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: March 31, 2004
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: 000-19301
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 May 10, 2004:
100,516,848.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
-------------------- --------
Condensed Consolidated Balance Sheets at March 31, 2004 (unaudited) and
December 31, 2003..............................................................3
Condensed Consolidated Statements of Operations for the Three-Month
Period Ended March 31, 2004 and 2003 (unaudited)...............................4
Condensed Consolidated Statements of Changes in Stockholders' Equity for the
Three-Month Period Ended March 31, 2004 (unaudited)............................5
Condensed Consolidated Statements of Cash Flows for the Three-Month Period
Ended March 31, 2004 and 2003 (unaudited)......................................6
Notes to Unaudited Condensed Consolidated Financial Statements.................7
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations................................................13
---------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........21
----------------------------------------------------------
Item 4A. Controls and Procedures..............................................22
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................22
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Item 2. Change in Securities and Use of proceeds.............................22
----------------------------------------
Item 3. Defaults Upon Senior Securities......................................22
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders..................22
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Item 5. Other Information....................................................22
-----------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits....................................................22
(b) Reports on Form 8-K.........................................22
Signatures...........................................................23
-2-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2004 2003
--------- -----------
Unaudited
Assets
Current assets:
Cash and cash equivalents................... $ 390 $ 1,039
Accounts receivable, net.................... 2,695 742
Inventories................................. 24 47
Prepaid expenses and other current assets... 161 177
---------- ----------
Total current assets.................... 3,270 2,005
Property and equipment, net.................. 124 138
Patents and trademarks....................... 4,947 5,042
Other assets................................. 30 30
---------- ----------
Total assets............................ $ 8,371 $ 7,215
========== ==========
Liabilities and Stockholders' equity
Current liabilities:
Short-term debt - related party............. $ 3,008 $ 3,008
Short-term debt - other..................... 750 750
Accounts payable............................ 85 243
Accrued compensation........................ 312 259
Other accrued liabilities................... 375 475
Deferred revenue............................ 369 165
--------- ----------
Total current liabilities............... 4,899 4,900
Long-term debt - related party............... 11 13
Minority interest............................ 106 115
Commitments - -
Stockholders' equity:
Common stock................................. 1,001 1,001
Additional paid-in capital................... 83,528 83,528
Accumulated deficit.......................... (80,997) (82,164)
Accumulated foreign currency translation
adjustment.................................. (177) (178)
---------- ----------
Total stockholders' equity............... 3,355 2,187
---------- ----------
Total liabilities and stockholders' equity.... $ 8,371 $ 7,215
========== ==========
The accompanying notes form an integral part of these
Condensed Consolidated Financial Statements
-3-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
Three Months Ended
March 31,
-----------------------------
2004 2003
--------- ----------
Revenues:
Online/retail...................... $ 41 $ 114
Corporate.......................... 2,352 667
China.............................. 36 327
---------- ----------
Total revenues................. 2,429 1,108
Operating costs and expenses:
Cost of sales:
Online......................... - 1
Corporate ..................... 7 12
China.......................... 26 220
Research and development........... 319 340
Sales and marketing................ 332 283
General and administrative......... 504 512
---------- ----------
Total operating costs and expenses.. 1,188 1,368
---------- ----------
Income (loss) from operations........... 1,241 (260)
Other income (expense):
Interest and other income
(expense), net......................... 9 (1)
Interest expense....................... (83) (49)
----------- -----------
Net Income (loss) ............. $ 1,167 $ (310)
=========== ===========
Basic and diluted income (loss)
per share.............................. $ 0.01 $ (0.01)
=========== ===========
Weighted average common shares
outstanding basic...................... 100,102 91,907
=========== ===========
Weighted average common shares
outstanding diluted.................... 102,618 91,907
=========== ===========
The accompanying notes form an integral part of these
Condensed Consolidated Financial Statements
-4-
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except share amounts)
Accumulated
Additional Other
Shares Common Paid-In Accumulated Comprehensive
Outstanding Stock Capital Deficit Loss Total
Balances as of
December31, 2003... 100,102 $ 1,001 $ 83,528 $(82,164) $ (178) $ 2,187
-----------------------------------------------------------
Foreign currency
translation
adjustment........ - - - - 1 1
Net income - - - 1,167 - 1,167
-----------------------------------------------------------
Balances as of
March 31, 2004..... 100,102 $ 1,001 $ 83,528 $(80,997) $ (177) $ 3,355
===========================================================
The accompanying notes form an integral part of these
Condensed Consolidated Financial Statements
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Three Months Ended
March 31,
-------- ---------
2004 2003
-------- ---------
Cash flows from operating activities:
Net income (loss)..........................................$ 1,167 $ (310)
Adjustments to reconcile net income (loss) to net cash
(used) in operating activities:
Depreciation........................................... 15 27
Patent and capitalized software amortization........... 98 98
Changes in operating assets and liabilities:
Accounts receivable, net............................ (1,953) (414)
Inventories......................................... 23 19
Prepaid expenses and other current assets........... 16 47
Other assets........................................ - 1
Accounts payable.................................... (158) 185
Accrued compensation................................ 53 (27)
Other accrued liabilities........................... (108) (13)
Deferred revenue.................................... 204 (98)
-------- --------
Net cash (used in) operating activities............... (643) (485)
-------- --------
Cash flows from investing activity:
Acquisition of property and equipment...................... (3) -
-------- --------
Net cash used in investing activity.................... (3) -
-------- --------
Cash flows from financing activities:
Payments on long-term debt................................. (2) -
Proceeds from acquisition of short term debt............... - 600
Proceeds from the issuance of common stock................. - 400
Offering costs............................................. - (287)
Principal payments on capital lease
obligations............................................. (1) (3)
-------- --------
Net cash provided (used) by financing
activities............................................. (3) 710
-------- --------
Effect of exchange rate changes on cash..................... - -
-------- --------
Net increase (decrease) in cash and
cash equivalents........................................... (649) 225
Cash and cash equivalents at beginning
of period.................................................. 1,039 711
-------- --------
Cash and cash equivalents at end of period.................. $ 390 $ 936
======== ========
The accompanying notes form an integral part of these
Condensed Consolidated Financial Statements
-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 and basis of presentation
The financial information contained herein should be read in conjunction with
the Company's consolidated audited financial statements and notes thereto
included in its Annual Report on Form 10-K for the year ended December 31, 2003.
