UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20112012
___ Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 For the transition period from ___ to ___
Commission File No. 000-19301
Communication Intelligence Corporation
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 94-2790442 (I.R.S. Employer Identification No.) |
275 Shoreline Drive, Suite 500 Redwood Shores, California (Address of principal executive offices) | | 94065 (Zip Code) |
Registrant’s telephone number, including area code: 650-802-7888
Securities registered under Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes __ NoX
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes __ NoX
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 XNo __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes XNo __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the act (check one): Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer ___ Smaller reporting companyX
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)
Yes __ NoX
The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant as of June 30, 2011,2012, was approximately $3,796,067$7,142,591 based on the closing sale price of $0.0335$0.050 on such date, as reported by OTC Markets Group Inc. The number of shares of Common Stock outstanding as of the close of business on March 20, 2012,30, 2013, was 228,974,338.225,824,328.
COMMUNICATION INTELLIGENCE CORPORATION
TABLE OF CONTENTS
| | Page |
PART I | 3 |
Item 1. Business | 3 |
Item 1A. Risk Factors | 7 |
Item 1B. Unresolved Staff Comments | 7 |
Item 2. Properties | 7 |
Item 3. Legal Proceedings | 7 |
Item 4. Mine Safety Disclosures | 7 |
PART II | 7 |
| Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 7 |
Item 6. Selected Financial Data | 8 |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations | 8 |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 1516 |
Item 8. Financial Statements and Supplementary Data | 16 |
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 16 |
Item 9A. Controls and Procedures | 16 |
Item 9B. Other Information | 1718 |
PART III | 1718 |
Item 10. Directors, and Executive Officers and Corporate Governance | 1718 |
Item 11. Executive Compensation | 20 |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 22 |
Item 13. Certain Relationships and Related Transactions and Director Independence | 2627 |
Item 14. Principal Accountant Fees and Services | 2829 |
PART IV | 2930 |
Item 15. Exhibits, Financial Statement Schedules | 2930 |
___________
CIC’s logo, Handwriter®Handwriter®, Jot®Jot®, iSign®iSign®, InkSnap®InkSnap®, InkTools® SIGVIEW®InkTools® SIGVIEW®, Sign-On®Sign-On®, Sign-it®Sign-it®, WordComplete®WordComplete®, INKshrINK®INKshrINK®, SigCheck®SigCheck®, SignatureOne®SignatureOne®, Ceremony®Ceremony® and The Power To Sign Online®Online® are registered trademarks of the Company. KnowledgeMatchä is a trademark of the Company. Applications for registration of various trademarks are pending in the United States, Europe and Asia. The Company intends to register its trademarks generally in those jurisdictions where significant marketing of its products will be undertaken in the foreseeable future.
Note Regarding Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K, 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 that may cause actual events to differ materially from expectations. Such factors include the following: (1) technological, engineering, quality control or other circumstances which could delay the sale or shipment of 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 ability to protect its trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others or 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 I
Item 1. Business
Unless otherwise stated all amounts in Part I through Part IV are stated in thousands (“000s”).
General
Communication Intelligence Corporation (the “Company” or “CIC”) was incorporated in Delaware in October 1986. CIC is a leading supplier of electronic signature products and the recognized leader in biometric signature verification. CIC enables companies to achieve truly paperless workflow in their electronic business processes by providing multiple signature technologies across virtually all applications. CIC’s solutions are available both in software-as-a-service (“SaaS”) and on-premise delivery models and afford “straight-through-processing,” which can increase customer revenue by enhancing user experience and can also reduce costs through paperless and virtually error-free electronic transactions that can be completed significantly faster than paper-based procedures. The Company is headquartered in Redwood Shores, California.
For the year ended December 31, 20112012, total revenue was $1,546,$2,378, an increase of $695,$832, or 82%54%, compared to total revenue of $851$1,546 in the prior year. For the year ended December 31, 2011,2012, product revenue was $915,$1,729, an increase of $718,$814, or 364%89%, compared to product revenue of $197$915 in the prior year. Maintenance revenue for the year ended December 31, 2112012, was $631, a decrease$649, an increase of $23,$18, or 4%3%, compared to maintenance revenue of $654$631 in the prior year. The increase in product revenue is due primarily to new product offerings and an increased demand for electronic signature solutions. The decreaseincrease in maintenance revenue is a reflectionprimarily due to an increase in the sale of the Company’s shift in focus from one-time, on-premise sales to a recurring revenue model.enterprise licenses.
For the year ended December 31, 2011,2012, the net loss attributable to common stockholders was $6,663, an increase$6,109, a decrease of $2,110,$554, or 51%8%, compared to $4,553$6,663 in the prior year. For the year ended December 31, 2011,2012, non-cash charges attributable to interest expense financing and loan discount amortization related to the Company’s debt and the accretion of the beneficial conversion feature was $1,181$2,446 compared to $2,039$1,181 in the prior year. There was a lossgain of $113$211 on the derivative liability value for the year ended December 31, 20112012, compared to a gainloss of $3,136$113 in the prior year. For the year ended December 31, 2011,2012, operating expenses, including amortization of software development costs, were $5,829,$5,432, a decrease of $276,$397, or 5%7%, compared to operating expenses of $6,105$5,829 for the prior year. The decrease in operating expense resulted primarily from a chargedecreases in the prior yearcost of $1,009 related to the accelerated amortization of certain capitalized software development costs, offset by a $700 increase in the amount of software development cost expensed in 2011sales and sales and marketing expenses compared to what would have been capitalized in the prior year.
Core Technologies
The Company's core technologies can be referred to as "transaction-enabling” and “business process work flow” technologies. These technologies include various forms of electronic signature technologies,methods, such as handwritten, biometric, click-to-sign and others, as well as technologies related to signature verification, authentication, cryptography and the logging of audit trails to showprove signers’ intent. These technologies enable the appending of secure, legal and regulatory compliant electronic transactions completed throughsignatures coupled with an enhanced customeruser experience, all at a fraction of the time and cost required by traditional, paper-based processes.processes for signature capture.
Products
The Company’s enterprise-class SignatureOne®SignatureOne® and iSign® suite of electronic signature solutions enables businesses to implement truly paperless, electronic signature-driven business processes. Many applications provide electronic forms and allow users to fill in information, but most of these applications still require users to print out a paper copy for a handwritten, ink signature. Solutions powered by CIC products allow legally binding electronic signatures to be added to digital documents, eliminating the need for paper copies. This allows users to reduce transaction times and processing costs and to increase theirthe time available for revenue generating activities.
The SignatureOne®SignatureOne® and iSign® suite of products includes the following:
SignatureOne® Ceremony® Server™SignatureOne® Ceremony® Server | The SignatureOne® Ceremony® Server™SignatureOne® Ceremony® Server (“Ceremony Server”) isprovides a J2EE server product that provides the capability to definehighly secure, scalable, patent-protected and manage anstreamlined electronic signature process within a service oriented architecturesolution. Its flexible, easy-to-configure and thatagile workflow can be deployed both on-premiserapidly integrated via standard Web services to become an ultimate and cost efficient endpoint in true straight-through processing (the complete removal of paper from business processes) and to facilitate end-to-end management of multi-party approvals for PDF and XHTML documents. The Ceremony Server contains CIC’s core esignature engine and signature ceremony management tools, and can be seamlessly integrated with numerous ancillary products. Its key features include: •Consent/disclosure management – integral part of audit record; easily reproducible in the Cloud asevent of a SaaS solution. Application program interfaces, web services, notification services, reporting,dispute; •Configurable document presentment – signatory receipt, access and viewing of document tracked in audit trail; •Multi-party ceremonies – complex processes, simplified; allows for dynamic, multi-channel workflow changes, including remote, face-to-face and mobile scenarios; •Supports complex business rules and dynamic user behaviors; •Configurable branding and workflow; •Flexible tracking and flexible XML schema enable virtually seamless integration with most electronic content management, enterprise resource planning or other workflow, content managementreporting – includes event notification service •Extensive audit trail – embedded in individual document in a tamper evident digital seal; and storage/repository systems •Support for the automation of any document process that requires signatures.multiple signature methods – click-to-sign; biometric; and others. |
iSign®iSign® Console™ | The iSign®iSign® Console™ (“Console”) productleverages the Ceremony Server’s core signature engine and is ideal for organizations looking for a server-based offering that leverages CIC’s patented Ceremony® process andstandalone electronic signature solution. Through its intuitive graphical interface, the Console allows users to upload documents for signature, select signers and signature methods, and manage and controlenforce document workflow for routing, reviewing, signing and notifications. The Consol offers a secure and intuitive solution that requires no integration and is available on-premise or in the set up and delivery of documents for electronic signatures in an easy and flexible way, and with a comprehensive audit trail for non-repudiation. The Console works independently from advanced document management systems and represents an intuitive front-end solution for small-to-medium enterprises to rapidly integrate electronic signatures in their business processes. Its principal features include the ability to upload multiple documents for review and/or execution, to select an electronic signature method, such as click-to-sign or biometric, choose signature field placement, manage the signature process via invites and pre-set email reminders, and secure the entire process with passcodes.cloud. |
Sign-it®iSign® Suite | Sign-it®The growing suite of iSign® products and service includes iSign® Mobile (for signing on iOS and Android mobile devices), iSign® Forms (for integrated use of templates and forms), and iSign® Live (CIC’s patent-pending co-browsing solution for simultaneous browsing signature ceremonies).
|
Sign-it® | Sign-it® is a family of desktop software products that enable the real-time capture of electronic and digital signatures, as well as their verification and binding within a standard set of applications, including Adobe Acrobat and Microsoft Word, web basedweb-based applications using HTML, XML and XHTML, and custom applications for .NET, C# and similar development environments for the enterprise market. The Sign-it®Sign-it® family of products combines the strengths of biometrics, and other forms of electronic signatures, with cryptography in a patented process that insures the creation of documents containing legally compliant electronic signatures. These signatures have the same legal standing as a traditional so-called wet signature on paper and are created pursuant to the Electronic Signature in National and Global Commerce Act, as well as other related legislation and regulations. With Sign-it®Sign-it® products, organizations wishing to process electronic forms, requiring varying levels of security, can reduce the cost and other inefficiencies inherent with paper documents by adding electronic signature technologies to their workflow solutions. |
iSign®iSign® Toolkits | The iSign®iSign® suite of application development tools for electronic signature capture, encryption and verification in custom applications and web-based processes captures and analyzes the image, speed, stroke sequence and acceleration of a person's handwritten electronic signature and can providesignature. This capability offers an effective and inexpensive solution for immediate authentication of handwritten signatures. iSign®iSign® toolkits also store certain forensic elements of an electronic signature for use in determining whether a person’s electronic signature is legally valid andvalid. They also include software libraries for industry standard encryption and hashing to protect the sensitive nature oft a user’s signature, as well as the data captured in the Ceremony®Ceremony® process. iSign® toolkits are used internally by the Company as an underlying technology for its SignatureOne® and Sign-it® suite of products. |
Products and upgrades that were introduced and first shippeddeployed in 20112012 include the following:
iSign® for Windows®, Version 4.7 |
iSign® Mobility Suite, Version 1.5 |
iSign® Mobility Suite, Version 1.5.1 |
SignatureOne® Ceremony® Server, Version 2.4 |
SignatureOne® Ceremony® Server, Version 2.5 |
SignatureOne® Ceremony® Server, Version 2.6 |
SignatureOne® Ceremony® Server, Version 2.6.1 |
SignatureOne® Ceremony® Server, Version 2.7 |
SignatureOne® Ceremony® Server, Version 3.0.4 |
SignatureOne® Ceremony® Server Migration Toolkit |
iSign ® Console™, Version 1.5 |
SignatureOne® Standard, Version 1.5 |
SignatureOne® Ceremony® Server v2.5.1
SignatureOne® Ceremony® Server v2.6.2
SignatureOne® Ceremony® Server v2.6.3
SignatureOne® Ceremony® Server v2.6.4
SignatureOne® Ceremony® Server v2.6.5
SignatureOne® Ceremony® Server v3.1
SignatureOne® Ceremony® Server v3.2
SignatureOne® Ceremony® Server v3.3
SignatureOne® Ceremony® Server v3.3.1
SignatureOne® Sign-it® v8.0 for Acrobat®
iSign® Mobile v1.5.2
iSign Console v2.1
Copyrights, Patents and Trademarks
The Company relies on a combination of patents, copyrights, trademarks, trade secrets and contractual provisions to protect its software offerings and technologies. The Company has a policy of requiring its employees and contractors to respectcommit to the protection of proprietary information through written agreements. The Company also has a policy of requiring prospective business partners to enter into non-disclosure agreements before disclosure of any of its proprietary information.
Over the years, the Company has developed and patented major elements of its software offerings and technologies. In addition, in October 2000 the Company acquired from PenOp, Inc. and its subsidiary, a significant patent portfolio relevant to the markets in which the Company sells its products. The Company’s patents and the years in which they each expire are as follows:
| | Patent No. | Expiration | |
| | 5544255 | 2013 | |
| | 5647017 | 2014 | |
| | 5818955 | 2015 | |
| | 5933514 | 2016 | |
| | 6064751 | 2017 | |
| | 6091835 | 2017 | |
| | 6212295 | 2018 | |
| | 6381344 | 2019 | |
| | 6487310 | 2019 | |
The Company believes that these patents provide a competitive advantage in the electronic signature and biometric signature verification markets. The Company believes the technologies covered by the patents are unique and allow it to produce superior products. The Company also believes these patents are broad in their coverage.unique. The technologies go beyond the simple handwritten signature and include measuring electronically the manner in which a person signs to ensure tamper resistance and security of the resultant documents, and the use of other systems for identifying an individual and using that information to validate the signer and the transaction. The Company believes that the patents are sufficiently broad in coverage that products with substantially similar functionality would infringe its patents.
The Company has an extensive list of registered and unregistered trademarks and applications therefor in the United States and other countries. The Company generally intends to register its trademarks generally in those jurisdictions where significant marketing of its products will be undertaken in the foreseeable future.
Material Customers
Historically, the Company’s revenue has been derived from hundreds of customers, but a significant percentage of the revenue has been attributable to a limited number of customers. Two customers, Allstate Insurance Company and State Farm Insurance Company, accounted for 28%29% and 10%19%, respectively of total revenue for the year ended December 31, 2011.2012.
Seasonality of Business
The Company believes that the sale of its products areis not subject to seasonal fluctuations.
Backlog
Backlog was approximately $914$818 and $1,097$914 at December 31, 20112012 and 2010,2011, respectively, representing advanced payments on product and service maintenance agreements. In 2009, the Company negotiated several long term maintenance agreements of which the remaining balance of approximately $397$249 will be recognized over one to two years. The remaining backlog is expected to be recognized over the next twelve months.
Competition
The Company faces competition at different levels both domestically and internationally. The technology-neutral nature of the laws and regulations related to what constitutes an “electronic signature” and CIC’s multi-modal enterprise-wide suite of products causes the Company to compete with different companies depending upon the specific type of electronic signature sought by a prospective customer. Currently, CIC’s primary competition is Silanis and/or DocuSign when the application is click-wrap, voice, fingerprint, password, andfor basic click-to-sign technology.electronic signatures includes Silanis, Adobe EchoSign and/or DocuSign. Principal competition for handwritten biometric signatures includes SoftPro, Wondernet and signature pad vendors. The Company believes it has a competitive advantage by offering solutions with a multitudevariety of different electronic signature methods that enable users to sign virtually any document format, in any software environment, and on any hardware platform.
The Company believes that it has a clear differentiation from its competitors and enjoys certain advantages, including its patent portfolio. However, there can be no assurance that competitors, including some with greater financial or other resources, will not succeed in developing products or technologies that are more effective, easier to use or less expensive than our products or technologies and that could render our products or technologies obsolete or non-competitive.
Employees
As of December 31, 2011,2012, the Company employed 1920 full-time employees and two consultants.one temporary employee. The Company has established long-standing strategic relationships that allow it to rapidly access product development and deployment capabilities that could be required to address most customer requirements. None of the Company’s employees are party to any collective bargaining agreements. We believe our employee relations are good.
Geographic Areas
For the years ended December 31, 20112012 and 2010,2011, sales in the United States as a percentage of total sales were 93%100% and 93%, respectively. At December 31, 20112012 and 2010,2011, long-lived assets located in the United States were $2,159$1,712 and $2,899,$2,159, respectively. There were no long-lived assets located elsewhere as of December 31, 20112012 and 2010.2011.
Segments
The Company reports its financial results in one segment.
Available Information
Our web site is located at www.cic.com. The information on or accessible through our web site is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available, free of charge, on our web site as soon as reasonably practicable after we electronically file with or furnish such material to the Securities and Exchange Commission (“SEC”). Furthermore, a copy of this Annual Report on Form 10-K and other reports filed by CIC with the SEC may be read and copied by the public at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549 on official business days during the hours of 10 a.m. and 3 p.m. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, including CIC, that file electronically with the SEC at www.sec.gov.
Item 1A Risk Factors
Not applicable.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company leases its principal facilities, consisting of approximately 9,600 square feet, in Redwood Shores, California, pursuant to a lease that expires in 2016.
Item 3. Legal Proceedings
None.
Item 4. Mine Safety Disclosures
None.
