UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock,
as of November 7, 2001: 90,734,016.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at September 30, 2001
(unaudited) and December 31, 2000........................................3
Condensed Consolidated Statements of Operations for the Three and
Nine-Month Periods Ended September 30, 2001 and 2000 (unaudited)..........4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Three and Nine-Month Periods Ended September 30, 2001
and 2000 (unaudited)......................................................5
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Period Ended September 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...............................................18
-----------------
Item 2. Change in Securities............................................18
--------------------
Item 3. Defaults Upon Senior Securities.................................18
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.............18
---------------------------------------------------
Item 5. Other Information...............................................18
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits....................................................18
(b) Reports on Form 8-K.........................................18
Signatures...............................................................19
-2-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2001 2000
------------- ------------
Unaudited
Assets
Current assets:
Cash and cash equivalents........................ $ 3,053 $ 2,349
Accounts receivable, net, includes $250
at 12/31/00 from M10 (previously PenOp Inc.)..... 743 1,760
Inventories...................................... 215 171
Prepaid expenses and other current assets........ 246 270
-------- ---------
Total current assets......................... 4,257 4,550
Note receivable from officer.......................... - 46
Property and equipment, net........................... 202 262
Patents and trademarks................................ 5,913 6,234
Other assets.......................................... 222 210
-------- ---------
Total assets................................. $ 10,594 $ 11,302
======== =========
Liabilities and Stockholders' equity Current liabilities:
Short-term debt.................................. $ 181 $ 120
Accounts payable................................. 138 679
Accrued compensation............................. 220 263
Other accrued liabilities........................ 307 318
Deferred revenue................................. 152 61
--------- ---------
Total current liabilities.................... 998 1,441
Long-term debt - related party........................ 3,000 1,427
Minority interest..................................... 130 127
Commitments
Stockholders' equity:
Common stock..................................... 907 897
Additional paid-in capital....................... 81,463 80,656
Accumulated deficit.............................. (75,706) (73,043)
Cumulative translation adjustment................ (198) (203)
--------- ---------
Total stockholders' equity................... 6,466 8,307
--------- ---------
Total liabilities and stockholders' equity... $ 10,594 $ 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Online.............................. $ 237 $ 297 $ 977 $ 1,026
Corporate........................... 222 1,469 1,884 2,631
Nonrecurring maintenance
fees (net)- M10 (previously
PenOp Inc.)........................ - - 352 -
China ........................... 456 580 1,223 1,316
------- ------- ------- -------
Total revenues.................. 915 2,346 4,436 4,973
Operating costs and expenses:
Cost of sales:
Online........................... 132 226 707 897
Corporate........................ 12 38 244 378
China ........................... 312 433 829 959
Research and development............ 428 399 1,399 1,216
Sales and marketing ............... 470 537 1,604 1,717
General and administrative ........ 728 548 2,107 1,589
------- ------- ------- -------
Total operating costs and expenses 2,082 2,181 6,890 6,756
------- ------- ------- -------
Income (Loss) from operations .......... (1,167) 165 (2,454) (1,783)
Interest and other income
(expense), net ....................... 5 20 19 66
Interest expense ....................... (66) (78) (225) (192)
Minority interest ...................... (1) (1) (3) -
------- ------- ------- ------
Net income (loss) ............. (1,229) 106 (2,663) (1,909)
======= ======= ======= =======
Basic and diluted income (loss)
per common share ....................... $(0.01) $ 0.00 $(0.03) $(0.02)
======= ======= ======= =======
Weighted average common
shares outstanding ................ 90,715 84,538 90,495 83,970
======= ======= ======= =======
See accompanying notes.
-4-
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
Accum
Additional Other
Common Paid-In Accum Comprehen
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
============================================
Exercise of options for 40 shares
of Common Stock................. $ - $ 1 $ - $ - $ 1
Foreign currency translation
adjustment...................... - - - 3 3
Net loss.......................... - - (1,229) - (1,229)
--------------------------------------------
Balances as of September 30, 2001. $ 907 $ 81,463 $(75,706) $(198) $ 6,466
============================================
See accompanying notes.
