number of shares of the Company’s Common Stock obtained by dividing the amount of such Creditor’s Loan by 0.14 (each a “Warrant” and collectively, the ‘Warrants”). A total of 25,982 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 have an exercise price of fourteen cents ($0.14) per share. Additional Warrants may be issued if the Company exercises its option to make interest payments on th e Loans in kind. The Company ascribed the relative fair value of $1,231 to the warrants, which is recorded as a discount to “Long-term debt” in the balance sheet. The fair value of 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, the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and asecond amendment to the Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008 (See Note 5). Under the Purchase Agreement, in exchangeorder to provide for certain registration rights for the cancellationshares of $995Common Stock issuable upon exercise of the warrants issuable under Amendment No. 2 to the Credit Agreement.
On June 21, 2010, in order to effect the Recapitalization, the Company entered into an Exchange Agreement and related documents with its two principal stockholders, Phoenix and $45 of interest accrued thereonMr. Engmann, and other holders of the Company’s outstanding indebtedness and interest accrued thereon,senior secured indebtedness. Pursuant to the Exchange Agreement, dated June 21, 2010, the Company issuedand such parties agreed, subject to the terms thereof, that Phoenix, Mr. Engmann and other holders of such debt an aggregate of 1,040 sharessenior secured indebtedness would exchange all of the Company’s Series A-1 Preferred. Mr. Engmann and entities controlled by Mr. Engmann cancelled an aggregate of $720 in principal and $45 of interest accrued thereon, and, accordingly,outstanding senior secured indebtedness under the Company issued an aggregate of 765 shares of the Company’s Series A-1 Preferred to Mr. Engmann and entities controlled by Mr. Engmann. TheseCredit Agreement into shares of Series A-1B Preferred carryStock at an eight percent (8%) annual dividend, payable quarterlyexchange price of $1.00 per share.
On June 21, 2010, in arrearsconnection with the Series B Financing, the Company also entered into the Series B Purchase Agreement with Phoenix and other investors. Pursuant to the Series B Purchase Agreement, the Company and the investors agreed, subject to the terms thereof, that the Company would issue and sell and the investors would purchase for cash in cash or ina private placement 1,440 additional shares of Series A-1B Preferred had a liquidation preference over Common Stock of one dollar ($1.00) per share, and are convertible into shares of Common Stock at a ratiopurchase price of one share of Series A-1 Preferred for 7.1429 shares of Common Stock. Series A-1 Preferred may vote on matters put$1.00 per share. Subject to the Company’s stockholders on an as-converted-to-Common-Stock basis. Subject to further adjustment as provided in the Certificate of Designations, Powers, Preferences and Rightsterms of the Series A-1 Cumulat ive Convertible Preferred Stock,B Purchase Agreement, Phoenix agreed to purchase 600 shares of Series A-1B Preferred are presently convertible into sharesStock and Mr. Engmann and an affiliated entity agreed to purchase an aggregate of Common Stock at a ratio of one share of Series A-1 Preferred for 7.1429 shares of Common Stock. If all300 shares of Series A-1B Preferred were convertedStock.
On August 5, 2010, the Company consummated both the Recapitalization and the Series B Financing.
On December 9, 2010, the Company entered into Common Stock ata Securities Purchase Agreement with Phoenix, Mr. Engmann and other investors. Pursuant to the above conversion ratio,Securities Purchase Agreement, the Company and the investors agreed, subject to the terms thereof, that the Company would issue 7,429and sell and the investors would purchase for cash in a private placement shares of Common Stock. AsSeries C Preferred Stock at a purchase price of December 31, 2008, holders$1.00 per share. Subject to the terms of the Securities Purchase Agreement, Phoenix agreed to purchase 1,200 shares of Series A-1C Preferred have convertedStock and Mr. Engmann and one of his affiliated entities agreed to purchase an aggregate of 184200 shares of Series A-1C Preferred into 1,317 shares of Common Stock. As of December 31, 2008, Mr. Engmann and entities controlled by Mr. Engmann have converted an aggregate of 109 shares of Series A-1 Preferred into 781 shares of Common Stock.
The issuance of shares of Series A-1 Preferred Stock resulted in a beneficial conversion feature of $371, of which $273 is attributable to Michael Engmann and $98 to the other creditors. The beneficial conversion feature was recorded as a charge to loss applicable to holders of Common Stock for the quarter ended June 30, 2008. The Company has accrued dividends on the shares of Series A-1 Preferred of $47. As of December 31, 2008, $29 of the accrued dividends have been paid in cash. As of December 31, 2008, Mr. Engmann and entities controlled by Mr. Engmann have been paid $19 in accrued dividends.
Under the terms of the Registration RightsSecurities Purchase Agreement, the CompanyPhoenix was obligated to prepare and file with the SEC a registration statement under the Securities Act covering the resale of thebe issued at closing warrants to purchase 53,333 shares of Common Stock and Mr. Engmann and one of his affiliated entities was to be issued uponat closing warrants to purchase an aggregate of 8,889 shares of Common Stock. The exercise price of these warrants is $0.0225 per share. The Series C Preferred Stock issued in connection with the Financing was to be convertible into Common Stock at an initial conversion price of $0.0225 per share. The conversion price of the Series C Preferred Stock and the exercise price for the Warrants were negotiated between the Company and Phoenix on behalf of the Investors.
On December 31, 2010, the Company issued 2,211 shares of Series C Preferred Stock and issued warrants to purchase an aggregate of 98,244 shares of Common Stock. Phoenix and Mr. Engmann invested the amounts and were issued the shares of Series A-1C Preferred Stock and exercise of the Warrants aswarrants to purchase Common Stock described above. The Company must also use its reasonable best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date that is two years after its Effective Date or until the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144. The Registration Rights Agreement provided for certain registration rights whereby the Company would have incurred penalties if a registration statement was not filed or declared effective by the SEC on a timely basis. The Company filed the required registration statement on August 18, 2008, which was declared effective on October 10, 2008. The Company was obligated to pay the costs and expenses of such registration.
During the 12 monthsyear ended December 31, 20092010 the Company paid interest in kind by issuing notes of approximately $283 and $51 to SG Phoenix LLC and Mr. Engmann, respectively. (See Note 3 of Notes to Consolidated Financial Statements on page F-17 for additional details.)
Item 14. Principal Accounting Fees and Services
Audit and other Fees. GHP Horwath, P.C. ashas been the Company’s auditors since September 2006. During fiscal years 20092010 and 2008,2009, the fees for audit and other services performed by GHP Horwath for the Company were as follows:
| | Amount and percentage of fees | Amount and percentage of fees | | Nature of Services | 2009 | | 2008 | 2010 | | 2009 | | | | | | | | | | | | Audit Fees | Audit fees are expected to be | $ 140,000 (91%) | | Audit Fees | $ 136,000 (92%) | Audit fees are expected to be | $ 109,000 (76%) | | Audit Fees | $ 103,300(72%) | | Audit-Related Fees | | $ 5,000 (3%) | | Audit-Related fees | $ − | | $ 25,000 (18%) | | Audit-Related fees | $ 29,400(20%) | | Tax Fees | Tax fees are expected to be | $ 9,000 (6%) | | Tax Fees | $ 9,000 (6%) | Tax fees are expected to be | $ 9,000 (6%) | | Tax Fees | $ 12,000( 8%) | | All Other Fees | | $ − | | All Other Fees | $ − | | $ − | | All Other Fees | $ − | | Total | | $ 154,000 | | Total | $ 145,000 | | $ 143,000 | | Total | $ 144,700 |
Pre-Approval Policies.
It is the policy of the Company not to enter into any agreement with its auditors to provide any non-audit services unless (a) the agreement is approved in advance by the Audit Committee or (b) (i) the aggregate amount of all such non-audit services constitutes no more than 5% of the total amount the Company pays to the auditors during the fiscal year in which such services are rendered, (ii) such services were not recognized by the Company as constituting non-audit services at the time of the engagement of the non-audit services and (iii) such services are promptly brought to the attention of the Audit Committee and prior to the completion of the audit are approved by the Audit Committee or by one or more members of the Audit Committee who are members of the board of directors to whom authority to grant such ap provalsapprovals has been delegated by the Audit Committee. The Audit Committee will not approve any agreement in advance for non-audit services unless (x) the procedures and policies are detailed in advance as to such services, (y) the Audit Committee is informed of such services prior to commencement and (z) such policies and procedures do not constitute delegation of the Audit Committee’s responsibilities to management under the Securities Exchange Act of 1934, as amended.
The Audit Committee has considered whether the provision of non-audit services has impaired the independence of GHP Horwath, P. C. and has concluded that GHP Horwath, P.C. is independent under applicable SEC and NasdaqNASDAQ rules and regulations.
PART IV
Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements
Index to Financial Statements | | | Page | | (a)(1) | Financial Statements | | | | Report of GHP Horwath, P.C., Independent Registered Public Accounting Firm | F-1 | | | Consolidated Balance Sheets at December 31, 20092010 and 20082009 | F-2 | | | Consolidated Statements of Operations for the years ended December 31, 20092010 and 20082009 | F-3 | | | Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 20092010 and 20082009 | F-4 | | | Consolidated Statements of Cash Flows for the years ended December 31, 20092010 and 20082009 | F-5 | | | Notes to Consolidated Financial Statements | F-7 |
(2) Financial Statement Schedules
| (2) Financial Statement Schedules |
None
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
(3) Exhibits The exhibits required by Item 601 of Regulation S-K are listed in paragraph (b) below. (b) Exhibits. The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC as indicated below:
Exhibit Number | Document | | 3.1 | Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration Statement on Form 10 (File No. 000-19301). | | 3.2 | Certificate of Amendment to the Company's Certificate of Incorporation (authorizing the reclassification of the Class A Common Stock and Class B Common Stock into one class of Common Stock) filed with the Delaware Secretary of State on November 1, 1991, incorporated herein by reference to Exhibit 3 to Amendment 1 on Form 8 to the Company's Form 8-A (File No. 000-19301). | | 3.3 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State June 12, 1998, incorporated herein by reference to Exhibit 10.24 to the Company’s 1998 Form 10-K filed on April 6, 1999. | | 3.4 | By-laws of the Company adopted on October 6, 1986, incorporated herein by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10 (File No. 000-19301). | | 3.5 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State January 24, 2001, incorporated herein by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007. | | 3.6 | Certificate of Elimination of the Company’s Certificate of Designation of the Series A Preferred Stock filed with the Delaware Secretary of State August 17, 2001, incorporated herein by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007. | | |
| | Exhibit Number | Document | | 3.7 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State August 17, 2007, incorporated herein by reference to Exhibit 3.7 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007. | | 3.8 | Amended and Restated Certificate of Incorporation of the Company filed with the Delaware Secretary of State on May 18, 1995, incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 3.9 | Certificate of Designations, Powers, Preferences and Rights of the Series A Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on June 4, 2008, incorporated herein by reference to Exhibit 4.23 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
Exhibit
Number
| Document
| | 3.10 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 30, 2008, incorporated herein by reference to Exhibit 3.7 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 3.11 | Certificate of Designations, Powers, Preferences and Rights of the Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on October 30, 2008.,2008, incorporated herein by reference to Exhibit 3.11 to the Company’s Annual Report on Form 10-K filed on March 12, 2009. | | 3.12 | Certificate of Elimination of the Company’s Series A Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on December 30, 2008, incorporated herein by reference to Exhibit 3.12 to the Company’s Annual Report on Form 10-K filed on March 12, 2009. | | 3.13 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 30, 2009, incorporated herein by reference to Exhibit 3.13 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. | | 3.14 | Amendment No. 1 to By-laws dated June 17, 2010, incorporated herein by reference to Exhibit 3.14 to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2010. | | 3.15 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.15 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. | | 3.16 | Amended and Restated Certificate of Designation of Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.16 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. | | 3.17 | Certificate of Designation of Series B Participating Convertible Preferred Stock filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.17to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. | | *3.18 | Certificate of Amendment to Amended And Restated Certificate of Incorporation filed with the Delaware Secretary of State on December 31, 2010. | | *3.19 | Second Amended and Restated Certificate of Designation of Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010. | | *3.20 | Second Amended and Restated Certificate of Designation of Series B Participating Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010. | | *3.21 | Certificate of Designation of Series C Participating Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010. | | †4.10 | 1999 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 4.2 to the Company's Form S-8 filed on September 19, 2008. | | 4.11 | Form of Convertible Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.3 to the Company's Form 8-K filed on November 3, 2004. | | 4.12 | Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.4 to the Company's Form 8-K filed on November 3, 2004. | | 4.13 | Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company's Form 8-K filed on August 12, 2006. |