PART II
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s Common Stock is quoted on OTC Markets Group Inc.’s OTCQB quotation system under the trading symbol CICI. Trading activity for the Company’s Common Stock can be viewed at www.otcmarkets.com. Prior to March 1, 2010, the Company’s Common Stock was also quoted on the Over-the-Counter Bulletin Board under the trading symbol CICI.OB. The following table sets forth the high and low sale prices of the Common Stock for the periods noted.
| | | Sale Price Per Share | | Sale Price Per Share |
| Year | Period | High | Low | Period | High | Low |
| | | | |
| 2010 | First Quarter | $ 0.14 | $ 0.08 | |
| | Second Quarter | $ 0.14 | $ 0.05 | |
| | Third Quarter | $ 0.08 | $ 0.03 | |
| | Fourth Quarter | $ 0.06 | $ 0.03 | | |
| 2011 | First Quarter | $ 0.10 | $ 0.03 | First Quarter | $ 0.10 | $ 0.03 |
| | Second Quarter | $ 0.07 | $ 0.03 | Second Quarter | $ 0.07 | $ 0.03 |
| | Third Quarter | $ 0.05 | $ 0.02 | Third Quarter | $ 0.05 | $ 0.02 |
| | Fourth Quarter | $ 0.06 | $ 0.02 | |
| | Fourth Quarter | $ 0.06 | $ 0.02 |
| 2012 | First Quarter | $ 0.14 | $ 0.03 |
| | Second Quarter | $ 0.08 | $ 0.03 |
| | Third Quarter | $ 0.06 | $ 0.03 |
| | Fourth Quarter | $ 0.05 | $ 0.03 |
Holders
As of March 20, 20122013 there were approximately 853812 holders of record of our Common Stock.
Dividends
To date, the Company has not paid any dividends on its Common Stock and does not anticipate paying any such dividends in the foreseeable future. The declaration and payment of dividends on the Common Stock is at the discretion of the Board of Directors and will depend on, among other things, the Company's operating results, financial condition, capital requirements, contractual restrictions or such other factors as the Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
All securities sold during 20112012 by the Company were either previously reported on a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K filed with the SEC.
Issuer Purchases of Equity Securities
None.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and related notes appearing elsewhere in this Form 10-K. The following discussion relating to projected growth and future results and events constitutes forward-looking statements. Actual results in future periods may differ materially from the forward-looking statements due to a number of risks and uncertainties. We cannot guarantee future results, levels of activity, performance or achievements. Except as otherwise required under applicable law, we disclaim any obligation to revise or update forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Unless otherwise stated herein, all figures in this Item 7, other than price per share data, are stated in thousands (“000s”).
Overview and Recent Developments
The Company is a leading supplier of electronic signature solutions for business process automation and is the recognized leader in biometric signature verification technology. Our products enable companies to achieve secure paperless business transactions with multiple signature technologies, across virtually all applications and hardware platforms, andplatforms. If the Company’s processes are followed, the result is a signature that areis legally binding and compliant with applicable laws and regulations and that can provide a higher level of security than paper-based processes. The Company has been a leading supplier of electronic signature solutions within the financial services and insurance industries and has delivered significant expense reduction by enabling complete document and workflow automation.automation through the use of electronic signatures and the resulting reduction mail, scanning, filing and other costs related to the use of paper.
The Company was incorporated in Delaware in October 1986. Except for the year ended December 31, 2004, in each year since its inception the Company has incurred losses. For the two-year period ended December 31, 2011,2012, net losses attributable to common stockholders aggregated approximately $11,216,$12,772, and, at December 31, 2011,2012, the Company's accumulated deficit was approximately $111,839.$114,420.
For the year ended December 31, 2011,2012, total revenue was $1,546,$2,378, an increase of $695,$832, or 82%54%, compared to total revenue of $851$1,546 in the prior year. The increase in product revenue is primarily due to new product offerings and an increased demand for electronic signature solutions.
For the year ended December 31, 2011,2012, operating expenses were $5,432, a decrease of $397, or 7%, compared to operating expense of $5,829 in the prior year. The decrease in operating expense resulted primarily from a decrease in capitalized software development costs, as well as decreases in selling and general administrative expenses. For the year ended December 31, 2012, the loss from operations was $4,283,$3,054, a decrease of $971,$1,229, or 18%29%, compared with a loss from operations of $5,254$4,283 in the prior year. The decrease in the operating loss is primarily attributable to a charge of $1,009 related to the acceleration of amortization of certain capitalized software development costs$832 increase in sales and the prior year. For the year ended December 31, 2011, operating expenses were $5,829, a decrease of $276, or 5%, compared to operating expense of $6,105 in the prior year. The$403 decrease in operating expense resulted primarily from a charge in the prior year of $1,009 related to the accelerated amortization of certain capitalized software development costs, offset by a $700 increase in the amount of software development cost expensed in 2011 compared to what would have been capitalized in the prior year.expenses.
In March 2011,November 2012, the Company amended its Amended and Restated Certificate of Incorporation to increase the number of authorized shares of capital stock. The Company’s stockholders approved an amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of capital stock from 1,050,000,000 to 1,536,000,000 (the “Charter Amendment”). Of these authorized shares, 1,500,000,000 were designated as Common Stock, 2,000,000 as Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred Stock”), 14,000,000 as Series B Participating Convertible Preferred Stock (the “Series B Preferred Stock”), 9,000,000 as Series C Participating Convertible Preferred Stock (the “Series C Preferred Stock”), 3,000,000 as Series D-1 Convertible Preferred Stock (the “Series D-1 Preferred Stock”) and 8,000,000 as Series D-2 Convertible Preferred Stock(the “Series D-2 Preferred Stock”; together with the Series D-1 Preferred Stock, the “Series D Preferred Stock”). The Charter Amendment allows the Company to have additional shares of stock available for possible future capital raising activities as may be approved by the Board of Directors.
On November 15, 2012, the Company’s note holders converted approximately $3,289 of short term debt and accrued interest into 1,110 shares of Series D-1 Preferred Stock and 2,179 share of Series D-2 Preferred Stock. In addition, the Company sold 800approximately 1,082 shares of Series CD-2 Preferred Stock for aggregate proceeds of $800, net of$1,082. Expenses associated with these financings were approximately $121 in expenses,$306, of which $50$150 went in payment of an administrative fee to SG Phoenix LLC, an affiliated entity of the Company’s largest stockholder Phoenix Venture Fund LLC (“Phoenix”), in payment of an administrative fee and $71$156 in expenses to third parties in connection with the financing.parties. The Company recorded a beneficial conversion feature of $800$1,110 related to the intrinsic value of the conversion feature of the shares of Series CD-1 Preferred Stock. The Company issued 30573 shares of Series A-1 Preferred Stock, 948 shares of Series B Preferred Stock, 389 shares of Series C Preferred Stock, and 55 shares of Series D Preferred Stock in payment of dividends for the year ended December 31, 2011.2012.
In September 2011,2012, the Company borrowedentered into subscription agreements (the “September 2012 Subscription Agreements”) with a number of new and existing investors (the “September 2012 Investors”). Under the terms of the September 2012 Subscription Agreements, the September 2012 Investors purchased approximately $1,103,000 of unsecured promissory notes (the “September 2012 Notes”), and, subject to the satisfaction of certain closing conditions, agreed to purchase on a later closing date (the “Final Closing”) approximately 1,103,000 shares of Series D-2 Preferred Stock at a purchase price of $1.00 per share. The September 2012 Notes had an aggregateinterest rate of $10010% per annum, and a maturity date of December 31, 2012. The Notes automatically converted into shares of Series D-2 Preferred Stock at a price of $1.00 per share upon the consummation of the Final Closing, which occurred on November 15, 2012. The Series D-2 Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion price of $0.05 per share (subject to adjustment). The Final Closing was subject to stockholder approvals and the satisfaction of customary closing conditions. A portion of the proceeds from Phoenixthe September 2012 Notes was used to repay approximately $225 in demand notes to a related party and an employee of the Company, and for working capital and general corporate purposes in the ordinary course of business. In connection with the September 2012 Subscription Agreements, the Company issued, after the Final Closing, an aggregate of 294 warrants to four consultants on the financing at an exercise price of $0.05 per share.
In August and September 2012, the Company borrowed $50 and $50, respectively, from Phoenix and issued unsecured demand notes to each. These notes had an interest at the rate of 10% per annum. The notes were repaid in September 2012, out of the proceeds from the September 2012 Subscription Agreements.
In April 2012, the Company entered into a purchase agreement (the “April 2012 Purchase Agreement”) with a number of new and existing investors (the “April 2012 Investors”). The Company issued $1,000 in unsecured promissory notes (the “April 2012 Notes”), and received $983 in cash, net of expenses. The April 2012 Notes had an interest at the rate of 10% per annum and a maturity date of April 22, 2013. The April 2012 Notes automatically converted into shares of Series D-2 Preferred Stock at the Final Closing. In connection with the issuance of the April 2012 Notes to the April 2012 Investors, the Company also issued warrants to purchase 5,000 shares of Common Stock at an exercise price of $0.05 per share (the “April 2012 Warrants”) to the April 2012 Investors. The warrants are due onexercisable for a period of three years from the date of issue. The Company ascribed a value of $47 to the April 2012 Warrants, which was recorded as a discount to notes payable and as a derivative liability.
In connection with the April 2012 Purchase Agreement, the Company paid $17 in consulting fees and issued an aggregate of 349 warrants at an exercise price of $0.05 per share to two consultants. These warrants are exercisable for three years from the date of issue. The Company ascribed a value of $2 to these warrants using a modified Black Scholes pricing model with the following assumptions: risk free interest rate of 0.40; expected life of three years; expected volatility of 213%; and a dividend yield of zero. The warrant value was recorded as a professional service fee expense and as a derivative liability.
In February 2012, the Company borrowed $25 in the form of a demand and bearnote from Phoenix. This note had an interest at the rate of 10% per annum. In additionMarch 2012, the Company entered into a Note and Warrant Purchase Agreement (the “September 2011Purchase Agreement”) with Phoenix Banner Holdings, LLC (the “September 2011 Investor”),borrowed an entity affiliated with Phoenix. Under the terms of the September 2011 Purchase Agreement, the Company issued an unsecured convertible promissory noteadditional $100 in the amountform of $500 (the “September 2011 Note”) toa demand note from Phoenix under the September 2011 Investor. The September 2011 Note bears interest at the rate of 10% per annum, and has a maturity date of September 20, 2012. The September 2011 Note is also convertible at the option of the September 2011 Investor into securities sold in the Company’s next equity financing with gross proceeds tosame terms described above. These notes were repaid by the Company in excess of $100. In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 Investor a warrant to purchase 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share.
Overview and Recent Developments (continued)
In December 2011, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Philip Sassower, the Company’s Chairman and CEO, and other investors (the “December 2011 Investors”). Under the terms of the Purchase Agreement, the Company issued unsecured convertible promissory notes in the aggregate amount of $500 (the “December 2011 Notes”) to the December 2011 Investors. The December 2011 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 20, 2012. The December 2011 Notes are also convertible at the option of the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the December 2011 Notes, the Company also issued to the December 2011 Investors warrants to purchase an aggregate of 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share.
New Accounting Pronouncements
See Note 1, Notes to Consolidated Financial Statements included under Part IV, Item 15 of this report on Form 10-K.
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 the Company’s
consolidated financial statements and the accompanying notes. The amounts of assets and liabilities reported in its balance sheets and the amounts of revenue and expenses reported for each period presented are affected by these estimates and assumptions that are used for, but not limited to, revenue recognition, allowance for doubtful accounts, intangible asset impairments, fair value of financial instruments, software development costs, research and development costs, foreign currency translation and net operating loss carry-forwards. Actual results may differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used by the Company’s management in the preparation of the consolidated financial statements.
Derivatives: The Company follows the relevant accounting guidance and records derivative instruments (including certain derivative instruments embedded in other contracts) in the balance sheet as either an asset or a liability measured at their fair value, with changes in the derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. The Company values these derivative securities under the fair value method at the end of each reporting period (quarter), and their value is marked-to-market at the end of each reporting period with the gain or loss recognition recorded in earnings. The Company continues to revalue these instruments each quarter to reflect their current value in light of the current market price of our Common Stock. The Company utilizes a discounted Black-Scholes option-pricing model to estimate fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instrument’s expected remaining life. These assumptions require significant management judgment.
Revenue: Revenue is recognized when earned in accordance with the applicable accounting guidance. The Company recognizes revenue from sales of software products upon shipment, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all non-recurring engineering work necessary to enable the Company's product to function within the customer's application has been completed and the Company's product has been delivered according to specifications. Revenue from service subscriptions is recognized as costs are incurred or over the service period, whichever is longer.
Software license agreements may contain multiple elements, including upgrades and enhancements, products deliverable on a when and if available basis and post-contract support. Revenue from software license agreements is recognized upon delivery of the software, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all nonrecurring engineering work necessary to enable the Company's products to function within the customer's application has been completed and the CompanyCompany's product has been delivered its product according to specifications.
Maintenance revenue is recorded for post-contract support and upgrades or enhancements, which is paid for in addition to license fees, and is recognized as costs are incurred or over the support period, whichever is longer. For undelivered elements where objective and reliable evidence of fair value does not exist, revenue is deferred and subsequently recognized when delivery has occurred and when fair value has been determined.
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s
estimates of recoverability of amounts due could be affected and the Company would adjust the allowance accordingly.
Long-lived assets: The Company performs intangible asset impairment analyses in accordance with the applicable accounting guidance. The Company uses the guidance in response to changes in industry and market conditions that affect its patents, thepatents. The Company then determines if an impairment of its assets has occurred. The Company reassesses the lives of its patents and tests for impairment at least annually in order to determine whether the book value exceeds the fair value for each patent. Fair value is determined by estimating future cash flows from the products that are and will be protected by the patents and considering the following additional factors:
| · | legal, regulatory or contractual provisions known to the Company that limit the useful life of any patent to less than the assigned useful life; |
| · | whether the Company needs to incur material costs or make modifications in order for it to continue to be able to realize the protection afforded by the patents; |
| · | effects of obsolescence or significant competitive pressure on the Company’s current or future products are expected to reduce the anticipated cash flow from the products covered by the patents; |
| · | demand for products utilizing the patented technology will diminish, remain stable or increase; and |
| · | whether the current markets for the products based on the patented technology will remain constant or will change over the useful lives assigned to the patents. |
The Company had obtained an independent valuation from Strategic Equity Group of the carrying value of its patents as of December 31, 2005. The Company believes that the biometric market potential identified in current year market research has improved over the data used to validate the carrying value of the Company’s patents at the endas of 2005.such date. Management updated this analysis at December 31, 20112012, and believes that that no impairment of the carrying value of the patents exists at December 31, 2011.2012.
Customer Base: To date, the Company's electronic signature revenue has been derived primarily from financial service industry end-users and from resellers and channel partners serving the financial service industry primarily in North America, the ASEAN Region and Europe. The Company performs periodic credit evaluations of its customers and does not require collateral. The Company maintains reserves for potential credit losses. Historically, such losses have been within the range of management's expectations.
Software Development Costs: Capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. The costs capitalized include the coding and testing of the product after technological feasibility has been established and ends upon the release of the product. The annual amortization is equal to the straight-line amortization over the estimated useful lives of the software and varies by type of software. The Company generally subdivides its software into product software, server software and Software-as-a-Service. The Company capitalizeddid not capitalize software development costs of approximately $72 and $772 forduring the yearstwelve months ended December 31, 20112012, and 2010, respectively. Forcapitalized approximately $72 for the year ended December 31, 2010, the Company decided to accelerate the amortization of its software portfolio to better reflect the transition of its offering from being mostly product-based to becoming mostly server and service-based and to provide a closer match with the useful life of the development costs being capitalized. This acceleration resulted in an increase in amortization expense of $1,009.2011.
Research and Development Costs: Research and development costs are charged toas expense as incurred.
Net Operating Loss Carry-forwards: Utilization of the Company's net operating losses may be subject to an annual limitation due to the ownership change limitations under Section 382 of the the Internal Revenue Code and similar state provisions. As a result, a portion of the Company's net operating loss carry-forwards may not be available to offset future taxable income. The Company has provided a full valuation allowance for deferred tax assets at December 31, 20112012, of approximately $27.4$29.4 million based upon the Company's history of losses.
Segments: The Company reports its financial results in one segment.
Results of Operations – Years Ended December 31, 20112012 and December 31, 20102011
Revenue
For the year ended December 31, 2011,2012, total revenue was $1,546,$2,378, an increase of $695,$832, or 82%54%, compared to total revenue of $851$1,546 in the prior year. For the year ended December 31, 2011,2012, product revenue was $915,$1,729, an increase of $718,$814, or 364%89%, compared to $197$915 in the prior year. The increase in product revenue is primarily due to new product offerings and an increased demand for electronic signature solutions. For the year ended December 31, 2011,2012, maintenance revenue was $631, a decrease$649, an increase of $23,$18, or 4%3%, compared to maintenance revenue of $654$631 in the prior year. This decreaseincrease is primarily a reflectiondue to an increase in the sale of the Company’s shift in focus from one-time, on-premise sales to a recurring revenue model.enterprise licenses.