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Nine Months Ended
September 30,
-----------------------
2001 2000
---------- ---------
Cash flows from operating activities:
Net loss............................................. $ (2,663) $ (1,909)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities:
Depreciation..................................... 125 143
Patent amortization.............................. 322 4
Loan discount amortization....................... 74 60
Non-cash compensation............................ 46 61
Changes in operating assets and liabilities:
Accounts receivable, net..................... 1,018 408
Inventories.................................. (44) (54)
Prepaid expenses and other current assets.... 24 (143)
Other assets................................. (12) 69
Accounts payable............................. (541) (14)
Accrued compensation......................... (43) (49)
Other accrued liabilities.................... (11) (99)
Deferred revenue............................. 91 13
--------- ---------
Net cash used in operating activities......... (1,614) (1,510)
--------- ---------
Cash flows from investing activity:
Acquisition of property and equipment.............. (53) (50)
--------- ---------
Net cash used in investing activity............ (53) (50)
--------- ---------
Cash flows from financing activities:
Principal payments on short-term debt................ (1,802) (60)
Principal payments on capital lease obligations...... (6) (6)
Proceeds from acquisition of short term debt......... 362 121
Proceeds from exercise of stock options and warrants. 817 1,744
Proceeds from acquisition of long-term debt......... 3,000 -
---------- ---------
Net cash provided by financing activities..... 2,371 1,799
---------- ---------
Effect of exchange rate changes on cash................ - -
---------- ---------
Net increase in cash and cash equivalents............. 704 239
Cash and cash equivalents at beginning of period...... 2,349 2,374
---------- ---------
Cash and cash equivalents at end of period............ $ 3,053 $ 2,613
========== =========
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 these 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 nine months ended September 30, 2001, the Company's cash and cash
equivalents increased by $704 from $2,349 at the beginning of the period to
$3,053. The increase was due primarily to $2,371 in net cash provided by
financing activities. This increase was partially offset by cash used in
operating activities of $1,614 and cash used in investing activities of
$53. The $2,371 in net cash provided by financing activities consists
primarily of $3,000 in proceeds from a long-term loan obtained through a
charitable remainder annuity trust controlled by an affiliate of the
Company, $817 in proceeds from the exercise of stock options by certain of
the Company's employees and proceeds from short-term debt acquired by the
Company's Joint Venture of $362. These proceeds from investing activities
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
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 $302 of short term loans
by the Company's Joint Venture and capital lease obligations of $6. As of
September 30, 2001, the Company's principal source of funds were its cash
and cash equivalents aggregating $3,053. The Company anticipates that it
will have adequate capital to fund its planned operations for at least the
next twelve months. However, there can be no assurance that the Company
will not require additional capital resources to fund planned operations
prior to such time or that 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:
September 30, December 31,
2001 2000
--------------------- -------------------
Cash in bank $ 2,337 $ 1,332
Commercial paper - 687
Money market 716 330
--------------------- -------------------
$ 3,053 $ 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 September 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
pursuant to which 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 August 23, 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 5.37% per annum and is due August
23, 2002. The borrowing did not require the Joint Venture to deposit a
compensating balance.
-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 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 bore interest at 5.12% per annum and was due August
19, 2001. The borrowings did not require the Joint Venture to deposit a
compensating balance. This loan was repaid on August 19, 2001.
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% per annum. The borrowings did not require the Joint
Venture to deposit 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 N.A. from time to time, which was 8.00% per annum at
September 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 nine months ended September 30, 2001, the Company recognized
$352 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
intellectual property rights from PenOp.
7. Revenue recognition
-------------------
Online/Retail 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 nine months ended September 30, 2001, potential common
shares excluded from the calculation of diluted earnings per share, as
their effect is not dilutive, include 7,416,070 stock options and 469,833
warrants. Potential common shares excluded from the calculation for the
three and nine months ended September 30, 2000 include 8,700,001 stock
options and 469,833 warrants.