| | Exhibit Number | Document | | 4.14 | Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.37 to the Company's Form 8-K filed on August 12, 2006. | | 4.15 | Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company’s Form 8-K filed on February 9, 2007. | | 4.16 | Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.37 to the Company’s Form 8-K filed on February 9, 2007. | | 4.17 | Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company’s Form 8-K filed on June 20, 2007. | | 4.18 | Form of Warrant issued the Company, incorporated herein by reference to Exhibit 10.37 to the Company’s Form 8-K filed on June 20, 2007. | | 4.19 | Form of Common Stock Purchase Warrant issued by the Company, incorporated herein by reference to Exhibit 4.19 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 4.20 | Form of Additional Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 4.21 | Form of Secured Promissory Note issued by the Company dated June 5, 2008, incorporated herein by reference to Exhibit 4.21 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 4.22 | Form of Additional Secured Promissory Note, incorporated herein by reference to Exhibit 4.22 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 4.23 | Certificate of Designations, Powers, Preferences and Rights of the Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on October 30, 2008, incorporated herein by reference to Exhibit 4.23 to the Company’s Annual Report on Form 10-K filed on March 12, 2009..2009. | | 4.24 | Form of Secured Promissory Note issued by the Company dated May 28, 2009, incorporated herein by reference to Exhibit 4.24 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
Exhibit
Number
| Document
| | 4.25 | Form of Additional Secured Promissory Note, incorporated herein by reference to Exhibit 4.25 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. | | 4.26 | Form of Common Stock Purchase Warrant issued by the Company, incorporated herein by reference to Exhibit 4.26 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. | | 4.27 | Form of Additional Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.27 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. | | ††10.19 | Software Development and License Agreement dated December 4, 1998 between Ericsson Mobile Communications AB and the Company incorporated herein by reference to Exhibit 10.26 of the Company's 1998 Form 10-K (File No. 0-19301). | | 10.24 | Form of Note and Warrant Purchase Agreement dated October 28, 2004, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K filed on November 3, 2004. | | 10.25 | Form of Registration Rights Agreement dated October 28, 2004, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K filed on November 3, 2004. | | 10.26 | Form of Note and Warrant Purchase Agreement dated August 10, 2006, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on August 12, 2006. | | 10.26 | Form of Note and Warrant Purchase Agreement dated August 10, 2006, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on August 12, 2006. | | 10.27 | Form of Registration Rights Agreement dated August 10, 2006, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on August 12, 2006. |
Exhibit Number | Document | | †††10.28 | Amendment dated May 31, 2005 to the License agreement dated December 22, 2000 between the Company and eCom Asia Pacific, Ltd., incorporated by reference to Exhibit 10.26 of the Company’s Form 10-K/A filed on September 15, 2005. | | †††10.29 | License agreement dated June 2, 2005 between the Company and SnapOn Credit LLC, incorporated herein by reference to Exhibit 10.27 of the Company’s Form 10-K/A filed on September 15, 2005. | | †10.30 | Amendment to employment agreement with Guido DiGregorio, incorporated herein by reference to the Company's Form 8-K filed on September 21, 2005. | | †10.31 | Amendment to employment agreement with Francis V. Dane, incorporated herein by reference to the Company's Form 8-K filed on September 21, 2005. | | †10.32 | Form of stock option agreement dated August 31, 2005 with Russel L. Davis, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006. | | †10.33 | Form of stock option agreement dated December 19, 2005 with Guido DiGregorio, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006. | | †10.34 | Form of stock option agreement dated August 31, 2005 with Francis V. Dane, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006. | | †10.35 | Form of stock option agreement dated August 31, 2005 with C. B. Sung, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006. | | 10.36 | Form of Note and Warrant Purchase Agreement dated February 5, 2007, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on February 5, 2007. | | 10.37 | Form of Registration Rights Agreement dated February 5, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on February 5, 2007. | | 10.38 | Amendment to the Note and Warrant Purchase Agreement dated February 5, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 99.1 to the Company's Form 8-K filed on March 15, 2007. |
Exhibit
Number
| Document
| | 10.39 | Form of Note and Warrant Purchase Agreement dated June 15, 2007, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on June 15, 2007. | | 10.40 | Form of Registration Rights Agreement dated June 15, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on June 15, 2007. | | 10.41 | Form of Securities Purchase and Registration Rights Agreement dated August 24, 2007, by and among the Company and Phoenix Venture Fund LLC, incorporated herein by reference to Exhibit 10.36 to the Company's Form 8-K filed on August 27, 2007. | | †10.42 | Consulting Agreement dated January 9, 2008 between the Company and GS Meyer & Associates LLC - Incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K filed on March 12, 2007. | | 10.43 | Credit Agreement dated June 5, 2008, by and among the Company and the Lenders Party Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 10.44 | Pledge and Security Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 10.44 | Securities Purchase Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | 10.45 | Registration Rights Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. | | |
| | Exhibit Number | Document | | 10.46 | Amendment No. 1 to Credit Agreement dated May 28, 2009, by and among the Company, the Lenders and Additional Lenders Parties Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. | | 10.47 | Amendment No. 1 to Registration Rights Agreement dated May 28, 2009, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.47 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. | | 10.48 | Salary Reduction Plan for Executive Officers of Communication Intelligence Corporation under Amendment No. 1 to Credit Agreement dated May 28, 2009, incorporated herein by reference to Exhibit 10.48 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. | | 10.53 | Amendment No. 3 to Credit Agreement dated July 22, 2010, by and among the Company, the Lenders and Additional Lenders Parties Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. | | 10.54 | Amendment No. 3 to Registration Rights Agreement dated July 22, 2010, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. | | 10.55 | Registration Rights Agreement dated August 5, 2010, by and among the Company and the Persons Executing the Agreement as Investors, incorporated herein by reference to Exhibit 10.55 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. | | 10.56 | Investor Rights Agreement dated August 5, 2010, by and among the Company and Phoenix Venture Fund LLC, SG Phoenix LLC, Michael Engmann, Ronald Goodman, Kendu Partners Company and MDNH Partners L.P., incorporated herein by reference to Exhibit 10.56 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. | | 10.57 | Securities Purchase Agreement dated December 9, 2010, by and among the Company, Phoenix Venture Fund LLC, and the Investors signatory thereto, incorporated herein by reference to Exhibit 10.57 to the Company’s Current Report on Form 8-K filed on December 9, 2010. | | 10.58 | Registration Rights Agreement dated December 31, 2010, by and among the Company and the Persons Executing the Agreement as Investors, incorporated herein by reference to Exhibit 10.58 to the Company’s Current Report on Form 8-K filed on January 6, 2011. | | 14.1 | Code of Ethics, incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K filed on March 30, 2004. | | *21.1 | Schedule of Subsidiaries. | | *23.1 | Consent of GHP Horwath, P.C., Independent Registered Public Accounting Firm. | | *31.1 | Certification of Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | *31.2 | Certificate of Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | *32.1 | Certification of Chief Executive Officer pursuant to 18 USC Section 1750, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | *32.2 | Certification of Chief Financial Officer pursuant to 18 USC Section 1750, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| † | Indicates management contract or compensatory plan, contract or arrangement. |
| †† | Confidential treatment of certain portions of this exhibit have been requested from the SEC pursuant to a request for confidentiality dated March 30, 1999, filed pursuant to the Securities and Exchange Act of 1934. |
| ††† | Confidential treatment of certain portions of this exhibit have been requested from the SEC pursuant to a request for confidentiality dated March 30, 2006 filed pursuant to the Securities and Exchange Act of 1934. |
The exhibits listed under Item 15(a)(3) hereofabove are filed as part of this Form 10-K other than Exhibits 32.1 and 32.2, which shall be deemed furnished.
(c) Financial Statement Schedules | (c) Financial Statement Schedules |
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
SIGNATURES
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 31, 2010.29, 2011.
| | Communication Intelligence Corp.Corporation | | | By: | /s/ Francis V. DaneAndrea Goren Francis V. DaneAndrea Goren
(Principal Financial Officer and Officer Duly Authorized to Sign on Behalf of the Registrant) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on March 31, 2010.29, 2011.
| Signature | Title | | | | /s/ Guido DiGregorioPhilip S. Sassower Guido DiGregorioPhilip S. Sassower
| Chairman President and Chief Executive Officer (Principal Executive Officer) | /s/ Francis V. DaneAndrea Goren Francis V. DaneAndrea Goren
| Chief Legal Officer andDirector, Acting Chief Financial Officer
(Principal Financial and Accounting Officer) | /s/ Kurt Amundson Kurt Amundson | Director | /s/ Louis P. PanettaFrancis J. Elenio Louis P. PanettaFrancis J. Elenio
| Director | /s/ David Welch David Welch | Director |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders Communication Intelligence Corporation
We have audited the accompanying consolidated balance sheets of Communication Intelligence Corporation and its subsidiary (“the Company”) as of December 31, 20092010 and 2008,2009, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2009.2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
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, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2009,2010, 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.
As discussed in Notes 1 andNote 4 to the consolidated financial statements, in 2009, the Company adopted a new accounting standard related to whether an equity-linked financial instrument ( or(or embedded feature) is indexed to an entity'sentity’s stock.
/S/ GHP Horwath, P.C. Denver, Colorado March 31, 2010
Communication Intelligence Corporation Consolidated Balance Sheets (In thousands, except par value amounts)
