UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ------ THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2001
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ------- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
-------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of
August 6, 2001: 90,721,024.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
-------------------- --------
Condensed Consolidated Balance Sheets at June 30, 2001 (unaudited) and
December 31, 2000......................................................3
Condensed Consolidated Statements of Operations for the Three
and Six-Month Periods Ended June 30, 2001 and 2000 (unaudited).........4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Three and Six-Month Periods Ended
June 30, 2001 and 2000 (unaudited)....................................5
Condensed Consolidated Statements of Cash Flows for the Three and
Six-Month Periods Ended June 30, 2001 and 2000 (unaudited)............6
Notes to Unaudited Condensed Consolidated Financial Statements...........7
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations...........................................12
---------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......17
----------------------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................17
-----------------
Item 2. Change in Securities.............................................17
--------------------
Item 3. Defaults Upon Senior Securities..................................18
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders..............18
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Item 5. Other Information................................................19
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits..............................................19
(b) Reports on Form 8-K...................................19
Signatures........................................................20
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
2001 2000
------------ -------------
Unaudited
Assets
Current assets:
Cash and cash equivalents............. $ 3,618 $ 2,349
Accounts receivable, net,
includes $250 at 12/31/00 from
M10 (previously PenOp Inc.)........... 1,555 1,760
Inventories........................... 85 171
Prepaid expenses and other
current assets....................... 244 270
---------- -----------
Total current assets.............. 5,502 4,550
Note receivable from officer............... - 46
Property and equipment, net................ 239 262
Patents and trademarks..................... 6,027 6,234
Other assets............................... 226 210
---------- -----------
Total assets...................... $ 11,994 $ 11,302
========== ===========
Liabilities and Stockholders'
equity Current liabilities:
Short-term debt....................... $ 181 $ 120
Accounts payable...................... 387 679
Accrued compensation.................. 261 263
Other accrued liabilities............. 215 318
Deferred revenue...................... 130 61
---------- -----------
Total current liabilities......... 1,174 1,441
Long-term debt - related party............. 3,000 1,427
Minority interest.......................... 129 127
Commitments
Stockholders' equity:
Common stock.......................... 907 897
Additional paid-in capital............ 81,462 80,656
Accumulated deficit................... (74,477) (73,043)
Cumulative translation adjustment..... (201) (203)
---------- -----------
Total stockholders' equity........ 7,691 8,307
---------- -----------
Total liabilities and stockholders'
equity........................... $ 11,994 $ 11,302
========== ===========
See accompanying notes.
-3-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Online................................... $ 348 $ 430 $ 740 $ 729
Corporate................................ 1,183 449 1,662 1,162
Nonrecurring maintenance
fees (net) - M10(previously PenOp Inc.).. - - 352 -
China ................................. 372 371 767 736
------- ------- ------- -------
Total revenues..................... 1,903 1,250 3,521 2,627
Operating costs and expenses:
Cost of sales:
Online................................ 306 400 575 671
Corporate............................. 157 138 232 340
China ................................ 239 270 517 526
Research and development................. 494 388 971 817
Sales and marketing .................... 573 588 1,134 1,180
General and administrative ............. 736 571 1,379 1,041
------ ------ ------ ------
Total operating costs and expenses 2,505 2,355 4,808 4,575
------ ------ ------ ------
Loss from operations ..................... (602) (1,105) (1,287) (1,948)
Interest and other income
(expense), net ......................... 9 33 14 46
Interest expense ......................... (98) (55) (159) (114)
Minority interest ........................ (2) - (2) 1
------- ------- ------- -------
Net loss ........................ (693) (1,127) (1,434) (2,015)
======= ======= ======= =======
Basic loss per common share .............. $(0.01) $(0.01) $(0.02) $(0.02)
======= ======= ======= =======
Diluted loss per common share ............ $(0.01) $(0.01) $(0.02) $(0.02)
======= ======= ======= =======
Weighted average common
shares outstanding .................. 90,542 84,370 90,384 83,684
======= ======= ======= =======
See accompanying notes.
-4-
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
Accumulated
Additional Other
Common Paid-In Accum. Comprehensive
Stock Capital Deficit Gain (Loss) Total
Balances as
of December 31, 2000............ $ 897 $ 80,656 $(73,043) $ (203) $ 8,307
-----------------------------------------------
Exercise of options
for 683 shares
of Common Stock................. 7 561 - - 568
Foreign currency translation
adjustment.................... - - - 1 1
Net loss........................ - - (741) - (741)
-----------------------------------------------
Balances as of March 31, 2001... $ 904 $ 81,217 $(73,784) $(202) $ 8,135
===============================================
Exercise of options for 331 shares
of Common Stock............... 3 245 - - 248
Foreign currency translation
adjustment.................... - - - 1 1
Net loss........................ - - (693) - (693)
-----------------------------------------------
Balances as of June 30, 2001.... $ 907 $ 81,462 $(74,477) $(201) $ 7,691
===============================================
See accompanying notes.