9. Comprehensive income
--------------------
Total comprehensive income (loss) was as follows:
Nine Months Ended September 30,
------------- ------ --------------
2001 2000
------------ -------------
Net loss $ (2,663) $ (1,909)
Other comprehensive income:
Cumulative translation adjustment 5 6
------------ -------------
Total comprehensive loss $ (2,658) $ (1,903)
============ =============
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"), is
comprised of 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 six revenue categories:
multilingual handwriting recognition systems, electronic signature,
biometric signature verification, cryptography, electronic ink capture
tools, and operating systems extensions that enable pen input. 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:
Nine Months ended September 30,
-------------------------------------------------------------
2001 2000
------------------------------- -----------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ----- ----------- ----------- -----
Revenues $ 3,439 $ 997 $ 4,436 $ 3,657 $ 1,316 $ 4,973
Loss from
Operations $(2,368) $(86) $(2,454) $(1,779) $ (4) $(1,783)
Significant change
in Total assets
from Year End $ - $ - $ - $ - $ - $ -
11. Subsequent Event
----------------
On October 2, 2001 the Company entered a new five year lease for its
existing principal offices at 275 Shoreline Drive, Suite 500, Redwood
Shores California for approximately 9,634 square feet. The lease will
commence November 1, 2001 with first year lease costs of approximately
$347,000. The cost of the lease will increase approximately 3% per annum
over the term of the lease which expires October 31, 2006. In addition to
the base rent the Company will pay a percentage of the increase, if any, in
operating cost incurred by the landlord in such year over the operating
expenses incurred by the landlord in the base year. The Company believes
the offices will be adequate for its needs over the term of the lease.
-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, 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
purchased 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 nine months ended September 30, 2001, total
revenues decreased $1,431 and $537, respectively, or 61% and 11%, respectively,
to $915 and $4,436 from $2,346 and $4,973, respectively, for the comparable
three and nine month periods ended September 30, 2000 as discussed below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Online......................... $ 237 $ 297 $ 977 $ 1,026
Corporate...................... 222 1,469 1,884 2,631
Nonrecurring maintenance
fees (net) - M10 (previously
PenOp)........................ - - 352 -
China.......................... 456 580 1,223 1,316
------- ------- ------- --------
Total revenues $ 915 $2,346 $4,436 $4,973
======= ======= ======= ========
Online revenues decreased $60 or 20% to $237 for the three months ended
September 30, 2001 as compared to $297 in the prior year period. This decrease
was primarily due to a lower sales rate on the available names used in the
Company's direct mail campaign compared to the same period last year. For the
nine months ended September 30, 2001, Online revenues decreased $49 or 5% to
$977 from $1,026 in the same nine month period last year. This decrease was due
primarily to a decrease in available names used in the Company's direct mail
campaign and to a lower sales rate on the available names compared to the same
nine month period in the prior year.
Corporate sales, which includes Enterprise sales, OEM and Development
contract revenues, decreased for the three and nine month periods ended
September 30, 2001, $1,247 and $747, respectively, or 85% and 28%, respectively
to $222 and $1,884, respectively, from $1,469 and $2,631, respectively, as
compared to the same prior year periods as discussed below.
OEM and license revenues included in corporate sales decreased $1,198 and
$902, respectively, or 90% and 54%, respectively, to $131 and $766,
respectively, for the three and nine month periods ended September 30, 2001
compared to $1,329 and $1,668, respectively, for the comparable prior year
periods. This decrease was due primarily to the recognition during the prior
period of $1 million in license fees paid by a hardware manufacturer, and to a
decrease in the amount of royalty revenues recognized from OEMs as compared to
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
the comparable prior year periods. Revenues from development contracts decreased
$53 or 100% to $0 from $53 for the three months ended September 30, 2001
compared to the same prior year period. The decrease was due primarily to
decreases in revenue generating non-recurring engineering ("NRE") projects
compared to the same three month period last year. For the nine months ended
September 30, 2001, revenues from development contracts decreased 14% or $29 to
$177 from $206 in the same prior year period. This decrease was primarily due to
the decrease in NRE activities during the third quarter of 2001 compared to the
prior year. NRE activities for the three and nine months ended September 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.
