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, 1998
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 May 6, 1997: 51,498,486.
This Quarterly Report on Form 10-Q contains 19 pages of which this is page 1.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets at March 31, 1998 (unaudited) and
December 31, 1997.......................................................3
Condensed Consolidated Statements of Operations for the three-month
periods ended March 31, 1998 and 1997 (unaudited).......................4
CondensedConsolidated Statements of Cash Flows for the three-month
periods ended March 31, 1998 and 1997(unaudited)........................5
Notes to Condensed Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................13
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
See accompanying notes.
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In Thousands)
March 31, December 31,
1998 1997
------------------ ------------------
Unaudited
Assets
Current assets:
Cash and cash equivalents $ 2,943 $ 5,485
Accounts receivable, net 598 362
Inventories 158 193
Other current assets 322 175
------------------ ------------------
Total current assets 4,021 6,215
Note receivable from officer 210 210
Property and equipment, net 736 798
Other assets 272 268
------------------ ------------------
Total assets $ 5,239 $ 7,491
================== ==================
Liabilities and stockholders' equity Current liabilities:
Short-term debt $ 37 $ 490
Accounts payable 350 1,059
Accrued compensation 378 446
Other accrued liabilities 847 1,059
Deferred revenue 98 440
------------------ ------------------
Total current liabilities 1,710 3,494
Other liabilities 6 8
Commitments (Note 5)
Stockholders' equity:
Convertible preferred stock (Note 5) 5 6
Common stock 486 474
Additional paid-in capital 70,102 69,955
Accumulated deficit (66,958) (66,347)
Cumulative translation adjustment (112) (99)
------------------ ------------------
Total stockholders' equity 3,523 3,989
================== ==================
Total liabilities and
stockholders' equity (Note 5) $ 5,239 $ 7,491
================== ==================
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In Thousands, except per share amounts)
Three Months Ended
March 31,
--------------------------------------------
1998 1997
------------------- -------------------
Revenues:
Product $ 675 $ 765
License and royalty 593 272
Development contracts 98 161
------------------- -------------------
1,366 1,198
Operating costs and expenses:
Cost of sales:
Product 329 785
License and royalty 15 19
Development contracts 57 97
Research and development 579 476
Sales and marketing 547 1,400
General and administrative 500 429
------------------- -------------------
Total operating costs and expenses 2,027 3,206
------------------- -------------------
Loss from operations (661) (2,008)
Interest and other income
(expense), net (Note 5) 64 (421)
Interest expense (14) (17)
------------------- -------------------
Net loss (611) (2,446)
Embedded yield on preferred stock - (2,188)
Preferred stock dividend (167) (141)
------------------- -------------------
Net loss applicable
to common stockholders $ (778) $ (4,775)
=================== ===================
Basic loss per common share $ (0.02) $ (0.11)
=================== ===================
Diluted loss per common share $ (0.02) $ (0.11)
=================== ===================
Weighted average common
shares outstanding 48,400 44,521
=================== ===================
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
Three Months Ended
March 31,
--------------------------
1998 1997
----------- ---------
Cash flows from operating activities:
Net loss $ (611) $ (2,446)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 71 43
Warrant issuance costs - 484
Stock options issued for services 7 46
Changes in operating assets and liabilities:
Accounts receivable (236) (280)
Inventories 35 (337)
Other current assets (147) (127)
Other assets (12) (57)
Accounts payable and accrued compensation (776) 61
Other accrued liabilities (284) (6)
Deferred revenue (287) (172)
Pre-petition liabilities - (878)
---------- ----------
Net cash used in operating activities (2,240) (3,669)
---------- ----------
Cash flows from investing activities:
Proceeds from sales and maturities of
short-term investments - 3,000
Purchase of short-term investments - (4,729)
Acquisition of property and equipment - (79)
---------- ----------
Net cash used in investing activities - (1,808)
---------- ----------
Cash flows from financing activities:
Principal payments on short-term debt (453) -
Proceeds from exercise of stock options 151 102
---------- ----------
Net cash provided by (used in)
financing activities (302) 102
---------- ----------
Effect of exchange rate changes on cash - (34)
---------- ----------
Net decrease in cash and cash equivalents (2,542) (5,409)
Cash and cash equivalents at beginning of quarter 5,485 10,573
---------- ----------
Cash and cash equivalents at end of quarter $ 2,943 $ 5,164
========== ==========
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
Three Months Ended
March 31,
-------------------------
1998 1997
-------- ---------
Schedule of non-cash transactions:
Conversion of redeemable convertible
preferred stock into Series A Preferred Stock $ - $ 9,417
======== =========
Communication Intelligence Corporation
and Subsidiary
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
- - 9 -
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 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 interim results are not
necessarily indicative of the results to be expected for the entire
year.