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
June 30,
---------- ---------
2001 2000
---------- ---------
Cash flows from operating activities:
Net loss.................................................$(1,434) $(2,015)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities:
Depreciation........................................... 75 96
Patent amortization.................................... 208 5
Loan discount amortization............................. 74 32
Non-cash compensation.................................. 46 40
Changes in operating assets and liabilities:
Accounts receivable, net............................ 205 653
Inventories......................................... 86 (36)
Prepaid expenses and other current assets........... 26 (70)
Other assets........................................ (16) 69
Accounts payable.................................... (292) 127
Accrued compensation................................ (2) (5)
Other accrued liabilities........................... (99) (225)
Deferred revenue.................................... 69 1,078
------- -------
Net cash used in operating activities................. (1,054) (251)
------- -------
Cash flows from investing activity:
Acquisition of property and equipment................... (50) (43)
------- -------
Net cash used in investing activity.................. (50) (43)
------- -------
Cash flows from financing activities:
Principal payments on short-term debt................. (1,620) (60)
Principal payments on capital lease obligations....... (4) (4)
Proceeds from acquisition of short term debt.......... 181 -
Proceeds from exercise of stock options and warrants.. 816 1,617
Proceeds from acquisition of long-term debt........... 3,000 -
------- -------
Net cash provided by financing activities.......... 2,373 1,553
------- -------
Effect of exchange rate changes on cash................... - -
------- -------
Net increase in cash and cash equivalents................. 1,269 1,259
Cash and cash equivalents at beginning of period.......... 2,349 2,374
------- -------
Cash and cash equivalents at end of period................$ 3,618 $ 3,633
======= =======
See accompanying notes.
-6-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements
The accompanying unaudited condensed consolidated financial statements of
Communication Intelligence Corporation and its subsidiary (the "Company" or
"CIC") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the financial statements included
in this quarterly report reflect all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of its financial position at the dates presented and the
Company's results of operations and cash flows for the periods presented.
The Company's interim results are not necessarily indicative of the results
to be expected for the entire year.
The Company develops and markets biometric electronic signature
verification and natural input software solutions aimed at emerging, fast
growth, large potential markets such as e-commerce, corporate security,
mobile voice/Internet devices including smartphones/communicators, PDAs,
webpads and the Palm OS aftermarket.
The Company's core software technologies include multilingual handwriting
recognition systems (Jot(R)) and the Handwriter Recognition System,
referred to as HRS(TM), electronic signature, biometric signature
verification, cryptography, electronic ink capture tools (InkTools(TM)),
Sign-it(R), iSign(TM) and Sign-On(TM), and operating systems extensions
that enable pen input (PenX(TM)). Other consumer and original equipment
manufacturer ("OEM") products include electronic notetaking (QuickNotes(TM)
and InkSnap(TM)) and predictive text input (WordComplete(R)). CIC's
products are designed to increase the ease of use, functionality and
security of electronic devices with a primary focus on wireless internet
and information devices such as smartphones, electronic organizers
("PDA's") and portable web browsers.
The Company offers a wide range of multi-platform software products that
enable or enhance pen-based computing. The Company's core technologies are
classified into two broad categories: "natural input technologies" and
"transaction and communication enabling technologies". Natural input
technologies are designed to allow users to interact with a computer or
handheld device by using an electronic pen or "stylus" as the primary input
device or in conjunction with a keyboard. CIC's natural input offerings
include multilingual handwriting recognition systems, software keyboards,
predictive text entry, and electronic ink capture technologies. Many small
handheld devices such as electronic organizers, pagers and smart cellular
phones do not have a keyboard. For such devices, handwriting recognition
and software keyboards offer viable solutions for performing text entry and
editing. CIC's predictive text entry technology simplifies data entry even
further by reducing the number of actual letters required to be entered.
The Company's ink capture technologies facilitate the capture of electronic
ink for notetaking, drawings or short handwritten messages. The Company's
transaction and communication enabling technologies are designed to provide
a cost-effective means for securing electronic transactions, providing
network and device access control, and enabling workflow automation of
traditional paper form processing. CIC believes that these technologies
offer more efficient methods for conducting electronic transactions and
provide more functional user authentication and heightened data security.
The Company's transaction and communication enabling technologies have been
fundamental in its development of software for signature verification, data
security, and data compression.
For the six months ended June 30, 2001, the Company's cash and cash
equivalents increased by $1,269 from $2,349 at the beginning of the period
to $3,618. The increase is due primarily to $2,373 provided by financing
activities. This increase was partially offset by cash used in operating
activities of $1,054 and cash used in investing activities of $50. The
$2,373 provided by financing activities consists primarily of $816 in
proceeds from the exercise of stock options by certain of the Company's
employees, net proceeds from short-term debt acquired by the Company's
Joint Venture of $61, and $3,000 of long-term debt incurred by the Company.