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 accounting principles generally accepted
in the United States of America ("GAAP") for complete consolidated financial
statements. In the opinion of management, the unaudited condensed consolidated
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 software that can verify handwritten signatures
and electronic signature and handwritten data entry software solutions aimed at
emerging, large potential markets such as e-commerce, workflow automation,
corporate security, smart handheld devices such as handheld computers &
smartphones and the Palm OS aftermarket.
The Company's core software technologies include electronic signature, biometric
signature verification, cryptography, electronic ink recording tools
(InkTools(R)), (Sign-it(R)), (iSign(TM)) and (Sign-On(TM)), operating systems
extensions that enable pen input (PenX(TM)) and multilingual handwriting
recognition systems (Jot(R)) and the Handwriter(R) Recognition System, referred
to as HRS(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
smart handheld devices such as handheld computers and smartphones.
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: "transaction and communication enabling technologies"
and "natural input technologies".
Transaction and communication enabling technologies have been fundamental to the
Company's development of software for electronic signatures, handwritten
biometric signature verification, data security, data compression, and
electronic ink capture. These 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 while providing more functional
user authentication, heightened data security, and increased user productivity.
Natural input technologies are designed to allow users to interact with handheld
devices, including PDA's and smartphones, 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, and predictive text entry technologies.
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
Going Concern
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
suffered recurring losses from operations that raise a substantial doubt about
its ability to continue as a going concern. At March 31, 2004, the Company's
accumulated deficit was approximately $81 million and has a working capital
deficit of $1.6 million. The Company filed a registration statement with the
Securities and Exchange Commission that was declared effective February 2003,
pursuant to the line of credit agreement with Cornell Capital Partners, LP
("Cornell"). However, there can be no assurance that the Company will have
adequate capital resources to fund planned operations 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 ability to operate as a going concern. The accompanying condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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:
March 31, December 31,
2004 2003
--------------------- -- -------------------
Cash in bank $ 79 $ 110
Money market 311 929
--------------------- -------------------
$ 390 $ 1,039
===================== ===================
3. Inventories
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method. At March 31, 2004, inventories
consisted primarily of finished goods.
4. Short-term debt - other
On December 19, 2003, the Company borrowed $750 from Cornell Capital Partners,
LP. The proceeds of the loan were used for working capital purposes. The loan is
secured by 4,621 shares of the Company's common stock held in escrow. The
promissory note is due and payable in seven installments, commencing January 19,
2004 and ending on March 1, 2004, and may be paid in cash or shares of the
company's common stock. The Company has the option to delay the commencement of
the installment payments for an unlimited number of 30 day periods for an amount
equal to 2% of the principal amount owed on or before the beginning of the
current option period. The 2% payment may be made in cash or shares of common
stock. Any delay in the commencement date will result in an equal delay in the
due date of the note. If the note is not paid in full when due, the outstanding
principal owed shall be due and payable in full together with interest at the
rate of 2% per annum commencing from the due date.
Subsequent to December 19, 2003, the Company exercised its option to delay the
commencement of the installment payments by paying the 2% fee discussed above,
which was $38 in the aggregate for the three months ended March 31, 2004. The
Company chose to delay commencement of the installment payments in anticipation
of an increase in the price of the Company's stock based upon a projection of
profitable first quarter results. Under the equity line of credit, the higher
the market value of the Company's stock the fewer number of shares are required
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
to repay amounts drawn on the line. As of May 10, 2004, the Company has repaid
$400,000 of the loan through the issuance of common stock and, due to the delay
in commencement of the due date, it has issued approximately 21 fewer shares
than it would have if it had not exercised its option to defer the due date.