The Company develops, markets and licenses pen-input and biometric
security software and technologies for the computer, consumer
electronics and communication markets. The Company's products include
multi-lingual character recognition software (JOT(TM) and Handwriter
Recognition System), signature verification software and biometric
security development tools (SigCheck(TM) and InkTools(TM)), and
electronic ink compression and electronic note-taking software
(INKshrINK and QuickNotes(TM)). CIC's products are designed to increase
the ease of use, functionality and security of a variety of electronic
devices from desktop PCs to "smart" cellular phones.
The Company offers a wide range of software products for pen-based
computing, based on the Company's core handwriting recognition and
related technologies. 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 as the sole input device or
in conjunction with a keyboard. The pen eliminates the need for a mouse
as a navigational device. The Company believes that pen-input enhances
productivity and creativity because it is a more natural means of
input, facilitates editing and screen navigation, and reduces the risk
of repetitive stress illness. The Company's transaction and
communication enabling technologies are designed to provide a
cost-effective means for protecting electronic transactions, electronic
files and private communications. CIC believes that these technologies
offer more efficient methods to conduct 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, data compression and pen-based operating environments.
For the three months ended March 31, 1998, the Company's cash and cash
equivalents decreased by approximately $2,542 from approximately $5,485
at the beginning of the period to approximately $2,943. The decrease is
due primarily to cash used in operating activities of approximately
$2,240 and approximately $453 used to repay an accounts receivable line
of credit during the three months ended March 31, 1998. Although there
can be no assurance, the Company believes that its cash and cash
equivalents will be sufficient to fund planned operations for at least
the next twelve months. However, if the Company is unable to generate
adequate cash flow from sales, or if expenditures required to achieve
the Company's plans are greater than expected, the Company may need to
obtain additional funds or reduce
1. Interim financial statements (continued)
discretionary spending. Management believes that it will be able to
reduce discretionary spending if required.
The Company's Form 10-Q for the quarter ended March 31, 1997 was
restated to reflect the non-cash charge for the embedded yield on the
convertible preferred stock resulting from the discounted conversion
feature provided on such stock and the cumulative dividends of $1.25
per share, per annum, on outstanding shares of Series A Convertible
Preferred Stock. The Company believes the restatement of the March 31,
1997 quarterly results was in accordance with the accounting treatment
of the embedded discount on convertible preferred stock as announced by
the Securities and Exchange Commission at the March 13, 1997 meeting of
the Financial Accounting Standards Board's Emerging Issues Task Force.
The effect of this restatement on the results of operations originally
reported in the Company's Form 10-Q for the quarter ended March 31,
1997 was to increase the net loss applicable to common stockholders by
$2,329 from $2,446 to $4,775 and to increase the net loss per common
share by $0.06 from $0.05 to $0.11. The restatement had no effect on
the Company's cash position at March 31, 1997.
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, 1997.
Certain prior period amounts in this Form 10-Q have been reclassified
to conform with the current period presentation.
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,
1998 1997
----------- -------------
Cash in bank $ 665 $ 1,160
Commercial paper 529 2,330
Money market accounts 1,600 1,004
Corporate debt securities - 991
Other debt securities 149 -
----------- -------------
$ 2,943 $ 5,485
=========== =============
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,
1998, inventory was comprised primarily of finished goods.
4. Short-term debt
In May 1997, the Company purchased office furniture and a security
system with an approximate value of $209 from a third party. The
Company paid $100 in cash and signed an unsecured note for $109 due in
monthly installments through May 1998. The note bears interest on the
unpaid balance at a rate of 10% per annum. At March 31, 1997, $37 was
outstanding under this note.
In October 1997, the Company entered into an accounts receivable
financing agreement whereby the Company may factor its accounts
receivable in accordance with the terms of the agreement. The maximum
credit available to the Company under the agreement is $1,500 with an
advance rate of 80% of eligible accounts receivable less than 90 days
old. The term of the agreement is twelve months with annual renewals. A
financing fee of 2.1% per month applies to the outstanding balance
based on the face value of each invoice. The line of credit is secured
by a blanket first priority lien on all Company assets with the
exception of intellectual property. The amounts financed under the
accounts receivable financing agreement at December 31, 1997, were
repaid in January 1998. The Company has approximately $1,500 of credit
available under this agreement at March 31, 1998.