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
These proceeds from investing activities were offset by the payment of
$1,500 in short-term debt from the proceeds of the new $3,000 long-term
loan, the repayment of $120 of short term loans by the Company's Joint
Venture and capital lease obligations of $4. As of June 30, 2001, the
Company's principal source of funds were its cash and cash equivalents
aggregating $3,618. The Company anticipates that it will have adequate
capital to fund its planned operations for the foreseeable future. However,
there can be no assurance that the Company will have adequate capital
resources to fund planned operations or that any additional funds will be
available to the Company when needed, or if available, will be available on
favorable terms or in amounts required by the Company. If the Company is
unable to obtain adequate capital resources to fund operations, it may be
required to delay, scale back or eliminate some or all of its operations,
which may have a material adverse effect on the Company's business, results
of operations and prospects.
The financial information contained herein should be read in conjunction
with the Company's audited financial statements included in its Annual
Report on Form 10-K for the year ended December 31, 2000.
2. Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Cash and cash equivalents consist of the following:
June 30, December 31,
2001 2000
--------------------- -------------------
Cash in bank $ 2,719 $ 1,332
Commercial paper 684 687
Money market 215 330
--------------------- -------------------
$ 3,618 $ 2,349
===================== ===================
3. Inventories
------------
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At June 30, 2001,
inventories consisted primarily of finished goods.
4. Note receivable from officer
----------------------------
In April 1994, the Company loaned $210 to the Company's then Chief
Executive Officer in exchange for a note, secured by shares of the
Company's Common Stock. The note bore interest at the lesser of the highest
marginal rate per annum applicable to the Company's borrowings or the
highest rate allowable by law. On August 14, 1998, the Company entered into
an agreement (the "Agreement") with the former Chief Executive Officer.
Under the Agreement, the former officer agreed to provide consulting
services to the Company through December 15, 2001. In exchange for these
services, $110 of the note receivable from the officer will be forgiven on
a monthly basis over the period commencing August 15, 1998 and ending
December 15, 2001. The remaining $100 of the note receivable from the
officer will be forgiven on December 15, 2001 if the officer has performed
all the required services under the Agreement. The Agreement will terminate
on December 15, 2001.
5. Short-term debt
---------------
On March 19, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a
Chinese bank. The loan bears interest at 5.12% and is due August 19, 2001.
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
5. Short-term debt (continued)
---------------------------
On September 1, and September 19, 2000, respectively, the Company's 90%
owned Joint Venture borrowed, in two transactions, the aggregate equivalent
of $121, denominated in Chinese currency, from a Chinese bank. The loans
bore interest at 5.12%. The borrowings did not require a compensating
balance. The loans were paid in full in March 2001.
6. Related Party Transactions:
--------------------------
A. Long-term debt related party
------------------------------
On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable remainder annuity trust of which a director
and officer of the Company is a trustee (the "Trust"). The proceeds of the
Loan were used to refinance $1,500 of indebtedness outstanding to the Trust
pursuant to a loan made by the Trust to the Company in October 1999 and for
working capital purposes.
The Loan bears interest at the rate of 2% over the prime rate publicly
announced by Citibank from time to time, which amounts to 8.75% at June 30,
2001, and is due June 18, 2004. The Loan may be pre-paid by the Company in
whole or in part at any time without penalty, subject to the right of the
Trust to convert the outstanding principal amount of the Loan into shares
of common stock. Pursuant to the terms of the Loan, the Trust has the
option, at any time prior to maturity, to convert all or any portion of the
outstanding principal amount of the Loan into shares of common stock of the
Company at a conversion price of $2.00 per share, subject to adjustment
upon the occurrence of certain events. If, prior to maturity of the Loan,
the Company consummates one or more financings providing $5 million or more
in gross proceeds, the Company is required to apply 50% of the proceeds in
excess of $5 million to the then outstanding principal amount of the Loan.
The Loan is secured by a first priority security interest in and lien on
all of the Company's assets as now owned or hereafter acquired by the
Company.
In connection with the Loan, the Company entered into a registration rights
agreement with the Trust which obligates the Company to file a registration
statement with the Securities and Exchange Commission covering the sale of
the shares of the Company's common stock issuable upon conversion of the
Loan if it receives a demand by the holder of the Loan to do so, and to use
its reasonable best efforts to cause such registration statement to become
effective.
B. Transactions with PenOp
-----------------------
During the six months ended June 30, 2001, the Company recognized $325 in
nonrecurring maintenance fees net of expenses of $48. The Company engaged
in a transaction with PenOp to provide nonrecurring maintenance services
from pre-existing PenOp contracts in the aggregate amount of $1.5 million,
of which $877 was recorded (net) in the fourth quarter of 2000. The Company
previously entered into a separate transaction to acquire the intellectual
property rights from PenOp.
7. Revenue recognition
-------------------
Online Revenue - Revenue from retail product sales is recognized upon sell
through, while revenue from other product sales is recognized upon shipment
provided that no significant obligations remain and the collection of the
resulting receivable is probable. The Company provides for estimated sales
returns at the time of shipment.