| | | | | | | | | December 31, | | | December 31, | | | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | Assets | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 1,021 | | | $ | 929 | | | $ | 1,879 | | | $ | 1,021 | | Accounts receivable, net of allowance of $117 and $104 at December 31, 2009 and 2008, respectively | | | 227 | | | | 700 | | | Accounts receivable, net of allowance of $9 and $117 at December 31, 2010 and 2009, respectively | | | | 103 | | | | 227 | | Prepaid expenses and other current assets | | | 66 | | | | 80 | | | | 44 | | | | 66 | | | | | | | | | | | | | | | | | | | | Total current assets | | | 1,314 | | | | 1,709 | | | | 2,026 | | | | 1,314 | | Property and equipment, net | | | 31 | | | | 48 | | | | 26 | | | | 31 | | Patents, net | | | 2,771 | | | | 3,149 | | | | 2,392 | | | | 2,771 | | Capitalized software development costs, net | | | 1,515 | | | | 1,406 | | | | 452 | | | | 1,515 | | Deferred financing costs (Note 3) | | | 218 | | | | 301 | | | | – | | | | 218 | | Other assets | | | 29 | | | | 30 | | | | 29 | | | | 29 | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 5,878 | | | $ | 6,643 | | | $ | 4,925 | | | $ | 5,878 | | | | | | | | | | | | | | | | | | | | | Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Short-term debt, net of discount of $5 at December 31 2008 (Note 3) | | | − | | | | 60 | | | Current portion of long-term debt –net of discount of $2,222, including related party debt of $4,918, net of discount of $2,138 at December 31, 2009 (Note 3) | | | 2,869 | | | | − | | | $ | – | | | $ | 2,869 | | Accounts payable | | | 118 | | | | 92 | | | | 450 | | | | 118 | | Accrued compensation | | | 327 | | | | 369 | | | | 446 | | | | 327 | | Other accrued liabilities | | | 169 | | | | 236 | | | | 159 | | | | 169 | | Deferred revenue | | | 458 | | | | 343 | | | | 456 | | | | 458 | | | | | | | | | | | | | | | | | | | | Total current liabilities | | | 3,941 | | | | 1,100 | | | | 1,511 | | | | 3,941 | | | Long-term debt –net of discount of $873, including related party debt of $2,644, net of discount of $834 at December 31, 2008 (Note 3) | | | − | | | | 2,765 | | | Deferred revenue long-term | | | 867 | | | | − | | | | 650 | | | | 867 | | Deferred rent | | | | 183 | | | | – | | Derivative liability | | | 422 | | | | − | | | | 499 | | | | 422 | | | Total liabilities | | | 5,230 | | | | 3,865 | | | | 2,843 | | | | 5,230 | | | Commitments and contingencies (Note 6) | | | | | | | | | | | | | | | | | | Stockholders' equity: | | | | | | | | | | | | | | | | | Preferred stock, $.01 par value; 10,000 shares authorized; 751 and 856 shares outstanding at December 31, 2009 and 2008, respectively ($751 liquidation preference at December 31, 2009) | | | 751 | | | | 856 | | | Common stock, $.01 par value; 225,000 shares authorized; 190,026 and 130,374 shares issued and outstanding at December 31, 2009 and 2008, respectively | | | 1,900 | | | | 1,304 | | | Series A-1 Preferred Stock, $.01 par value; 2,000 shares authorized; 813 and 751 shares outstanding at December 31, 2010 and 2009, respectively ($813 liquidation preference at December 31, 2010) | | | | 813 | | | | 751 | | Series B Preferred Stock, $.01 par value; 14,000 shares authorized; 8,380 shares outstanding at December 31, 2010 ($12,570 liquidation preference at December 31, 2010) | | | | 6,350 | | | | – | | Series C Preferred Stock, $.01 par value; 4,100 shares authorized; 2,211 shares outstanding at December 31, 2010 ($3,317 liquidation preference at December 31, 2010) | | | | 2,032 | | | | – | | Common stock, $.01 par value; 1,050,000 shares authorized; 191,489 and 190,026 shares issued and outstanding at December 31, 2010 and 2009, respectively | | | | 1,915 | | | | 1,900 | | Additional paid-in capital | | | 101,221 | | | | 95,174 | | | | 98,347 | | | | 101,221 | | Accumulated deficit | | | (103,178 | ) | | | (94,569 | ) | | | (107,337 | ) | | | (103,178 | ) | Accumulated other comprehensive (loss) income | | | (46 | ) | | | 13 | | | | | | | | | | | | | | Accumulated other comprehensive loss | | | | (38 | ) | | | (46 | ) | Total stockholders' equity | | | 648 | | | | 2,778 | | | | 2,082 | | | | 648 | | | | | | | | | | | | | Total liabilities and stockholders' equity | | $ | 5,878 | | | $ | 6,643 | | | $ | 4,925 | | | $ | 5,878 | | | | | | | | | | | | |
The accompanying notes form an integral part of these Consolidated Financial Statements
Communication Intelligence Corporation Consolidated Statements of Operations (In thousands, except per share amounts)
| | | Years Ended December 31, | | | Years Ended December 31, | | | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | Revenue: | | | | | | | | | | | | | Product | | $ | 1,185 | | | $ | 1,686 | | | $ | 197 | | | $ | 1,185 | | Maintenance | | | 751 | | | | 715 | | | | 654 | | | | 751 | | | | | | 1,936 | | | | 2,401 | | | | 851 | | | | 1,936 | | | Operating costs and expenses: | | | | | | | | | | | | | | | | | Cost of sales: | | | | | | | | | | | | | | | | | Product | | | 724 | | | | 895 | | | | 635 | | | | 724 | | Maintenance | | | 161 | | | | 169 | | | | 244 | | | | 161 | | Acceleration of amortization of certain capitalized software development costs | | | | 1,009 | | | | | Research and development | | | 343 | | | | 198 | | | | 431 | | | | 343 | | Sales and marketing | | | 1,501 | | | | 1,353 | | | | 1,531 | | | | 1,501 | | General and administrative | | | 1,977 | | | | 2,030 | | | | 2,255 | | | | 1,977 | | | | | | | | | | | | | | | | | | | | | | | | 4,706 | | | | 4,645 | | | | 6,105 | | | | 4,706 | | | | | | | | | | | | | | | | | | | | Loss from operations | | | (2,770 | ) | | | (2,244 | ) | | | (5,254 | ) | | | (2,770 | ) | | | | | | | | | | | | | | | | | | | Interest and other income, net | | | 2 | | | | 72 | | | Interest and other (expense) income, net | | | | (2 | ) | | | 2 | | | Interest expense: | | | | | | | | | | | | | | | | | Related party (Note 3) | | | (312 | ) | | | (243 | ) | | | (255 | ) | | | (312 | ) | Other (Note 3) | | | (43 | ) | | | (45 | ) | | | (8 | ) | | | (43 | ) | | Amortization of debt discount and deferred financing cost: | | | | | | | | | | | | | | | | | Related party (Note 3) | | | (1,600 | ) | | | (730 | ) | | | (1,719 | ) | | | (1,600 | ) | Other (Note 3) | | | (78 | ) | | | (119 | ) | | | (57 | ) | | | (78 | ) | Loss on extinguishment of long-term debt | | | (829 | ) | | | − | | | | – | | | | (829 | ) | Loss on derivative liability | | | (5,136 | ) | | | – | | | Gain (loss) on derivative liability | | | | 3,136 | | | | (5,136 | ) | Net loss | | | (10,766 | ) | | | (3,309 | ) | | | (4,159 | ) | | | (10,766 | ) | | Accretion of beneficial conversion feature, preferred shares (Note 5): | | | | | | | | | | Related party | | | – | | | | (273 | ) | | Other | | | – | | | | (98 | ) | | | Preferred stock dividends: | | | | | | | | | | | | | | | | | Related party | | | (45 | ) | | | (34 | ) | | | (292 | ) | | | (45 | ) | Other | | | (16 | ) | | | (13 | ) | | | (102 | ) | | | (16 | ) | | | | | | | | | | | | | | | | | | | | Net loss attributable to common stockholders | | $ | (10,827 | ) | | $ | (3,727 | ) | | $ | (4,553 | ) | | $ | (10,827 | ) | Basic and diluted loss per common share | | $ | (0.08 | ) | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | (0.08 | ) | Weighted average common shares outstanding, basic and diluted | | | 141,436 | | | | 129,247 | | | | 190,721 | | | | 129,247 | | | | | | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these Consolidated Financial Statements
Communication Intelligence Corporation Consolidated Statements of Changes in Stockholders' Equity (In thousands except per share amounts) | | | Preferred Shares Outstanding | | | Preferred Shares Amount | | | Common Shares Outstanding | | | Common Stock | | | Additional Paid-In Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Income (Loss) | | | Total | | | Series A-1Preferred Shares Outstanding | | | Series A-1Preferred Shares Amount | | | Series B Preferred Shares Outstanding | | | Series B Preferred Shares Amount | | | Series C Preferred Shares Outstanding | | | Series C Preferred Shares Amount | | | Common Shares Outstanding | | | Common Stock Amount | | | Additional Paid-In Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Income (Loss) | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of January 1, 2008 | | | − | | | $ | − | | | | 129,057 | | | $ | 1,291 | | | $ | 93,785 | | | $ | (91,260 | ) | | $ | (35 | ) | | $ | 3,781 | | | Stock based employee compensation | | | | | | | | | | | | | | | | | | | 161 | | | | | | | | | | | | 161 | | | | Fair value of warrants issued in connection with Long-term debt | | | | | | | | | | | | | | | | | | | 1,231 | | | | | | | | | | | | 1,231 | | | | Conversion of short-term notes into Preferred shares, net of expenses of $127 | | | 1,040 | | | | 1,040 | | | | | | | | | | | | (127 | ) | | | | | | | | | | | 913 | | | | Beneficial Conversion Feature associated with the Preferred Shares | | | | | | | | | | | | | | | | | | | 371 | | | | | | | | | | | | 371 | | | | Conversion of preferred shares into Common Stock | | | (184 | ) | | | (184 | ) | | | 1,317 | | | | 13 | | | | 171 | | | | | | | | | | | | − | | | | Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | | | | | | | | | | | | | | | | | | | | | (3,309 | ) | | | | | | | (3,309 | ) | | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | 48 | | | | 48 | | | Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,261 | ) | | | Accretion of beneficial conversion feature on preferred stock | | | | | | | | | | | | | | | | | | | (371 | ) | | | | | | | | | | | (371 | ) | | Preferred share dividends | | | | | | | | | | | | | | | | | | | (47 | ) | | | | | | | | | | | (47 | ) | | | Balance as of December 31, 2008 | | | 856 | | | | 856 | | | | 130,374 | | | | 1,304 | | | | 95,174 | | | | (94,569 | ) | | | 13 | | | | 2,778 | | | | 856 | | | $ | 856 | | | | | | | | | | | | | | | | 130,374 | | | $ | 1,304 | | | $ | 95,174 | | | $ | (94,569 | ) | | $ | 13 | | | $ | 2,778 | | | Cumulative effect of change in accounting principle on January 1, 2009 – Reclassification of equity-linked financial instrument to derivative liability | | | | | | | | | | | | | | | | | | | (3,510 | ) | | | 2,157 | | | | | | | | (1,353 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (3,510 | ) | | | 2,157 | | | | | | | | (1,353 | ) | | Stock-based employee compensation | | | | | | | | | | | | | | | | | | | 318 | | | | | | | | | | | | 318 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 318 | | | | | | | | | | | | 318 | | | Conversion of preferred shares | | | (166 | ) | | | (166 | ) | | | 1,183 | | | | 11 | | | | 155 | | | | | | | | | | | | − | | | | (166 | ) | | | (166 | ) | | | | | | | | | | | | | | | 1,183 | | | | 11 | | | | 155 | | | | | | | | | | | | − | | | Cancellation of warrants recorded as derivative liability | | | | | | | | | | | | | | | | | | | 875 | | | | | | | | | | | | 875 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 875 | | | | | | | | | | | | 875 | | Exercise of stock options | | | | | | | | | | | 85 | | | | 1 | | | | 7 | | | | | | | | | | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | 85 | | | | 1 | | | | 7 | | | | | | | | | | | | 8 | | Exercise of warrants | | | | | | | | | | | 58,384 | | | | 584 | | | | 8,263 | | | | | | | | | | | | 8,847 | | | | | | | | | | | | | | | | | | | | | | | | 58,384 | | | | 584 | | | | 8,263 | | | | | | | | | | | | 8,847 | | | Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | | | | | | | | | | | | | | | | | | | | | (10,766 | ) | | | | | | | (10,766 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (10,766 | ) | | | | | | | (10,766 | ) | Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | (59 | ) | | | (59 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (59 | ) | | | (59 | ) | | Total comprehensive (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (10,825 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (10,825 | ) | | Preferred share dividends, paid in kind | | | 61 | | | | 61 | | | | | | | | | | | | (61 | ) | | | | | | | | | | | − | | | | 61 | | | | 61 | | | | | | | | | | | | | | | | | | | | | | | | (61 | ) | | | | | | | | | | | − | | Balances as of December 31, 2009 | | | 751 | | | $ | 751 | | | | 190,026 | | | $ | 1,900 | | | $ | 101,221 | | | $ | (103,178 | ) | | $ | (46 | ) | | $ | 648 | | | | 751 | | | | 751 | | | | − | | | | − | | | | − | | | | − | | | | 190,026 | | | | 1,900 | | | | 101,221 | | | | (103,178 | ) | | | (46 | ) | | | 648 | | | Conversion of long-term notes into Series B Preferred Shares, net of unamortized discount of $1,509 | | | | | | | | | | | | 6,608 | | | $ | 6,608 | | | | | | | | | | | | | | | | | | | | (1,509 | ) | | | | | | | | | | | 5,099 | | | Issuance of Series B Preferred Shares | | | | | | | | | | | | 1,440 | | | | 1,440 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,440 | | | Financing cost on conversion of long-term notes and issuance of Series B Preferred Shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (580 | ) | | | | | | | | | | | (580 | ) | | Conversion feature associated with the Series B Preferred Shares | | | | | | | | | | | | | | | | (2,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,000 | ) | | Warrants issued for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (153 | ) | | | | | | | | | | | (153 | ) | | Stock based employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 93 | | | | | | | | | | | | 93 | | | Common stock issued for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | 750 | | | | 8 | | | | 58 | | | | | | | | | | | | 66 | | | Restricted common stock issued in lieu of salaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | 713 | | | | 7 | | | | (7 | ) | | | | | | | | | | | − | | | Restricted stock expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 40 | | | | | | | | | | | | 40 | | | Issuance of Series C Preferred Shares | | | | | | | | | | | | | | | | | | | | 2,211 | | | $ | 2,211 | | | | | | | | | | | | | | | | | | | | | | | | 2,211 | | | Financing cost on issuance of Series C Preferred Shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (422 | ) | | | | | | | | | | | (422 | ) | | Conversion feature associated with the Series C Preferred Shares | | | | | | | | | | | | | | | | | | | | | | | | (179 | ) | | | | | | | | | | | | | | | | | | | | | | | (179 | ) | | Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,159 | ) | | | | | | | (4,159 | ) | | Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8 | | | | 8 | | | Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,151 | ) | | Preferred share dividends | | | | 62 | | | | 62 | | | | 332 | | | | 332 | | | | | | | | | | | | | | | | | | | | (394 | ) | | | | | | | | | | | − | | | Conversion feature, Preferred Share dividends | | | | | | | | | | | | | | | | (30 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (30 | ) | | Balances as of December 31, 2010 | | | | 813 | | | $ | 813 | | | | 8,380 | | | $ | 6,350 | | | | 2,211 | | | $ | 2,032 | | | | 191,489 | | | $ | 1,915 | | | $ | 98,347 | | | $ | (107,337 | ) | | $ | (38 | ) | | $ | 2,082 | |
The accompanying notes form an integral part of these Consolidated Financial Statements
Communication Intelligence Corporation Consolidated Statements of Cash Flows (In thousands) | | | 2009 | | | 2008 | | | Cash flows from operating activities: | | | | | | | Net loss | | $ | (10,766 | ) | | $ | (3,309 | ) | Adjustments to reconcile net loss to net cash provided by (used for) operating activities: | | | | | | | | | Depreciation and amortization | | | 1,107 | | | | 951 | | Amortization of debt discount and deferred financing costs | | | 1,678 | | | | 848 | | Loss on extinguishment of long term debt | | | 829 | | | | - | | Stock based employee compensation | | | 318 | | | | 161 | | Loss on derivative liability | | | 5,136 | | | | - | | Non-cash financing expense | | | 337 | | | | - | | Changes in operating assets and liabilities: | | | | | | | | | Accounts receivable | | | 473 | | | | (248 | ) | Prepaid expenses and other assets | | | 15 | | | | 55 | | Accounts payable | | | 26 | | | | (43 | ) | Accrued compensation | | | (42 | ) | | | 5 | | Other accrued liabilities | | | (67 | ) | | | (106 | ) | Deferred revenue | | | 982 | | | | (88 | ) | Net cash provided by (used for) operating activities | | | 26 | | | | (1,774 | ) | | | | | | | | | | | Cash flows from investing activities: Acquisition of property and equipment | | | (8 | ) | | | (27 | ) | Capitalized software development costs | | | (813 | ) | | | (813 | ) | Net cash used for investing activities | | | (821 | ) | | | (840 | ) | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Deferred financing costs | | | (174 | ) | | | (425 | ) | Proceeds from issuance of short-term debt | | | - | | | | 125 | | Proceeds from the exercise of stock options and warrants | | | 26 | | | | - | | Proceeds from issuance of long-term debt | | | 1,100 | | | | 3,000 | | Principal payments on debt | | | (65 | ) | | | (302 | ) | Net cash provided by financing activities | | | 887 | | | | 2,398 | | Effect of exchange rate changes on cash and cash equivalents | | | - | | | | 1 | | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | 92 | | | | (215 | ) | | Cash and cash equivalents at beginning of period | | | 929 | | | | 1,144 | | | Cash and cash equivalents at end of period | | $ | 1,021 | | | $ | 929 | |