5.Short-term debt - related party transactions
Short-term debt
On June 19, 2001, the Company consummated a three-year $3 million financing (the
"Loan") with a charitable remainder annuity trust of which a former director and
officer of the Company is a trustee (the "Trust"). The proceeds of the Loan were
used to refinance $1.5 million 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 6% per annum at March 31, 2004,
and is due by 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.
The loan is due and payable by June 18, 2004. The Company is currently
investigating and considering various methods to pay off the loan. Alternatives
being considered include: paying the loan from cash generated by operations,
refinancing the loan with a different lender either as straight debt or as
convertible debt, refinancing the loan with a different lender with terms that
allow the Company, at its option, to repay the loan through issuance of stock or
with available cash, and of course, if necessary, the Company's existing equity
line of credit agreement could be used to pay the loan. Any of the preceding
alternatives may be used individually or in combination with any other stated
alternative. The Company continues to investigate various methods of payment and
other alternatives may become available which the Company may determine are
preferable to the above.
In the event the Company exceeds $5 million in financing from its equity line of
credit with Cornell Capital, LP, 50% of the proceeds in excess of $5 million
would be required to be used to reduce the amount of the loan. As of March 31,
2004, the Company has raised $2,750 gross, under the line of credit of which
$750 was classified as a note payable.
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. As of
March 31, 2004, no demand had been made upon the Company to file this
registration statement.
Total interest paid for all outstanding debt during the three months ended March
31, 2004 and 2003 was $83, and $49, respectively.
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
6. Net income (loss) per share
The Company calculates net income (loss) 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 net income (loss) per
share, which is based on the weighted average number of shares outstanding, and
diluted income (loss) per share, which is based on the weighted average number
of shares and dilutive potential shares outstanding. For the three month period
ended March 31, 2004 and 2003, the computation for basic and diluted weighted
average shares outstanding is as follows:
Three Months Ended
March 31, 2004 March 31, 2003
------------------------------- --------------------------
Weighted Weighted
Average Average
Net Shares Per-Share Net Shares Per-Share
Income Outstanding Amount Loss Outstanding Amount
Basic income (loss)
per share:
Income available to
stockholders $ 1,167 100,102 $ 0.01 $(310) 91,907 $(0.01)
Effect of dilutive
securities:
Stock options - 529 - - - -
Note payable to
Cornell - 1,987 - - - -
-------- ------- ------- ----- ------ -------
Diluted income (loss) $ 1,167 102,618 $0.01 $(310) 91,907 $(0.01)
======= ======= ======= ====== ====== ========
For the three months ended March 31, 2004, 4,813 stock options were excluded
from the calculation of dilutive earnings per share because the exercise price
of such options was greater than the average market price of the Company's
common stock. For the three months ended March 31, 2003, stock options of 6,358
were excluded from the calculation of diluted earnings per share as the effect
of these options is not dilutive.
7. Common Stock Options
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") as amended by Financial
Accounting Standards Board Statement No. 148. The Company has elected to
continue to use the intrinsic value based method of Accounting Principles Board
Opinion No. 25, as allowed under SFAS 123, to account for its employee
stock-based compensation plans. No stock based employee compensation expense is
reflected in the consolidated statement of operations as all options granted had
an exercise price equal to the market value of the Company's common stock on the
date of grant. The Company complies with the disclosure provisions of SFAS 123.
-10-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
7. Common Stock Options (continued)
Had compensation cost for the Company's option plans been determined based on
the fair value of the options at the date of grant, as prescribed by SFAS 123,
the Company's net income (loss) available to common stockholders and basic and
diluted net income (loss) per share available to stockholders would have been as
follows:
Three Months Ended
March 31, March 31,
2004 2003
-------------- ---------------
Net income (loss) available to stockholders:
As reported.............................. $ 1,167 $ (310)
-----------------------------------
Add: Stock-based employee compensation
expense included in reported results of
operations, net of related tax effect - -
Deduct: Total stock based employee
compensation expense determined under
fair value based method net of tax....... (38) (95)
Total stock based employee compensation
expense determined under fair value
based method net of tax -----------------------------------
Pro forma................................ $ 1,129 $ (405)
===================================
Basic and diluted net income (loss) per share available to
stockholders:
As reported............................ $ 0.01 $ (0.01)
Pro forma.................... $ 0.01 $ (0.01)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable periods:
o risk-free interest rate of 2.37% and 2.11% for 2004 and 2003;
o an expected life of 6.6 years for 2004, 6.4 years for 2003;
o expected volatility of 100%for all periods; and
o dividend yield of 0% for all periods.
The Company expects to make additional option grants. The Company believes the
above pro forma disclosures may not be representative of the pro forma effects
on reported results of operations to be expected in future periods due to
changes in interest rates, expected lives of current and future option grants
and changes in the volatility of the price of the Company's common stock in the
market.
8. Comprehensive income (loss)
Total comprehensive (loss) was as follows:
Three month Ended March 31,
---------------- ------ ---------------
2004 2003
---------------- ---------------
Net income (loss) $ 1,167 $ (310)
Other comprehensive income:
Foreign currency translation adjustment 1 2
---------------- ---------------
Total comprehensive income (loss) $ 1,168 $ (308)
================ ===============
-11-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
9. Segment Information
The Company identifies reportable segments by classifying revenues into two
categories: handwriting recognition and system integration. Handwriting
recognition software is an aggregate of three revenue categories; online/retail,
enterprise and original equipment manufacturers ("OEM"). 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 represent
sales to external customers.