5. Convertible preferred stock
In December 1996, the Company completed a private placement (the
"December Private Placement") of 450 shares of redeemable convertible
preferred stock (the "Series A Preferred Stock") at $25.00 per share to
certain institutional and other investors. Of the aggregate 450 shares
sold, 70 shares of Series A Preferred Stock were issued in exchange for
390 shares of Common Stock originally issued by the Company in a
private placement of Common Stock in June 1996.
On March 28, 1997, and effective as of December 31, 1996, holders
constituting 100% of the issued and outstanding Series A Preferred
Stock executed a waiver to certain provisions of the Registration
Rights Agreement ("the Agreement") entered into in connection with the
December Private Placement. Under the waiver, these holders irrevocably
waived any redemption obligations of the Company with respect to the
Series A Preferred Stock in exchange for the issuance to such holders
of 300 warrants to purchase the Company's Common Stock, allocated
amongst the holders on a pro-rata basis. The warrants expire five years
from the date of issuance and have an exercise price of $2.00 per
share, subject to adjustment for anti-dilution. The Company has
ascribed a value of $484 to these warrants, which was recorded as an
expense in the Company's statement of operations during the first
quarter of 1997. The fair value ascribed to the warrants was estimated
on the date of issuance using the Black-Scholes pricing model with the
following assumptions: risk-free interest rate of 6.60%; expected life
of 5 years; expected volatility of 104%; and expected dividend yield of
0%. As a result of the aforementioned waiver, the shares of Series A
Preferred Stock which were classified as redeemable securities at
December 31, 1996 were reclassified as convertible preferred stock at
March 31, 1997 and, as such, are included in stockholders' equity.
On November 26, 1997, the Company completed a private placement of 240
shares of Series B Preferred Stock (the "November Private Placement")
at $25.00 per share to certain investors.
5. Convertible preferred stock (continued)
Each share of Series A Preferred Stock and Series B Preferred Stock is
convertible by the holders into shares of the Company's Common Stock at
any time. In addition, all outstanding shares of Series A Preferred
Stock will be automatically converted into shares of Common Stock on
December 31, 1999, subject to the satisfaction of certain conditions
and events by the Company, or later under certain circumstances. All
outstanding shares of Series B Preferred Stock will be automatically
converted into shares of Common Stock on November 25, 2000, or at the
Company's option, up to one year later.
The number of common shares to be issued upon conversion of the Series
A Preferred Stock is determined by dividing (i) the sum of $25.00
multiplied by the number of Series A Preferred shares being converted,
plus accrued and unpaid dividends and any unpaid default payments
thereon, by (ii) a conversion price which is approximately 72% of the
then applicable market price of the Company's Common Stock (the
"Conversion Price").
The number of common shares to be issued upon conversion of the Series
B Preferred Stock is determined by dividing (i) the sum of $25.00
multiplied by the number of shares of Series B Preferred stock being
converted, plus accrued and unpaid dividends and any unpaid default
payments thereon, by (ii) a conversion price equal to the lower of (a)
the average market price of the Common Stock or (b) $1.59 per share
Each holder of the outstanding shares of Series A Preferred Stock and
Series B Preferred Stock is entitled to receive, out of funds legally
available therefor, cumulative dividends on each share at the rate of
$1.25 per share per annum, compounded semi-annually and quarterly,
respectively, when payable (whether or not declared). The dividends may
be paid in cash or additional shares of preferred stock (with each
additional share valued at $25.00 per share), at the Company's option.
Dividends must be paid on the Series A Preferred Stock and Series B
Preferred Stock prior to any dividends being paid on any other class of
stock ranking junior thereto.
Pursuant to the Series A Registration Rights Agreement entered into in
connection with the sale of the Series A Preferred Stock, the Company
is required to pay to each holder a default payment in an amount equal
to 3% of the liquidation preference of the Series A Preferred Stock
held for any part of each 30-day period in which (i) the Company fails,
refuses or is unable to cause the securities covered by the
registration statement related to the shares of Common Stock issuable
upon conversion of the Series A Preferred Stock (the "1997 Registration
Statement") to be listed on the exchange on which the Common Stock is
traded, (ii) any holder's ability to sell the securities covered by the
1997 Registration Statement is suspended for more than sixty days in
the aggregate, or (iii) the Company does not have a sufficient number
of shares of Common Stock available to effect conversion of the Series
A Preferred Stock.