| | | 2010 | | | 2009 | | | Cash flows from operating activities: | | | | | | | Net loss | | $ | (4,159 | ) | | $ | (10,766 | ) | Adjustments to reconcile net loss to net cash used for operating activities: | | | | | | | | | Depreciation and amortization | | | 1,224 | | | | 1,107 | | Accelerated amortization of certain capitalized software development costs | | | 1,009 | | | | − | | Amortization of debt discount and deferred financing costs | | | 1,776 | | | | 1,678 | | Loss on extinguishment of long-term debt | | | − | | | | 829 | | Stock-based employee compensation | | | 93 | | | | 318 | | Restricted stock expense | | | 40 | | | | − | | Stock issued for services | | | 66 | | | | − | | (Gain) loss on derivative liability | | | (3,136 | ) | | | 5,136 | | Non cash interest expense | | | 291 | | | | 337 | | Changes in operating assets and liabilities: | | | | | | | | | Accounts receivable, net | | | 124 | | | | 473 | | Prepaid expenses and other assets | | | 22 | | | | 15 | | Accounts payable | | | 332 | | | | 26 | | Accrued compensation | | | 119 | | | | (42 | ) | Other accrued liabilities | | | 173 | | | | (67 | ) | Deferred revenue | | | (219 | ) | | | 982 | | Net cash (used for) provided by operating activities | | | (2,245 | ) | | | 26 | | | | | | | | | | | | Cash flows from investing activities: Acquisition of property and equipment | | | (14 | ) | | | (8 | ) | Capitalized software development costs | | | (772 | ) | | | (813 | ) | Net cash used for investing activities | | | (786 | ) | | | (821 | ) | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Deferred financing costs | | | − | | | | (174 | ) | Net proceeds from issuance of short-term debt | | | 1,390 | | | | − | | Net proceeds from exercise of stock options and warrants | | | | | | | 26 | | Net proceeds from issuance of long-term debt | | | − | | | | 1,100 | | Net proceeds from issuance of Series B preferred shares | | | 860 | | | | − | | Net proceeds from issuance of Series C preferred shares | | | 1,789 | | | | − | | Principal payments on short term debt | | | (150 | ) | | | (65 | ) | Net cash provided by financing activities | | | 3,889 | | | | 887 | | | | | | | | | | | | | Net increase in cash and cash equivalents | | | 858 | | | | 92 | | | Cash and cash equivalents at beginning of period | | | 1,021 | | | | 929 | | | Cash and cash equivalents at end of period | | $ | 1,879 | | | $ | 1,021 | | | | | | | | | | | |
The accompanying notes form an integral part of these Consolidated Financial Statements
Communication Intelligence Corporation Consolidated Statements of Cash Flows (In thousands)
Supplemental disclosure of cash flow information: | | | December 31, | | | | | 2009 | | | 2008 | | Interest paid | | $ | – | | | $ | 226 | | Non-cash financing and investing transactions: | | | | | | | | | Short-term notes and accrued interest exchanged for convertible preferred stock | | $ | – | | | $ | 1,040 | | Dividends on preferred shares | | $ | 61 | | | $ | 21 | | Short term notes and accrued interest exchanged for long term notes | | $ | – | | | $ | 638 | | Accretion of beneficial conversion feature on convertible preferred shares | | $ | – | | | $ | 371 | | Conversion of preferred stock to common stock | | $ | 166 | | | $ | 184 | | Issuance of long-term debt for payment of interest in kind | | $ | 355 | | | $ | – | | Reclassification of equity linked instrument to derivative liability | | $ | 1,353 | | | $ | – | | Debt discount and related liability recorded in connection with long-term debt | | $ | 3,433 | | | $ | – | | Warrants issued for interest recorded as derivative liability | | $ | 291 | | | $ | – | |
| | | December 31 | | | | | 2010 | | | | | 2009 | | | Supplementary disclosure of cash flow information | | | | | | | | | | | | | | | | | | | | | Non-cash financing and investing transactions | | | | | | | | | | Secured indebtedness and accrued interest exchanged for Series B convertible preferred stock | | $ | 6,608 | | | | | $ | − | | Conversion feature of Series B preferred shares classified as a derivative liability | | $ | 2,000 | | | | | | − | | Dividends on preferred shares | | $ | 394 | | | | | $ | 61 | | Conversion feature of Series B preferred shares dividends issued as payment in-kind classified as a derivative liability | | $ | 30 | | | | | | − | | Conversion of Series A-1 preferred stock to common stock | | $ | − | | | | | $ | 166 | | Issuance of long-term debt for payment of interest in kind | | $ | − | | | | | $ | 355 | | Reclassification of equity linked instrument to derivative liability | | $ | − | | | | | $ | 1,353 | | Debt discount and related liability recorded in connection with long-term debt | | $ | − | | | | | $ | 3,433 | | | Warrants issued as payment of financing services | | $ | 153 | | | | | $ | − | | Warrants issued in connection with bridge loans recorded as derivative liabilities | | $ | 682 | | | | | $ | − | | Warrants issued for interest recorded as a derivative liability | | $ | 170 | | | | | $ | 291 | | Conversion feature of Series C preferred shares classified as a derivative liability | | $ | 179 | | | | | $ | − | |
The accompanying notes form an integral part of these Consolidated Financial Statements
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands)thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies
The Company:
Communication Intelligence Corporation and its joint venture (the "Company" or "CIC") developsis a leading supplier of electronic signature products and marketsthe recognized leader in biometric signature verification. CIC enables companies to achieve truly paperless workflow in their electronic business processes by providing multiple signature technologies across virtually all applications. CIC’s solutions are available both in SaaS and on-premise delivery models and afford “straight-through-processing,” which can increase customer revenue by enhancing user experience and can also reduce costs through paperless and virtually error-free electronic transactions that can be completed significantly quicker than paper-based procedures. To date, the Company primarily has delivered biometric and electronic signature solutions for business process automationto channel partners and biometric signature verification.end-user customers in the financial services industry.
The Company's research and development activities have given rise to numerous technologies and products. The Company's core technologies arecan be referred to as "transaction and communication enabling"transaction-enabling” technologies." These technologies are designedinclude various forms of electronic signatures, such as handwritten biometric, click-to-sign and others, as well signature verification, cryptography and the logging of audit trails to provide a cost-effective means for securingshow signers’ intent. These technologies can enable secure, legal and regulatory compliant electronic transactions providing networkthat can enhance customer experience 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 .paper-based processes. The Company’s products include SignatureOne®, Ceremony® Server, SignatureOneServer™, SignatureOne® Profile Server,Server™, Sign-it®, and iSign®, biometric and electronic signature products, and multi-lingual Jot® handwriting recognition system.
The Company’s 90%-owned joint venture, Communication Intelligence Computer Corporation, in China (the "Joint Venture"), has licensed eCom Asia Pacific Pty Ltd (“eCom”) as its master reseller for CIC products to end users and resellers with the authority and responsibility to create optimal distribution channels within the People’s Republic of China..
Going concern:concern and management plans:
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Except for 2004, the Company has incurred significant losses since its inception and, at December 31, 2009,2010, the Company’s accumulated deficit was approximately $103,200.$107,300. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has primarily funded these losses through the sale of debt and equity securities. As of December 31, 2010, the Company’s cash balance was approximately $1,879. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In June 2008 and May 2009 the Company raised additional funds through debt and equity financings and converted short-term notes payable to equity (see Note 3)equity. In May, June and July 2010, the Company amended its credit agreement to provide for an additional $1,260 in short term funding. On August 4, 2010, stockholders approved the issuance of a Series B Participating Convertible Preferred Stock and the Company converted approximately $6,608 of long-term debt due in December 2010 into shares of Series B Preferred Stock. In addition the Company sold, for cash in a private placement, 1,440 additional shares of Series B Preferred Stock at a purchase price of $1.00 per share (Note 5). In December 2010 the shareholders approved the issuance of a Series C Participating Convertible Preferred Stock and the Company sold, for cash in a private placement, 2,211 shares of Series C Preferred Stock at a purchase price of $1.00 per share (Note 5).
The Company believes the underlying and driving factors necessary for the electronic signature market to enter the high growth phase have finally merged including, the right technology to allow hosted electronic signature-based recurring revenue solutions through top-tier solution providers who are capable of reaching the mainstream Financial Services Industry market, and economic stability sufficient to sustain reasonable IT spending. The Company also believes it is well positioned to participate in and benefit from the market take off with increasing and sustainable revenue and income growth.
There can be no assurance that the Company will be successful in securing adequate capital resources to fund planned operations or that any additional funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on the Company's business, results of operations and ability to operate as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands)thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Basis of consolidation:
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, and include the accounts of Communication Intelligence Corporation and its 90%-owned Joint Venture in the People's Republic of China. All inter-company accounts and transactions have been eliminated. All amounts shown in the accompanying consolidated financial statements are in thousands of dollars except per share amounts.
Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
Fair value of financial instruments:
The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, short-term debt and long-term debt approximate fair value due to their relatively short maturities. The derivative liability has been stated at fair value using a discounted Black-Sholes option pricing model (Note 4).
Cash and cash equivalents:
The Company considers all highly liquid investments with maturities at the date of purchase of three months or less to be cash equivalents.
The Company's cash and cash equivalents (level 1 inputs), at December 31, consisted of the following:
| | | 2009 | | 2008 | | 2010 | 2009 | Cash in bank | Cash in bank | $ 124 | | $ 127 | | $ | 1,852 | | $ | 124 | Money market funds | Money market funds | 897 | | 802 | | | 27 | | | 897 | | | | | | | | | | | | | Cash and cash equivalents | Cash and cash equivalents | $ 1,021 | | $ 929 | | $ | 1,879 | | $ | 1,021 | | | | | | | | | | |
Concentrations of credit risk:
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, 2009, the Joint Venture had approximately $1 in cash accounts held by a financial institution in the People's Republic of China.
To date, accounts receivable have been derived principally from revenue earned from end users, manufacturers, and distributors of computer products in North America and the Pacific Rim.America. 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.
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands)thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Concentrations of credit risk (continued):
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:
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 $218 for the year ended December 31, 2010. The costs amortized to interest expense for the year ended December 31, 2009 amounted to $425, including $212 of unamortized fees written off due to cancellation of the June 2008 notes in May 2009, and $124, for the years ended December 31, 2009 and 2008, respectively.2009.
Property and equipment, net:
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 $25$19 and $66$25 for the years ended December 31, 20092010 and 2008,2009, respectively.
Property and equipment, net at December 31, consists of the following: | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | Machinery and equipment | | $ | 1,210 | | | $ | 1,202 | | | $ | 1,224 | | | $ | 1,210 | | Office furniture and fixtures | | | 435 | | | | 435 | | | | 435 | | | | 435 | | Leasehold improvements | | | 90 | | | | 90 | | | | 90 | | | | 90 | | Purchased software | | | 323 | | | | 323 | | | | 323 | | | | 323 | | | | | | | | | | | | | | | | | | �� | | | | | | 2,058 | | | | 2,050 | | | | 2,072 | | | | 2,058 | | Less accumulated depreciation and amortization | | | (2,027 | ) | | | (2,002 | ) | | | (2,046 | ) | | | (2,027 | ) | | | | | | | | | | | | | | | | | | | | | | $ | 31 | | | $ | 48 | | | $ | 26 | | | $ | 31 | | | | | | | | | | | | | | | | | | | |
Patents:
On October 6, 2000, the Company acquired certain assets of PenOp Limited (“PenOp”) and its subsidiary PenOp Inc. pursuant to an asset purchase agreement dated as of September 29, 2000.