The accounting policies followed by the segments are the same as those described
in the "Critical Accounting Policies." Segment data includes revenues and
allocated costs charged to each of the operating segments.
The table below presents information about reporting segments for the
periods indicated:
Three months ended March 31,
2004 2003
------------------------------- ------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ------- ----------- ----------- ------
Revenues $ 2,398 $ 31 $ 2,429 $ 829 $ 279 $1,108
Income (loss) from
operations $ 1,286 $ (45) $ 1,241 $ (221) $ (39) $ (260)
Significant change
in total long
lived assets from
year end $ - $ - $ - $ - $ - $ -
For the three months ended March 31, 2004 and 2003, one customer accounted for
83% and 40% respectively, of total handwriting recognition segment revenue.
For the three months ended March 31, 2004 and 2003, one customer accounted for
47% and 23% of system integration revenues, respectively.
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the Company's unaudited condensed consolidated financial statements and notes
thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" set fourth in the Company's Annual report on Form 10-K for the
fiscal year ended December 31, 2003.
Overview
The Company was initially incorporated in Delaware in October 1986. In each
year since its inception, the Company has incurred losses. For the five-year
period ended December 31, 2003, operating losses aggregated approximately $13
million and at December 31, 2003, the Company's accumulated deficit was
approximately $82 million. At March 31, 2004, the Company's accumulative deficit
was approximately $81 million.
The first quarter of 2004 was the most profitable quarter in the history of
the Company. Total revenues of $2.43 million for the quarter ended March 31,
2004, more than doubled compared to revenues of $1.11 million in the
corresponding quarter of the prior year increasing 119%. Revenue for the first
quarter reflects increasing adoption of our eSignature solutions in our target
markets and is primarily attributable to Wells Fargo, which chose CIC eSignature
technology for use in all of its full-service bank locations, and also revenues
from Charles Schwab, IA Systems, Misys Healthcare, PalmSource, Prudential and
TVA. The increasing focus on corporate accountability, including a growing
demand for auditable business approval processes, is driving many enterprises to
add eTransactions to their priority deployments in 2004.
The net income of $1.17 million for the quarter ended March 31, 2004,
represents an increase of $1.48 million compared to the net loss of $310
incurred in the corresponding quarter of the prior year. Both the magnitude of
the profit and the 48% Return on Sales is significant and reflects a high level
of effective integration of human resources, including product development, with
our China operation, resulting in significantly lower base costs. Most
impressive is our belief that the current cost structure can support
significantly higher revenue without significant increases in base costs.
Securing adoption of signature verification, as the best biometric
solution, across multiple vertical markets to insure longer-term revenue growth
is our primary challenge. Key growth drivers have merged to accelerate the
deployment of eTransactions worldwide, including both the increasing awareness
and reality of the significant benefits of the paperless environment, together
with increasing competitive pressures. The intuitively obvious, non-intrusive
nature of handwritten eSignatures has emerged as a key factor in achieving the
significant benefits that can be derived from secure, signature dependent,
legally binding eTransactions in the financial service industry and is beginning
to penetrate the Healthcare industry. However, signature verification is only
one of the several biometric technologies that are being evaluated and signature
verification has yet to be accepted as the biometric of choice across sufficient
vertical markets to insure sustained sales and earnings growth.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in our consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported in our
balance sheets and the amounts of revenues and expenses reported for each period
presented are affected by these estimates and assumptions which are used for,
but not limited to, accounting for product returns, allowance for doubtful
accounts, intangible asset impairments, and inventory. Actual results may differ
from these estimates. The following critical accounting policies are
significantly affected by judgments, assumptions and estimates used by our
management in the preparation of the consolidated financial statements.
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Revenue is recognized when earned in accordance with applicable accounting
standards, including AICPA Statement of Position ("SOP") No. 97-2, Software
Revenue Recognition, as amended, Staff Accounting Bulletins 104 ("SAB 104") and
the interpretive guidance issued by the Securities and Exchange Commission and
EITF issue 00-21 of the AICPA Emerging Issues Task Force. We recognize revenues
from sales of software products upon shipment, provided that persuasive evidence
of an arrangement exists, collection is determined to be probable and no
significant obligations remain. Revenue from service subscriptions is recognized
as costs are incurred or over the service period, which ever is longer.
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact the consolidated financial statements.
Revenue from software license agreements is recognized upon delivery of the
software provided that persuasive evidence of an arrangement exists, collection
is determined to be probable and no significant obligations remain. Deferred
revenue is recorded for post-contract support and is recognized as costs are
incurred or over the support period which ever is longer. Vendor specific
objective evidence of the fair value of the elements contained in these software
license agreements is based on the price determined by management having the
relevant authority when the element is not yet sold separately.