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
7. Revenue recognition (continued)
-------------------------------
Corporate Revenue - License and product revenues are recognized when the
software has been delivered and when all significant obligations have been
met in accordance with the American Institute of Certified Public
Accountants Statement of Position Number 97-2, "Software Revenue
Recognition" and the Securities and Exchange Commission Staff Accounting
Bulletin Number 101, "Revenue Recognition in Financial Statements". Royalty
revenues are recognized as products are licensed/sold by licensees.
Development contracts revenue is generated primarily from non-recurring
engineering activities. Revenue is recognized in accordance with the terms
of the agreements, generally when collection is probable and related costs
have been incurred.
China Revenue - Revenue from system integration activities and product
sales are recognized upon shipment provided that no significant obligations
remain and the collection of the resulting receivable is probable.
8. Net loss per share
------------------
The Company calculates earnings per share under the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the disclosure of both basic earnings per share,
which is based on the weighted average number of common shares outstanding,
and diluted earnings per share, which is based on the weighted average
number of common shares and dilutive potential common shares outstanding.
For the three and six months ended June 30, 2001, potential common shares
excluded from the calculation of diluted earnings per share as their effect
is anti-dilutive, include 7,168,070 stock options and 469,833 warrants.
Potential common shares excluded from the calculation for the three and six
months ended June 30, 2000 include 8,818,152 stock options and 469,833
warrants.
9. Comprehensive income
Total comprehensive income (loss) was as follows:
Six Months Ended June 30,
----------------------------------
2001 2000
------------- -------------
Net loss $ (1,434) $ (2,015)
Other comprehensive income:
Cumulative translation adjustment 2 4
------------- -------------
Total comprehensive loss $ (1,432) $ (2,011)
============= =============
10. Segment Information
-------------------
The Company's segment information under the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of An Enterprise and Related Information" ("SFAS 131"), has
been broken down into two segments - handwriting recognition software and
systems integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment data
includes revenues, as well as allocated corporate-headquarters costs
charged to each of the operating segments.
-10-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
10. Segment Information (continued)
-------------------------------
The Company identifies reportable segments by classifying revenues into two
categories: handwriting recognition and system integration. Handwriting
recognition software is an aggregate of five revenue categories. All
handwriting recognition software is developed around the Company's core
technology. System integration represents the sale and installation of
third party computer equipment and systems that utilize the Company's
products. All sales above represent sales to external customers.
The table below presents information about reporting segments for the
periods indicated:
Six Months ended June 30,
-------------------------------------------------------------
2001 2000
------------------------------- -----------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ----- ----------- ----------- -----
Revenues $ 2,912 $ 609 $ 3,521 $ 1,891 $ 736 $ 2,627
Loss from
Operations $(1,236) $ (51) $(1,287) $(1,942) $ (6) $(1,948)
Significant change
in Total assets
from Year End $ - $ - $ - $ - $ - $ -
-11-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the Company's unaudited condensed consolidated financial statements and notes
thereto included in Part I - Item 1 of this Quarterly Report on Form 10-Q and
"Management`s Discussion and Analysis of Financial Condition and Results of
Operations" set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
On October 6, 2000, CIC Acquisition Corp., a wholly-owned subsidiary of the
Company ("Acquisition Corp."), acquired certain assets of PenOp Limited and its
subsidiary PenOp Inc. for 4.7 million shares of common stock of the Company
pursuant to an Asset Purchase Agreement, dated as of September 29, 2000, by and
among Acquisition Corp., PenOp Limited and PenOp Inc. At the closing of this
transaction, Mr. Philip Sassower, the Company's Chairman of the Board, and his
designees agreed to purchase from PenOp Limited and PenOp Inc., in a private
transaction, an aggregate of 1,713,728 shares of common stock received by PenOp
Limited and PenOp Inc. in connection with the Acquisition for $3,300.
Results of Operations
- ---------------------
Revenues. For the three and six months ended June 30, 2001, total revenues
increased $653 and $894, respectively, or 52% and 34%, respectively, to $1,903
and $3,521 from $1,250 and $2,627, respectively, for the comparable three and
six month periods ended June 30, 2000 as discussed below:
Three Months Ended Six Months Ended
June 30, June 30,
---------------- -------------------
2001 2000 2001 2000
------ ------ ------- --------
Revenues:
Online $ 348 $ 430 $ 740 $ 729
Corporate 1,183 449 1,662 1,162
Nonrecurring maintenance
fees (net) - M10 (previously PenOp) - - 352 -
China 372 371 767 736
------- ------ -------- --------
Total revenues $1,903 $1,250 $ 3,521 $ 2,627
======= ======= ======== ========
Online revenues decreased $82 or 19% to $348 for the three months ended
June 30, 2001 as compared to $430 in the prior year period. This decrease was
primarily due to a less than anticipated close rate on the available names used
in the Company's direct mail campaign compared to the same period last year. For
the six months ended June 30, 2001, Online revenues increased $11 or 2% to $740
from $729 in the same six month period last year. This increase is due to an
increase in available names used in the Company's direct mail campaign compared
to the same six month period in the prior year.