The nature of the underlying technology of each material patent is as follows:
| · | Patent numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the electronic capture of a handwritten signature utilizing an electronic tablet device on a standard computer system within an electronic document, (b) the verification of the identity of the person providing the electronic signature through comparison of stored signature measurements, and (c) a system to determine whether an electronic document has been modified after signature. |
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands)thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Patents (continued):
| · | Patent number 6091835 involves all of the foregoing and the recording of the electronic execution of a document regardless of whether execution occurs through a handwritten signature, voice pattern, fingerprint or other identifiable means. |
| · | Patent numbers 5933514, 6212295, 6381344, and 6487310 involve methods and processes related to handwriting recognition developed by the Company over the years. Legal fees associated with these patents were immaterial and expensed as the fees were incurred. |
Patents, net consists of the following at December 31:
| | | | | Expiration | | | Estimated Original Life | | | 2009 | | | 2008 | | | | Expiration | | Estimated Original Life | | 2010 | | 2009 | | Patent (Various) | Patent (Various) | | | Various | | | | 5 | | | $ | 9 | | | $ | 9 | | Patent (Various) | | Various | | | 5 | | $ | 9 | | $ | 9 | | Patent (Various) | Patent (Various) | | | Various | | | | 7 | | | | 476 | | | | 476 | | Patent (Various) | | Various | | | 7 | | | 476 | | | 476 | | | | 5544255 | | | | 2013 | | | | 13 | | | | 93 | | | | 93 | | | | | 5647017 | | | | 2014 | | | | 14 | | | | 187 | | | | 187 | | | | | 5818955 | | | | 2015 | | | | 15 | | | | 373 | | | | 373 | | | | | 6064751 | | | | 2017 | | | | 17 | | | | 1,213 | | | | 1,213 | | | | | 6091835 | | | | 2017 | | | | 17 | | | | 4,394 | | | | 4,394 | | | | 5544255 | | | | | 2013 | | | 13 | | | 93 | | | 93 | | | 5647017 | | | | | 2014 | | | 14 | | | 187 | | | 187 | | | 5818955 | | | | | 2015 | | | 15 | | | 373 | | | 373 | | | 6064751 | | | | | 2017 | | | 17 | | | 1,213 | | | 1,213 | | | 6091835 | | | | | 2017 | | | 17 | | | 4,394 | | | 4,394 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,745 | | | | 6,745 | | | | | | | | | | | 6,745 | | | 6,745 | | Less accumulated amortization | Less accumulated amortization | | | | | | | | | | | | (3,974 | ) | | | (3,596 | ) | Less accumulated amortization | | | | | | | | | (4,353 | | | (3,974 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,771 | | | $ | 3,149 | | | | | | | | | | $ | 2,392 | | $ | 2,771 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 $378$379 and $379$378 for the years ended December 31, 20092010 and 2008,2009, respectively. Amortization expense is estimated to be $379 for each of the sevensix years through December 31, 2017. The estimated remaining weighted average useful lives of the patents are 76 years. The patents identified as "various" are technically narrow or dated patents that the Company believes the expiration of which will not be material to its operations. At December 31, 2009,2010, the net carrying value of those patents is $0.
The useful lives assigned to the patents are based upon the following assumptions and conclusions:
| · | The estimated cash flow from products based upon each patent are expected to exceed the value assigned to each patent; |
| · | There are no legal, regulatory or contractual provisions known to the Company that limit the useful life of each patent to less than the assigned useful life; |
| · | No additional material costs need to be incurred or modifications made in order for the Company to continue to be able to realize the protection afforded by the patents; and |
| · | The Company does not foresee any effects of obsolescence or significant competitive pressure on its current or future products, anticipates increasing demand for products utilizing the patented technology, and believes that the current markets for its products based on the patented technology will remain constant or will grow over the useful lives assigned to the patents because of a legal, regulatory and business environment encouraging the use of electronic signatures. |
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands)thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Patents (continued):
The Company performs intangible asset impairment analyses at least annually in accordance with the guidance in the Codification Topic ASC 350-30-05, “Goodwill and Other” ( “ASC 350”) and ASC 360-05-4, “Impairment or Disposal of Long-Lived Assets” ("ASC 360"). The Company uses the guidance in ASC 350 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 of each patent exceeds the fair value of 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 additional factors list edlisted in Critical Accounting Policies in Item 7 of this Form 10-K. The Company believes that no significant events or circumstances occurred or changed during the year ended December 31, 2009,2010, and therefore concluded that no impairment in the carrying values of the patents existed at December 31, 2009.2010.
Long-lived assets:
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, 2009.2010.
Software development costs:
Software development costs are accounted for in accordance with the guidance in the Codification Topic 985-20, "Costs of Software to be Sold, Leased or Marketed" ("ASC 985-20"). Under ASC 985-20, capitalization 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 the 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)of the amount based on the ratiosoftware and varies by type of current revenue to anticipated future revenue.software. The Company performs periodic impairment reviews to ensure that unamortized deferred development costs remain recoverable from the projected future net cash flows that they are expected to generate.
The capitalized costs are amortized to cost of sales. During 20092010 and 2008,2009, the Company had capitalized approximately $772 and $813 of software development costs each year.costs. Amortization of capitalized software development costs for the years ended December 31, 2010 and 2009, was $1,835 and 2008 was $704, respectively. The increase between periods is related to the Company’s decision 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 $504, respectively.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 in 2010.
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Other currentaccrued liabilities:
The Company records liabilities based on reasonable estimates for expenses, or payables that are known but some amounts must beor estimated such asincluding deposits, taxes, rents and services. The estimates are for current liabilities that should be extinguished within one year.
The Company had the following other accrued liabilities at December 31:
| | | 2009 | | | 2008 | | | Accrued professional services | | $ | 102 | | | $ | 110 | | | Rents | | | 39 | | | | 47 | | | Interest | | | 1 | | | | 75 | | | Other | | | 27 | | | | 4 | | | Total | | $ | 169 | | | $ | 236 | |
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Other current liabilities (continued):| | | 2010 | | | 2009 | | | Accrued professional services | | $ | 100 | | | $ | 102 | | | Rents | | | 19 | | | | 39 | | | Interest | | | – | | | | 1 | | | Other | | | 40 | | | | 27 | | | Total | | $ | 159 | | | $ | 169 | |
Material commitments:
The Company had the following commitments at December 31, 2009:2010:
| | | Payments due by period | | | Payments due by period | | | Contractual obligations | | Total | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | | | Total | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | Thereafter | | | Short-term debt related party (1) | | $ | 5,091 | | | $ | 5,091 | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | | Operating lease commitments (2) | | | 532 | | | | 292 | | | | 240 | | | | – | | | | – | | | | – | | | | – | | | | Operating lease commitments (1) | | | | 1,650 | | | 284 | | | 267 | | | 275 | | | 283 | | | 292 | | | 249 | | | Total contractual cash obligations | | $ | 5,623 | | | $ | 5,383 | | | $ | 240 | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | 1,650 | | $ | 284 | | $ | 267 | | $ | 275 | | $ | 283 | | $ | 292 | | $ | 249 | |
| 1. | Short-term debt reportedThe Company extended the lease on the balance sheet is net of approximately $2,222its offices in discounts representing the fair value of warrants issued in connection with the Company’s debt financings. |
2. | April 2010. The base rent will decrease approximately 6% in November 2011 and then increase approximately 3% per annum over the term of the lease, which expires on October 31, 2011.2016. |
Revenue recognition:
Revenue is recognized when earned in accordance with applicable guidance found in the Codification topic, ASC 605 “Revenue Recognition,” ASC 985-605, “Software Revenue Recognition,” and ASC 985-605-25 “Revenue Recognition, Multi-Element Arrangements”. The Company recognizes revenue 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 specific ations.specifications. Revenue from service subscriptions is recognized as costs are incurred or over the service period which ever is longer. Software license agreements may contain multiple elements, including upgrades and enhancements, products deliverable on a when and if available basis and post 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.
For arrangements with multiple deliverables the Company allocates consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, Management’s best estimate of the selling prices is use. For the Company’s tangible products containing software and hardware elements that function together and deliver the tangible products’ essential functionality is accounted for under the multiple-element arrangements revenue recognition guidance discussed above.
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
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.
For each of the years ended December 31, 20092010 and 2008,2009, the Company’s sales in the United States as a percentage of total sales were 92% and 96%., respectively. For the years ended December 31, 2009,2010 and 2008,2009, the Company’s export sales as a percentage of total revenue were approximately 8% and 4%., respectively. Foreign sales are determined based onsales to customers in all countries other than the countries to which the Company’s products are sold.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)U.S.
Major customers:
Wells Fargo Bank accounted for 20% of total revenue for the year ended December 31, 2010. Two customers accounted for 55% of total revenue for the year ended December 31, 2009. American Family Insurance, Co. accounted for 12% and Wells Fargo Bank accounted for 43%. For the year ended December 31, 2008, two
Two customers accounted for 39%66% of total revenue, Allstate Insurance Companygross accounts receivable at December 31, 2010. Mountain America Credit Union accounted for 19%49% and Travelers Indemnity CompanyOracle USA Inc. accounted for 20%17%.
Four customers accounted for 75% of gross accounts receivable at December 31, 2009. eCom Asia Pacific, Ltd, accounted for 30%, Lender Live accounted for 22%, Integrasys accounted for 13%, and John Deere Information Systems accounted for 10%. Four customers accounted for 82% of accounts receivable at December 31, 2008. Allstate Insurance Company accounted for 37%, SHI Inc. accounted for 18%, Travelers Indemnity Company accounted for 15% and eCom Asia Pacific, Ltd accounted for 12%.
Research and development:
Research and development costs are charged to expense as incurred.
Marketing
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, 2010 and 2009 was $20 and 2008 was $59, and $180, respectively.
Net loss per share:
The Company calculates net loss income per share under the provisions of the Codification Topic ASC 260, Earnings Per Share. ASC 260 requires the disclosure of both basic net loss per share, which is based on the weighted average number of shares outstanding, and diluted loss per share, which is based on the weighted average number of shares and dilutive potential shares outstanding.
For the year ended December 31, 2010, 10,028 shares of Common Stock subject to outstanding options, and 135,131 shares issuable upon exercise of warrants were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants would be anti-dilutive.
For the year ended December 31, 2009, 10,231 shares of Common Stock subject to outstanding options and 16,728 shares issuable upon exercise of the warrants were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants would be anti-dilutive.
For the year ended December 31, 2008, 7,608 shares of Common Stock subject
Communication Intelligence Corporation Notes to outstanding options and 41,131 shares issuable upon exercise of the warrants were excluded from the calculation of dilutive earningsConsolidated Financial Statements (In thousands except per share because the exerciseamounts)
1. Nature of such optionsBusiness, Basis of Presentation and warrants would be anti-dilutive.Summary of Significant Accounting Policies (continued)
Foreign currency translation:
The Company considers the functional currency of the Joint Venture, CICC to be the local currency and, accordingly, gains and losses from the translation of the local foreign currency financial statements are included as a component of "accumulated other comprehensive income (loss)" inloss in” the accompanying consolidated balance sheets. Foreign currency assets and liabilities are translated into U.S. dollars at the end-of-period exchange rates except for long-term assets and liabilities, which are translated at historical exchange rates. Revenue and expenses are translated at the average exchange rates in effect during each period except for those expenses related to balance sheet amounts which are translated at historical exchange rates.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
Net foreign currency transaction gains and losses are included in "Interest and other income, net" in the accompanying consolidated statements of operations. Foreign currency transaction gains and losses in 20092010 and 20082009 were insignificant.
Comprehensive income:
Accounting Standards Codification topic, ASC 220-10, “Comprehensive Income” (“ASC 220”), requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual statement that is displayed with the same prominence as other annual financial statements. ASC 220 also requires that an entity classify items as other comprehensive earnings by their nature in an annual financial statement.
Income taxes:
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 follows the provisions of the Accounting Standards Codification topic, ASC 740, “Income Taxes” (ASC 740). There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company's financial condition or results of operations as a result of ASC 740.
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, and state tax examinations for years before 2002. 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 ASC 740, there was no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the twelve month periods ended December 31, 20092010 and 2008.2009.
Recently issued and adopted accounting pronouncements:pronouncement:
In June 2009, the Financial Accounting Standards Board (“FASB”) approved its Accounting Standards Codification (“Codification”) as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which changes the referencing of financial standards, was effective for the Company beginning September 15, 2009. The change in references to the new Codification did not have an impact on the Company’s consolidated financial position or results of operations.
On January 1, 2009, the Company adopted the guidance of the Derivatives and Hedging topic, ASC 815-40-15, in the Codification, which requires that the Company apply a two-step approach in evaluating whether an equity-linked financial instrument (or embedded feature) is indexed to the Company’s stock, including evaluation of the instrument’s contingent exercise and settlement provisions. See Note 4 for the impact of the adoption of ASC 815-40-15 on the Company’s consolidated balance sheet and statement of operations.