Revenue from system integration activities is recognized upon installation
provided that persuasive evidence of an arrangement exists, no significant
obligations remain and the collection of the resulting receivable is probable.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable. If
there is a change in actual defaults from our historical experience, our
estimates of recoverability of amounts due us could be affected and we will
adjust the allowance accordingly.
We perform intangible asset impairment analysis on a quarterly basis in
accordance with the guidance in Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets ("SFAS No. 142") and Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long
Lived Assets ("SFAS No. 144"). We use SFAS 144 in response to changes in
industry and market conditions that affect our patents, we then determine if an
impairment of our assets has occurred. Based on the impairment analysis of the
intangible assets, no impairment existed as of March 31, 2004.
Sources of Revenues. To date, the Company's revenues have been derived
principally from end-users, manufacturers, retailers and distributors of
computer products in North America, Europe and the Pacific Rim. The Company
performs periodic credit evaluations of its customers and does not require
collateral. The Company maintains reserves for potential credit losses.
Historically, such losses have been insignificant and within management's
expectations.
Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, capitalization of software development costs begins
upon the establishment of technological feasibility, subject to net realizable
value considerations. In the Company's case, capitalization commences upon the
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
completion of a working model and generally ends upon the release of the
product. The capitalized costs are amortized to cost of sales on a straight line
basis over the estimated life of the product, generally three years. As of March
31, 2004 and 2003, such costs were insignificant.
Research and Development. Research and development costs are charged to
expense as incurred.
Foreign Currency Translation. We consider the functional currency of the
Joint Venture to be the respective local currency and, accordingly, gains and
losses from the translation of the local foreign currency financial statements
are included as a component of "accumulated other comprehensive loss" in our
consolidated balance sheets. Foreign currency assets and liabilities are
translated into U.S. dollars at exchange rates prevailing at the end of the
period, except for non-monetary assets and liabilities that are translated at
historical exchange rates. Revenues and expenses are translated at the average
exchange rates in effect during each period, except for those expenses included
in balance sheet accounts, which are translated at historical exchange rates.
Net foreign currency transaction gains and losses are included as
components of "interest income and other income (expense), net" in the Company's
consolidated statements of operations. Due to the stability of the currency in
China, net foreign currency transaction gains and losses were not material for
the three months ended March 31, 2004 and 2003, respectively.
Net Operating Loss Carryforwards. Utilization of the Company's net
operating losses may be subject to an annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. As a result, a portion of the Company's net operating loss
carryforwards may not be available to offset future taxable income. The Company
has provided a full valuation allowance for deferred tax assets at March 31,
2004 based upon the Company's history of losses.
Segments
We report in two segments: handwriting recognition and systems integration.
For purposes of Management Discussion and Analysis, handwriting recognition
includes online/retail revenues and corporate sales, including enterprise and
original equipment manufacturers ("OEM") revenues. Handwriting recognition
represents the sale of software for electronic signatures, handwritten biometric
signature verification, data security, data compression, and electronic ink
capture. It also includes the sale of natural input technologies that are
designed to allow users to interact with handheld devices. All handwriting
recognition software is developed around our core technology. Handwriting
recognition product revenues are generated through our web site and a direct
sales force to individual or enterprise end users. We also license a version of
our handwriting recognition software to OEM's. The handwriting recognition
software is included as part of the OEM's product offering. From time to time,
we are required to develop an interface (port) for our software to run on a new
customer's hardware platform or within the customer's software operating system.
The development contract revenues are included in the handwriting recognition
segment.
System integration represents the sale and installation of third party
computer equipment and systems that utilize our products. System integration
sales are derived through a direct sales force which then develops a system to
utilize our software based on the customers requirements. Systems integration
sales are accomplished solely through our Joint Venture.
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Results of Operations
The following table provides unaudited financial information for each of
our two segments.
Three Months Ended
March 31,
2004 2003
------------------- ------------------
Segment revenues:
Handwriting recognition
Online/retail $ 41 $ 114
Corporate 2,352 667
China 5 48
------------------- ------------------
Total Handwriting recognition $ 2,398 $ 829
Systems integration
China 31 279
------------------- ------------------
Total revenues $ 2,429 $ 1,108
------------------- ------------------
Cost of Sales
Handwriting recognition $ 7 $ 16
Systems integration 26 217
------------------- ------------------
Total cost of sales $ 33 $ 233
------------------- ------------------
Other operating cost and expenses
Research and development $ 319 $ 340
Sales and Marketing 332 283
General and administrative 504 512
------------------- ------------------
Total other operating costs
and expenses $ 1,155 $ 1,135
------------------- ------------------
Interest and other income
(expense) net $ (74) $ (50)
------------------- ------------------
Net income (loss) $ 1,167 $ (310)
=================== ==================
Amortization of intangible assets
Cost of sales $ 3 $ 3
General and administrative 95 95
------------------- ------------------
Total amortization of intangible
assets $ 98 $ 98
=================== ==================
Revenues
Handwriting recognition.
Handwriting recognition segment revenues include online/retail, corporate
and China software sales. Handwriting recognition segment revenues increased
189% ($1,569), from $829 to $2,398, for the three months ended March 31, 2004,
as compared to the same prior year period.