Corporate sales, which includes Enterprise sales, OEM and Development contract
revenues, increased for the three and six month periods ended June 30, 2001,
$734 and $500, respectively, or 164% and 43%, respectively to $1,183 and $1,662,
respectively, from $449 and $1,162, respectively, as compared to the same prior
year periods. Enterprise sales and maintenance contract fees from sources other
than M10 increased $465 or 196% to $703 for the three months ended June 30, 2001
compared to $238 in the same prior year period. This increase is primarily due
to a sale to a major insurance company (Prudential Insurance Company of
America). For the six months ended June 30, 2001, enterprise sales increased 27%
or $180 to $850 from $670 in the same prior year period. The six month increase
is primarily due to the reasons mentioned above. OEM and license revenues
included in corporate sales increased $282 and $296, respectively, or 182% and
87%, respectively, to $437 and $635, respectively, for the three and six month
periods ended June 30, 2001 compared to $155 and $339, respectively,
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
for the comparable prior year periods. This increase was due primarily to
license fees paid by a hardware manufacturer , and to an increase in the amount
of royalty revenues recognized from OEMs compared to the prior year periods.
Revenues from development contracts decreased $13 or 22% to $44 from $57 for the
three months ended June 30, 2001 compared to the same prior year period. The
decrease is due primarily to decreases in revenue generating non-recurring
engineering ("NRE") projects compared to the same three month period last year.
For the six months ended June 30, 2001, revenues from development contracts
increased 16% or $24 to $176 from $152 in the same prior year period. This
increase was primarily due to the increase in NRE activities during the first
quarter of 2001 compared to the prior year. NRE activities for the three and six
months ended June 30, 2001 and 2000, respectively, were primarily attributable
to porting of the Company's software to third party products such as PDA's,
smartphones and web browsers.
During the six months ended June 30, 2001, the Company recognized $325 in
nonrecurring maintenance fees net of expenses of $48. The Company engaged in a
transaction with PenOp to provide nonrecurring maintenance services from
pre-existing PenOp contracts in the aggregate amount of $1.5 million, of which
$877 was recorded (net) in the fourth quarter of 2000. The Company previously
entered into a separate transaction to acquire the intellectual property rights
from PenOp.
China sales for the three months ended June 30, 2001 increased $1 to $372
from $371 in the same prior year period. For the six months ended June 30, 2001
China revenues increased 4% or $31 to $767 from $736 in the same prior year
period. This increase was due to increased sales activity in 2001 and not
related to any one time large sale to a single customer.
Cost of Sales. Cost of sales decreased for the three and six months ended
June 30, 2001 $106 and $213, respectively, or 13% and 14%, respectively, to $702
and $1,324, respectively compared to $808 and $1,537, respectively, in the same
prior year periods.
Online cost of sales for the three and six months ended June 30, 2001
decreased $94 and $96, respectively, or 24% and 14%, respectively, to $306 and
$575, respectively, compared to $400 and $671, respectively, in the same prior
year periods. This decrease is due to the elimination of mailing costs
associated with follow-up mailers sent after initial contact with the potential
customer via direct mail.
Corporate sales costs for the three months ended June 30, 2001 increased
$19 or 14% to $157 from $138 in the same prior year period. For the six months
ended June 30, 2001, corporate cost of sales decreased $108 or 32% to $232
compared to $340 in the same prior year period. Enterprise cost of sales
increased $119 or 1,101% to $129 for the three months ended June 30, 2001 from
$11 in the comparable prior year period. The increase in was due to third party
hardware costs sold with the Company's corporate signature software solution
products, and amortization of capitalized software costs. For the six months
ended June 30, 2001, enterprise cost of sales declined $13 or 9% to $130
compared to $143 in the comparable prior year period. The decrease was due to
sales requiring fewer third party hardware devices. OEM and licensing costs for
the three and six month periods ended June 30, 2001 decreased $1 and $3,
respectively, or 6% and 10%, respectively, to $13 and $24, respectively, from
$14 and $27, respectively, in the prior year periods. The decrease was due to a
decrease in revenues and the associated technology import tax from the Company's
Japanese OEM customers. Costs of development contract revenues decreased $99 and
$92, respectively, or 88% and 55%, respectively, to $14 and $79, respectively,
from $113 and $171, respectively, in the same prior year periods. This decrease
was due to the decrease in NRE projects during the three and six months ended
June 30, 2001 as compared to the same prior year periods.
China cost of sales for the three and six months ended June 30, 2001
decreased $31 and $9, respectively, or 11% and 2% to $239 and $517,
respectively, compared to $270 and $526, respectively, in the same prior year
periods. The decrease was due to a reduction in system integration sales and an
increase in higher margin sales of the Company's software products.