In October 2009, the FASB issued ASU 2009-13 and 2009-14,a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)
revenue recognition guidance discussed above. Both standards will beare effective for the Company in the first quarter of 2011. Earlyon January 1, 2011 while early adoption is permitted. The Company is currently evaluatingadopted these new accounting standards on January 1, 2010 using the impact thatprospective method and the adoption of this standard maydid not have a material impact on our consolidated financial statements. Had the Company adopted these new standards in 2009, the impact on its consolidated financial statements.statements would not have been material.
2. Chinese Joint Venture:
The Company currently owns 90% of a joint venture (the “Joint Venture”) with the Jiangsu Hongtu Electronics Group, a provincial agency of the People's Republic of China (the "Agency"). The Joint Venture's business license expires October 18, 2043.
The Joint Venture had no revenue for the years ended December 31, 2010 and 2009, and 2008, respectively. There wereIt had no long-lived assets as of December 31, 20092010 and 2008.2009.
3. Debt:
Short-term debt:
Short-termImmediately prior to the conversion of debt as of December 31, 2008, consists of(the “Recapitalization”) in August 2010 (see Note 5), the Company had outstanding debt with a principal balance of $65,$6,608 (recorded in the balance sheet net of a remaining debt discount of $5.$1,509). The debt was repaidoutstanding balance included $1,260 of funds borrowed through bridge financing obtained in 2009.
Long-term debt:
The current portionMay, June and July 2010 with the following terms: an interest rate of long-term debt as8% per annum and a maturity date of December 31, 2009, consists2010. Warrants to purchase 18,000 shares of debt related to a financing transaction entered intoCommon Stock with an exercise price of $0.06 per share expiring in periods from May 2009. On May 28, 2009, the Company entered into a financing transaction (“New Financing Transaction”) under which the Company raised capital2013 through the issuance of new secured indebtedness and modified the terms of the June 2008 credit agreement (“Credit Agreement”) described below. Certain parties (Phoenix Venture Fund LLC (“Phoenix”), Michael Engmann and certain entities related to Mr. Engmann) to the New Financing Transaction had a pre-existing relationshipJuly 2013 were issued with the Company. Inbridge financings. The remaining principal balance of $5,348 relates to funds raised in financing transactions in 2008 and 2009. The funds raised in these financings had the New Financing Transaction, the Company received an aggregate of $1,100, which is due on December 31, 2010, which accruesfollowing terms: interest at 8% per annum and, which, at the option of the Compa ny, mayCompany, interest could be paid in cash or in kind. In conjunction with the New Financing Transaction, the Company issued warrants to the lendersWarrants to purchase an aggregate of 18,33380,154 shares of common stock (exercisable throughCommon Stock with an exercise price of $0.06 and an expiration date of June 30, 2012 were issued in the financing transactions. Upon execution of each financing a debt discount was recorded. At December 31, 2009, a discount of $2,222 was included in the debt balance. For the years ended December 31, 2010 and 2009, amortization of the debt discount and deferred financing costs was $1,776 and $1,678, respectively. The unamortized discount of $1,509 was charged to paid-in capital in connection with conversion of the associated debt into shares of Series B Preferred Stock (Note 7). The warrants included in the financing transactions were determined to be derivative liabilities (Note 4).
In May and June 2010, the Company received loans aggregating $960 of the $1,260 in additional funding. The Company issued 16,000 warrants to purchase shares of Common Stock at $0.06 per share). Additionally,share. The warrants expire three years from the date of issuance. The Company ascribed a value of $622 to the warrants, which was recorded as a discount to “Current portion of long-term debt” in the balance sheet.
In July 2010, the Company issuedentered into a warrant to SG Phoenix LLC, an affiliatethird amendment of Phoenix, to purchase 3,948 shares of common stock (exercisable throughthe Credit Agreement dated June 30, 2012 at $0.06 per share) and a warrant to purchase 250 shares of common stock (exercisable through June 30, 2012 at $0.06 per share)5, 2008 (“Amendment No. 3”). Under Amendment No. 3 to the attorney for Phoenix as partial paymentCredit Agreement, the Company received an additional $300 in secured indebtedness through the issuance of Phoenix’s legal fees relatedan additional secured promissory note to the transaction.
a new investor. In connection with the New Financing Transaction,issuance of this additional secured promissory note to this investor, the Company amended the Credit Agreement such that the notes underlying the Credit Agreement were cancelled and new notes werealso issued (principal amount of $3,709). In addition,2,000 warrants to purchase 26,495 shares of common stock includedthe Company’s Common Stock at $0.06 per share. The warrant expires three years from the date of issuance. The Company ascribed a value of $60 to the warrants, which was recorded as a discount to “Current portion of long-term debt” in the June 2008 transaction were cancelled and new warrantsbalance sheet. Prior to purchase 61,821 sharesconversion upon the closing of common stock were issued. Thethe Recapitalization on August 5, 2010, the additional secured promissory note and warrants have identical termswas due to the terms outlined in the New Financing Transaction.mature on December 31, 2010.
The Company recorded a lossclosed the Recapitalization on debt extinguishmentAugust 5, 2010, issuing 6,608 shares of Series B Preferred Stock in the amount of $829 related to the cancellationexchange for all of the notes, and recorded an increase to additional paid-in capital inCompany’s outstanding secured indebtedness under the amount of $875 related to the cancellation of warrants that had been recorded as a derivative liability.Exchange Agreement.
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands)thousands except per share amounts)
3. Debt (continued):
Long-term debt:
The Company ascribed the fair value of $3,178 to the new warrants, excluding the warrants issued for administrative services, which is recorded as a discount to long-term debt in the balance sheet. The fair value of the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 1.64%; expected term of 3 years; expected volatility of 137%; and expected dividend yield of 0%. The Company may use the proceeds from the New Financing Transaction to pay the Company’s indebtedness and accrued interest on that indebtedness, for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses in connection with the New Financing Transaction, which were $347, including $173 attributable to the war rants issued for the administrative services. The fees and expenses are recorded as deferred financing costs and are to be amortized over the life of the loan.
In connection with the New Financing Transaction, the Registration Rights Agreement from the previous financing transaction discussed below was amended to provide the lenders certain rights to demand registration of shares issuable upon exercise of the new warrants.
The long-term debt, and related current portion of long-term balance as of December 31, 2008 related to a financing transaction entered into in June 2008. On June 5, 2008, the Company effected a financing transaction under which the Company raised capital through the issuance of new secured indebtedness and equity, and restructured a portion of the Company’s existing debt (collectively, the “Financing Transaction”) described below. Certain parties to the Financing Transactions (Phoenix Venture Fund LLC and Michael Engmann) had a pre-existing relationship with the Company and, with respect to such parties the Financing Transaction may be considered a related party transaction.
Under the Financing Transaction, the Company entered into a Credit 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 Ronald Goodman (collectively with Phoenix, the “Creditors,” and each individually a “Creditor”). Under the terms of the Credit 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, the “Loans”). The Loans, which are represented by secured promissory notes (each a “Note” and collectively, the “Notes”), bore interest at eight pe rcent (8%) per annum which, at the option of the Company, may be paid in cash or in kind. 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 used the remaining proceeds for working capital and general corporate purposes, in each case in the ordinary course of business; and to pay fees and expenses in connection with the Financing Transaction, which were approximately $452. Additionally, a portion 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, the Company and its subsidiary, CIC Acquisition Corp., granted the Creditors a first priority security interest in and lien upon all of the assets of the Company and CIC A cquisition Corp. As noted above the terms related to this Credit Agreement were modified in 2009 by the New Financing Transaction discussed above.
Under the terms of the Credit Agreement and in partial consideration for the Creditors’ respective Loans made pursuant to the terms of the Credit Agreement as described above, the Company issued to each Creditor a warrant to purchase up to the number of shares of the Company’s Common Stock obtained by dividing the amount of such Creditor’s Loan by 0.14 (each a “Warrant” and collectively, the ‘Warrants”). A total of 25,982 shares of the Company’s Common Stock may be issued upon exercise of the Warrants. The Warrants are exercisable beginning June 30, 2008. The Warrants had an exercise price of fourteen cents ($0.14) per share. The Company ascribed the relative fair value of $1,231 to the warrants, which was recorded as a discount to “Long-term debt” in th e balance sheet. The fair value of 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
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
3. Debt (continued):
Long-term debt:
82.3%; and expected dividend yield of 0%. These warrants were cancelled under the terms of the New Financing Transaction discussed above.
In connection with the closing of the Financing Transaction, 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.
In June 2008, in connection with the Financing Transaction, the outstanding principal balances of $995 plus accrued and unpaid interest of $45 were exchanged for Series A-1 Preferred Shares (the “Preferred Shares”). Certain debt holders elected not to exchange principle balances of $125 and unpaid interest thereon and were repaid in September 2008.
The offer and sale of the Warrants and 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 Section 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.
There are outstanding, warrants to acquire 16,728 shares of the Company’s Common Stock issued as part of the above referenced financings. These warrants expire between June 2010 and June 2012. Of the warrants discussed above, 10,246 of the shares underlying the warrants were registered with the Company’s Form S-1/A, which was declared effective December 28, 2007.
During the year ended December 31, 2009, the Company exercised its option related to the New Financing Transaction and made the interest payments in kind. The Company issued new notes in the amount of $283, and issued additional warrants to purchase 4,686 shares of common stock with the same terms as those issued in the New Financing Transaction. The Company ascribed the fair value of $268, to the additional warrants, of which $255 is recorded as a discount to long-term debt in the balance sheet. The fair value of the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 1.64% and 1.45%; expected term of 3 years; expected volatility of 137% and 142%; and expected dividend yield of 0%.
Interest expense associated with the Company’s debt for the year ended December 31, 2010 and 2009 was $2,039 and 2008 was $2,033, and $1,137, respectively, of which $1,912$1,974 and $973$1,912 was related party expense. Amortization of debt discount and deferred financing costs included in interest expense for the year ended December 31, 2010 and 2009 was $1,776 and 2008 was $1,678, and $849, respectively, of which $1,600$1,719 and $730$1,600 was related party expense.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
4. Derivative liability:
The Company follows the guidance found in Codification topic, ASC 815-40 “the Derivative and Hedging, Contracts in Entity’s Own Equity.” TheEquity topic in the Codification, ASC 815-40-15. Paragraphs 15-5 through 15-8 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. ASC 815-40-15 provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception. The Company adopted ASC 815-40-15 effective January 1, 2009, and determined that certain warrants and the embedded conversion feature on the preferred stockSeries A-1, Series B Preferred Shares and Series C Preferred Shares require liability classification because of certain provisions that may result in an adjustment to the number of shares upon settlement and an adjustment to their exercise or conversion price. The fair value of the embedded conversion feature at January 1, 2009 and December 31, 2009 was insignificant.conversion. The warrants were retroactively reclassified as liabilities, the result was a decrease in paid inpaid-in capital as of January 1, 2009 of $3,510, a decrease in accumulative deficit of $2,157 and the recognition of a liability of $1,353 during various dates. In October and November 2009, warrant holders exercised 300 warrants for cash aggregating $18 and exchanged an aggregate of 82,257 warrants in cashless exercises in accordance with the termsThe fair value of the agreements. embedded conversion feature for the Series A-1 Preferred Shares at December 31, 2010 and December 31, 2009 was insignificant. The fair value of the embedded conversion feature on the Series B Preferred Shares on the initial valuation date was approximately $2.0 million. The fair value of the embedded conversion feature on the Series B Preferred Shares at December 31, 2010 was approximately $130 (Note 7). The fair value of the embedded conversion feature on the Series C Preferred Shares on the initial valuation date, December 31, 2010, was approximately $179.
The Company issued 58,384additional warrants to purchase 30,405 shares of common stock during the year ended December 31, 2010, including 18,000 in satisfactionconnection with bridge financing, 3,469 for paid in-kind interest and 8,936 for services related to the Recapitalization and Purchase Agreements (Note 7). The issuance of the transactions. The value of the derivative liability for the exchanged warrants was adjusted on the their respective dates of exchange resultingSeries C Preferred Shares resulted in a $3,354 non-cash charge to expensean increase in the fourth quarterliability of 2009.$179. The remaining liabilityderivative liabilities were adjusted to fair value as of December 31, 20092010, resulting in a decrease in the liability and other expense of $3,136 for the year ended December 31, 2010. The ending derivative liability balance at December 31, 2010 was $422.$499.