Online/retail revenues decreased 64% ($73), from $114 to $41, for the three
months ended March 31, 2004, as compared to the same prior year period. . The
Company expects that online/retail sales from the internet will continue to
decline as the shipments of the PalmSource operating system embedded with the
Company's Jot software increase. The Company believes the increases in
PalmSource OS shipments and the resulting increased royalties, included in
Corporate revenues, will offset the decline in online/retail internet sales.
-16-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Corporate revenues increased 253% ($1,685), from $667 to $2,352 for the
three months ended March 31, 2004, as compared to the same prior year period.
OEM and channel partner sales increased 532% ($234), from $44 to $278, for the
three months ended March 31, 2004, as compared to the same prior year period.
The increase in sales is due primarily to increased royalties from the shipment
by PalmSource of its OS containing the CIC's Jot software. The Company expects
channel partner and OEM sales to increase in the future as new channel partners
and OEM customers are identified and new agreements are signed. Corporate sales
increased 231% ($1,449), from $625 to $2,074, for the three months ended March
31, 2004, as compared to the same prior year period. The increase was due
primarily to the sale of the Company's eSignature products to Wells Fargo Bank
in the three months ended March 31, 2004. The Company has been working with
other customers that have been developing internal applications that utilize the
Company's eSignature products. The Company believes that corporate eSignature
revenues will increase in the near term as the customers begin their roll out
and corporate IT spending increases as the economy strengthens. However the
timing of customer product roll out is difficult to project due to many factors
beyond the Company's control. The Company views eSignature as a high potential
revenue market and intends to continue to place increasing focus on this market.
Software sales in China decreased 90% ($43), from $48 to $5, for the three
months ended March 31, 2004, as compared to the same prior year period. This
decrease reflects the inherent delay in revenue generation while establishing a
channel strategy, which began in May of 2003, aimed at achieving accelerated and
sustained sales growth by leveraging channel partners to gain China-wide market
coverage. The channel strategy involves training the partners' sales forces and
CIC Chinas' engineering efforts to embed CIC eSignature software into the
partners' total application solutions. We believe the channel partner strategy
will begin delivering increasing and sustained sales growth beginning in the
second quarter of 2004. As of March 31, 2004, CIC China has approximately $110
of channel partner related backlog which is forecasted to be recognized in the
second quarter of 2004.
Systems Integration.
System integration segment revenue declined 89% ($248), from $279 to $31,
for the three months ended March 31, 2004, as compared to the same prior year
period. Over the prior two years, CIC China has emerged as the leading supplier
in Jiangsu Province to a fast-growing mobile industry application for regulated
goods, with an estimated 70% market share. The decline in system integration
revenue reflects the decision not to expand this business to other provinces,
which would require significant increases in base costs to provide turn-key
capabilities, but rather to focus on the emerging high potential
eSignature/office automation market in China, leveraging channel partners
capabilities. System integration revenues are expected to continue to be below
the prior year amounts in future quarters.
Cost of Sales
Handwriting recognition segment.
Handwriting recognition segment cost of sales includes online/retail,
corporate and China software sales costs. Such costs are comprised of royalty
and import tax payments, third party hardware costs, direct mail costs,
engineering direct costs and amortization of intangible assets excluding
patents. Cost of sales for the handwriting recognition segment decreased 56%
($9), from $16 to $7, for the three months ended March 31, 2004, as compared to
the same prior year period. The decline is primarily due to the sale of less
third party hardware along with the Company's software products. Cost of sales
may increase in the future depending on the customers decision to purchase from
the Company its software solution and third party hardware as a complete package
rather than buying individual components from separate vendors.
Online/retail cost of sales remained flat during the three month period
ended March 31, 2004 compared to the prior year period. The Company does not
anticipate a material increase is costs associated with the online/retail sales.
-17-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
Enterprise and OEM cost of sales decreased 56% ($9), from $16 to $7, for
the three months ended March 31, 2004, as compared to the same prior year
period. The decrease was due to the lower volume of third party hardware sales
and engineering development costs over the comparable three month period of the
prior year. Any increases in Enterprise and OEM cost of sales in the future will
be driven by the amount of third party hardware that is sold with the Company's
software solutions.
China handwriting recognition segment cost remained flat, during the three
month period ended March 31, 2004 compared to the prior year period. It is
expected that cost of sales will remain low for the foreseeable future as the
current trend has been in the sale of software solutions through channel
partners with little third party hardware.
Systems Integration.
China Systems integration segment cost of sales decreased 88% ($191), from
$217 to $26, for the three month period ended March 31, 2004, as compared to the
same prior year period. The decrease in costs was due primarily to the reduction
in sales during in the current three months ended March 31, 2004 compared to the
prior year period. The Company expects that system integration cost of sales
will decrease over time as the Company continues to increase its focus on the
emerging high potential eSignature/office automation market in China.