6. Net loss per share
Effective December 31, 1997, the Company adopted 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. All prior year earnings per share
data have been restated to reflect the provisions of SFAS 128.
Potential common shares, including outstanding convertible preferred
stock, stock options and warrants, have been excluded from the
calculation of diluted earnings per share for all periods presented as
their effect is anti-dilutive. Per share results of operations are
reduced by the amortization of the beneficial conversion rate on the
Series A Preferred Stock and the cumulative dividend requirements
earned by the preferred stockholders.
7. Recent accounting pronouncements
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), which the Company has adopted for
transactions entered into during the fiscal year beginning January 1,
1998. SOP 97-2 provides guidance for recognizing revenue on software
transactions and supersedes Statement Of Position No. 91-1, "Software
Revenue Recognition". In March 1998, the AICPA issued Statement of
Position No. 98-4, "Deferral of the Effective Date of a Provision of
SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 98-4 defers,
for one year, the application of certain passages in SOP 97-2 which
limit what is considered vendor-specific objective evidence ("VSOE")
necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist.
Additional guidance is expected to be provided prior to adoption of the
deferred provision of SOP 97-2. The Company will determine the impact,
if any, the additional guidance will have on current revenue
recognition practices when issued. Adoption of the remaining provisions
of SOP 97-2 did not have a material impact on revenue recognition
during the three months ended March 31, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments
of An Enterprise and Related Information " ("SFAS 131"). SFAS 131
revises information regarding the reporting of operating segments and
is required to be adopted in periods beginning after December 15, 1997.
It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company will
adopt SFAS 131 for the year ended December 31, 1998 and such adoption
is not expected to have a material effect on its consolidated financial
statements.
8 Change in accounting principle
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income"("SFAS 130"). The Company adopted SFAS 130
effective January 1, 1998. SFAS 130 requires that all items
8 Change in accounting principle (continued)
recognized under accounting standards as components of comprehensive
earnings be reported in an annual statement that is displayed with the
same prominence as other annual financial statements. SFAS 130 also
requires that an entity classify items as other comprehensive earnings
by their nature in an annual financial statement. For example other
comprehensive earnings may include foreign currency translation
adjustments, minimum pension liability adjustments, and unrealized
gains and losses on marketable securities classified as
available-for-sale. Annual financial statements for prior periods will
be reclassified, as required.
Total comprehensive loss was as follows:
Three Months Ended March 31,
----------- ----- ------------
1998 1997
----------- ------------
Net loss $ (611) $ (2,446)
Other comprehensive loss:
Cumulative translation adjustment (13) (35)
----------- ------------
Total comprehensive loss $ (624) $ (2,481)
=========== ============
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
unaudited condensed consolidated financial statements and notes thereto included
in Part I - Item 1 of this 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, 1997.
Results of Operations
Revenues. The Company's revenues are derived from product sales, license and
royalty revenues and development contracts. For the three months ended March 31,
1998, revenues increased by 14% to $1,366 from $1,198 for the comparable three
month period ended March 31, 1997 as discussed below:
Three Months Ended
March 31,
------------ -------------
1998 1997
------------ -------------
Unaudited
Revenues:
Product $ 675 $ 765
License and royalty 593 272
Development contract 98 161
------------ -------------
Total revenues $ 1,366 $ 1,198
============ =============
Product sales decreased to $675 or by 12% for the three month period ended March
31, 1998 from $765 in the comparable prior year period. This decrease was due
primarily to the withdrawal of Handwriter products from the retail channel
during the three months ended March 31, 1998. Handwriter product sales decreased
$294 to $194 during the period ended March 31, 1998 compared to $488 in the
prior year period. Product sales by the Company's 90% owned joint venture in The
People's Republic of China (the "Joint Venture") were $499 for the period ended
March 31, 1998 compared to $275 during the same period last year. The increase
is primarily due to increases in sales efforts made possible by an expansion of
the sales force during the first quarter of 1998.
Revenues from license and royalty fees for the three month period ended March
31, 1998 increased to $593 from $272 in the comparable prior year period. This
increase was primarily the result of approximately $404 of revenues recognized
on licensing agreements for which the Company has no further obligation to
deliver additional software or services compared to approximately $164 of such
revenues in the comparable prior year period.