The Company uses thea discounted Black-Scholes pricing model to calculate the fair value of its preferred share and warrant liabilities. Key assumptions used to apply these models are as follows:
| | December 31, 2009 | January 1, 2009 | | December 31, 2010 | | | December 31, 2009 | | | Expected term | 0.5 to 3.00 years | .75 to 2.5 years | | 0.5 to 4.00 years | | | 0.5 to 3.00 years | | | Volatility | 139.0% - 156.0% | 141.9% - 171.7% | | 141.5% - 184.1% | | | 139.0% - 156.0% | | | Risk-free interest rate | 1.70% | 1.14% | | 0.29 – 1.02% | | | 1.70% | | | Dividend yield | 0% | 0% | | 0% | | | 0% | |
Fair value measurements:
Assets and liabilities measured at fair value as of December 31, 2009,2010, are as follows:
| | | Value at December 31, 2009 | | | Quoted prices in active markets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Derivative liability | | $ | 422 | | | $ | − | | | $ | − | | | $ | 422 | |
| | | Value at December 31, 2010 | | | Quoted prices in active markets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Derivative liability | | $ | 499 | | | $ | − | | | $ | − | | | $ | 499 | |
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
4. Derivative liability (continued):
The fair value framework requires a categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. | | Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. |
| | Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. |
There were no financial assets or liabilities measured at fair value, with the exception of cash and cash equivalents (level 1) and the above mentioned derivative liability as of December 31, 20092010 and December 31, 2008.2009.
Changes in the fair value of the level 3 derivative liability for the year ended December 31, 2009,2010, are as follows:
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
4. Derivative liability (continued):
| | | Derivative Liability | | | Balance at January 1, 2009 | | $ | 1,353 | | | Derecognition of derivative related to May 28, 2009 refinancing | | | (875 | ) | | Additional derivative recorded related to May 28, 2009 refinancing, including quarterly warrant derivative liability issued as paid-in-kind interest | | | 3,637 | | | Loss recorded to adjust derivative liability to fair value | | | 5,136 | | | Derecognition of derivative related to exercise of warrants in the fourth quarter of 2009 | | | (8,829 | ) | | Balance at December 31, 2009 | | $ | 422 | |
| | | Derivative Liability | | | Balance at January 1, 2010 | | $ | 422 | | | Additional liabilities recorded related to warrants issued for services | | | 153 | | | Additional liabilities recorded related to warrants issued for interest paid in kind and bridge financing | | | 851 | | | Additional liabilities recorded related to the conversion feature on Series B preferred shares and dividends paid in kind | | | 2,030 | | | Additional liabilities recorded related to the conversion feature on Series C preferred shares | | | 179 | | | Gain on derivative liability | | | (3,136 | ) | | Balance at December 31, 2010 | | $ | 499 | |
5. Stockholders' equity:
Common stock options:
At December 31, 2009,2010, the Company has one stock-based employee compensation plan, (the "2009 Stock Compensation Plan") and may also grants options to employees, directors and consultants outside of the 2009 Stock Compensation Plan under individual plans.
On July 1, 2009 the Board of Directors adopted the 2009 Stock Compensation Plan. Non-qualified options under the 2009 Stock Compensation Plan are granted to employees, officers, and consultants of the Company. There were 7,000 shares of common stockCommon Stock authorized for issuance under the 2009 Stock Compensation Plan. The options have a term of three to seven years and vest immediately or quarterly over three years as defined. As of December 31, 2009, 2,6532010, 3,745 plan options were outstanding, and 2,3972,366 plan options were exercisable with a weighted average exercise price of $0.10$0.09 per share.
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
5. Stockholders' equity (continued):
In April 1999, the Company adopted and in June 1999, the shareholders approved the 1999 Option Plan. Incentive and non-qualified options under the 1999 Option Plan were granted to employees, officers, and consultants of the Company. The 1999 Option Plan expired in April 2009 (options outstanding under that plan are not effected by its expiration). There were 4,000 shares of common stockCommon Stock authorized for issuance under the 1999 Option Plan. The options had a seven year term and generally vested quarterly over three years. As of December 31, 2009, 2,4492010, 2,153 plan options were outstanding and 2,4392,153 plan options were exercisable with a weighted average exercise price of $0.58$0.61 per share.
The Company has issued options under individual plans to its employees and directors. The individual plan options generally vest over four years or pro rata quarterly over three years. Non-plan options are generally exercisable over a period not to exceed seven years. As of December 31, 2009, 5,1292010, 4,130 non-plan options were outstanding and 3,4133,790 non-plan options were exercisable with a weighted average exercise price of $0.35$0.44 per share.
Share-based payment:
The Company accounts for stock based compensation in accordance with Accounting Standards Codification topic, ASC718 “Compensation- Stock Compensation” (“ASC 718”). ASC 718 requires the recognition of the cost of employee services received in exchange for an award of equity instrument in the financial statements and is measured based on the grant date fair value of the award.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' equity (continued):
Share-based payment:
Share-based compensation expense is based on the estimated grant date fair value of the portion of share-based payment awards that are ultimately expected to vest during the period. The grant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. ASC 718 requires forfeitures of share-based payment awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated average forfeiture rates for the year ended December 31, 2009,2010, was approximately 224%.
ASC 718 requires the cash flows from tax benefits for deductions in excess of the compensation costs recognized for share-based payment awards to be classified as financing cash flows. Due to the Company’s loss position, there were no such tax benefits during the year ended December 31, 2009.2010.
Valuation and Expense Information under ASC 718:
The weighted-average fair value of stock-based compensation is based on the single option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to employees is amortized using the accrual method over the vesting period of the options. The fair value calculations are based on the following assumptions:
| | | Year Ended December 31, 20092010 | Year Ended December 31, 20082009 | | Risk free interest rate | | 1.12% - 5.11% | 2.64%1.12% - 5.11% | | Expected life (years) | | 2.82 – 7.00 | 3.582.82 – 6.887.00 | | Expected volatility | | 91.99% - 145.0%147.4% | 91.99% - 99.98%145.0% | | Expected dividends | | None | None |
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
5. Stockholders' equity (continued):
Share-based payment:
The following table summarizes the allocation of stock-based compensation expense related to stock option grants under ASC 718 for the years ended December 31, 20092010 and 2008.2009. There were no stock option exercises during the year ended December 31, 2010. During the year ended December 31, 2009, 85 stock options were exercised at a weighted average $0.09 per share. There were no stock option exercises during the year ended December 31, 2008.
| | | Year Ended December 31, 2009 | | | Year Ended December 31, 2008 | | | Research and development | | $ | 59 | | | $ | 37 | | | Sales and marketing | | | 98 | | | | 33 | | | General and administrative | | | 137 | | | | 75 | | | Director options | | | 24 | | | | 16 | | | Stock-based compensation expense included in operating expenses | | $ | 318 | | | $ | 161 | |
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' equity (continued):
Share-based payment:| | | Year Ended December 31, 2010 | | | Year Ended December 31, 2009 | | | Research and development | | $ | 21 | | | $ | 59 | | | Sales and marketing | | | 52 | | | | 98 | | | General and administrative | | | 20 | | | | 137 | | | Director options | | | – | | | | 24 | | | Stock-based compensation expense included in operating expenses | | $ | 93 | | | $ | 318 | |
The summary activity under the Company’s 2009 Stock Compensation Plan, the 1999 Option Plan and Individual Plans is as follows:
| | | December 31, 2009 | | | December 31, 2008 | | | December 31, 2010 | | | December 31, 2009 | | | | | Shares | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life | | | Shares | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life | | | Shares | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life | | | Shares | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at beginning of period | | | 7,608 | | | $ | 0.48 | | | | | | | 6,036 | | | $ | 0.59 | | | | | | | 10,231 | | | $ | 0.34 | | | | | | | | 7,608 | | | $ | 0.48 | | | | | | Granted | | | 3,976 | | | $ | 0.10 | | | | | | | 1,975 | | | $ | 0.15 | | | | | | | 2,550 | | | $ | 0.08 | | | | | | | | 3,976 | | | $ | 0.10 | | | | | | Exercised | | | (85 | ) | | $ | 0.09 | | | | | | | − | | | $ | 0.00 | | | | | | | – | | | $ | 0.00 | | | | | | | | (85 | ) | | $ | 0.09 | | | | | | Forfeited | | | (1,268 | ) | | $ | 0.40 | | | | | | | (403 | ) | | $ | 0.47 | | | | | | | (2,753 | ) | | $ | 0.15 | | | | | | | | (1,268 | ) | | $ | 0.40 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at period end | | | 10,231 | | | $ | 0.34 | | | | | 3.9 | | | | 7,608 | | | $ | 0.48 | | | | | 4.4 | | | | 10,028 | | | $ | 0.33 | | | | | 3.2 | | | | 10,231 | | | $ | 0.34 | | | | | 3.9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options vested and exercisable at period end | | | 8,249 | | | $ | 0.39 | | | | | 3.3 | | | | 6,043 | | | $ | 0.56 | | | | | 3.9 | | | | 8,309 | | | $ | 0.38 | | | | | 2.6 | | | | 8,249 | | | $ | 0.39 | | | | | 3.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average grant-date fair value of options granted during the period | | $ | .10 | | | | | | | | | | | | $ | 0.10 | | | | | | | | | | | | $ | 0.08 | | | | | | | | | | | | $ | 0.10 | | | | | | | | | | |
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2009:2010:
| | | | | Options Outstanding | | | Options Exercisable | | | | | Options Outstanding | | | Options Exercisable | | Range of Exercise Prices | Range of Exercise Prices | | | Options Outstanding | | | Weighted Average Remaining Contractual Life(in years) | | | Weighted Average Exercise Price | | | Number Outstanding | | | Weighted Average Exercise Price | | Range of Exercise Prices | | | Options Outstanding | | | Weighted Average Remaining Contractual Life(in years) | | | Weighted Average Exercise Price | | | Number Outstanding | | | Weighted Average Exercise Price | | | $ | 0.00 – $0.50 | | | | 7,235 | | | | 4.3 | | | $ | 0.17 | | | | 5,253 | | | $ | 0.19 | | 0.00 – $0.50 | | | | 7,047 | | | | 3.8 | | | $ | 0.15 | | | | 5,328 | | | $ | 0.18 | | | $ | 0.51 – $1.00 | | | | 2,908 | | | | 2.8 | | | $ | 0.72 | | | | 2,908 | | | $ | 0.72 | | 0.51 – $1.00 | | | | 2,908 | | | | 1.8 | | | $ | 0.72 | | | | 2,908 | | | $ | 0.72 | | | $ | 1.01 – $2.00 | | | | 73 | | | | 2.2 | | | $ | 1.66 | | | | 73 | | | $ | 1.66 | | 1.01 – $2.00 | | | | 73 | | | | 1.2 | | | $ | 1.66 | | | | 73 | | | $ | 1.66 | | | $ | 2.01 – $2.99 | | | | − | | | | 0.0 | | | $ | 0.00 | | | | − | | | $ | 0.00 | | | | $ | 3.00 – $7.50 | | | | 15 | | | | 0.5 | | | $ | 3.56 | | | | 15 | | | $ | 3.56 | | | | | | | | | 10,231 | | | | | | | | | | | | 8,249 | | | | | | | | | | 10,028 | | | | | | | | | | | | 8,309 | | | | | |
A summary of the status of the Company’s nonvested shares as of December 31, 2009 is as follows:
Nonvested Shares | | Shares | | | Weighted Average Grant-Date Fair Value | | Nonvested at January 1, 2009 | | | 1,565 | | | $ | 0.30 | | | Granted | | | 3,976 | | | $ | 0.08 | | | Forfeited | | | (1,268 | ) | | $ | 0.11 | | | Vested | | | (2,291 | ) | | $ | 0.25 | | | Nonvested | | | 1,982 | | | $ | 0.10 | |
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands)thousands except per share amounts)
5. Stockholders' equity (continued):
Share-based payment:
A summary of the status of the Company’s non-vested shares as of December 31, 2010 is as follows:
Non-vested Shares | | Shares | | | Weighted Average Grant-Date Fair Value | | Non-vested at January 1, 2010 | | | 1,982 | | | $ | 0.10 | | | Granted | | | 2,550 | | | $ | 0.07 | | | Forfeited | | | (1,895 | ) | | $ | 0.12 | | | Vested | | | (918 | ) | | $ | 0.18 | | | Non-vested | | | 1,719 | | | $ | 0.06 | |
As of December 31, 2009,2010, there was $100$43 of total unrecognized compensation cost related to nonvestednon-vested share-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.252.1 years.
The Company expects to make additional option grants in future years. The options issued to employees and directors will be subject to the provisions of ASC 718, which may have a material impact on the Company’s financial statements.
As of December 31, 2009, 10,231 shares of common stock were reserved for issuance upon exercise of outstanding options.
Warrants:
In October 2009, a note holder and related party exercised 300 warrants, and the Company issued 300 shares of common stock at $0.06 per share. Company received $18 in cash.
In late October and early November 2009, note holders, including related parties, exercised 82,557 warrants in cashless exercises under the terms of the New Financing Transaction. The warrant exchange rate was based on the average closing price of the Company’s common stock for the preceding five trading days prior to the date of exercise. The Company issued 58,384 shares of common stock, including 52,429 shares to related parties.
At December 31, 2009, 16,7282010, 10,028 shares of Common Stock were reserved for issuance upon exercise of outstanding warrants.options.