Operating expenses
Research and development expenses. Research and development expenses
decreased 6% ($21), from $340 to $319, for the three months ended March 31,
2004, as compared to the same prior year period. Engineering expenses consist
primarily of salaries and related costs, outside engineering, maintenance items,
and allocated facilities expenses. These expenses are offset by the
capitalization of software development costs and direct costs associated with
nonrecurring engineering contracts charged to cost of sales. Salaries and
related expenses decreased 2%, or $5, during the three months ended March 31,
2004 due primarily to the reduction of one of the engineering staff as compared
to the same prior year period. Other engineering administrative costs including
allocated facilities expenses declined 14% ($16), during the three months ended
March 31, 2004, as compared to the same prior year period. The Company believes
that the reductions in engineering head count and expenses will not have an
adverse effect on its ability to handle the current requirements. Currently the
Company does not anticipate further reductions in personnel nor does it
anticipate an increase in personnel as the Company maintains its relationship
with an outside engineering group familiar with its products and, if required,
can engage them on an as needed basis to fill future engineering requirements.
In addition the Company draws on the engineering capabilities of the Joint
Venture as required. This reliance on the Joint Venture and outside parties
allows the Company to maintain lower base costs and to increase engineering cost
on a temporary basis in response to specific revenue opportunities.
Sales and marketing expenses. Sales and marketing expenses increased 17%
($49), from $283 to $332, for the three months ended March 31, 2004, as compared
to the same prior year period. Sales and marketing expenses consist of salaries,
commissions and related expenses, professional services, advertising and
promotion, general office and allocated facilities expenses. Salaries and
related expenses declined 8%, or $10, for the three months ended March 31, 2004,
as compared to the prior year period. The decline is salaries and related
expense is due to the net reduction of one sales person compared to the three
months in the prior year period. Recruiting expense was $20 in the three months
ended March 31, 2004, as compared to no recruiting expense in the same prior
year period. Commissions expense increased 280% or $84 in the three months ended
March 31, 2004, as compared to the same prior year period. The increase in
commission expense is due to the increase in revenues between the comparable
periods. Other expenses including facilities and other office related expenses
decreased 35% or $45 for the three months ended March 31, 2004, as compared to
the same prior year period. These reductions in other expenses were realized in
both the US and China operations and were primarily related to travel expenses,
depreciation and allocated facility costs. The Company expects these costs would
increase at such time in the future as the sales force is expanded to respond to
increasing revenue opportunities. The Company believes that the current cost
structure can support significantly higher revenue without significant increases
in base costs.
-18-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
General and Administrative Expenses. General and administrative expenses
decreased 2% ($8), from $512 to $504, for the three months ended March 31, 2004,
as compared to the same prior year period. General and administrative expense
consists of salaries, professional fees, investor relations expenses, patent
amortization and office and allocated facilities costs. Salaries and wages
remained flat, for the three months ended March 31, 2004 compared to the same
prior year period. Professional service expenses which include consulting, legal
and outside accounting fees decreased 38%, or $38, as compared to the same prior
year period. The decrease was primarily due to lower legal and accounting fees
associated with the Company's 2003 annual report during the three months ended
March 31, 2004, as compared to the same prior year period. Other administrative
expenses increased 13%, or $30, for the three month period ended March 31, 2004,
as compared to the same prior year period. The increase was primarily due to an
increase in the reserve for uncollected accounts receivable of $16 an increase
in insurance of $3 and a $11 increase in other administrative expenses including
facilities expenses allocation and allocated expenses associated with the Joint
Venture. The Company does not anticipate significant increases in administrative
expense in the near future.
Interest and other income (expense), net
Interest and other income (expense), net increased $10, for the three
months ended March 31, 2004, compared to the same prior year period. The
increase in was due to the change in minority interest resulting from an
operating loss by the join venture.
Interest expense
Interest expense increased 69% ($34), from $49 to $83 for the three months
ended March 31, 2004 compared to the same prior year period. The increase was
primarily due to interest paid to Cornell Capital Partners, LC associated with
the $750 in short-term debt (See Note 4 of the condensed consolidated financial
statements). Interest paid on the Company's $3,000 debt over the comparable
three month periods was unchanged.
Liquidity and Capital Resources
At March 31, 2004, cash and cash equivalents totaled $390 compared to cash
and cash equivalents of $1,039 at December 31, 2003. The decrease in cash was
primarily due to cash used in operating activities of $643, acquisition of
property and equipment amounting to $3 and payments of long term debt and
capital lease obligations of $3. Total current assets were $3,270 at March 31,
2004, compared to $2,005 at December 31, 2003. As of March 31, 2004, the
Company's principal sources of funds included its cash and cash equivalents
aggregating $390, accounts receivable and the Equity Line of Credit through
Cornell Capital Partners LP.
Accounts receivable increased $1,953 for the three months ended March 31,
2004 compared to December 31, 2003, due primarily to the sale during the period
to Wells Fargo Bank. The receivable, approximating $2,200 was collected four
days subsequent to March 31, 2004. The Company expects the development of the
eSignature market will result in more consistent revenue on a quarter to quarter
basis and therefore, less fluctuation in accounts receivable from quarter to
quarter.
Prepaid expenses and other current assets declined by $16 for the three
months ended March 31, 2004, compared to December 31, 2003, due to expensing
more annual fees or maintenance and support costs than added to prepaids over
the three months ended March 31, 2004. Generally, annual insurance premiums and
maintenance and support fees are prepaid in December and June of each year and
therefore the balances typically begin to decrease in the first and third
quarters as the balances are amortized.