Cost of Sales
For the year ended December 31, 2011,2012, cost of sales was $663,$375, a decrease of $216,$288, or 25%43%, compared to cost of sales of $879$663 in the prior year. The decrease resulted primarily from a $381$368 reduction in capitalized software amortization offset by an increase in direct engineering costs associated with development contract services revenue.costs.
Operating Expenses
Research and Development Expenses
For the year ended December 31, 2011,2012, research and development expenses were $1,498,$1,802, an increase of $1,067,$304, or 248%20%, compared to research and development expenses of $431$1,498 in the prior year. Research and development expenses consist primarily of salaries and related costs, outside contract engineering as required, maintenance items, and allocated facility expenses. The most significant factorfactors contributing to the increase in theseengineering expenses was an increase in salaries and wages due to the addition of three full time positions, an increase in cloud operations costs associated with our recurring revenue sales model, and the amount of software development costs expensed compared to what would have been capitalized in the prior year. For the year ended December 31, 2011,2012, total research and development expenses before capitalization of software development costs and other allocations were $2,055,$2,278, an increase of $659,$223, or 47%11%, compared to $1,396$2,055 of total research and development expenses before capitalization of software development costs and other allocations in the prior year. The increase is due primarily to an increase in salaries and related expenses, including stock compensation expense and contractedreductions in engineering expense.costs allocated for sales and IT support.
Sales and Marketing Expenses
For the year ended December 31, 2011,2012, sales and marketing expenses were $1,500,$1,392, a decrease of $31,$108, or 2%7%, compared to sales and marketing expenses of $1,531$1,500 in the prior year. The decrease was primarily attributable to decreases in salariesstock option compensation and general overhead expenses caused by the reallocation of thereductions in engineering sales engineering function to research and development,support offset by increases in commissions and allocated charges from engineering for sales support associated with the increasesincrease in sales.
General and Administrative Expenses
For the year ended December 31, 2011,2012, general and administrative expenses were $2,168,$1,863, a decrease of $87,$305, or 4%14%, from general and administrative expenses of $2,255$2,168 in the prior year. The decrease was primarily due to a decrease in investor relationsstock option compensation expense offset by an increaseand decreases in professional service fees, including legalother general operating expenses.
Interest and Other Income (Expense), Net
Interest and other income, net, was $79, an increase$19, a decrease of $77,$60, compared to an expense of $2$79 in the prior year. The increase in interest and other income, netdecrease was due to the settlement of a Section 16b related lawsuit filed on behalf of a stockholder in April 2011.March 2012. (See Note 13 in the Consolidated Financial Statements of this report on Form 10-K).
Interest Expense
For the year ended December 31, 2011,2012, related party interest expense was $21, a decrease$100, an increase of $234,$79, or 92%376%, compared to related party interest expense of $255$21 in the prior year. The decreaseincrease was due to the restructuring of the Company’s debtan increase in the August 5, 2010 Recapitalization through the issuance of Series B Preferred Stockrelated party short-term notes issued in exchange for all outstanding secured indebtedness.2011 and 2012. For the year ended December 31, 2011,2012, interest expense-other was $3, a decrease$89, an increase of $5,$86, or 63%286%, compared to interest expense-other of $8$3 in the prior year. The decreaseincrease was primarily due to the factors discussed above. For the year ended December 31, 2011,2012, amortization of related party loan discount and deferred financing, which includes warrant costs associated with the Company’s debt and deferred financing costs associated with the notes and warrant purchase agreements, was $3, a decrease$14, an increase of $1,716,$11, or 99%366%, compared to amortization of related party loan discount and deferred financing of $1,719$3 in the prior year. The decreaseincrease was primarily due to the restructuring of the Company’s debt.increase in other short-term borrowings in 2012. (See Note 7 to the Consolidated Financial Statements of this report on Form 10-K.)
For the year ended December 31, 2011,2012, amortization of debt discount and deferred financing-other, which includes warrant and deferred financing costs associated with the notes and warrant purchase agreements decreased $57,was $64, an increase of $61, or 100%2033%, compared to $3 in the prior year. The decrease was primarily due to the factors discussed in interest expense above. (See Note 7 to the Consolidated Financial Statements of this report on Form 10-K.)
The change in the fair value of the derivative liabilities resulted in a non-cash gain of $211, an increase of $323 compared to a loss of $113 an increase of $3,249 comparedin the prior. The change in fair value is primarily due to a gain of $3,136decrease in the prior year that resultednumber of derivatives resulting from the revaluationexercise of warrants and the Company’s derivatives at December 31, 2010. The loss recorded at December 31, 2011, isconversion of shares of Series B Preferred Stock and Series C Preferred Stock during the resultfirst quarter of an increase2012, as well as a decrease in the closing price of the Company’s Common Stock at December 31, 2011, compared to December 31, 2010.2012. The fair value of the Company’s derivative instruments is based on the fair value of our stock asCommon Stock. As such, gain/loss isrelated gains and losses are dependent upon our stockCommon Stock price and will fluctuate accordingly.
Liquidity and Capital Resources
Cash and cash equivalents totaled $486 at December 31, 2012, compared to $307 at December 31, 2011, compared to cash and cash equivalents of $1,879 at December 31, 2010.2011. The decreaseincrease is primarily attributable to $3,255$3,195 of funds provided by financing activities offset by $3,004 used byin operating activities and $96$12 of funds used in investing activities. These uses of funds were offset by $1,779 of funds provided by financing activities in the form of short-term notes and the sale of additional shares of Series C Preferred s Stock.
The cash used by operations was primarily attributable to the net loss of $4,502,$3,195, a $211 gain on derivative liabilities and changes in operating assets and liabilities of $697.$609. These amounts were offset by non-cash charges of depreciation and amortization of $838, loss on derivative liabilities$460, amortization of 113,debt discount and deferred financing costs of $64, stock-based employee compensation of $807,$461, restricted stock expense of $2, and stock issued for services$92 from the net settlement of $195.the 16b and indemnification claim.
The cash used in investing activities of $96$12 was due to capitalized software development costs of $72 and the acquisition of office and computer equipment of $24.equipment.
Proceeds from financing activities consisted primarily of $1,100$2,328 in net proceeds from the issuance of short-term debt, $225 in proceeds from the exercise of warrants and $679stock options for cash, and $967 in net proceeds from the issuance of Series CD-2 Preferred Stock. These proceeds were offset by the payment of $121 related to the Series C Preferred Stock issued in March 2011.$325 of short term notes for cash.
Accounts receivable were $298$701 at December 31, 2011,2012, an increase of $195,$403, or 189%135%, compared to accounts receivable of $103$298 at December 31, 2010.2011. Accounts receivable at December 31, 20112012 and 2010,2011, are net of $27 and $3, and $9, respectively, inof allowances provided for potentially uncollectible accounts. Sales in the Company’s fourth quarter of 20112012 were 60%86% higher than 2010.2011.
Prepaid expenses and other current assets were $29$73 at December 31, 2011, a decrease2012, an increase of $15,$44, or 34%152%, compared to prepaid expenses and other current assets of $44$29 at December 31, 2010.2011. The decreaseincrease is primarily due to the timingprepayment of the billingsDirectors and payments of annual
maintenance and other prepaid contracts.Officers Liability Insurance premium. Prepaid expenses generally fluctuate due to the timing of annual insurance premiums and maintenance and support fees, which are prepaid in December and June of each year.
Accounts payable were $261$75 at December 31, 2011,2012, a decrease of $189,$186, or 42%71%, from accounts payable of $450$261 at December 31, 2010.2011. The decrease in accounts payable is primarily due to decreases in liabilities associated with professional fees incurred in connection with the Recapitalization, Series B Financing,16b litigation and Series C Financingother corporate matters during the second half of 2010.2011.
Other current liabilities, which include accrued compensation of $221,$289, were $464$439 at December 31, 2011,2012, a decrease of $141,$25, or 23%5%, compared to other current liabilities of $605$464 at December 31, 2010.2011. The decrease is primarily due to the payment in 2011lower accrual of severance pay for three senior level executives that leftestimated professional services compared to the company in December 2010.prior year.
Deferred revenue was $914$818 at December 31, 2011,2012, a decrease of $192,$96, or 17%11%, compared to deferred revenue of $1,106$914 at December 31, 2010.2011. The decrease is primarily due primarily to the long-termrecognition of several long term maintenance contracts that were renewed at a discount compared to the annual renewal amounts.entered into in prior years..
Financing Transactions
In MarchNovember 2012, the Company’s note holders converted approximately $3,289 of short term debt and accrued interest, which notes had been issued by the Company between September 2011 and September 2012, into 1,110 shares of Series D-1 Preferred Stock and 2,179 shares of Series D-2 Preferred Stock. In addition, the Company sold 800approximately 1,082 shares of Series CD-2 Preferred Stock for aggregate proceeds of $800, net of$1,082. Expenses associated with the financing were approximately $121 in expenses,$306, of which $50$150 went to SG Phoenix, LLC in payment of an administrative fee to SG Phoenix LLC, and $71$156 in expenses to third parties in connection with the financing. In connection with the sale of the shares of Series C Preferred Stock, the Company issued warrants to purchase an aggregate of 35,556 shares of Common Stock with an exercise price of $0.0225 per share, which warrants are exercisable for a period of three years from the date of issuance.parties. The Company recorded a beneficial conversion feature of $800$1,110 related to the intrinsic value of the conversion feature of the shares of Series CD-1 Preferred Stock. The Company issued 30573 shares of Series A-1 Preferred Stock, 948 shares of Series B Preferred Stock, 389 shares of Series C Preferred Stock, and 55 shares of Series D Preferred Stock in payment of dividends for the year ended December 31, 2011.2012.
In September 2011,2012, the Company borrowedentered into the September 2012 Subscription Agreements with the September 2012 Investors. Under the terms of the September 2012 Subscription Agreements, the September 2012 Investors purchased approximately $1,103 of September 2012 Notes, and, subject to the satisfaction of certain closing conditions, agreed to purchase at the Final Closing approximately 1,103 shares of Series D-2 Preferred Stock at a purchase price of $1.00 per share. The September 2012 Notes had an aggregateinterest at the rate of $10010% per annum, and a maturity date of December 31, 2012. The September 2012 Notes automatically converted into shares of Series D-2 Preferred Stock at a price of $1.00 per share upon the consummation of the Final Closing, which occurred on November 15, 2012. The Series D-2 Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion price of $0.05 per share (subject to adjustment). The Final Closing was subject to stockholder approvals and the satisfaction of customary closing conditions. A portion of the proceeds from Phoenixthe September 2012 Notes was used to repay approximately $225 in demand notes to a related party and an employee of the
Company, and for working capital and general corporate purposes in the ordinary course of business. In connection with the September 2012 Subscription Agreements, the Company, after the Final Closing, issued an aggregate of 294 warrants to four consultants on the financing at an exercise price of $0.05 per share.
In August and September 2012, the Company borrowed $50 and $50, respectively, from Phoenix and issued unsecured demand notes to each. These notes arewere due on demand and bearhad an interest at the rate of 10% per annum. The notes were repaid in September 2012, out of the proceeds from the September 2012 Subscription Agreements.
In April 2012, the Company entered into the April 2012 Purchase Agreement with the April 2012 Investors, and issued the April 2012 Notes, receiving $983 in cash, net of expenses. The April 2012 Notes had an interest at the rate of 10% per annum and a maturity date of April 22, 2013. The April 2012 Notes automatically converted into shares of Series D-2 Preferred Stock at the Final Closing. In connection with the issuance of the April 2012 Notes, the Company also issued to the April 2012 Investors warrants to purchase 5,000 shares of Common Stock at an exercise price of $0.05 per share. The April 2012 Warrants are exercisable for a period of three years from the date of issue. The company ascribed a value of $47 to the April 2012 Warrants, which was recorded as a discount to notes payable and as a derivative liability.
In connection with the April 2012 Purchase Agreement, the Company paid $17 in consulting fees and issued an aggregate of 349 warrants at an exercise price of $0.05 per share to two consultants. These warrants are exercisable for three years from the date of issue, and the Company ascribed to them a value of $2, using a modified Black Scholes pricing model with the following assumptions: risk free interest rate of 0.40; expected life of three years; expected volatility of 213%; and a dividend yield of zero. The related warrant value was recorded as a professional service fee expense and as a derivative liability.
In February 2012, the Company borrowed $25 in the form of a demand note from Phoenix. The note had an interest at the rate of 10% per annum. In additionMarch 2012, the Company entered into the September 2011 Purchase Agreement with the September 2011 Investor. Under the terms of the September 2011 Purchase Agreement, the Company issued the September 2011 Note to the September 2011 Investor. The September 2011 Note bears interest at the rate of 10% per annum, and has a maturity date of September 20, 2012. The September 2011 Note is also convertible at the option of the September 2011 Investor into securities soldborrowed an additional $100 in the Company’s next equity financing with gross proceeds toform of a demand note from Phoenix under the Companysame terms described above. The notes were repaid in excess of $100. In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 Investor a warrant to purchase 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share. The Company ascribed a value of $7 to the warrants, which was recorded as a discount to short-term debt in the balance sheet.
In December 2011, the Company entered into a the December 2011 Purchase Agreement with the December 2011 Investors. Under the terms of the December 2011 Purchase Agreement, the Company issued the December 2011 Notes to the December 2011 Investors. The December 2011 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 20, 2012. The December 2011 Notes are also convertible at the option of the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the December 2011 Note, the Company also issued to the December 2011 Investors warrants to purchase an aggregate of 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share. The Company ascribed a value of $13 to the warrants, which was recorded as a discount to short-term debt in the balance sheet.
During the year ended December 31, 2011, the Company exercised its option related to the terms of its classes of preferred stock and made dividend payments in kind. For the year ended December 31, 2011, the Company issued an aggregate of 67 shares of Series A-1 Preferred Stock, 870 shares of Series B Preferred Stock and 305 shares of Series C Preferred Stock in payment of dividends.
Interest expense associated with the Company’s indebtedness for the years ended December 31, 2012 and 2011, was $189 and 2010, was $27 and $2,039,$24, respectively, of which $24$100 and $1,974,$21, respectively, was related party expense. Amortization of debt discount and deferred financing costs included in interest expense for the year ended December 31, 2012 and 2011, was $64 and 2010, was $3, and $1,776, respectively, of which $3$14 and $1,719,$3, respectively, was related party expense.
Contractual Obligations
The Company had the following material commitments as of December 31, 2011:2012:
| | | Payments due by period | |
| Contractual obligations | | Total | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | |
| Short-term note payable (1) | | | 1,100 | | | | 1,100 | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Operating lease commitments (2) | | | 1,366 | | | | 267 | | | | 275 | | | | 283 | | | | 292 | | | | 249 | | | | - | |
| Total contractual cash obligations | | $ | 2,466 | | | $ | 1,367 | | | $ | 275 | | | $ | 283 | | | $ | 292 | | | $ | 249 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | |
| Contractual obligations | | Total | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | |
| Operating lease commitments (1) | | | 1,100 | | | | 275 | | | | 284 | | | | 292 | | | | 249 | | | | - | |
| 1. | The Company extended the lease on its offices in April 2010. The base rent decreased by approximately 6% in November 2011 and will increase by approximately 3% per annum over the term of the new lease, which expires on October 31, 2016. |
As of December 31, 2011,2012, the Company leased facilities in the United States totaling approximately 9,600 square feet. The Company’s rental expense was $271$275 and $281$271 for the years ended December 31, 20112012 and 2010, ,2011, respectively. In addition to the base rent, the Company pays a percentage of the increase, if any, in operating costcosts incurred by its landlord in such year, over the operating expenses incurred by its landlord in the base year.
As of December 31, 2011,2012, the Company's principal source of liquidity was its cash and cash equivalents of $307.$486. Revenues increased in 20112012 compared to 2010.2011. Delays in closing new sales at the volumes required could result in the need for additional funds. However, there can be no assurance that additional funds will be available when needed or, if available, will be on favorable terms or in the amounts the Company may require. If adequate funds are not available when needed, the Company may be required to delay, scale back or eliminate some or all of its marketing and development efforts or other operations, which could have a material adverse effect on the Company's business, results of operations and prospects. As a result of this uncertainty, our auditors have expressed substantial doubt onin our ability to continue as a going concern.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Any investments in fixed income securities 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 twelve months ended December 31, 2011.2012.
Foreign Currency Risk. The Company operates a joint venture in China and from time-to-time could make certain capital equipment or other purchases denominated in foreign currencies. As a result, the Company's cash flows and earnings could be exposed to fluctuations in interest rates and foreign currency exchange rates. The Company would attempt to limit any such exposure through operational strategies and generally has not hedged currency exposure.
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, competitor consolidation in the industry, announcements of new strategic relationships by the Company or its competitors, general conditions in the computer software industry or the global
economy generally, or market volatility unrelated to the Company's business and operating results. The impact and severity of the above factors could be exacerbated by the Company’s small size, public float and a lack of market liquidity for its Common Stock.
Item 8. Financial Statements and Supplementary Data
The Company's audited consolidated financial statements for the years ended December 31, 20112012 and 2010,2011, and for each of the years in the two-year period ended December 31, 2011,2012, begin on page F-137 of this Annual Report on Form 10-K, and are incorporated into this item by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to paragraph (b) of Rule 13a-15 and 15d-15 under the Exchange Act. Based on that review, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.disclosures.