Development contract revenues for the three month period ended March 31, 1998
decreased 39% to $98 from $161 in the comparable prior year period. This
decrease resulted from a decrease in grant revenue recognized from the National
Science Foundation from the comparable prior year period.
Cost of sales. Cost of product sales for the three months ended March 31, 1998
decreased 55% to $401 from $901 in the comparable prior year period. Cost of
product sales at March 31, 1998 comprises approximately $304 of hardware and
software components related to the system integration activities of the Joint
Venture, compared to approximately $235 in the prior year period. The increase
in systems integration cost of product sales is due to the increase in sales and
was offset by a decrease of $525 in Handwriter(R) product cost of sales. The
decrease in Handwriter(R) product cost of sales is due to reduced sales of such
products for the three months ended March 31, 1998 compared to the prior year,
and lower product costs resulting from inventory write-downs of approximately
$1,600 and other cost reductions in the three month period ended December 31,
1997 relating to Handwriter products. License and royalty cost of sales
decreased approximately $4 to $15 for the three months ended March 31, 1998
compared to $19 for the comparable 1997 period. Costs incurred in connection
with development contract revenues decreased 41% for the three months ended
March 31, 1998 as compared to the March 31, 1997 period, commensurate with the
decrease in contract development revenues in the first quarter of 1998.
Research and development expenses. Research and development expenses for the
three month period ended March 31, 1998 increased by 22% to $579 as compared to
$476 in the comparable period of the prior year. This increase was primarily due
to approximately $58 in payroll and related costs attributable to the number of
personnel for the three months ended March 31, 1998 compared to the same three
month period last year. Other costs, including facilities and related costs,
increased approximately $52 for the three month period ended March 31, 1998 as
compared to the comparable prior year period. This increase was commensurate
with the increased personnel. The Company capitalized $7 in software development
costs during the three month period ended March 31, 1998 compared to no
capitalization in the comparable period of 1997.
Sales and marketing expenses. Sales and marketing expenses for the three month
period ended March 31, 1998 decreased 61% to $547 as compared to $1,400 in the
comparable period of the prior year. This decrease was primarily due to
decreases of $444 in advertising and related expenses, and $205 in payroll and
related expenses consistent with the Company's new objectives. Other costs
including facilities and related expenses decreased $204 commensurate with
reductions in staffing. The reductions in staffing and advertising expenses were
primarily due to the withdrawal of the Company's Handwriter products from the
retail channel during the first quarter of 1998 and the closure of the Japanese
sales office in December 1997., respectively.
General and administrative expenses. General and administrative expenses for the
three month period ended March 31, 1998 increased 17% to $500 as compared to
$429 in the comparable period of the prior year. This increase was primarily
attributable to an increase of approximately $54 in other costs, including
consulting expenses and facilities and related costs and an increase in the
administrative activities of the Joint Venture.
Interest and other income (expense), net. Interest and other income (expense),
net decreased due to a one time non-cash charge to expense in March 1997 of $484
for 300 warrants issued on March 28, 1997 to holders constituting 100% of the
issued and outstanding redeemable convertible preferred stock in exchange for
the execution of a waiver to certain provisions of the Agreement entered into in
connection with the December Private Placement (See Note 5 in the Notes to the
Condensed Consolidated Financial Statements).
Embedded yield on preferred stock. The embedded yield on preferred stock results
from the discount feature provided on the conversion price of the Series A
Preferred Stock into Common Stock. The embedded yield totaling $4,376 was
recognized from the issuance date of December 31, 1996 through July 1, 1997, the
date upon which the Series A Preferred Stock first became convertible.
Preferred stock dividend. The preferred stock dividend relates to cumulative
dividends of $1.25 per share, per annum, compounded quarterly and semi-annually,
respectively, whether or not declared, on the convertible preferred stock.
Liquidity and Capital Resources
At March 31, 1998, cash and cash equivalents totaled $2,943 compared to cash and
cash equivalents of $5,485 at December 31, 1997. This decrease was primarily the
result of $2,240 used in operating activities and approximately $453 used to
repay the accounts receivable line of credit. Total current assets were $4,021
at March 31, 1998 compared to $6,215 at December 31, 1997.