Enterprise sales and maintenance contract fees from sources other than
nonrecurring maintenance fees - M10 increased $4 or 5% to $91 for the three
months ended September 30, 2001 compared to $87 in the same prior year period.
This increase was primarily due to a sale to a major insurance company. For the
nine months ended September 30, 2001, enterprise sales increased 24% or $184 to
$941 from $757 in the same prior year period. The nine month increase is
primarily due to the reasons mentioned above.
During the nine months ended September 30, 2001, the Company recognized
$352 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. As stated earlier,
on October 6, 2000 the Company completed a separate transaction to acquire the
intellectual property rights from PenOp.
China sales for the three months ended September 30, 2001 decreased $124 or
21% to $456 from $580 in the same prior year period. For the nine months ended
September 30, 2001, China revenues decreased 7% or $93 to $1,223 from $1,316 in
the same prior year period. This decrease was due to a large sale to a single
customer in the comparable period in the prior year.
Cost of Sales. Cost of sales decreased for the three and nine months ended
September 30, 2001 $241 and $454, respectively, or 35% and 20%, respectively, to
$456 and $1,780, respectively compared to $697 and $2,234, respectively, in the
same prior year periods.
Online cost of sales for the three and nine months ended September 30, 2001
decreased $94 and $190, respectively, or 42% and 21%, respectively, to $132 and
$707, respectively, compared to $226 and $897, respectively, in the same prior
year periods. This decrease was 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 September 30, 2001
decreased $26 or 68% to $12 from $38 in the same prior year period. For the nine
months ended September 30, 2001, corporate cost of sales decreased $134 or 35%
to $244 compared to $378 in the same prior year period as discussed below.
Enterprise cost of sales for the three and nine months ended September 30,
2001 decreased $9 and $21, respectively or 68% and 14%, respectively to $3 and
$133, respectively from $12 and $154, respectively, in the comparable prior year
periods. The decrease in costs in the three and nine month periods was due to
lower sales volumes of products requiring third party hardware costs sold with
the Company's corporate signature software solution products. OEM cost of sales
for the three months ended September 30, 2001 increased $2 or 21% to $9 from $7
in the same period of the prior year. This increase was due primarily to an
increase in revenues and the associated technology import tax from the Company's
Japanese OEM customers. For the nine months ended September 30, 2001 OEM cost of
sales decreases $1 to $33 from $34 in the comparable period of the prior year.
Costs of development contract revenues decreased $19 and $112, respectively, or
100% and 59%, respectively, to $0 and $78, respectively, from $19 and $190,
respectively, in the same prior year periods. This decrease was due to the
decrease in NRE projects during the three and nine months ended September 30,
2001 as compared to the same prior year periods.
China cost of sales for the three and nine months ended September 30, 2001
decreased $121 and $130, respectively, or 28% and 14%, to $312 and $829,
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
respectively, compared to $433 and $959, respectively, in the same prior year
periods. The decrease in the three months ended September 30, 2001 was due to
lower sales as compared to the same three month period last year. The decrease
in the nine month period ended September 30, 2001 was due to a reduction in
system integration sales and an increase in higher margin sales of the Company's
software products.
Gross Margin. Gross margin for the three and nine months ended September
30, 2001 decreased $1,190 and $83, respectively, or 72% and 3%, respectively, to
$459 and $2,656, respectively, from $1,649 and $2,739, respectively, in the same
prior year periods.
Online gross margin for the three and nine months ended September 30, 2001
increased $34 and $141, respectively, or 48% and 109%, respectively, to $105 and
$270, respectively, from $71 and $129, 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 44% and 28%, respectively, of sales for the
three and nine months ended September 30, 2001 compared to 24% and 13%,
respectively, in the same prior year periods.