The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedures are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The Company considered these limitations during the development of its disclosure
controls and procedures, and will continually reevaluate them to ensure they provide reasonable assurance that such controls and procedures are effective.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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 internal control over financial
reporting pursuant to applicable rules under the Securities Exchange Act of 1934, as amended. In making this assessment, the Company’s management used the criteria established in “Internal Control, Integrated Framework” issued by the Committee Sponsoring Organization of the Treadway Commission (COSO). In performing this assessment, management identified the following material weaknesses:
As a small company with limited resources that are mainly focused on the development and sales of software products and services, CIC does not employ a sufficient number of staff in its finance department to possess an optimal segregation of duties or to provide optimal levels of oversight. This has resulted in certain audit adjustments. Although past adjustments have been immaterial, management believes that there may be a possibility for a material misstatement to occur while it employs the current number of personnel in its finance department.
Based on this evaluation, the Company’s its assessment, our management has concluded that, as of December 31, 2010,2012, our internal control over financial reporting was not effective. There are inherent limitations Management believes that the identified weaknesses have not affected our ability to present GAAP-compliant financial statements in this Form 10-K. During the effectiveness of any system of internal control overyear-end financial reporting. Accordingly, even an effective system of internal control overstatement close we were able to recognize and adjust our financial reporting can only provide reasonable assurancerecords to properly present our financial statements and we were therefore able to present GAAP-compliant financial statements. Management does not believe that its weakness with respect to financial statement preparationits procedures and presentation in accordance with accounting principles generally accepted in the United States of America. Our internal controls overhave had a pervasive effect upon our financial reporting are subjectand the overall control environment due to various inherent limitations,our ability to make the necessary reconciling adjustments to our financial statements.
Management’s Remediation Initiatives
Management conducts a number of activities to address the material weaknesses noted above, including cost limitations, judgments usedbut not limited to the following:
• Key managers and accounting personnel work closely with our independent audit firm in decision making, assumptions aboutevaluating our progress in remediating our material weaknesses with oversight by the likelihood of future events,audit committee;
• Evaluate control procedures on an ongoing basis, and, where possible, modify those control procedures to improve oversight;
• Evaluate, and, where possible, employ additional third party resources that can provide oversight support within the soundnessCompany’s budget constraints; and
• As the Company grows its business and the cash flow necessary to hire additional accounting personnel, management expects to pursue and implement such additional hires.
Elements of our systems,remediation plan can only be accomplished over time and we can offer no assurances that those initiatives will ultimately have the possibilityintended effects. Ultimately, revenue growth and performance improvements are the most likely avenue to greater resources that will improve the Company’s internal controls.
Management will continue the process of human errorreviewing existing controls, procedures and responsibilities to more closely identify financial reporting risks and the risk of fraud. Moreover, projections of any evaluation of effectivenessrequired controls to future periodsaddress them. Key control and compensating control procedures will be developed to ensure that material weaknesses are subject to the risk that controls may be inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time.
properly addressed and related financial reporting risks are mitigated. Periodic control validation and testing will also be implemented to ensure that controls continue to operate consistently and as designed.Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 20112012 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The same is true for the period from January 1, 2013, through the date of the filing of this Annual Report on Form 10-K with the SEC.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table sets forth certain information concerning the Company’s directors and executive officers:
| Name | Age | Positions with the Company |
| Philip S. Sassower, Chairman | 72 | Chairman and Chief Executive Officer |
| Andrea Goren | 4445 | Director and Chief Financial Officer |
| William Keiper | 6162 | President and Chief Operating Officer |
| Stanley Gilbert | 7174 | Director |
| Jeffrey Holtmeier | 5455 | Director |
| David E. Welch | 6366 | Director |
The business experience of each of the directors and executive officers for at least the past five years includes the following:
Philip S. Sassower has served as the Company’s Chairman and Chief Executive Officer since August 2010. Mr. Sassower is a Managing Director of SG Phoenix LLC, a private equity firm, and has served in that capacity since May 2003. Mr. Sassower has also been Chief Executive Officer of Phoenix Enterprises LLC, a private equity firm, and has served in that capacity since 1996. In addition, Mr. Sassower has served as Chief Executive Officer of Xplore Technologies Corp. (OTCQB: XLRT) since February 2006 and has been a director of Xplore Technologies Corp. and served as Chairman of its board of directors since December 2004. On May 13, 2008, Mr. Sassower was named Chairman of the Board of The Fairchild Corporation (NYSE: FA), a motorcycle accessories and aerospace parts and services company. On March 18, 2009, The Fairchild Corporation and 61 subsidiaries filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court, District of Delaware. On January 7, 2010, The Fairchild Corporation’s plan of liquidation was declared effective and the company’s board of directors was relieved of its duties. Mr. Sassower also served as Chairman of the Board of the Company from 1998 to 2002 and as Co-Chief Executive Officer of the Company from 1997 to 1998. Mr. Sassower is co-manager of the managing member of Phoenix
Venture Fund LLC. Mr. Sassower’s qualifications to serve on the Board of Directors include more than 40 years of business and investment experience. Mr. Sassower has developed extensive experience working with management teams and boards of directors, and in acquiring, investing in and building companies and implementing changes.
Andrea Goren has served as a director since August 2010. Mr. Goren was appointed the Company’s Chief Financial Officer in December 2010. Mr. Goren is a Managing Director of SG Phoenix LLC, a private equity firm, and has served in that capacity since May 2003 and has been associated with Phoenix Enterprises LLC since January 2003. Prior to that, Mr. Goren served as Vice President of Shamrock International, Ltd., a private equity firm, from June 1999 to December 2002. Mr. Goren has been a director of Xplore Technologies Corp. (OTCQB: XLRT) since December 2004 and of The Fairchild Corporation (NYSE: FA) from May 2008 to January 2010. On March 18, 2009, The Fairchild Corporation and 61 subsidiaries filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court, District of Delaware. On January 7, 2010, The Fairchild Corporation’s plan of
liquidation was declared effective and the company’s board of directors was relieved of its duties. Mr. Goren is co-manager of the managing member of Phoenix Venture Fund LLC. Mr. Goren’s qualifications to serve on the Board of Directors include his experience and knowledge acquired in approximately 1213 years of private equity investing. Mr. Goren has played a significant role in SG Phoenix LLC’s private equity investments and has developed extensive experience working with management teams and boards of directors, including at numerous public companies affiliated with SG Phoenix LLC.
William Keiper was appointed the Company’s President and Chief Operating Officer in December 2010. Mr. Keiper is Managing Partner of First Global Partners LLC where he specializes in working with investors and Boards of Directors in resolving issues related to business continuity, performance and sustainable value creation. Mr. Keiper has over 30 years of business experience, more than 18 of which have been in the management of software, technology and IT product distribution and services organizations. He was President and Chief Executive Officer of Hypercom Corporation (NYSE: HYC) from 2005 to 2007 and served as a member of its Board of Directors from 2000 to 2007. He was Chairman and Chief Executive Officer of Arrange Technology LLC, a software development services outsourcing company, from 2002 to 2005. From 1997 to 2002, he served as a principal in mergers and acquisitions firms serving middle market software and IT services companies. He was Chief Executive Officer of Artisoft, Inc., a public networking and communications software company, from 1993 to 1997, and its Chairman from 1995 to 1997. He held several executive positions, including President and Chief Operating Officer, of MicroAge, Inc., an indirect sales-based IT products distribution and services company, from 1986 to 1993, where he was a key executive in helping to profitably drive more than a billion dollar revenue increase over the course of his tenure with the company.
Stanley L. Gilbert has served as a director since October 2011. Mr. Gilbert has more than 45 years of experience as a lawyer with primary specialties in wills, trusts, estate planning and administration, as well as tax planning. Mr. Gilbert is Founder, and, has been President of Stanley L. Gilbert PC since 1982. Mr. Gilbert has also been a partner of a number of law firms, including Nager Korobow, Bell Kallnick Klee and Green, and Migdal Pollack Rosenkrantz and Sherman. Mr. Gilbert has served as a Director of Planned Giving at Columbia University Medical Center’s Nathaniel Wharton Fund, which supports a broad variety of projects in basic research, clinical care and teaching since 2001. Mr. Gilbert was elected by a majority of CIC’s Series C and Series B Preferred stockholders voting together as a separate class on an as converted to common stock basis, and serves on CIC’s audit and compensation committees. Mr. Gilbert’s qualifications to serve on the Board of Directors include his significant tax and accounting expertise acquired through his years of practicing law.
Jeffrey Holtmeier has served as a director since August 2011. Mr. Holtmeier has more than 25 years of successful entrepreneurship in the technology and communications fields. As CEO of GENext from 2001 to present, and through its subsidiary China US Business Development, LLC, Mr. Holtmeier has assisted many US companies in establishing relationships in China, where he also co-founded Koncept International, Inc., a Chinese-based VoIP and digital media technology company. Prior to his involvement in the Chinese market, Mr. Holtmeier founded, built over seventeen years and successfully sold InfiNET in 2001 to Teligent, a NASDAQ listed company. Mr. Holtmeier was a recipient of the prestigious Ernst & Young, NASDAQ/USA Today “Entrepreneur of the Year” award in 1999, and has served on the boards of numerous corporations and non-profit organizations. He will serve on CIC’s audit and compensation committees. Mr. Holtmeier’s qualifications to serve on the Board of Directors include his experience as a successful entrepreneur and his experience in establishing business relationships in China.
David E. Welch has served as a director since March 2004. From July 2002 to present Mr. Welch has been the principal of David E. Welch Consulting, a financial consulting firm. Mr. Welch has also been Vice President and Chief Financial Officer of American Millennium Corporation, Inc., a provider of satellite based asset tracking and reporting equipment, from April 2004 to present. Mr. Welch was Vice President and Chief Financial Officer of Active Link Communications, a manufacturer of telecommunications equipment, from 1999 to 2002. Mr. Welch has held positions as Director of Management Information Systems and Chief Information Officer with Micromedex, Inc. and Language Management International from 1995 through 1998. Mr. Welch other directorships have been with AspenBio Pharma, Inc., from 2004 to present, PepperBall Technologies, Inc. from January 2007 to January 2009 and
Advanced Nutraceuticals, Inc., from 2003 to 2006. Mr. Welch is a Certified Public Accountant licensed in the state of Colorado. Mr. Welch’s qualifications to serve on the Board of Directors include his significant accounting and financial expertise.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company's officers, directors and persons who own more than ten percent of a registered class of the Company's equity securities to file certain reports with the Securities and Exchange Commission (the "SEC") regarding ownership of, and transactions in, the Company's securities. These officers, directors and stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) reports that are filed with the SEC. The following Section 16 filings were not timely filed for the year ended December 31, 2011: the Form 3 for MDNH Partners LP dated January 20, 2011, the three Form 4s for MDNH Partners LP dated January 20, 2011, the Form 4 for former director Francis Elenio dated February 4, 2011, the Form 4 for former director Kurt Amundson dated February 4, 2011,2012: the Form 4 for Andrea Goren dated February 4, 2011,November 15, 2012, the Form 4 for Philip Sassower dated February 4, 2011,November 15, 2012, the Form 4 for David Welch dated February 4, 2011 the two Form 4s for William Keiper dated April 13, 2011, the Form 4 for Andrea Goren dated August 17, 2011, the Form 3 for Stan Gilbert dated November 3, 2011,15, 2012, and the Form 34 for Jeffrey Holtmeier dated November 4, 2011, and the Form 4 for William Keiper dated November 4, 2011.15, 2012.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics, referred to as our Code of Business Conduct and Ethics, which applies to all of our directors, officers, and employees, including our principal executive officer, our principal financial and accounting officer, and our Chief Technology officer. A copy of the Code of Business Conduct and Ethics is posted on the Company’s web site, at www.cic.com.
Audit Committee Financial Expert
Mr. Welch serves as the Audit Committee’s financial expert. Each member of the Audit Committee is independent as defined under the applicable rules and regulations of the SEC and the director independence standards of the NASDAQ Stock Market, as currently in effect.
Item 11. Executive Compensation
Summary Compensation Table (in dollars)
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) (4) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value And Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) |
Philip S Sassower Chairman and CEO | 20112012
20102011
| −(1) −(1) | − − | − − | $27,315$ −
$27,315 | − − | − − | − − | $ − $27,315 |
| William Keiper, President | 2012 2011 | −(2) −(2) | − − | − − | $ − $74,148 | − − | − − | − − | $ - 74,148 |
Andrea Goren, CFO | 2012 2011 | -(3) -(3) | − − | − − | $ − 59,615 | − − | − − | − − | $27,315 −
|
William Keiper, President | 2011
2010
| −(2)
−(2)
| −
−
| −
−
| $74,148
−
| −
−
| −
−
| − −
| $74,148
−
|
Andrea Goren, CFO
| 2011
2010
| -(3)
-(3)
|
|
| $59,615
|
|
|
| $59,615
−
|
| | | | | | | | | | |
| 1. | Mr. Sassower was appointed Chairman of the Board and Chief executive officer on August 5, 2010, and receives no compensation. |
| 2. | Mr. Keiper was appointed President and Chief Operating Officer on December 7, 2010. Mr. Keiper receives no salary compensation from the Company. |
| 3. | Mr. Goren was appointed Chief Financial Officer on December 7, 2010. Mr. Goren receives no compensation from the Company. |
| 4. | The amounts provided in this column represent the aggregate grant date fair value of option awards granted to our officers, as calculated in accordance with FASB ASC Topic 718, Stock Compensation. Mr. Sassower has 333,600666,800 options that are vested and exercisable within sixty days of December 31, 2011.2012. Mr. Keiper has 1,999,9966,333,322 options that are vested and exercisable within sixty days of December 31, 2011.2012. Mr. Goren has 1,168,6003,167,800 options that are vested and exercisable within sixty days of December 31, 2011.2012. In accordance with applicable regulations, the value of such options does not reflect an estimate for features related to service-based vesting used by the Company for financial statement purposes. See footnote 10 in the Notes to Consolidated Financial Statements included with this report on Form 10-K. |
Mr. Keiper is retained by the Company through an Advisory Services Agreement (“(the “FGP Agreement”) with First Global Partners, LLC (“FGP’). Mr. Keiper is Managing Partner of FGP. The term of the agreementFGP Agreement is two years unless terminated earlier and will automatically renew for additional one year periods upon the same terms and conditions unless either party notifies the other in writing of its intent to terminate at least 90 days prior to the then-current term. FGP receives a cash sum payment of $20,000 (“Cash Fee”) per month. In addition, FPG is eligible for, but not entitled to receive, an annual cash performance fee of up to thirty-five percent (35%) of the Cash Fee during a given year or prorated portion thereof. Such performance fee, if any, willwould be awarded based upon the sole discretion of the Company’s Board of Directors. No performance fee was paid to FGP in 2011.2012. Under the FGP shall furnish,Agreement, FGP furnishes, at FGP'sits own expense, all materials and equipment necessary to carry out the terms of thisthe FGP Agreement. The Company agreeshas agreed to pay FGP for reasonable and documented out of pocket expenses incurred for Services rendered by FGP during the term of the Agreement. FGP shall obtainAgreement, as long as FGP obtains written approval of the Company prior to incurring any significant expense.
Mr. Goren is retained by the Company through an Advisory Services Agreement (“(the “SGP Agreement”) with SG Phoenix LLC (“SGP”). Mr. Goren and Mr. Sassower are managing members of SGP. The term of the agreementSGP Agreement is two years unless terminated earlier and will automatically renew for additional one year periods upon the same terms and conditions unless either party notifies the other in writing of its intent to terminate at least 90 days prior to the then-current term. SGP receives a cash sum payment of $15,000 (“Cash Fee”) per month. In addition, SGP is eligible for, but not entitled to receive, an annual cash performance fee of up to thirty-five percent (35%) of the Cash Fee during a given year or prorated portion thereof. Such performance fee, if any, willwould be awarded based upon the sole discretion of the Company’s Board of Directors. No performance fee was paid to SGP in 2011.2012. Under the SGP shall furnish,Agreement, SGP furnishes, at SGP'sits own expense, all materials and equipment necessary to carry out the terms of thisthe SGP Agreement. The Company agreeshas agreed to pay SGP for reasonable and documented out of pocket expenses incurred for Servicesservices rendered by SGP during the term of the Agreement. SGP shall obtainAgreement, as long as SGP obtains written approval of the Company prior to incurring any significant expense.