As of March 31, 1998, the Company's principal source of liquidity was its cash
and cash equivalents of $2,943. Although there can be no assurance, the Company
believes that its cash and cash equivalents will be sufficient to fund planned
operations for at least the next twelve months. However, if, among other things,
the Company is unable to generate adequate cash flows from sales, or if
expenditures required to achieve the Company's plans are greater than expected,
the Company may need to obtain additional funds or reduce discretionary
spending. There can be no assurance that additional funds will be available when
needed, or if available, will be available on favorable terms or in the amounts
required by the Company. If adequate funds are not available when needed, the
Company may be required to delay, scale back or eliminate some or all of its
operations, which will have a material adverse effect on the Company's business,
results of operations and prospects.
Current liabilities, which include deferred revenue, were $1,710 at March 31,
1998. Deferred revenue, totaling $98 at March 31, 1998, primarily reflects
nonrefundable advance royalty fees received from the Company's licensees which
are generally recognized as revenue by the Company in the period in which
licensees report that products incorporating the Company's software have been
shipped. As such, the period over which such deferred revenue will be recognized
as revenue is uncertain because the Company cannot presently determine either
the timing or volume of future shipments by its licensees.
The Company currently owns 90% of a joint venture (the "Joint Venture") with The
Ministry of Electronic Industries of the Jiangsu Province, a provincial agency
of the People's Republic of China (the "Agency"). Under the provisions of a
joint venture agreement, the Company may be required to contribute up to an
aggregate of $5,400 in cash to the Joint Venture and is required to provide it
with non-exclusive licenses to technologies and certain distribution rights. The
Agency is required to contribute certain land use rights and provide other
services to the Joint Venture. As of March 31, 1997, the Company had contributed
an aggregate of $1,800 in cash to the Joint Venture and provided it with
non-exclusive licenses to technologies and certain distribution rights and the
Agency had contributed certain land use rights. The Company believes that any
future cash contributions required to be made to the Joint Venture will be paid
from its working capital or proceeds from additional financings, if any. The
Joint Venture is subject to the annual licensing requirements of the Chinese
government. The Joint Venture's business license has been renewed through March
1,1999. The failure of the Joint Venture to receive a renewal of its license
beyond this date may adversely affect the Company's ownership interests in the
Joint Venture. 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.
In December 1996, the Company completed a private placement of 450 shares of
redeemable convertible preferred stock (the "December Private Placement") at
$25.00 per share to certain institutional and other investors. Of the aggregate
450 shares sold, 70 shares of redeemable convertible preferred stock were issued
in exchange for 390 shares of Common Stock, originally issued in an earlier
private placement.
On November 26, 1997, the Company completed a private placement of 240 shares of
Series B Preferred Stock (the "November Private Placement") at $25.00 per share
to certain investors.
Each share of Series A and Series B Preferred Stock is convertible by the
holders into shares of Common Stock at any time. In addition, all outstanding
shares of Series A Preferred Stock will be automatically converted into shares
of Common Stock on December 31, 1999, subject to the satisfaction of certain
conditions and events by the Company, or later under certain circumstances. All
outstanding shares of Series B Preferred Stock will be automatically converted
into shares of Common Stock on November 25, 2000, or at the Company's option, up
to one year later.
Generally, the number of shares of Common Stock to be issued upon conversion of
the Series A Preferred Stock is determined by dividing (i) the sum of $25
multiplied by the number of shares being converted, plus accrued and unpaid
dividends thereon and any unpaid default payments, by (ii) a conversion price
(as determined in the certificate of designations for such shares) which is
approximately 72% of the then applicable market price of the Common Stock. The
then applicable market price generally will be determined as follows: (i) if the
holder giving the conversion notice has sold the shares of Common Stock issuable
upon conversion, the market price will be the weighted average of the actual
selling price at which the holder converting has sold the shares of Common Stock
(which may not be less than the lowest trading price on the date of such trade
as reported by the Nasdaq Small-Cap Market), net of normal and customary
commissions and underwriting or dealer spreads, or (ii) if the holder giving the
conversion notice has not sold the shares of Common Stock issuable upon
conversion, the market price will be the average of the daily mean between the
low trading price and the closing price of the Common Stock for each of the
three consecutive trading days prior to the conversion date. The conversion
price is also subject to adjustment for customary dilutive events such as stock
splits, stock dividends, reorganizations and certain mergers.