Corporate sales gross margin for the three and nine months ended September
30, 2001 decreased $1,221 and $613, respectively, or 85% and 27%, respectively,
to $210 and $1,640, respectively, compared to $1,431 and $2,253, respectively,
in the same prior year periods. This decrease was primarily due to the decrease
in Corporate sales. Corporate sales gross margin as a percentage of sales was
94% and 87% for the three and nine month periods ended September 30, 2001
compared to 97% and 86% for the same three and nine month periods of the prior
year.
Gross margins related to nonrecurring maintenance fees from M10 increased
for the nine months ended September 30, 2001 by $352 compared to $0 in the prior
year period. This increase is due to no recognition of nonrecurring maintenance
fees during the comparable nine month period in the prior year.
China sales gross margin for the three month period ended September 30,
2001 decreased only $3 or 2% to $144 from $147 in the same prior year period on
a 21% decrease in revenues. This minor decrease in gross margin for the three
months ended September 30, 2001 resulted from a change in the sales mix from
lower margin system integration sales to higher margin software sales. The
change in revenue mix for the nine month period ended September 30, 2001
increased China gross margins $37 or 10% on 11% less revenue. As a percentage of
sales China gross margins were to 32% and 32% for the three and nine months
ended September 30, 2001 compared to 25% and 27%, respectively, for the
comparable three and nine month periods in the prior year periods.
Research and development expenses. Research and development expenses for
the three and nine months ended September 30, 2001 increased by $29 and $183,
respectively, to $428 and $1,399, respectively, as compared to $399 and $1,216,
respectively, in the comparable three and nine month periods of the prior year.
These increases were due primarily to $39 and $223, 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 $11 and $65,
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 increased $1 and $45, respectively, compared to the same
periods last year. The Company capitalized $20 in software development costs
associated with new products and enhancements during the nine months ended
September 30, 2001. The Company did not capitalize any software development
costs in the nine month period ending September 30, 2000.
Sales and marketing expenses. Sales and marketing expenses for the three
and nine months ended September 30, 2001 decreased $67 and $113, respectively,
to $470 and $1,604, respectively, as compared to $537 and $1,717, respectively,
in the comparable periods of the prior year. Professional services and
advertising expenses increased $11 to $92 from $81 for the three month ended
September 30, 2001 as compared with the same period last year. For the nine
month period ended September 30, 2001, professional services and advertising
fees decreased $53 to $309 from $362 as compared with the same period last year.
This decrease was due primarily to the one-time cost of the development of a
media campaign in the prior year aimed at significantly increasing Online sales
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
via CIC's website. Other costs, including salaries and related expenses and
travel and recruiting expenses, decreased $78 for the three months ended
September 30, 2001 compared to the same period in the prior year. For the nine
months ended September 30, 2001 other costs, including salaries and related
expenses and travel and recruiting expenses decreased $60 as compared to the
same nine month period last year.
General and administrative expenses. General and administrative expenses
for the three and nine months ended September 30, 2001 increased $180 and $518
to $728 and $2,107, respectively, from $548 and $1,589, respectively, in the
comparable period of the prior year. This increase was attributable primarily to
an increase in patent amortization expense of $113 and $319, respectively, due
to the acquision of the PenOp intellectual property in the fourth quarter of
2000. Professional services increased $60 for the three months ended September
30, 2001 as compared to the prior year period due primarily to professional fees
associated with the Company's stock option plan. For the nine months ended
September 30, 2001 professional fees increased $186 due primarily to the
reversal in the prior year of expenses accrued in 1999 in anticipation of audit
expenses related to the change in the Company's outside accounting firm and the
fees associated with the Company's stock option plan. Payroll and related costs
increased approximately $34 and $65, respectively, due to an increase in
personnel during the first quarter of 2001. Other costs, including facilities
and related costs, decreased $27 and $52, respectively, over the comparable
three and nine 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 nine months ended September 30, 2001 decreased
$15 and $47, respectively, to $5 and $19, respectively, compared to $20 and $66,
respectively, in the comparable periods of the prior year. Interest income from
cash and cash equivalents decreased $14 and $50, respectively, to $17 and $50
for the three and nine months ended September 30, 2001 compared to $31 and $100
in the same periods of the prior year. This decrease was due to lower cash
balances during the three and nine month periods ended September 30, 2001. The
interest income was offset by $12 and $31, respectively, of credit card
processing fees related to Online sales and other expenses for the three and
nine month periods ended September 30, 2001 compared to $11 and $34,
respectively, in the same periods of the prior year.