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Gross Margin. Gross margin for the three and six months ended June 30, 2001
increased $780 and $1,108, respectively, or 172% and 102%, respectively, to
$1,202 and $2,197, respectively, from $422 and $1,089, respectively, in the same
prior year periods.
Online gross margin for the three and six months ended June 30, 2001
increased $12 and $106, respectively, or 45% and 184%, respectively, to $42 and
$164, respectively, from $30 and $58, respectively, in the same prior year
periods. This increase was due to the elimination of the follow-up mailers,
primarily used to attempt to convert long time users of PDA's to the Company's
products. Online gross margins were 11% and 22%, respectively, of sales for the
three and six months ended June 30, 2001 compared to 7% and 8%, respectively, in
the same prior year periods.
Corporate sales gross margin for the three and six months ended June 30,
2001 increased $715 and $608, respectively, or 229% and 74%, respectively, to
$1,027 and $1,430, respectively, compared to $312 and $822, respectively, in the
same prior year periods. This increase was primarily due to the increase in
Corporate sales. Corporate sales gross margin as a percentage of sales was 87%
and 86% for the three and six month periods ended June 30, 2001 compared to 69%
and 70% for the same three and six month periods of the prior year.
China sales gross margin for the three and six month periods ended June 30,
2001 increased $32 and $40, respectively, or 31% and 19%, respectively, to $133
and $250, respectively, from $101 and $210, respectively, in the same prior year
periods. This increase is due to the increase in sales, and change in the sales
mix from system integration sales to software sales as. China gross margin as a
percentage of sales increased to 35% and 32% for the three and six months ended
June 30, 2001 compared to 27% and 29%, respectively, for the comparable three
and six month periods in the prior year periods.
Research and development expenses. Research and development expenses for
the three and six months ended June 30, 2001 increased by $106 and $154,
respectively, to $494 and $971, respectively, as compared to $388 and $817,
respectively, in the comparable three and six month periods of the prior year.
These increases were due primarily to approximately $44 and $184, respectively,
in outside engineering costs associated with the assimilation of the PenOp
intellectual property into the Company's products and continued support for new
engineering projects. This increase was offset by decreases of approximately $34
and $54, respectively, in payroll and related costs including training and
facilities costs attributable to reductions in the number of personnel. Other
costs including expense transferred to cost of sales and shared engineering
costs with the Joint Venture decreased $96 and $44, respectively, compared to
the same periods last year. The Company capitalized $20 in software development
costs associated with new products and enhancements during the six months ended
June 30, 2001. The Company did not capitalize any software development costs in
the six month period ending June 30, 2000.
Sales and marketing expenses. Sales and marketing expenses for the three
and six months ended June 30, 2001 decreased $15 and $46, respectively, to $573
and $1,134, respectively, as compared to $588 and $1,180, respectively, in the
comparable periods of the prior year. Professional services and advertising
expenses increased $8 to $100 from $92 for the three month ended June 30, 2001
as compared with the same period last year. For the six month period ended June
30, 2001, professional services and advertising fees decreased $64 to $217 from
$281 as compared with the same period last year. This decrease was due primarily
to the one-time cost of development of a media campaign in the prior year aimed
at significantly increasing Online sales via CIC's website. Other costs,
including salaries and related expenses and travel and recruiting expenses,
decreased $23 for the three months ended June 30, 2001 compared to the same
period in the prior year. For the six months ended June 30, 2001 other costs,
including salaries and related expenses and travel and recruiting expenses
increased $18 as compared to the same six month period last year.
General and administrative expenses. General and administrative expenses
for the three and six months ended June 30, 2001 increased $165 and $338 to $736
and $1,379, respectively, from $571 and $1,041, respectively, in the comparable
period of the prior year. This increase was attributable primarily to an
increase in patent amortization expense of $112 and $206, respectively, due to
the acquision of the PenOp intellectual property in the fourth quarter of 2000.
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Professional services increased $68 and $128, respectively, due to the reversal
in the prior year of expenses accrued in 1999 in connection with anticipated
audit expenses related to the change in the Company's outside accounting firm.
Payroll and related costs increased approximately $11 and $31, respectively, due
to an increase in personnel. Other costs, including facilities and related
costs, decreased $26 and $27, respectively, over the comparable three and six
month periods of the prior year. The decrease in expenses discussed above were
due primarily to a decrease in investor related expenses as a result of the
reduction in costs associated with information disseminated via the wire
services.
Interest and other income (expense), net. Interest and other income
(expense), net for the three and six months ended June 30, 2001 decreased $24
and $32, respectively, to $9 and $14, respectively, compared to $33 and $46,
respectively, in the comparable periods of the prior year. Interest income from
cash and cash equivalents decreased $28 and $36, respectively, to $17 and $34
for the three and six months ended June 30, 2001, compared to $44 and $70 in the
same periods of the prior year. This decrease was due to lower cash balances
during the three and six month periods ended June 30, 2001. The interest income
was offset by $8 and $20, respectively, of credit card processing and other fees
compared to $12 and $24, respectively, in the same period of the prior year
related to Online sales.