Accounts payable decreased $158 for the three months ended March 31, 2004,
compared to December 31, 2003, due to the payments made on annual insurance
premiums, maintenance and support fees and materials used by the Joint Venture
in cost of sales and purchased in the fourth quarter of 2003. Accounts payable
balances typically increase in the second and fourth quarters when the insurance
and annual maintenance and support fees are incurred. Materials used in cost of
sales may impact accounts payable depending on the amount of third party
-19-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
hardware sold as part of the software solution. Accrued compensation increased
$53 due to the accrual of commissions based on the increase in revenues over the
three months ended March 31, 2004 compared to the prior year period. These
commissions are expected to be paid in the second quarter of 2004.
The Company has suffered recurring losses from operations that raise a
substantial doubt about its ability to continue as a going concern. The
Company's accumulated deficit was reduced to approximately $81 million at March
31, 2004 from approximately $82 million at December 31, 2003. There can be no
assurance that the Company will continue to reduce the accumulative deficit or
have adequate capital resources to fund planned operations or that any
additional funds will be available to it when needed, or if available, will be
available on favorable terms or in amounts required by it. 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 its business, results of operations and
ability to operate as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The Company intends to use the net proceeds from the issuance of the shares
of its common stock under the Equity Line of Credit to repay short term debt and
for working capital. In addition, fifty percent of any such funds in excess of
$5 million must be applied to the outstanding principal of the Company's
short-term debt, related party. CIC believes the proceeds from the Equity Line
of Credit, when combined with cash provided from operations, will be sufficient
to meet its capital requirements for the foreseeable future. If the Company is
unable to secure at least $5 million in funds under the Equity Line of Credit or
is unable to sustain the increase in funds generated from operations, the
Company may not be able to continue its operations in their current form and may
not be a viable company on a going forward basis without significant changes in
its operations. The Company has raised, net of costs and expenses, approximately
$2,300 from the equity line of credit. The Company believes it will be able to
raise the necessary funds under the Equity Line of Credit and from operations.
The Company has not formulated specific plans to change its operations. Possible
changes could include reduced personnel expenses to better match its revenue
streams.
Current liabilities, which include deferred revenue, were $4,899 at March
31, 2004 compared to $4,900 at December 31, 2003. Deferred revenue, totaling
$369 at March 31, 2004, compared to $165 at December 31, 2003, primarily
reflects advance payments for products and maintenance fees from the Company's
licensees which are generally recognized as revenue by the Company when all
obligations are met or over the term of the maintenance agreement.
The $3,000 loan is due and payable by June 18, 2004. The Company is
currently investigating and considering various methods to pay off the loan.
Alternatives being considered include: paying the loan from cash generated by
operations, refinancing the loan with a different lender either as straight debt
or as convertible debt, refinancing the loan with a different lender with terms
that allow the Company, at its option, to repay the loan through issuance of
stock or with available cash, and of course, if necessary, the Company's
existing equity line of credit agreement could be used to pay the loan. Any of
the preceding alternatives may be used individually or in combination with any
other stated alternative. The Company continues to investigate various methods
of payment and other alternatives may become available which the Company may
determine are preferable to the above.
We have the following material commitments as of March 31, 2004:
Payments due by periods
- -------------------------------- ----------------------------------------------
Less than One to Four to After
Contractual obligations Total One year three five five
years years years
- -------------------------------- ------- -------- -------- -------- ------
Short term debt (1) $ 3,750 $ 3,750 $ - $ - $ -
Long term-debt 19 8 11 - -
Capital Lease Obligations 28 28 - - -
Operating lease commitments (2) 1,068 419 649 - -
------- -------- ------- ------ ------
Total contractual cash
obligations $ 4,865 $ 4,205 $ 660 $ - $ -
======= ======== ======== ====== ======
-20-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
1. The Short-term debt related party may be pre-paid by the Company in whole
or in part at any time without penalty, subject to the right to convert the
outstanding principal amount into shares of common stock at a conversion
price of $2.00 per share, subject to adjustment upon the occurrence of
certain events.
2. The operating lease commenced on November 1, 2001. The cost of the lease
will increase approximately 3% per annum over the term of the lease, which
expires on October 31, 2006.
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 those set fourth in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003
and delineated as follows:
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 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 did not enter into any
short-term security investments during the three months ended March 31, 2004.
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.
-21-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except per share amounts)
FORM 10-Q
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 in general, or market volatility unrelated to the
Company's business and operating results.
Item 4A. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures pursuant to Exchange Act Rule
13a-14(c) within 90 days of the filing date of this quarterly report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
Part II-Other Information
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT 31 - Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley act of
2002.
EXHIBIT 32 - Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 18 USC Section 1750, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 16, 2004, with respect to the
appointment of David Welch to the Company's Board of Directors.
-22-
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
May 12, 2004 s/ Francis V. Dane
- ------------------------ ---------------------------------------------
Date Francis V. Dane
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-23-