Outstanding Equity Awards at Fiscal 2011 Year EndDecember 31, 2012
The following table summarizes the outstanding equity award holdings held by our named executive officers. The amounts are not stated in thousands.
| | Name and Principal Position | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date |
| | Philip S. Sassower, Chairman and CEO | 250,300(1) | 749,700(1) | $0.0649 | 01/28/2018 |
| | William Keiper, President | 1,333,330(2) | 6,666,670(2) | $0.0250 | 08/11/2018 |
| | Andrea Goren, Chief Financial Officer | 250,300(3) 418,500(4) | 749,700(3) 4,581,500(4) | $0.0649 $0.0250 | 01/28/2018 08/11/2018 |
| | Name and Principal Position | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date |
| | Philip S. Sassower, Chairman and CEO | 666,800(1) | 333,200(1) | $0.0649 | 01/28/2018 |
| | William Keiper, President and COO | 6,333,322(2) | 1,666,678(2) | $0.0250 | 08/11/2018 |
| | Andrea Goren, Chief Financial Officer | 666,800(3) 2,5010,00(4) | 333,200(3) 1,499,000(4) | $0.0649 $0.0250 | 01/28/2018 08/11/2018 |
| | (1)Mr. Sassower’s 1,000,000 options were granted on January 28, 2011, vest pro rata quarterly over three years, and expire on January 28, 2018. |
| | (2)Mr. Keiper's 8,000,000 options were granted on August 11, 2011, vest pro rata quarterly over three years, and expire on August 11, 2018. |
| | (3)Mr. Goren's 1,000,000 options were granted on January 28, 2011, vest pro rata quarterly over three years, and expire on January 28, 2018. |
| | (4) Mr. Goren's 5,000,000 options were granted on August 11, 2011, vest pro rata quarterly over three years, and expire on August 11, 2018. |
Option Exercises and Stock Vested
During the twelve months ended December 31, 2012, a total of 203,456 stock options were exercised by employees of the Company and the Company received $13 in cash. There were no stock options exercised in 2011.
Director Compensation
The following table provides information regarding the compensation of the Company’s non-employee directors for the year ended December 31, 2011:2012:
Name | Fees Earned or Paid in Cash | Stock Awards | Option Awards (1) | Non-Equity Incentive Plan Compensation | Non-qualified Deferred Compensation Earnings | All Other Compensation | Total | | Fees Earned or Paid in Cash(1) | | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Non-qualified Deferred Compensation Earnings | All Other Compensation | | Total | |
| Current Directors | | | | | | | | |
Stanley Gilbert (2) | $ 1,000 | $ ─ | $ 17,900 | $ ─ | $ ─ | $ 18,900 | | $ | 1,000 | | $ ─ | $ ─ | $ ─ | $ ─ | | $ | 1,000 | |
Jeffrey Holtmeier(3) | $ 1,000 | $ ─ | $ 19,900 | $ ─ | $ ─ | $ 20,900 | | $ | 1,000 | | $ ─ | $ ─ | $ ─ | $ ─ | | $ | 1,000 | |
David Welch (4) | $ 1,000 | $ ─ | $ 50,500 | $ ─ | $ ─ | $ 51,500 | | $ | 1,000 | | $ ─ | $ ─ | $ ─ | $ ─ | | $ | 1,000 | |
| | | | |
| Former Directors | | | |
| Kurt Amundson (5) | $ ─ | $ ─ | $ 50,500 | $ ─ | $ ─ | $ 50,500 | |
| Francis Elenio (6) | $ ─ | $ ─ | $ 50,500 | $ ─ | $ ─ | $ 50,500 | |
| (1) | The amounts provided in this column represent the aggregate grant date fair valuefees paid for attendance at the November 13, 2012 Board of option awards granted to the Companies’ directors in the fiscal year ended December 31, 2011 as calculated in accordance with FASB ASC Topic 718, Stock Compensation. The aggregate number of option awards outstanding for each director as of December 31, 2011 is as follows:Directors Meeting. |
(2) | Mr. Gilbert received a stock option grant on November 7, 2011, to purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $0.023 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant. |
(3) | Mr. Holtmeier received a stock option grant on August 11, 2011,to purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $0.025 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant. |
(4) | Mr. Welch received a stock option grant on January 28, 2011 to purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $0.06 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant. |
(5) | Mr. Amundson received a stock option grant on January 28, 2011 to purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $0.06 per share. Mr. Amundson resigned from the Board on July 10, 2011. |
(6) | Mr. Elenio received a stock option grant on January 28, 2011 to purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $0.06 per share. Mr. Elenio resigned from the Board on October 19, 2011. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of March 15, 2012,20, 2013, with respect to the beneficial ownership of (i) any person known to be the beneficial owner of more than 5% of any class of voting securities of the Company, (ii) each director and director nominee of the Company, (iii) each of the current executive officers of the Company named in the Summary Compensation Table under the heading "Executive Compensation" and (iv) all directors and executive officers of the Company as a group. Except as indicated in the footnotes to this table (i) each person has sole voting and investment power with respect to all shares attributable to such person and (ii) each person’s address is c/o Communication Intelligence Corporation, 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065-1413. The amounts are not stated in thousands.
| | Common Stock | | Series A-1 Preferred Stock | | Series B Preferred Stock | | Series C Preferred Stock |
Name of Beneficial Owner | Number of Shares (1) | Percent Of Class (1) | | Number of Shares (2) | Percent Of Class (2) | | Number of Shares (3) | Percent Of Class (3) | | Number of Shares (4) | Percent Of Class (4) |
Andrea Goren (5) | 341,687,228 | 66.7% | | − | − | | 5,430,521 | 59.6% | | 1,651,610 | 43.2% |
Philip S. Sassower (6) | 340,204,822 | 66.9% | | − | − | | 5,407,422 | 59.4% | | 1,640,237 | 42.8% |
Stanley Gilbert (7) | 39,130,028 | 15.0% | | − | − | | 115,494 | 1.3% | | 328,488 | 8.6% |
Jeffrey Holtmeier (8) | 1,250,300 | * | | − | − | | − | − | | − | − |
| David E. Welch (9) | 591,900 | * | | − | − | | − | − | | − | − |
| | | | | | | | |
| | Common Stock | | Series A-1 Preferred Stock | | Series B Preferred Stock | | Series C Preferred Stock | | Series D Preferred Stock | |
Name of Beneficial Owner | Number of Shares (1) | Percent Of Class (1) | | Number of Shares (2) | Percent Of Class (2) | | Number of Shares (3) | Percent Of Class (3) | Number of Shares (4) | Percent Of Class (4) | Number of Shares (5) | Percent of Class (5) |
Philip S. Sassower (6) | 387,814,137 | 63.2% | | − | − | | 5,968,894 | 59.3% | 1,804,938 | 43.2% | 567,607 | 12.8% |
Andrea Goren (7) | 389,642,658 | 63.3% | | − | − | | 5,994,392 | 59.6% | 1,776,843 | 42.6% | 623,260 | 14.1% |
Stanley Gilbert (8) | 43,873,075 | 16.3% | | − | − | | 127,483 | 1.3% | 362,590 | 8.7% | 102,124 | 2.3% |
Jeffrey Holtmeier (9) | 2,033,240 | * | | − | − | | − | − | − | − | 22,487 | * |
David E. Welch (10) | 825,100 | * | | − | − | | − | − | − | − | − | − |
| William Keiper (11) | 25,825,531 | 10.3% | | − | − | | − | − | 228,577 | 5.5% | − | − |
| | | | | | | | | | | | | |
| All directors and executive officers as a group (6 persons) (12) | 466,418,563 | 74.8% | | − | − | | 6,163,494 | 60.9% | 2,409,629 | 57.7% | 725,384 | 16.4% |
| | | | | | | | | | | | | |
| 5% Shareholders | | | | | | | | | | | | |
Phoenix Venture Fund LLC (13) | 350,320,685 | 67.7% | | − | − | | 5,968,894 | 59.3% | 1,763,319 | 42.2% | − | − |
| Michael W. Engmann (14) | 36,073,041 | 14.3% | | 678,371 | 71.2% | | 724,479 | 7.2% | 124,446 | 3.0% | − | − |
* Less than 1%.
| | | | | | | | |
| | Common Stock | | Series A-1 Preferred Stock | | Series B Preferred Stock | | Series C Preferred Stock |
Name of Beneficial Owner | Number of Shares (1) | Percent Of Class (1) | | Number of Shares (2) | Percent Of Class (2) | | Number of Shares (3) | Percent Of Class (3) | | Number of Shares (4) | Percent Of Class (4) |
William Keiper (10) | 20,870,128 | 8.4% | | | − | | − | − | | 207,078 | 5.8% |
| | | | | | | | | | | | |
| All directors and executive officers as a group (6 persons) (11) | 406,002,039 | 71.7% | | − | − | | 5,546,015 | 60.0% | | 2,187,176 | 57.2% |
| | | | | | | | | | | | |
| 5% Shareholders | | | | | | | | | | | |
Phoenix Venture Fund LLC (12) | 337,731,632 | 66.5% | | − | − | | 5,407,422 | 59.4% | | 1,640,237 | 42.9% |
| Michael W. Engmann (13) | 61,034,902 | 22.0% | | 523,987 | 59.5% | | 1,502,612 | 16.5% | | 220,764 | 6.2% |
___________
* Less than 1%.
| 1. | Shares of Common Stock beneficially owned and the respective percentages of beneficial ownership of Common Stock assumes the exercise or conversion of all options, warrants and other securities convertible into Common Stock, including shares of Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of March 20, 2012.2013. Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days of March 20, 2012,2013, or securities convertible into Common Stock within 60 days of March 20, 20122013 are deemed outstanding and held by the holder of such shares of Common Stock, options, warrants, or other convertible securities, including shares of Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, for purposes of computing the percentage of outstanding Common Stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding Common Stock beneficially owned by any other person. The percentage of beneficial ownership of Common Stock beneficially owned is based on 228,974,338225,824,325 shares of Common Stock, 880,352952,925 shares of Series A-1 Preferred Stock, 9,110,61810,058,699 shares of Series B Preferred Stock, and 3,824,7884,175,370 shares of Series C Preferred Stock and 4,426,545 shares of Series D Preferred Stock outstanding as of March 15, 2012.20, 2013. The shares of Common Stock beneficially owned and the respective percentages of beneficial ownership of Common Stock stated in these columns assume conversion of shares of Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series CD Preferred Stock. |
| 2. | Each outstanding share of Series A-1 Preferred Stock is presently convertible into 7.1429 shares of Common Stock. The shares of Series A-1 Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series A-1 Preferred Stock stated in these columns reflect ownership of shares of Series A-1 Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series A-1 Preferred Stock at this ratio. The percentage of beneficial ownership of Series A-1 Preferred Stock beneficially owned is based on 880,353952,925 shares of Series A-1 Preferred Stock outstanding as of March 20, 2012.2013. |
| 3. | Each outstanding share of Series B Preferred Stock is presently convertible into 23.0947 shares of Common Stock. The shares of Series B Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series B Preferred Stock stated in these columns reflect ownership of shares of Series B Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock at this ratio. The percentage of beneficial ownership of Series B Preferred Stock beneficially owned is based on 9,110,61810,058,699 shares of Series B Preferred Stock outstanding as of March 20, 2012.2013. |
| 4. | Each outstanding share of Series C Preferred Stock is presently convertible into 44.444 shares of Common Stock. The shares of Series C Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series C Preferred Stock stated in these columns reflect ownership of shares of Series C Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series C Preferred Stock at this ratio. The percentage of beneficial ownership of Series C Preferred Stock beneficially owned is based on 3,824,7894,175,370 shares of Series C Preferred Stock outstanding as of March 20, 2012.2013. |
| 5. | Each share of Series D-1 Preferred Stock is presently convertible into 44.444 shares of Common Stock and each share of Series D-2 Preferred Stock is presently convertible into 20.000 shares of Common Stock. There are presently 1,124,134 shares of Series D-1 Preferred Stock, and 3,302,411 shares of Series D-2 Preferred Stock. The shares of Series D Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series D Preferred Stock stated in these columns reflect ownership of shares of Series D Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series D Preferred Stock at the above ratios. The percentage of beneficial ownership of Series D Preferred Stock beneficially owned is based on 4,426,545 shares of Series D Preferred Stock outstanding as of March 20, 2013. |
| 6. | Represents (a) 61,131,610 shares of Common Stock (b) 750,100 shares issuable to Mr. Sassower upon the exercise of options exercisable within 60 days of March 20, 2013, (c) 137,849,816 shares of Common Stock issuable upon the conversion of 5,968,894 shares of Series B Preferred Stock (d) 80,219,386 share of Common Stock issuable upon the conversion of 1,804,938 shares of Series C Preferred Stock(e) 25,226,953 shares of Common Stock issuable upon the conversion of 567,607 shares of Series D-1 Preferred Stock and (f) 82,636,270 shares of Common Stock issuable upon the exercise of warrants (see table below for details), including securities beneficially owned by Phoenix, SG Phoenix Ventures LLC, SG Phoenix LLC, Phoenix Banner Holdings LLC and Phoenix Enterprises Family Fund. Please see footnote 13 below for information concerning shares of Common Stock beneficially owned by Phoenix. Along with Mr. Goren, Mr. Sassower is the co-manager of SG Phoenix Ventures LLC, which has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and Phoenix Banner Holdings LLC, and, accordingly, Mr. Sassower may be deemed to be the beneficial owner of the shares owned by Phoenix and Phoenix Banner Holdings LLC. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix and Phoenix Banner Holdings LLC, except to the extent of their respective pecuniary interests therein. Mr. Sassower’s address is 110 East 59th Street, Suite 1901, New York, NY 10022. |
| | | Philip Sassower | | SG Phoenix Ventures LLC | | SG Phoenix LLC | | Phoenix Venture Fund | | Phoenix Enterprises Family Fund LLC | | Phoenix Banner Holdings | | Total |
| Common Shares | | 2,555,556 | | | | 2,792,494 | | 55,783,562 | | | | | | 61,131,612 |
| Stock Options | | 750,100 | | | | | | | | | | | | 750,100 |
| Series B Preferred Stock As If Converted to Common Stock | | | | | | | | 137,849,816 | | | | | | 137,849,816 |
| | | | | | | | | | | | | | | |
| Series C Preferred Stock As If Converted to Common Stock | | | | | | | | 78,369,655 | | 1,849,731 | | | | 80,219,386 |
| Series D Preferred Stock As If Converted to Common Stock | | | | | | | | | | | | 25,226,953 | | 25,226,953 |
| Warrants | | | | 13,139,414 | | | | 62,385,746 | | 1,555,555 | | 5,555,555 | | 82,636,270 |
| Total | | 3,305,656 | | 13,139,414 | | 2,792,494 | | 334,388,779 | | 3,405,286 | | 30,782,508 | | 387,814,137 |
5.7. | Represents (a) 19,00058,595,056 shares of Common Stock held by Mr. Goren (b) 1,668,4003,667,600 shares issuable to Mr. Goren upon the exercise of options exercisable within 60 days here of March 20, 2013, (c) 533,464138,438,685 shares of Common Stock issuable upon the conversion of 23,0995,968,894 shares of Series B Preferred Stock held by Andax LLC (d) 544,533 share78,970,721 shares of Common Stock issuable upon the conversion of 12,2521,763,319 shares of Series C Preferred Stock held by Andax LLC, (e) 1,189,46427,700,417 shares of Common Stock issuable upon the conversion of 623,260 shares of Series D-1 Preferred Stock and (e) 82,270,179 shares of Common Stock issuable upon the exercise of warrants held by Andax LLC and (f) includes Company(see table below for details), including securities beneficially owned by Phoenix.Phoenix, SG Phoenix Ventures LLC, SG Phoenix LLC, Phoenix Banner Holdings LLC, Andax LLC and Mr. Goren. Please see footnote 1213 below for information concerning Phoenix’s beneficial ownership. Mr. Goren is managing member Andax LLC and disclaims beneficial ownership of the shares except to the extent of his pecuniary interest therein. Along with Mr. Sassower, Mr. Goren is the co-manager of SG Phoenix Ventures LLC, which has the power to vote and dispose of the shares held by Phoenix and by Phoenix Banner Holdings LLC, and accordingly, Mr. Goren may be deemed to be the beneficial owner of the shares owned by Phoenix.Phoenix and Phoenix Banner Holdings LLC. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix and Phoenix Banner Holdings LLC, except to the extent of their respective pecuniary interests therein. Mr. Goren’s address is 110 East 59th Street, Suite 1901, New York, NY 10022. |
| | | Andrea Goren | | Andax, LLC | | SG Phoenix Ventures LLC | | SG Phoenix LLC | | Phoenix Venture Fund | | Phoenix Banner Holdings | | Total |
| Common Shares | | 19,000 | | | | 2,792,494 | | 55,783,562 | | | | | | 58,595,056 |
| Stock Options | | 3,667,600 | | | | | | | | | | | | 3,667,600 |
| Series B Preferred Stock As If Converted to Common Stock | | | | 588,869 | | | | | | 137,849,816 | | | | 138,438,685 |
| Series C Preferred Stock As If Converted to Common Stock | | | | 601,066 | | | | | | 78,369,655 | | | | 78,970,721 |
| Series D Preferred Stock As If Converted to Common Stock | | | | 2,473,464 | | | | | | | | 25,226,953 | | 27,700,417 |
| Warrants | | | | 1,189,464 | | | | 13,139,414 | | 62,385,746 | | 5,555,555 | | 82,270,179 |
| Total | | 3,686,600 | | 4,852,863 | | 2,792,494 | | 68,922,976 | | 278,605,217 | | 30,782,508 | | 389,642,658 |
6.8. | Represents (a) 2,055,5567,693,386 shares of Common Stock, held by Mr. Sassower (b) 416,900 shares issuable to Mr. Sassower upon the exercise of options exercisable within 60 days here of, and (c) includes shares of Common Stock Company securities beneficially owned by Phoenix. Please see footnote 12 below for information concerning shares of Common Stock beneficially owned by Phoenix’s beneficial ownership. Along with Mr. Goren, Mr. Sassower is the co-manager of SG Phoenix Ventures LLC, which has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, accordingly, Mr. Sassower may be deemed to be the beneficial owner of the shares owned by Phoenix. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix, except to the extent of their respective pecuniary interests therein. In addition to the shares beneficially owned by Phoenix, Mr. Sassower owns 2,055,556 shares of Common Stock. Mr. Sassower’s address is 110 East 59th Street, Suite 1901, New York, NY 10022. |