Generally, the number of shares of Common Stock to be issued upon conversion of
the Series B Preferred Stock is determined by dividing (i) the sum of $25
multiplied by the number of shares being converted, plus accrued and unpaid
dividends thereon and any unpaid default payments, by (ii) a conversion price
(as determined in the certificate of designations for such shares) equal to the
lower of (a) the average market price of the Common Stock, or (b) $1.59 per
share. The average market price generally will be the average of the daily
closing prices of the Common Stock for the three consecutive trading days prior
to the conversion date. The conversion price is also subject to adjustment for
customary dilutive events such as stock splits, stock dividends, reorganizations
and certain mergers.
If the average market price of the Common Stock on May 6, 1998 of $1.00 per
share was used to determine the number of shares issuable upon conversion of all
of the shares of Series A and Series B Preferred Stock outstanding as of the
same date, the Company would be obligated to issue an aggregate of approximately
13,795,000 shares of Common Stock. There is no limitation on the number of
shares of Common Stock that the Company may be required to issue in connection
with the conversion of the Series A and Series B Preferred Stock. The number of
shares of Common Stock issuable upon conversion of, or otherwise with respect
to, the shares of Series A and Series B Preferred Stock is subject to
adjustment, and will likely be different than the amount estimated herein. The
exact number is dependent upon factors which the Company is unable to predict at
this time, including the future market price of the Common Stock.
Pursuant to the Series A Registration Rights Agreement entered into in
connection with the sale of the Series A Preferred Stock, the Company is
required to pay to each holder a default payment in an amount equal to 3% of the
liquidation preference of the Series A Preferred Stock held for any part of each
30-day period in which (i) the Company fails, refuses or is unable to cause the
securities covered by the Registration Statement related to the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock (the "1997
Registration Statement") to be listed on the exchange on which the Common Stock
is traded, (ii) any holder's ability to sell the securities covered by the 1997
Registration Statement is suspended for more than sixty days in the aggregate,
or (iii) the Company does not have a sufficient number of shares of Common Stock
available to effect conversion of the Series A Preferred Stock. Any default
payment which the Company is required to make may have a material adverse effect
on the Company and, if such payment is made by the issuance of additional
shares, may further dilute the ownership interests of the holders of the Common
Stock.
As of May 6, 1998, there were approximately 219 shares of Series A Preferred
Stock and 240 shares of Series B Preferred Stock issued and outstanding.
In October 1997, the Company entered into an accounts receivable financing
agreement whereby the Company has the ability to factor its accounts receivable
in accordance with the terms of the agreement. The maximum credit available to
the Company under the agreement is $1,500, with an advance rate of 80% of the
eligible accounts receivable which are less than 90 days old. The term of the
agreement is twelve months with annual renewals. A financing fee of 2.1% per
month applies to the outstanding balance based on the face value of each
invoice. The line of credit is secured by a blanket first priority lien on all
Company assets with the exception of its intellectual property. As of March 31,
1997, the Company had no outstanding financed accounts receivable under this
agreement. The amounts financed under this agreement at December 31, 1997 were
repaid in January 1998.
The Company leases facilities in the United States and China. Future minimum
lease payments under non-cancelable operating leases are expected to be
approximately $617, $603, $620, and $558 for the years ending December 31, 1998,
1999, 2000 and 2001, respectively. The Company's rent expense is expected to be
reduced by approximately $167 in 1998 in connection with the subleases on excess
office space in the United States.
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.
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
The Company's future earnings and stock price may be subject to significant
volatility. The public stock markets have exhibited extreme volatility in stock
prices in recent years. The stock prices of high technology companies have
experienced particularly high volatility, including at times severe price
changes that are unrelated or disproportional to the operating performance of
these specific companies. The trading price of the Company's Common Stock could
be subject to wide fluctuation in response to, among other factors,
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
announcements of new strategic relationships by the Company or its competitors,
general conditions in the computer industry or the global economy generally, or
market volatility unrelated to the Company's business and operating results.
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 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 (1) technological, engineering,
manufacturing, quality control or other circumstances which could delay the sale
or shipment of the Company's products; (2) economic, business, market and
competitive conditions in the software industry and technological innovations
which could affect the Company's business; (3) the Company's 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 (4) general economic
and business conditions and the availability of sufficient financing.
Part II-Other Information
Item 1. Legal Proceedings
None
Item 2. Change in Securities
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 27, Financial Data Schedule.
(b) Reports on Form 8-K
None
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
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Registrant
May 15, 1998 /s/ Guido DiGregorio
- ---------------------- ---------------------------------------------------
Date Guido DiGregorio
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)