Interest expense. Interest expense increased $43 and $45, respectively, to
$98 and $159 for the three and six month periods ended June 30, 2001 compared to
$55 and $114, respectively, in the same prior year periods. The increase was due
to the write off of the loan discount as a result of the settlement of the
$1,500 note in June 2001. Interest expense decreased $3 and $4, respectively, to
$17 and $91, respectively, for the three and six months ended June 30, 2001,
compared to $55 and $95, respectively, in the same prior year periods. This
decrease was due to lower interest rates compared to last year.
Liquidity and Capital Resources
- -------------------------------
At June 30, 2001, cash and cash equivalents totaled $3,618 compared to cash
and cash equivalents of $2,349 at December 31, 2000. The increase is due
primarily to $2,373 provided by financing activities. This increase was
partially offset by cash used in operating activities of $1,054 and cash used in
investing activities of $50. The $2,373 provided by financing activities
consists primarily of $816 in proceeds from the exercise of stock options by
certain of the Company's employees, net proceeds from short-term debt acquired
by the Company's Joint Venture of $61 and $3,000 of long-term debt incurred by
the Company in June 2001. The proceeds from investing activities were offset by
the payment of $1,500 in short-term debt from the proceeds of the new $3,000
long-term loan, the repayment of $120 of short term loans by the Company's Joint
Venture and capital lease obligations of $4. Total current assets were $5,502 at
June 30, 2001 compared to $4,550 at December 31, 2000.
As of June 30, 2001, the Company's principal source of liquidity was its
cash and cash equivalents of $3,618. Although there can be no assurance, the
Company believes that its cash and cash equivalents together with cash provided
from projected revenues will be sufficient to fund planned operations for the
foreseeable future. However, if the Company is unable to generate adequate cash
flows from sales, or if expenditures required to achieve the Company's plans are
greater than expected, the Company may need to obtain additional funds or reduce
discretionary spending. There can be no assurance that additional funds will be
available when needed, or if available, will be available on favorable terms or
in the amounts required by the Company. If adequate funds are not available when
needed, the Company may be required to delay, scale back or eliminate some or
all of its operations, which will have a material adverse effect on the
Company's business, results of operations and prospects.
Current liabilities, which include deferred revenues, were $1,174 at June
30, 2001. Deferred revenues, totaling $130 at June 30, 2001, primarily reflects
advance payments and maintenance fees from the Company's licensees which are
generally recognized as revenue by the Company over the term of the maintenance
agreement.
The Company currently owns 90% of a joint venture with the Information
Industry Bureau, a provincial agency of the People's Republic of China (the
"Agency"). The Company's investment in the Joint Venture is subject to risks of
doing business abroad, including fluctuations in the value of currencies, export
duties, import controls and trade barriers (including quotas), restrictions on
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
the transfer of funds, longer payment cycles, greater difficulty in accounts
receivable collections, burdens of complying with foreign laws and political and
economic instability.
On March 19, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a Chinese
bank. The loans bear interest at 5.12% and is due August 19, 2001. The
borrowings did not require a compensating balance.
On September 1, and September 19, 2000, respectively, the Company's 90%
owned Joint Venture borrowed, in two transactions, the aggregate equivalent of
$121, denominated in Chinese currency, from a Chinese bank. The loans bore
interest at 5.12%. The borrowings did not require a compensating balance. The
loans were paid in full in March 2001.
On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable remainder annuity trust of which a director and
officer of the Company is a trustee (the "Trust"). The proceeds of the Loan were
used to refinance $1,500 of indebtedness outstanding to the Trust pursuant to a
loan made by the Trust to the Company in October 1999 and for working capital
purposes. The Loan bears interest at the rate of 2% over the prime rate publicly
announced by Citibank from time to time, which amounts to 8.75% at June 30,
2001, and is due June 18, 2004. The Loan may be pre-paid by the Company in whole
or in part at any time without penalty, subject to the right of the Trust to
convert the outstanding principal amount of the Loan into shares of common
stock. Pursuant to the terms of the Loan, the Trust has the option, at any time
prior to maturity, to convert all or any portion of the outstanding principal
amount of the Loan into shares of common stock of the Company at a conversion
price of $2.00 per share, subject to adjustment upon the occurrence of certain
events. If, prior to maturity of the Loan, the Company consummates one or more
financings providing $5 million or more in gross proceeds, the Company is
required to apply 50% of the proceeds in excess of $5 million to the then
outstanding principal amount of the Loan. The Loan is secured by a first
priority security interest in and lien on all of the Company's assets as now
owned or hereafter acquired by the Company.
In connection with the Loan, the Company entered into a registration rights
agreement with the Trust which obligates the Company to file a registration
statement with the Securities and Exchange Commission covering the sale of the
shares of the Company's common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its reasonable
best efforts to cause such registration statement to become effective.