7. | Represents (a) 3,734,749 shares of Common Stock held by Mr. Gilbert, (b) 28,485 shares of Common Stock held by Stanley Gilbert P.C., (c) 1,783,035 shares of Common Stock held by Galaxy LLC, (d) 2,147,117 shares of Common Stock held by Mrs. Stanley Gilbert, (e) 14,002,877 shares of Common Stock issuable upon the exercise of warrants held by Mr. Gilbert, (f) 167,000500,200 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereof held by Mr. Gilbert, (g) 2,667,298of March 20, 2013, (c) 2,2,944,182 shares of Common Stock issuable upon the conversion of 115,494127,483 shares of Series B Preferred Stock, held by Mr. Gilbert, and (h) 14,599,467(d) 16,114,950 shares of Common Stock issuable upon the conversion of 362,590 shares of Series C Preferred Stock, (e) 2,042,480 shares of Common Stock issuable upon the conversion of 102,124 shares of Series D-2 Preferred Stock, and (f) 14,577,877 shares of Common Stock issuable upon the exercise of 328,488 shares of Series C Preferred Stock held by Mr. Gilbert.warrants, (see table below for details) (d). As manager of Galaxy LLC, Mr. Gilbert has the power to vote and dispose of the shares of Common Stock held by Galaxy LLC, and, accordingly, Mr. Gilbert may be deemed to be the beneficial owner of the shares owned by Galaxy LLC. |
| | Stanley Gilbert | | Stanley Gilbert PC | | Galaxy LLC | | Mrs. Gilbert | | Total |
| Common Shares | 3,734,749 | | 28,485 | | 1,783,035 | | 2,147,117 | | 7,693,386 |
| Stock Options | 500,200 | | | | | | | | 500,200 |
| Series B Preferred Stock As If Converted to Common Stock | 2,944,182 | | | | | | | | 2,944,182 |
| Series C Preferred Stock As If Converted to Common Stock | 16,114,950 | | | | | | | | 16,114,950 |
| Series D Preferred Stock As If Converted to Common Stock | 2,042,480 | | | | | | | | 2,042,480 |
| Warrants | 14,577,877 | | | | | | | | 14,577,877 |
| Total | 39,914,438 | | 28,485 | | 1,783,035 | | 2,147,117 | | 43,873,075 |
8.9. | Represents (a) 250,300583,500 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereofof March 20, 2013, (b) 449,740 shares of Common Stock issuable upon the conversion of 22,487 shares of Series D2 Preferred Stock owned by Genext, LLC (“Genext”) and (b)(c) 1,000,000 shares of Common Stock issuable upon the exercise of warrants exercisable within 60 days hereofof March 20, 2013 beneficially owned by China U.S. Business Development, LLC (“CUBD”). As manager of CUBD and Genext, Mr. Holtmeier has the power to vote and dispose of the shares of Common Stock held by CUBD and Genext, and, accordingly, Mr. Holtmeier may be deemed to be the beneficial owner of the shares owned by CUBD.CUBD and Genext. |
9.10. | Represents 591,900825,100 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereof.of March 20, 2013. |
10.11. | Represents (a) 2,999,9946,999,988 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereofof March 20, 2013 (b) 9,203,46710,158,876 shares issuable upon the conversion of 207,078228,577 shares of Series C Preferred Stock, and (b) an aggregate of 8,666,667 shares of Common Stock issuable upon exercise of warrants exercisable within 60 days hereofof March 20, 2013 beneficially owned by FirstGlobal Partners LLC (“FirstGlobal”). As manager of FirstGlobal, Mr. Keiper has the power to vote and dispose of the shares of Common Stock held by FirstGlobal and, accordingly, Mr. Keiper may be deemed to be the beneficial owner of the shares owned by FirstGlobal. |
11.12. | Includes shares of Common Stock beneficially owned by Phoenix. Please see footnote 12 below for information concerning shares of Common Stock beneficially owned by Phoenix. Mr. Sassower and Mr. Goren are the co-managers of SG Phoenix Ventures LLC, which has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, accordingly, Mr. Sassower and Mr. Goren may be deemed to be the beneficial owner of the shares owned by Phoenix. SG Phoenix Ventures LLC, Mr. Sassower and Mr. Goren each disclaim beneficial ownership of the shares owned by Phoenix, except to the extent of their respective pecuniary interests therein. The amount stated above includes 2,085,3004,417,700 shares issuable upon the exercise of options within 60 days of March 15, 2011.20, 2013. |
12. | Represents (a) 58,576,054 shares of Common Stock, (b) 81,374,096 shares of Common Stock issuable upon the conversion of warrants (c) 124,882,789 share of Common Stock issuable upon the conversion of 5,407,422 shares of Series B Preferred stock and (d) 72,898,693 shares of Common Stock issuable upon the conversion of 1,640,237 shares of Series C Preferred Stock. See the following table for more detail. |
| | Common Shares | Warrants | Series B Preferred Stock As If Converted to Common Stock | Series C Preferred Stock As If Converted to Common Stock | Series B Preferred Stock | Series C Preferred Stock |
| Phoenix Venture Fund LLC | 55,783,562 | 63,548,571 | 124,882,789 | 71,222,977 | 5,407,422 | 1,602,533 |
| SG Phoenix Ventures LLC | 2,792,492 | 10,714,414 | | | | |
| Phoenix Enterprises Family Fund LLC | | 1,555,556 | | 1,675,717 | | 37,704 |
| Phoenix Banner Holdings LLC | | 5,555,555 | | | | |
| | 58,576,054 | 81,374,096 | 124,882,789 | 72,898,694 | 5,407,422 | 1,640,237 |
SG Phoenix Ventures LLC is the Managing Member of Phoenix, with the power to vote and dispose of the shares of Common Stock held by Phoenix. Accordingly, SG Phoenix Ventures LLC may be deemed to be the beneficial owner of such shares. Andrea Goren is the co-manager of SG Phoenix Ventures LLC, has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, as such, may be deemed to be the beneficial owner of the common shares owned by Phoenix and by SG Phoenix LLC, of which he is a member. Philip Sassower is the co-manager of SG Phoenix Ventures LLC, has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, as such, may be deemed to be the beneficial owner of the common shares owned by Phoenix and by SG Phoenix LLC, of which he is a member. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix, and Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by SG Phoenix LLC, except to the extent of their respective pecuniary interests therein. The address of these stockholders is 110 East 59th Street, Suite 1901, New York, NY 10022.
13. | Represents (a) 12,778,049 shares of Common Stock beneficially owned by Mr. Engmann, of which 4,041,140 are held by MDNH Partners, L.P. and 1,243,564 are held by KENDU Partners Company, (b) 3,742,764 shares of Common Stock issuable upon the conversion of shares of Series A-1 Preferred Stock beneficially owned by Mr. Engmann, of which 621,350 are issuable to MDNH Partners, L.P. and 3,083,743 are issuable to KENDU Partners Company, (c) 34,702,356 shares of Common Stock issuable upon the conversion of shares of Series B Preferred Stock beneficially owned by Mr. Engmann, of which 8,126,582 are issuable to MDNH Partners, L.P. and 2,916,697 are issuable to KENDU Partners Company; and (d) 9,811,733 shares of Common Stock issuable upon the conversion of shares of Series C Preferred Stock beneficially owned by Mr. Engmann, of which 4905867 are issuable to MDNH Partners, L.P. Mr. Engmann’s address is 220 Bush Street, No. 660, San Francisco, CA 94104. (See note 5 to the Consolidated Financial Statements). |
| 13. | Represents (a) 58,576,054 shares of Common Stock, (b) 137,849,816 share of Common Stock issuable upon the conversion of 5,968,894 shares of Series B Preferred stock and (c) 72,898,693 shares of Common Stock issuable upon the conversion of 1,763,319 shares of Series C Preferred Stock and (d) 75,525,160 shares of Common Stock issuable upon the conversion of warrants. See the following table for more detail. |
| 14. | SG Phoenix Ventures LLC is the Managing Member of Phoenix, with the power to vote and dispose of the shares of Common Stock held by Phoenix. Accordingly, SG Phoenix Ventures LLC may be deemed to be the beneficial owner of such shares. Andrea Goren is the co-manager of SG Phoenix Ventures LLC, has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, as such, may be deemed to be the beneficial owner of the common shares owned by Phoenix and by SG Phoenix LLC, of which he is a member. Philip Sassower is the co-manager of SG Phoenix Ventures LLC, has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, as such, may be deemed to be the beneficial owner of the common shares owned by Phoenix and by SG Phoenix LLC, of which he is a member. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix, and Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by SG Phoenix LLC, except to the extent of their respective pecuniary interests therein. The address of these stockholders is 110 East 59th Street, Suite 1901, New York, NY 10022. |
| | | Phoenix Venture Fund LLC | | SG Phoenix Ventures LLC | | Total | |
| Common Shares | | 55,783,562 | | 2,792,492 | | 58,576,054 | |
| Stock Options | | - | | | | | |
| Series B Preferred Stock As If Converted to Common Stock | | 137,849,816 | | | | 137,849,816 | |
| Series C Preferred Stock As If Converted to Common Stock | | 78,369,655 | | | | 78,369,655 | |
| Series D Preferred Stock As If Converted to Common Stock | | - | | | | | |
| Warrants | | 62,385,746 | | 13,139,414 | | 75,525,160 | |
| Total | | 334,388,779 | | 15,931,906 | | 350,320,685 | |
Represents (a) 8,964,953 shares of Common Stock beneficially owned by Mr. Engmann, (b) 4,845,536 shares of Common Stock issuable upon the conversion of shares of Series A-1 Preferred Stock beneficially owned by Mr. Engmann, (c) 16,731,625 shares of Common Stock issuable upon the conversion of shares of Series B Preferred Stock beneficially owned by Mr. Engmann (d) 5,530,927 shares of Common Stock issuable upon the conversion of shares of Series C Preferred Stock beneficially owned by Mr. Engmann. See the following table for more detail.. Mr. Engmann’s address is 220 Bush Street, No. 660, San Francisco, CA 94104. (See note 5 to the Consolidated Financial Statements).
| | | Michael Engmann | | MDNH Partners, LP | | KENDU Partners Company | | Total | |
| Common Shares | | 3,680,249 | | 4,041,140 | | 1,243,564 | | 8,964,953 | |
| Stock Options | | | | | | | | | |
| Series A-1 Preferred Stock As If Converted to Common Stock | | 40,779 | | 1,470,837 | | 3,333,920 | | 4,845,536 | |
| Series B Preferred Stock As If Converted to Common Stock | | 4,541,919 | | 8,970,212 | | 3,219,494 | | 16,731,625 | |
| Series C Preferred Stock As If Converted to Common Stock | | 115,777 | | 5,415,150 | | - | | 5,530,927 | |
| Series D Preferred Stock As If Converted to Common Stock | | - | | - | | - | | - | |
| Warrants | | - | | - | | - | | – | |
| Total | | 8,378,724 | | 19,897,339 | | 7,796,978 | | 36,073,041 | |
Equity Compensation Plan Information
The following table provides information as of December 31, 2011,2012, regarding our compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance:
| | Number of Securities To Be Issued Upon Exercise of Outstanding Options and Rights | Weighted-Average Exercise Price Of Outstanding Options and Rights | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans | Number of Securities To Be Issued Upon Exercise of Outstanding Options and Rights | | Weighted-Average Exercise Price Of Outstanding Options and Rights | | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans |
| Equity Compensation Plans Approved by Security Holders | | | | | | |
1999 Stock Option Plan | 924 | $ 0.56 | − | 345 | | $ | 0.39 | | − |
| | | | | | | | |
2011 Stock Compensation Plan | | 43,109 | | $ | 0.05 | | 56,891 |
Equity Compensation Plans Not Approved by Security Holders | | | | | | | |
2009 Stock Compensation Plan | 2,379 | 0.10 | 4,548 | 425 | | | 0.11 | | 6,502 |
Non Plan Stock Options | 3,479 | 0.50 | − | 150 | | $ | 0.19 | | − |
2011 Stock Compensation Plan | 44,571 | $ 0.05 | 5,429 | |
| Total: | 51,353 | $ 0.09 | 9,977 | 44,029 | | $ | 0.05 | | 63,393 |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Procedures for Approval of Related Person Transactions
In accordance with our Code of Business Conduct and Ethics, we submit all proposed transactions involving our officers and directors and related parties, and other transactions involving conflicts of interest, to the Board of Directors or the Audit Committee for approval. Each of the related party transactions listed below that were submitted to our board were approved by a disinterested majority of our Board of Directors after full disclosure of the interest of the related party in the transaction.
Director Independence
The Board of Directors has determined that Messrs. Gilbert, Holtmeier, and Welch are “independent,” as defined under the rules of the NASDAQ Stock Market relating to director independence, and that Messrs. Sassower and Goren are not independent under such rules. Messrs. Welch, Gilbert, and Holtmeier serve on the Compensation Committee of the Board of Directors. Each of the members of the Compensation Committee areis independent under the rules of the NASDAQ Stock Market relating to director independence. Messrs. Welch, Gilbert and Holtmeier serve on the Audit Committee of the Board of Directors. Under the applicable rules of the NASDAQ Stock Market and the SEC relating to independence of Audit Committee members, the Board of Directors has determined that Mr.Messrs. Welch isand Gilbert are independent and that Mr. Gilbert and Mr. Holtmeier areis not. Mr. Gilbert’s lack of independence stems solely from his beneficial ownership of 15.0% of the Company’s common stock, when such beneficial ownership is calculated in accordance with Exchange Act Rule 13d-3. When calculated on a fully diluted basis, Mr. Gilbert beneficially owns only approximately 5% of the Company’s common stock. For this reason, the Board of Directors has determined that Mr. Gilbert remains well suited to serving on the Company’s Audit Committee. Mr. Holtmeier's lack of independence stems solely from the fact that he was party to a consulting agreement under which he was paid $15,000 in the year ended December 31, 2011. The Board has determined that the amount paid to Mr. Holtmeier under this contract is not material, and thus the Board determined that Mr. Holtmeier remains well suitedis suitable to servingserve on the Audit Committee.
Related Party Transactions
Phoenix Venture Fund LLC (“Phoenix”) is the beneficial owner of approximately 66.5%67.0% of the Common Stock of the Company when calculated in accordance with Rule 13d-3, and Michael W. Engmann, together with two affiliated entities, is the beneficial owner of approximately 22.0%14.3% of the Common Stock of the Company when calculated in accordance with Rule 13d-3.
In February 2012, for working capital purposes, the Company borrowed $25 from Phoenix in the form of an unsecured demand note carrying 10% interest per annum. This note in plus accrued interest was repaid in September 2012.
In March 2011,2012, the Company sold 800 sharesborrowed an aggregate of Series C Preferred Stock for proceeds of $800, net of approximately $121$100 from Phoenix Banner Holdings LLC (“PBH”) in expenses, of which $50 went to SG Phoenix, LLC in paymentthe form of an administrative feeunsecured demand note. This note had an interest rate of 10% per annum. The funds were used for working capital purposes. The note plus accrued interest was repaid in September 2012.
In August and $71September 2012, the Company borrowed an aggregate of $50 and $50, respectively, from PBH in expenses to third partiesthe form of unsecured demand notes. These notes had an interest rate of 10% per annum. The funds were used for working capital purposes. These notes plus accrued interest were repaid in connectionNovember 2012.
In April 2012, the Company entered into the April 2012 Purchase Agreement with the financing.April 2011 Investors, which April 2011 Investors included Genext, LLC (”Genext”). Jeffrey Holtmeier is the managing member of Genext. Mr. Holtmeier was appointed to the Company’s board of directors on August 11, 2011. Under the terms of the April 2012 Purchase Agreement, the Company issued the April 2012 Notes to the April 2012 Investors. The April 2012 Notes bore interest at the rate of 10% per annum and had a maturity date of December 20, 2012. The December 2012 Notes were convertible at the option of the April 2012 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the saleissuance of the shares of Series C Preferred Stock,April 2012 Notes, the Company also issued to the April 2012 Investors warrants to purchase an aggregate of 35,5565,000 shares of the Company’s Common Stock withat an exercise price of $0.0225$0.05 per share, which warrants are exercisable for a period of three years from the date of issuance.share. The Company recordedascribed a beneficial conversion feature of $800 related to the intrinsic value of $47 to these warrants, which was recorded as a discount to short-term debt in the conversion feature of the shares of Series C Preferred Stock. The Company issued 305 shares of Series C Preferred Stock in payment of dividends for the year ended December 31, 2011.balance sheet.
In July 2011, the Company signed an agreement with China-US Business Development Corporation, (“CUBD”), to provide certain advisory and consulting services in relation to expanding distribution for certain CIC products in the People’s Republic of China. Specifically, introductions to targeted IT service companies, as well as facilitating meetings and assistance in negotiations for prospective partnerships. Jeffrey Holtmeier is the managing member of CUBD. Mr. Holtmeier was appointed to the Company’s board of directors on August 11, 2011.