Preferred Shares:
Series A-1
In connection with the closing of the June 2008 Financing Transaction, (see Note 3), 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. Under the Purchase Agreement, in exchange for the cancellation of $995 in principal amount and $45 of interest accrued thereon of the Company’s thenaggregate outstanding aggregate balance of $2,071 in existing debt and interest accrued thereon through May 31, 2008, the Company issued to the holders of such debt an aggregate of 1,040 Sharesshares of the Company’s Series A Cumulative Convertible Preferred Stock, which shares were subsequently exchanged in October 2008 for an equivalent number of shares of Series A-1 Cumulative Convertible Preferred Stock (“the(the “Series A-1 Preferred Shares”). During 2009, 146 Series A-1 Preferred Shares were converted into 1,005 shares of the Company’s Common Stock. As of December 31, 2009, there are 813 Series A-1 Preferred Shares outstanding. The Series A-1 Preferred Shares carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional Series A-1 Preferred Shares, have a liquidation preference over common stockCommon Stock of $1.00one dollar ($1.00) per share and are convertible into shares of common stockCommon Stock at a ratiothe conversion price of onefourteen cents ($0.14) per share. If the outstanding Series A-1 Preferred Share for 7.1429Shares are converted in their entirety, the Company would issue 5,809 shares of Common Stock. The Preferred Shares may vote on matters put to the Company’s stockholders on an as-converted-to-Common-Stock basis. Subject to further adjustment as provided in the Certificate of Designations, Powers, Preferences and Rights of the Preferred Shares, shares of Preferred are presently convertible into shares of common stock at a ratio of one share of Preferred for 7.1429 shares of common stock. If all shares of Series A-1 Preferred were converted into Common Stock at the above conversion ratio, the Company would issue 5,400 shares of Common Stock.Shares are convertible any time after June 30, 2008. As of December 31, 2009, holders of Preferred Shares have converted an aggregate of 350 shares of Preferred Shares into 2,500 shares of Common Stock. The preferred stock transaction resulted in a beneficial conversion feature of $371, o f which $273 is attributable to Michael Engmann and $98 to2010, the other creditors. The beneficial conversion feature was recorded as a charge to loss applicable to holders of Common Stock for the quarter ended June 30, 2008. The Company has accumulatedaccrued dividends on the preferred shares of Series A-1 Preferred of $108.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' equity (continued):
Preferred Shares (continued):
Under the terms of the Registration Rights Agreement, the Company was obligated to prepare and file with the Securities and Exchange Commission (the “Commission”) a registration statement under the Securities Act of 1933, as amended (the Securities Act”) covering the resale of the shares of Common Stock issued upon conversion of the shares of Preferred Stock and exercise of the Warrants as described above. The Company must also use its reasonable best efforts to keep the registration statement continuously effective under the Securities Act until the
5. Stockholders' equity (continued):
Preferred Shares (continued):
earlier of the date that is two years after its Effective Date or until the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144. The Registration Rights Agreement provided for certain registration rights whereby the Company would have incurred penalties if a registration statement was not filed or declared effective by the SEC on a timely basis. The Company filed the required registration statement on August 18, 2008, which was declared effective on October 10, 2008. The Company was obligated to pay the costs and expenses of such registration.
During the year ended December 31, 2009, one preferred shareholder, a related party, converted an aggregate of 166 preferred shares into 1,183 shares of the Company’s Common Stock.
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
5. Stockholders' equity (continued):
Series B
On August 5, 2010, the Company completed the conversion of all of the Company’s outstanding indebtedness into shares of Series B Participating Convertible Preferred Stock (the “Series B Preferred Stock”) in accordance with an executed Exchange Agreement entered into with Phoenix Venture Fund LLC and certain other holders of the Company’s indebtedness and sold approximately 1.44 million shares of Series B Preferred Stock in accordance with an executed Series B Preferred Stock Purchase Agreement (the “Purchase Agreement”). The Company issued approximately 6,608 shares of Series B Preferred Stock in exchange for all of the Company’s outstanding secured indebtedness and issued 1,440 shares of Series B Preferred Stock for proceeds of $1,440, net of expenses of $437. In addition, the Company paid approximately $143 in expenses to a third party in connection with the financing. The expenses were recorded as a charge to additional paid in capital. The proceeds are to be used for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses associated with the Recapitalization.
The Series B Preferred Stock carries a ten percent (10%) annual dividend, payable quarterly in arrears in cash or in additional shares of Series B Preferred Stock, has a liquidation preference over Common Stock of one dollar ($1.50) per share and are convertible into shares of Common Stock at an initial conversion price of six cents ($0.06) per share. The Company issued additional stock, the Series C Participating Convertible Preferred Stock (the “Series C Preferred Stock”), at a price less than the current conversion price of $0.06, which resulted in a downward adjustment in the conversion price of the Series B Preferred Stock to $0.0433 per share and in an increase in the number of shares of Common Stock that would be issued upon conversion of the Series B Preferred Stock (Note4). The Series B Preferred Stock is convertible any time after August 5, 2010. The Recapitalization included a conversion feature determined to be a derivative liability in the amount of $2,000 of which $1,498 was attributable to related parties and $502 to the other creditors. Due to the decline in the price of the Company’s Common Stock and the issuance of the Series C Preferred Stock the fair value of the embedded conversion feature on the Series B Preferred Stock was reduced to approximately $130 at December 31, 2010 (Note 4). The Company issued 206 shares of Series B Preferred Stock in payment of dividends for the year ended December 31, 2010. The conversion feature recorded on the Series B Preferred Stock dividends was $5. If the outstanding Series B Preferred Stock is converted in its entirety, the Company would issue 193,533 shares of Common Stock.
Series C
On December 31, 2010, the Company completed the sale of 2,211 shares of Series C Preferred Stock through a Purchase Agreement with Phoenix Venture Fund LLC and certain other investors for proceeds of $2,211 net of approximately $422 in expenses to third parties in connection with the financing. The Series C Preferred Stock is senior to the outstanding Series B Preferred Stock and Series A-1 Preferred Stock and all shares of Common Stock with respect to dividend rights and rights on liquidation, winding-up and dissolution in accordance with its Purchase Agreement. The expenses were recorded as a charge to additional paid in capital. The proceeds are to be used for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses associated with the sale of the Series C Preferred Stock.
The Series C Preferred Stock carries a ten percent (10%) annual dividend, payable quarterly in arrears in cash or in additional Series C Preferred Stock. In preference to all other shares of the Company’s capital stock, The Series C Preferred Stock will receive liquidating distributions in the amount of $1.50 per share plus any accrued dividends. The Series C Preferred Stock is convertible into Common Stock at any time at the option of the holder at an initial conversion price of $0.0225 per share, subject to adjustment for stock dividends, splits, combinations and similar events and, with certain exceptions, the issuance of additional securities at a purchase price less than the then current conversion price of the Series C Preferred Stock. The Series C Preferred Stock is convertible any time after December 31, 2010. On December 31, 2010, the Series C Preferred Stock’s conversion feature was determined to be a derivative liability in the amount of $179, of which $113 is attributable to related parties and $66 to the other holders. If the
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
5. Stockholders' equity (continued):
Series C
outstanding Series C Preferred Stock is converted in its entirety, the Company would issue 98,244 shares of Common Stock.
After receipt of the liquidation preference, the shares of Series C Preferred Stock and Series B Preferred Stock will participate pro rata on an as-converted basis with the shares of Common Stock in any remaining liquidation proceeds (after payment of the liquidation preference on the Series C Preferred Stock, Series B Preferred Stock and Series A-1 Preferred Stock).
Warrants:
Series C Warrants
Each investor received a warrant to purchase a number of shares of Common Stock equal to the aggregate number of shares of Series C Preferred Stock purchased by the investor divided by 0.0225. Each warrant issued in connection with the Series C Financing has an exercise price of $0.0225 per share and is exercisable in whole or in part, including by means of cashless exercise, for a period of three years from the date of issuance. If the outstanding Series C Warrants are executed for cash in their entirety, the Company would issue 98,244 shares of Common Stock.
Other Warrants
In October 2009, a note holder and related party exercised 300 warrants, and the Company issued 300 shares of Common Stock at $0.06 per share. The Company received $18 in cash.
In late October and early November 2009, note holders, including related parties, exercised 82,557 warrants on a cashless basis. The warrant exchange rate was based on the average closing price of the Company’s Common Stock for the preceding five trading days prior to the date of exercise. The Company issued 58,384 shares of Common Stock, including 52,429 shares to related parties.
At December 31, 2010, 135,364 shares of Common Stock were reserved for issuance upon exercise of outstanding warrants.
Restricted Share Grants
As part of the Recapitalization, the Company issued restricted shares to four employees in exchange for reductions in their respective salaries. The number of shares issued was calculated based on the amount of the annual salary reduction divided by $0.06 per share. Fifty percent of the shares vested on December 31, 2010 and the remaining 50% are scheduled to vest on June 30, 2011, subject to continued employment through such vesting dates. As of December 31, 2010, the Company will issue 678 restricted shares of Common Stock. 6. Commitments:
Lease commitments:
The Company currently leases its principal facilities (the "Principal Offices) in Redwood Shores, California, pursuant to a sublease that expires in 2011. The Joint Venture leases space on a month to month basis in Nanjing, China.2016. In addition to monthly rent, the U.S. facilities are subject to additional rental payments for utilities and other costs above the base amount. Facilities rent expense was approximately $267,$281, and $260,$303, in 20092010 and 2008,2009, respectively.
Communication Intelligence Corporation Notes to Consolidated Financial Statements (In thousands except per share amounts)
7. Income taxes:
As of December 31, 2009,2010, the Company had federal net operating loss carryforwardscarry-forwards available to reduce taxable income of approximately $64,787.$63,430. The net operating loss carryforwardscarry-forwards expire between 20102011 and 2029.2030. The Company also had federal research and investment tax credit carryforwardscarry-forwards of approximately $202$165 that expire at various dates through 2012. The Company also has state net operating loss carryforwardscarry-forwards available to reduce taxable income of approximately $25,241.$31,700. The net operating loss carryforwardscarry-forwards expire between 20102013 through 2029.2030.
Deferred tax assets and liabilities at December 31, consist of the following: | | | 2009 | | | 2008 | | | Deferred tax assets: | | | | | | | | Net operating loss carryforwards | | $ | 23,543 | | | $ | 24,959 | | | Credit carryforwards | | | 202 | | | | 315 | | | Deferred income | | | 582 | | | | 117 | | | Other, net | | | 156 | | | | 170 | | | | | | | | | | | | | Total deferred tax assets | | | 24,483 | | | | 25,561 | | | | | | | | | | | | | Valuation allowance | | | (24,483 | ) | | | (25,561 | ) | | | | | | | | | | | | Net deferred tax assets | | $ | - | | | $ | - | |
7. Income taxes (continued):| | | 2010 | | | 2009 | | | Deferred tax assets: | | | | | | | | Net operating loss carry-forwards | | $ | 25,373 | | | $ | 23,543 | | | Credit carry-forwards | | | 165 | | | | 202 | | | Deferred income | | | 456 | | | | 582 | | | Intangibles | | | 1,175 | | | | 684 | | | Other, net | | | 210 | | | | 156 | | | | | | | | | | | | | Total deferred tax assets | | | 27,379 | | | | 25,167 | | | | | | | | | | | | | Valuation allowance | | | (27,379 | ) | | | (25,167 | ) | | | | | | | | | | | | Net deferred tax assets | | $ | - | | | $ | - | |
Income tax benefit differs from the expected statutory rate as follows:
| | | 2009 | | | 2008 | | | Expected federal income tax benefit | | $ | (3,673 | ) | | $ | (1,267 | ) | | State income tax benefit | | | (648 | ) | | | (330 | ) | | Expired net operating loss | | | 2,714 | | | | 1,911 | | | Change in valuation allowance and other | | | 1,607 | | | | (314 | ) | | Income tax benefit | | $ | – | | | $ | – | |
7. Income taxes (continued):| | | 2010 | | | 2009 | | | Expected federal income tax benefit | | $ | (1,414 | ) | | $ | (3,673 | ) | | State income tax benefit | | | (250 | ) | | | (648 | ) | | Other | | | (548 | ) | | | 2,318 | | | Change in valuation allowance | | | 2,212 | | | | 2,003 | | | Income tax benefit | | $ | – | | | $ | – | |
A full valuation allowance has been established for the Company's net deferred tax assets since the realization of such assets through the generation of future taxable income is uncertain.
Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net operating losses and tax credit carryforwardscarry-forwards may be impaired or limited in certain circumstances. These circumstances include, but are not limited to, a cumulative stock ownership change of greater than 50%, as defined, over a three-year period. During 1997, the Company experienced stock ownership changes which could limit the utilization of its net operating loss and research and investment tax credit carryforwardscarry-forwards in future periods. In addition, a study of recent transactions has not been preformed to determine whether any further limitations might apply.
8. Employee benefit plans:
The Company sponsors a 401(k) defined contribution plan covering all employees meeting certain eligibility requirements. Contributions made by the Company are determined annually by the Board of Directors. To date, the Company has made no contributions to this plan.
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