The Company leases facilities in the United States and China. Future
minimum lease payments under non-cancelable operating leases are expected to be
approximately $487, excluding sub-lease income for the years ending December 31,
2001. The Company's rent expense is expected to be reduced by approximately $24
in 2001 in connection with the subleases on excess office space in the United
States.
Forward Looking Statements
- --------------------------
Certain statements contained in this Quarterly Report on Form 10-Q,
including without limitation, statements containing the words "believes",
"anticipates", "hopes", "intends", "expects", and other words of similar import,
constitute "forward looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements involve known and
unknown risks, uncertainties and other factors which may cause actual events to
differ materially from expectations. Such factors include the following:
o Technological, engineering, manufacturing, quality control or other
circumstances which could delay the sale or shipment of products;
o Economic, business, market and competitive conditions in the
software industry and technological innovations which could affect
the Company's business;
-16-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Forward Looking Statements (continued)
- --------------------------------------
o The Company's inability to protect its trade secrets or other
proprietary rights, operate without infringing upon the
proprietary rights of others and prevent others from infringing on
the proprietary rights of the Company; and
o General economic and business conditions and the availability of sufficient
financing.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, as a result of new information, future events or
otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
- ------------------
The Company has an investment portfolio of fixed income securities that
are classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short term securities. The Company has not entered into
any short-term security investments during the three months ended June 30, 2001.
Foreign Currency Risk
- ---------------------
From time to time, the Company makes certain capital equipment or other
purchases denominated in foreign currencies. As a result, the Company's cash
flows and earnings are exposed to fluctuations in interest rates and foreign
currency exchange rates. The Company attempts to limit these exposures through
operational strategies and generally has not hedged currency exposures.
Future Results and Stock Price Risk
- -----------------------------------
The Company's stock price may be subject to significant volatility. The
public stock markets have experienced significant volatility in stock prices in
recent years. The stock prices of technology companies have experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or disproportionate to the operating performance of such companies.
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to, among other factors, quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, announcements of new strategic relationships
by the Company or its competitors, general conditions in the computer industry
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.
Part II-Other Information
- -------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Change in Securities
--------------------
During the three months ended June 30, 2001, the Company granted stock
options to employees and directors as follows:
------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
------------------------------------------------------------------------------
3 Directors May 11, 2001 65,505 $1.11 Quarterly over May 11, 2012
three years
------------------------------------------------------------------------------
-17-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 2. Change in Securities (continued)
--------------------------------
------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
------------------------------------------------------------------------------
17 Employees May 11, 2001 184,490 $1.11 Quarterly over May 11, 2012
three years
1 Director June 11, 2001 15,000 $1.06 Quarterly over June 11, 2012
three years
3 Directors June 18, 2001 75,000 $1.01 Immediately June 18, 2012
------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on June 18, 2001. The
number of shares of common stock with voting rights as of the record date
represented at the meeting either in person or by proxy was 83,468 shares or 92%
of the eligible outstanding Common Stock of the Company. Three proposals were
voted upon by the stockholders. The proposals and the voting results follow:
Proposal 1
- ----------
Each of the five persons listed below were elected as directors to serve
until the next Annual Meeting or until his successor is elected or appointed.
The number of votes for and withheld for each individual is listed next to his
name.
Broker
-------------------------------
Name For Withheld Non-votes Abstain
---------------- ------------- ------------- --------------- --------------
Guido DiGregorio 82,848 619 None None
Louis Panetta 82,779 688 None None
Philip Sassower 82,306 1,162 None None
Jeffrey Steiner 82,269 1,199 None None
C. B. Sung 82,867 601 None None
Proposal 2
- ----------
To ratify the appointment of Stonefield Josephson, Inc. as independent
accountants of the Company for the fiscal year ending December 31, 2001. The
number of votes for, against and abstaining on this proposal was as follows:
Broker
-------------------------
For Against Abstain Non-votes Abstain
---------- ---------- ----------- ----------- -------------
All Classes 82,001 1,282 186 None None
-18-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Proposal 3
- ----------
To ratify the amendment to the Company's 1999 Stock Option Plan increasing
the number of shares of the Company's common stock available for grants of stock
options under the plan. The number of votes for, against and abstaining on this
proposal was as follows:
Broker
--------------------------
For Against Abstain Non-votes Abstain
----------- -------------- --------- ------------ -----------
All Classes 78,021 5,010 437 None None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 3, 2001, with respect to the Company's
unaudited financial results for the three months ended March 31, 2001.
Current Report on Form 8-K dated June 22, 2001, with respect to the new
$3,000 refinancing with a charitable remainder annuity trust.
-19-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
----------------------------------------------
Registrant
August 6, 2001 /s/ Marjorie L. Bailey
- ---------------------------- ---------------------------------------------
Date Marjorie L. Bailey
(Principal Financial Officer and Officer Duly
thorized to Sign on Behalf of the Registrant)
-20-