Per the agreement, CUBD is to bewas paid $20,000$20 in installments based upon reaching certain milestones. As of December 31, 2011, the Company has paid to CUBD $15,000. In addition, CUBD willwas entitled to receive a performance fee on any revenue it secured for the Company from a Chinese customer and/or partner equal to 7%, 5% and 3% of net revenue received from suchany customer and/or partners introduced by CUBD during the first, second and third twelve monthsmonth periods, respectively, of the Company’s relationship with such customer and/or partner. In October 2012, the Company amended its agreement with CUBD. The amendment provided for the addition of three monthly payments of $5 beginning in October 2012 and ending in December 2012. The Company made such additional payments. The amendment also changed the above mentioned performance fee, so that it extends beyond the initially contemplated 36 month period. Jeffrey Holtmeier is the managing member of CUBD.
On August 7, 2011,In September 2012 and November 2012, the board of directors approvedCompany paid to SG Phoenix LLC, $75 and CUBD received a warrant$75, respectively, for administrative fees related to purchase one (1) million shares of the Company’s CommonSeries D Convertible Preferred Stock at an exercise price of $0.025 per share. The warrant will vest in equal quarterly installments over a period of (18) eighteen months commencing on the date of issue. The vesting will accelerate upon attainment of $100,000 in net revenue, pursuant to CUBD’s agreement with the Company. The warrant has a three year life and expires on August 11, 2014.financing rounds.
In September 2011, the Company borrowed an aggregate of $100 from Phoenix and an employee of the Company and issuedin the form of unsecured demand notes to each. These notes are due on demand and bearbore interest at the rate of 10% per annum.
In additionSeptember 2011, the Company entered into the September 2011 Purchase Agreement the September 2011 Investor, an entity affiliated with Phoenix, the Company’s largest stockholder.PBH. Under the terms of the September 2011 Purchase Agreement, the Company issued the September 2011 Note to the September 2011 Investor.PBH. The September 2011 Note bearsbore interest at the rate of 10% per annum and has ahad an initial maturity date of September 20, 2012. The September 2011 Note is alsowas convertible at the option of the September 2011 InvestorPBH into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100. In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 InvestorPBH a warrant to purchase 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share. The Company ascribed a value of $7 to the warrants, which was recorded as a discount to short-term debt in the balance sheet.
In December 2011, the Company entered into the December 2011 Purchase Agreement with the December 2011 Investors, which December 2011 Investors includedincluding Philip Sassower. Under the terms of the December 2011 Purchase Agreement, the Company issued the December 2011 Notes to the December 2011 Investors. The Notes bearbore interest at the rate of 10% per annum and have ahad an initial maturity date of December 20, 2012. The December 2011 Notes arewere also convertible at the option of the December 2011 Investors into securities sold in the Company’s
next equity financing with gross proceeds to the Company in excess of $100. In
connection with the issuance of the December 2011 Notes, the Company also issued to the December 2011 Investors warrantwarrants to purchase an aggregate of 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share. The Company ascribed a value of $13 to the warrants, which was recorded as a discount to short-term debt in the balance sheet.
In September, 2012, pursuant to an agreement to amend and convert unsecured promissory notes, PBH and the December 2011 Investors agreed to extend the maturity dates of the September 2011 Note and the December 2011 Notes through December 31, 2012, and to convert such notes plus accrued interest into Series D-1 Preferred Stock. The conversion occurred at the Final Closing on November 15, 2012.
SG Phoenix LLC, a Phoenix affiliate, acted as administrative agent with respect to the aforementioned promissory and preferred stock offerings. Philip Sassower and Andrea Goren are the co-managers of SG Phoenix LLC, and are also the Company’s Chief Executive Officer and Chief Financial Officer, respectively. Mr. Sassower is Chairman of the Board of Directors, and Mr. Goren is also a member of the Company’s Board of Directors and the Company’s Corporate Secretary. The Company agreed to pay all legal fees and out-of-pocket expenses incurred by SG Phoenix LLC and its affiliates in connection with the aforementioned offerings. In addition and in connection to such offerings, SG Phoenix LLC was paid a cash administrative fee equal to $150 and issued three-year warrants to purchase 3,000,000 shares of the Common Stock at a $0.05 exercise price. A portion of the net proceeds from such offerings was used to repay approximately $350 in aggregate principal and accrued interest on outstanding demand notes, a part of which was owed to Phoenix and its affiliates.
During the year ended December 31, 2011,2012, the Company exercised its option related to the terms of the preferred stock-related financing transactions and made dividend payments in kind. For the year ended December 31, 2011,2012, the Company issued 6773 shares of Series A-1 Preferred Stock 870of which 52 were to related parties, 948 shares of Series B Preferred Stock and 305of which 716 were to related parties, 389 shares of Series C Preferred Stock in payment of dividends.which 210 were to related parties and 55 shares of Series D Preferred Stock of which 15 were to related parties.
Interest expense associated with the Company’s indebtedness for the years ended December 31, 20112012 and 2010, was $27$253 and $2,039,$27, respectively, of which $24$114 and $1,974,$24, respectively, was related party expense. Amortization of debt discount and deferred financing costs included in interest expense for the year ended December 31, 20112012 and 2010 was $3$64 and $1,776,$3, respectively, of which $3$14 and $1,719,$3, respectively, was related party expense.
Item 14. Principal Accounting Fees and Services
Audit and other Fees. PMB Helin Donovan has been the Company’s auditors since May 2011. GHP Horwath, P.C. was the Company’s auditors from September 2006 to September 2011. During fiscal years 2011 and 2010,2012, the estimated fees for audit and other services performed by PMB Helin Donovan and GHP Horwath for the Company were as follows:
| | | | | | | |
| Nature of Service | | 2012 | | | 2011 | |
| | | | | | | |
| Audit Fees | | $ | 71,000 | (86%) | | $ | 65,000 | (72%) |
| Audit-Related Fees | | $ | 5,300 | (6%) | | $ | 18,000 | (20%) |
| Tax Fees | | $ | 7000 | (8%) | | $ | 7,000 | (8%) |
| All Other Fees | | $ | − | | | $ | − | |
| Total | | $ | 83,300 | | | $ | 90,000 | |
| | Amount and percentage of fees |
| Nature of Services | 2011 | | 2010 |
| | | | | | |
| Audit Fees | Audit fees are expected to be | $ 65,000 (72%) | | Audit fees are expected to be | $ 109,000 (76%) |
| Audit-Related Fees | | $ 18,000 (20%) | | | $ 25,000 (18%) |
| Tax Fees | Tax fees are expected to be | $ 7,000 (8%) | | Tax fees are expected to be | $ 9,000 (6%) |
| All Other Fees | | $ − | | | $ − |
| Total | | $ 90,000 | | | $ 143,000 |
Pre-Approval Policies.
It is the policy of the Company not to enter into any agreement with its auditors to provide any non-audit services unless (a) the agreement is approved in advance by the Audit Committee or (b) (i) the aggregate amount of all such non-audit services constitutes no more than 5% of the total amount the Company pays to the auditors during the fiscal year in which such services are rendered, (ii) such services were not recognized by the Company as constituting non-audit services at the time of the engagement of the non-audit services and (iii) such services are promptly brought to the attention of the Audit
Committee and prior to the completion of the audit are approved by the Audit Committee or by one or more members of the Audit Committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the Audit Committee. The Audit Committee will not approve any agreement in advance for non-audit services unless (x) the procedures and policies are detailed in advance as to such services, (y) the Audit Committee is informed of such services prior to commencement and (z) such policies and procedures do not constitute delegation of the Audit Committee’s responsibilities to management under the Securities Exchange Act of 1934, as amended.
The Audit Committee has considered whether the provision of non-audit services has impaired the independence of GHP Horwath, P. C. and PMB Helin Donovan has concluded that GHP Horwath, P.C. and PMB Helin Donovan are independent under applicable SEC and NASDAQ rules and regulations.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements
Index to Financial Statements
| | | Page |
| (a)(1) | Financial Statements | |
| | Report of PMB Helin Donovan, Independent Registered Public Accounting Firm | F-1 |
| | Report of GHP Horwath, P.C., Independent Registered Public Accounting Firm
| F-2 |
| Consolidated Balance Sheets at December 31, 20112012 and 20102011 | F-3F-2 |
| | Consolidated Statements of Operations for the years ended December 31, 20112012 and 20102011 | F-4F-3 |
| | Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 20112012 and 20102011 | F-5F-4
|
| | Consolidated Statements of Cash Flows for the years ended December 31, 20112012 and 20102011 | F-6F-5 |
| | Notes to Consolidated Financial Statements | F-8F-7 |
| | (2) Financial Statement Schedules |
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
(3) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in paragraph (b) below.
(b) Exhibits.
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC as indicated below:
Exhibit Number | Document |
| 3.1 | Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration Statement on Form 10 (File No. 000-19301). |
| 3.2 | Certificate of Amendment to the Company's Certificate of Incorporation (authorizing the reclassification of the Class A Common Stock and Class B Common Stock into one class of Common Stock) filed with the Delaware Secretary of State on November 1, 1991, incorporated herein by reference to Exhibit 3 to Amendment 1 on Form 8 to the Company's Form 8-A (File No. 000-19301). |
| |
| |
| Exhibit Number | Document |
| 3.3 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State June 12, 1998, incorporated herein by reference to Exhibit 10.24 to the Company’s 1998 Form 10-K filed on April 6, 1999. |
| 3.4 | By-laws of the Company adopted on October 6, 1986, incorporated herein by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10 (File No. 000-19301). |
| 3.5 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State January 24, 2001, incorporated herein by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007. |
| 3.6 | Certificate of Elimination of the Company’s Certificate of Designation of the Series A Preferred Stock filed with the Delaware Secretary of State August 17, 2001, incorporated herein by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007. |
| 3.7 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State August 17, 2007, incorporated herein by reference to Exhibit 3.7 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007. |
| 3.8 | Amended and Restated Certificate of Incorporation of the Company filed with the Delaware Secretary of State on May 18, 1995, incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 3.9 | Certificate of Designations, Powers, Preferences and Rights of the Series A Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on June 4, 2008, incorporated herein by reference to Exhibit 4.23 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 3.10 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 30, 2008, incorporated herein by reference to Exhibit 3.7 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 3.11 | Certificate of Designations, Powers, Preferences and Rights of the Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on October 30, 2008, incorporated herein by reference to Exhibit 3.11 to the Company’s Annual Report on Form 10-K filed on March 12, 2009. |
| 3.12 | Certificate of Elimination of the Company’s Series A Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on December 30, 2008, incorporated herein by reference to Exhibit 3.12 to the Company’s Annual Report on Form 10-K filed on March 12, 2009. |
| 3.13 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 30, 2009, incorporated herein by reference to Exhibit 3.13 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
| 3.14 | Amendment No. 1 to By-laws dated June 17, 2010, incorporated herein by reference to Exhibit 3.14 to the Company’s Quarterly Report on Form 10-Q filed on August 16, 2010. |
| 3.15 | Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.15 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. |
| 3.16 | Amended and Restated Certificate of Designation of Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.16 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. |
Exhibit
Number
| Document
|
| 3.17 | Certificate of Designation of Series B Participating Convertible Preferred Stock filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.17to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. |
| 3.18 | Certificate of Amendment to Amended And Restated Certificate of Incorporation filed with the Delaware Secretary of State on December 31, 2010, incorporated herein by reference to Exhibit 3.18 to the Company’s Annual Report on Form 10-K filed on March 30, 2011. |
| 3.19 | Second Amended and Restated Certificate of Designation of Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010, incorporated herein by reference to Exhibit 3.19 to the Company’s Annual Report on Form 10-K filed on March 30, 2011. |
| |
| Exhibit Number | Document |
| 3.20 | Second Amended and Restated Certificate of Designation of Series B Participating Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010, incorporated herein by reference to Exhibit 3.20 to the Company’s Annual Report on Form 10-K filed on March 30, 2011. |
| 3.21 | Certificate of Designation of Series C Participating Convertible Preferred Stock filed with the Delaware Secretary of State on December 31, 2010, incorporated herein by reference to Exhibit 3.21 to the Company’s Annual Report on Form 10-K filed on March 30, 2011. |
| 3.22 | Amendment to the Amended And Restated Certificate of Designation of the Series B Participating Convertible Preferred Stock, incorporated herein by reference to Exhibit 10.59 to the Company’s Current Report on Form 8-K filed March 31, 2011. |
| 3.23 | Amendment to the Amended And Restated Certificate of Designation of the Series C Participating Convertible Preferred Stock, incorporated herein by reference to Exhibit 10.60 to the Company’s Current Report on Form 8-K filed March 31, 2011. |
| †4.10 | 1999 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 4.2 to the Company's Form S-8 filed on September 19, 2008. |
| 4.11 | Form of Convertible Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.3 to the Company's Form 8-K filed on November 3, 2004. |
| 4.12 | Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.4 to the Company's Form 8-K filed on November 3, 2004. |
| 4.13 | Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company's Form 8-K filed on August 12, 2006. |
| 4.14 | Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.37 to the Company's Form 8-K filed on August 12, 2006. |
| 4.15 | Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company’s Form 8-K filed on February 9, 2007. |
| 4.16 | Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.37 to the Company’s Form 8-K filed on February 9, 2007. |
| 4.17 | Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company’s Form 8-K filed on June 20, 2007. |
| 4.18 | Form of Warrant issued the Company, incorporated herein by reference to Exhibit 10.37 to the Company’s Form 8-K filed on June 20, 2007. |
| 4.19 | Form of Common Stock Purchase Warrant issued by the Company, incorporated herein by reference to Exhibit 4.19 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 4.20 | Form of Additional Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 4.21 | Form of Secured Promissory Note issued by the Company dated June 5, 2008, incorporated herein by reference to Exhibit 4.21 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 4.22 | Form of Additional Secured Promissory Note, incorporated herein by reference to Exhibit 4.22 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| |
Exhibit
Number
| Document
|
| 4.23 | Certificate of Designations, Powers, Preferences and Rights of the Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on October 30, 2008, incorporated herein by reference to Exhibit 4.23 to the Company’s Annual Report on Form 10-K filed on March 12, 2009. |
| 4.24 | Form of Secured Promissory Note issued by the Company dated May 28, 2009, incorporated herein by reference to Exhibit 4.24 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
| 4.25 | Form of Additional Secured Promissory Note, incorporated herein by reference to Exhibit 4.25 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
| 4.26 | Form of Common Stock Purchase Warrant issued by the Company, incorporated herein by reference to Exhibit 4.26 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
| |
| Exhibit Number | Document |
| 4.27 | Form of Additional Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.27 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
| ††10.19 | Software Development and License Agreement dated December 4, 1998 between Ericsson Mobile Communications AB and the Company incorporated herein by reference to Exhibit 10.26 of the Company's 1998 Form 10-K (File No. 0-19301). |
| 10.24 | Form of Note and Warrant Purchase Agreement dated October 28, 2004, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K filed on November 3, 2004. |
| 10.25 | Form of Registration Rights Agreement dated October 28, 2004, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K filed on November 3, 2004. |
| 10.26 | Form of Note and Warrant Purchase Agreement dated August 10, 2006, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on August 12, 2006. |
| 10.26 | Form of Note and Warrant Purchase Agreement dated August 10, 2006, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on August 12, 2006. |
| 10.27 | Form of Registration Rights Agreement dated August 10, 2006, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on August 12, 2006. |
| †††10.28 | Amendment dated May 31, 2005 to the License agreement dated December 22, 2000 between the Company and eCom Asia Pacific, Ltd., incorporated by reference to Exhibit 10.26 of the Company’s Form 10-K/A filed on September 15, 2005. |
| †††10.29 | License agreement dated June 2, 2005 between the Company and SnapOn Credit LLC, incorporated herein by reference to Exhibit 10.27 of the Company’s Form 10-K/A filed on September 15, 2005. |
| †10.30 | Amendment to employment agreement with Guido DiGregorio, incorporated herein by reference to the Company's Form 8-K filed on September 21, 2005. |
| †10.31 | Amendment to employment agreement with Francis V. Dane, incorporated herein by reference to the Company's Form 8-K filed on September 21, 2005. |
| †10.32 | Form of stock option agreement dated August 31, 2005 with RusselRussell L. Davis, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006. |
| †10.33 | Form of stock option agreement dated December 19, 2005 with Guido DiGregorio, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006. |
| †10.34 | Form of stock option agreement dated August 31, 2005 with Francis V. Dane, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006. |
| †10.35 | Form of stock option agreement dated August 31, 2005 with C. B. Sung, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006. |
| 10.36 | Form of Note and Warrant Purchase Agreement dated February 5, 2007, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on February 5, 2007. |
Exhibit
Number
| Document
|
| 10.37 | Form of Registration Rights Agreement dated February 5, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on February 5, 2007. |
| 10.38 | Amendment to the Note and Warrant Purchase Agreement dated February 5, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 99.1 to the Company's Form 8-K filed on March 15, 2007. |
| 10.39 | Form of Note and Warrant Purchase Agreement dated June 15, 2007, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on June 15, 2007. |
| 10.40 | Form of Registration Rights Agreement dated June 15, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on June 15, 2007. |
| |
| Exhibit Number | Document |
| 10.41 | Form of Securities Purchase and Registration Rights Agreement dated August 24, 2007, by and among the Company and Phoenix Venture Fund LLC, incorporated herein by reference to Exhibit 10.36 to the Company's Form 8-K filed on August 27, 2007. |
| †10.42 | Consulting Agreement dated January 9, 2008 between the Company and GS Meyer & Associates LLC - Incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K filed on March 12, 2007. |
| 10.43 | Credit Agreement dated June 5, 2008, by and among the Company and the Lenders Party Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 10.44 | Pledge and Security Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 10.44 | Securities Purchase Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 10.45 | Registration Rights Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008. |
| 10.46 | Amendment No. 1 to Credit Agreement dated May 28, 2009, by and among the Company, the Lenders and Additional Lenders Parties Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
| 10.47 | Amendment No. 1 to Registration Rights Agreement dated May 28, 2009, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.47 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
| 10.48 | Salary Reduction Plan for Executive Officers of Communication Intelligence Corporation under Amendment No. 1 to Credit Agreement dated May 28, 2009, incorporated herein by reference to Exhibit 10.48 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009. |
| 10.53 | Amendment No. 3 to Credit Agreement dated July 22, 2010, by and among the Company, the Lenders and Additional Lenders Parties Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. |
| 10.54 | Amendment No. 3 to Registration Rights Agreement dated July 22, 2010, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. |
| 10.55 | Registration Rights Agreement dated August 5, 2010, by and among the Company and the Persons Executing the Agreement as Investors, incorporated herein by reference to Exhibit 10.55 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. |
| |
| |
Exhibit
Number
| Document
|
| 10.56 | Investor Rights Agreement dated August 5, 2010, by and among the Company and Phoenix Venture Fund LLC, SG Phoenix LLC, Michael Engmann, Ronald Goodman, Kendu Partners Company and MDNH Partners L.P., incorporated herein by reference to Exhibit 10.56 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010. |
| 10.57 | Securities Purchase Agreement dated December 9, 2010, by and among the Company, Phoenix Venture Fund LLC, and the Investors signatory thereto, incorporated herein by reference to Exhibit 10.57 to the Company’s Current Report on Form 8-K filed on December 9, 2010. |
| 10.58 | Registration Rights Agreement dated December 31, 2010, by and among the Company and the Persons Executing the Agreement as Investors, incorporated herein by reference to Exhibit 10.58 to the Company’s Current Report on Form 8-K filed on January 6, 2011. |
| 10.59 | Form of Subscription Agreement dated March 31, 2011, by and among the Company and the Person Executing the Agreement as Subscribers, incorporated herein by reference to Exhibit 10.61 to the Company’s Current Report on Form 8-K filed on April 4, 2011. |
| 10.60 | Amendment No. 1 to Registration Rights Agreement dated March 31, 2011, by and among the Company and the Persons Executing the Agreement as Required Holders, incorporated herein by reference to Exhibit 10.62 to the Company’s Current Report on Form 8-K filed on April 4, 2011. |
| Exhibit Number | Document |
| 10.61 | Note and Warrant Purchase Agreement dated September 20, 2011, incorporated herein by reference to Exhibit 10.61 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2011. |
*10.62 | Note and Warrant Purchase Agreement dated December 2, 2011.2011, incorporated herein by reference to Exhibit 10.62 to the Company’s Annual Report on Form 10-K filed on March 30, 2012. |
| 10.63 | Note and Warrant Purchase Agreement dated April 23, 2012, incorporated herein by reference to Exhibit 10.63 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2012. |
| 10.64 | Form of Subscription Agreement dated September 14, 2012, incorporated herein by reference to Exhibit 10.64 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2012.. |
| 10.65 | Form of Unsecured Convertible Promissory Note dated September 14, 2012, incorporated herein by reference to Exhibit 10.65 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2012. |
| 14.1 | Code of Ethics, incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K filed on March 30, 2004. |
| *21.1 | Schedule of Subsidiaries. |
| *23.1 | Consent of GHP Horwath, P.C., Independent Registered Public Accounting Firm. |
*23.2 | Consent of PMB Helin Donovan, LLP, Independent Registered Public Accounting Firm. |
| *31.1 | Certification of Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| *31.2 | Certificate of Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| *32.1 | Certification of Chief Executive Officer pursuant to 18 USC Section 1750, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| *32.2 | Certification of Chief Financial Officer pursuant to 18 USC Section 1750, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | † | Indicates management contract or compensatory plan, contract or arrangement. |
| | †† | Confidential treatment of certain portions of this exhibit have been requested from the SEC pursuant to a request for confidentiality dated March 30, 1999, filed pursuant to the Securities and Exchange Act of 1934. |
| ††† | Confidential treatment of certain portions of this exhibit have been requested from the SEC pursuant to a request for confidentiality dated March 30, 2006 filed pursuant to the Securities and Exchange Act of 1934. |
The exhibits listed above are filed as part of this Form 10-K other than Exhibits 32.1 and 32.2, which shall be deemed furnished.