Interest expense. Interest expense decreased $12 to $66 for the three month
period ended September 30, 2001 compared to $78 in the same prior year period.
The decrease was due to the write off in June 2001 of the loan discount as a
result of the payment of the $1,500 note. For the nine months ended September
30, 2001, interest expense increased $33 to $225 compared to $192 in the same
prior year period. This increase was due to the increase in long term debt to
$3,000 in June of 2001.
Liquidity and Capital Resources
-------------------------------
At September 30, 2001, cash and cash equivalents totaled $3,053 compared to
cash and cash equivalents of $2,349 at December 31, 2000. The increase was due
primarily to $2,371 in net cash provided by financing activities consisting
primarily of $3,000 in proceeds from a long term loan obtained through a
charitable remainder annuity trust controlled by an affiliate of the Company,
$817 in proceeds from the exercise of stock options by certain of the Company's
employees and proceeds from short-term debt acquired by the Company's Joint
Venture of $362.. 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 $302 of short term loans by the Company's Joint
Venture and capital lease obligations of $6. Total current assets were $4,257 at
September 30, 2001 compared to $4,550 at December 31, 2000.
As of September 30, 2001, the Company's principal source of liquidity was
its cash and cash equivalents of $3,053. Although there can be no assurance, the
Company believes that its cash and cash equivalents together with cash provided
from projected revenues will be sufficient to fund planned operations for at
least the next twelve months. However, if the Company is unable to generate
adequate cash flows from sales, or if expenditures required to achieve the
Company's plans are greater than expected, the Company may need to obtain
additional funds earlier than anticipated 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
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
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 $998 at
September 30, 2001. Deferred revenues, totaling $152 at September 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
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 October 2, 2001 the Company entered a new five year lease for its
existing principal offices at 275 Shoreline Drive, Suite 500, Redwood Shores
California for approximately 9,634 square feet. The lease will commence November
1, 2001 with a first year lease costs of approximately $347,000. The cost of the
lease will increase approximately 3% per annum over the term of the lease which
expires October 31, 2006. In addition to the base rent the Company will pay a
percentage of the increase, if any, in operating cost incurred by the landlord
in such year over the operating expenses incurred by the landlord in the base
year. The Company believes the offices will be adequate for its needs over the
term of the lease.
On August 23, 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 5.37% per annum and is due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a compensating balance.
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 bore interest at 5.12% per annum and was due August 19, 2001. The
borrowings did not require the Joint Venture to deposit a compensating balance.
This loan was repaid on August 19, 2001.
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% per annum. The borrowings did not require the Joint Venture to
deposit 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 N. A. from time to time, which was 8.00% per annum at
September 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
-16-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
approximately $487, excluding sub-lease income, for the year 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;
o The Company's ability 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 from time to time primarily in short term securities. The Company has
not entered into any short-term security investments during the three months
ended September 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
-17-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
by the Company, its competitors or others, 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 September 30, 2001, the Company granted
common stock options to employees and consultants as follows:
------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
------------------------------------------------------------------------------
1 Consultant July 2, 2001 38,385 $0.99 Immediately July 2, 2012
1 Employee August 7, 2001 75,000 $0.94 Quarterly over August 7, 2012
three years
1 Employee August, 13 2001 100,000 $0.91 Quarterly over August 13, 2012
three years
1 Employee August 22, 2001 75,000 $0.93 Immediately August 22, 2012
------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 1, 2001, with respect to the Company's unaudited financial
results for the six months ended June 30, 2001.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
----------------------------------------
Registrant
November 7, 2001 /s/ Francis V. Dane
----------------------------- ---------------------------------------------
Date Francis V. Dane
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-19-