| | (c) Financial Statement Schedules |
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Redwood Shores, State of California.
| | Communication Intelligence Corporation |
| | By: | /s/ Andrea Goren Andrea Goren (Principal Financial Officer and Officer Duly Authorized to Sign on Behalf of the Registrant) |
Date: March 30, 2012April 1, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on March 15,April 1, 2012.
| Date | Signature | Title | |
March 30, 2011April 1, 2013 | /s/ Philip S. Sassower Philip S. Sassower | Chairman and Chief Executive Officer (Principal Executive Officer) |
March 30, 2011April 1, 2013 | /s/ Andrea Goren Andrea Goren | Director, Chief Financial Officer (Principal Financial and Accounting Officer) |
March 30, 2011April 1, 2013 | /s/ Stanly Gilbert Stanley Gilbert | Director |
March 30, 2011April 1, 2013 | /s/ Jeffrey Holtmeier Jeffrey Holtmeier | Director |
March 30, 2011April 1, 2013 | /s/ David Welch David Welch | Director |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Communication Intelligence Corporation and Subsidiary
We have audited the accompanying consolidated balance sheetsheets of Communication Intelligence Corporation and subsidiarySubsidiary as of December 31, 2012 and 2011, and the related consolidated statementstatements of operations, comprehensive loss, stockholders’ (deficit) equity, and cash flows for year ended December 31, 2011.of the years then ended. Communication Intelligence Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.audits.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communication Intelligence Corporation and subsidiarySubsidiary as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the yearyears then ended, December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s significant recurring losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are disclosed are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PMB Helin Donovan, LLP
San Francisco, CA
March 29, 2012
April 1, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Communication Intelligence Corporation
We have audited the accompanying consolidated balance sheet of Communication Intelligence Corporation and its subsidiary (“the Company”) as of December 31, 2010, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year ended December 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communication Intelligence Corporation and its subsidiary as of December 31, 2010, and the results of their operations and their cash flows for the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s significant recurring operating losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ GHP Horwath, P.C.
Denver, Colorado
March 29, 2011
Communication Intelligence Corporation
Consolidated Balance Sheets
(In thousands, except par value amounts)
| | | | | |
| | | December 31, | | | December 31, | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Assets | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 307 | | | $ | 1,879 | | | $ | 486 | | | $ | 307 | |
Accounts receivable, net of allowance of $3 and $9 at December 31, 2011 and 2010, respectively | | | 298 | | | | 103 | | |
Accounts receivable, net of allowance of $27 and $3 at December 31, 2012 and 2011 | | | | 701 | | | | 298 | |
Prepaid expenses and other current assets | | | 29 | | | | 44 | | | | 73 | | | | 29 | |
| | | | | | | | | | | | | | | | | |
Total current assets | | | 634 | | | | 2,026 | | | | 1,260 | | | | 634 | |
Property and equipment, net | | | 32 | | | | 26 | | | | 28 | | | | 32 | |
Patents, net | | | 2,020 | | | | 2,392 | | | | 1,655 | | | | 2,020 | |
Capitalized software development costs, net | | | 78 | | | | 452 | | | | − | | | | 78 | |
Other assets | | | 29 | | | | 29 | | | | 29 | | | | 29 | |
| | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,793 | | | $ | 4,925 | | | $ | 2,972 | | | $ | 2,793 | |
| | | | | | | | | | | | | | | | | |
| Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
Short-term Notes Payable (Note 7) | | $ | 1,083 | | | $ | – | | |
Short-term Notes Payable | | | $ | − | | | $ | 1,083 | |
Accounts payable | | | 261 | | | | 450 | | | | 75 | | | | 261 | |
Accrued compensation | | | 221 | | | | 446 | | | | 289 | | | | 221 | |
Other accrued liabilities | | | 243 | | | | 159 | | | | 150 | | | | 243 | |
Deferred revenue | | | 517 | | | | 456 | | | | 569 | | | | 517 | |
| | | | | | | | | | | | | | | | | |
Total current liabilities | | | 2,325 | | | | 1,511 | | | | 1,083 | | | | 2,325 | |
Deferred revenue long-term | | | 397 | | | | 650 | | | | 249 | | | | 397 | |
Deferred rent | | | 147 | | | | 183 | | | | 125 | | | | 147 | |
Derivative liability | | | 281 | | | | 499 | | | | 128 | | | | 281 | |
| Total liabilities | | | 3,150 | | | | 2,843 | | | | 1,585 | | | | 3,150 | |
| Commitments and contingencies (Note 10) | | | | | | | | | |
| Stockholders' equity: | | | | | | | | | |
Series A-1 Preferred Stock, $.01 par value; 2,000 shares authorized; 880 and 813 shares outstanding at December 31, 2011 and 2010, respectively ($880 liquidation preference at December 31, 2011) | | | 880 | | | | 813 | | |
Series B Preferred Stock, $.01 par value; 14,000 shares authorized; 9,250 and 8,380 shares outstanding at December 31, 2011 and 2010 ($13,875 liquidation preference at December 31, 2011) | | | 7,380 | | | | 6,350 | | |
Series C Preferred Stock, $.01 par value; 4,100 shares authorized; 3,547 and 2,211 shares outstanding at December 31, 2011 and 2010 ($5,320 liquidation preference at December 31, 2011) | | | 3,569 | | | | 2,032 | | |
Common stock, $.01 par value; 1,050,000 shares authorized; 198,188 and 191,489 shares issued and outstanding at December 31, 2011 and 2010, respectively | | | 1,981 | | | | 1,915 | | |
Additional paid-in capital | | | 97,715 | | | | 98,347 | | |
| Commitments and contingencies | | | | − | | | | − | |
| Stockholders' equity (deficit): | | | | | | | | | |
Series A-1 Preferred Stock, $.01 par value; 2,000 shares authorized; 953 and 880 shares issued and outstanding at December 31, 2012 and 2011, respectively ($953 liquidation preference at December 31, 2012) | | | | 953 | | | | 880 | |
Series B Preferred Stock, $.01 par value; 14,000 shares authorized; 10,058 and 9,250 shares issued and outstanding at December 31, 2012 and 2011 ($15,088 liquidation preference at December 31, 2012) | | | | 8,188 | | | | 7,380 | |
Series C Preferred Stock, $.01 par value; 9,000 shares authorized; 4,175 and 3,547 shares issued and outstanding at December 31, 2012 and 2011 ($6,263 liquidation preference at December 31, 2012) | | | | 4,754 | | | | 3,569 | |
Series D-1 Preferred Stock, $.01 par value; 3,000 shares authorized; 1,124 shares issued and outstanding at December 31, 2012 ($1,124 liquidation preference at December 31, 2012) | | | | 2,158 | | | | − | |
Series D-2 Preferred Stock, $.01 par value; 8,000 shares authorized; 3,302 shares issued and outstanding at December 31, 2012 ($3,302 liquidation preference at December 31, 2012) | | | | 3,073 | | | | − | |
Common stock, $.01 par value; 1,500,000 shares authorized; 224,523 and 198,188 shares issued and outstanding at December 31, 2012 and 2011, respectively | | | | 2,309 | | | | 1,981 | |
Treasury shares, 6,500 and 0 shares at December 31, 2012 and December 31, 2011 respectively | | | | (325 | ) | | | − | |
Additional paid-in-capital | | | | 95,262 | | | | 97,715 | |
Accumulated deficit | | | (111,839 | ) | | | (107,337 | ) | | | (114,420 | ) | | | (111,305 | ) |
Accumulated other comprehensive loss | | | (43 | ) | | | (38 | ) | | | (29 | ) | | | (43 | ) |
Total CIC stockholder’ equity | | | | 1,923 | | | | 177 | |
Non-Controlling interest | | | | (536 | ) | | | (534 | ) |
Total stockholders' equity (deficit) | | | (357 | ) | | | 2,082 | | | | 1,387 | | | | (357 | ) |
Total liabilities and stockholders' equity | | $ | 2,793 | | | $ | 4,925 | | | $ | 2,972 | | | $ | 2,793 | |
TheSee accompanying notes form an integral part ofto these Consolidated Financial Statements
Communication Intelligence Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts)
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | |
| Revenue: | | | | | | |
Product | | $ | 1,729 | | | $ | 915 | |
Maintenance | | | 649 | | | | 631 | |
| | | | 2,378 | | | | 1,546 | |
| Operating costs and expenses: | | | | | | | | |
Cost of sales: | | | | | | | | |
Product | | | 323 | | | | 416 | |
Maintenance | | | 52 | | | | 247 | |
Research and development | | | 1,802 | | | | 1,498 | |
Sales and marketing | | | 1,392 | | | | 1,500 | |
General and administrative | | | 1,863 | | | | 2,168 | |
| | | | | | | | | |
| | | | 5,432 | | | | 5,829 | |
| | | | | | | | | |
Loss from operations | | | (3,054 | ) | | | (4,283 | ) |
| | | | | | | | | |
Other expense, net | | | (19 | ) | | | (79 | ) |
| Interest expense: | | | | | | | | |
Related party | | | (100 | ) | | | (21 | ) |
Other | | | (89 | ) | | | (3 | ) |
| Amortization of debt discount and deferred financing cost: | | | | | | | | |
Related party | | | (14 | ) | | | (3 | ) |
Other | | | (50 | ) | | | − | |
Gain (loss) on derivative liability | | | 211 | | | | (113 | ) |
Net loss | | | (3,115 | ) | | | (4,502 | ) |
| Preferred stock dividends: | | | | | | | | |
| Accretion of beneficial conversion feature: | | | | | | | | |
Related party | | | (1,859 | ) | | | (295 | ) |
Other | | | (334 | ) | | | (859 | ) |
| Preferred stock dividends: | | | | | | | | |
Related party | | | (573 | ) | | | (726 | ) |
Other | | | (226 | ) | | | (281 | ) |
| Income tax tax expense | | | − | | | | − | |
| Net loss before non-controlling interest | | $ | (6,107 | ) | | $ | (6,663 | ) |
Net loss attributable to non-controlling interest | | | (2 | ) | | | − | |
Net loss attributable to common stockholders | | | (6,109 | ) | | | (6,663 | ) |
Basic and diluted loss per common share | | $ | (0.03 | ) | | $ | (0.03 | ) |
Weighted average common shares outstanding, basic and diluted | | | 223,390 | | | | 192,032 | |
| | | | | | | | | |
See accompanying notes to these Consolidated Financial Statements
Communication Intelligence Corporation
Consolidated Statements of OperationsComprehensive Loss
(In thousands, except per share amounts)
| | | Years Ended December 31, | |
| | | 2011 | | | 2010 | |
| Revenue: | | | | | | |
Product | | $ | 915 | | | $ | 197 | |
Maintenance | | | 631 | | | | 654 | |
| | | | 1,546 | | | | 851 | |
| Operating costs and expenses: | | | | | | | | |
Cost of sales: | | | | | | | | |
Product | | | 416 | | | | 635 | |
Maintenance | | | 247 | | | | 244 | |
Acceleration of amortization of certain capitalized software development costs | | | − | | | | 1,009 | |
Research and development | | | 1,498 | | | | 431 | |
Sales and marketing | | | 1,500 | | | | 1,531 | |
General and administrative | | | 2,168 | | | | 2,255 | |
| | | | | | | | | |
| | | | 5,829 | | | | 6,105 | |
| | | | | | | | | |
Loss from operations | | | (4,283 | ) | | | (5,254 | ) |
| | | | | | | | | |
Other expense, net | | | (79 | ) | | | (2 | ) |
| Interest expense: | | | | | | | | |
Related party (Note 7) | | | (21 | ) | | | (255 | ) |
Other (Note 7) | | | (3 | ) | | | (8 | ) |
| Amortization of debt discount and deferred financing cost: | | | | | | | | |
Related party (Note 7) | | | (3 | ) | | | (1,719 | ) |
Other (Note 7) | | | − | | | | (57 | ) |
Gain (loss) on derivative liability | | | (113 | ) | | | 3,136 | |
Net loss | | | (4,502 | ) | | | (4,159 | ) |
| Preferred stock dividends: | | | | | | | | |
| Accretion of beneficial conversion feature | | | | | | | | |
Related party (Note 9) | | | (295 | ) | | | − | |
Other (Note 9) | | | (859 | ) | | | − | |
| Preferred stock dividends | | | | | | | | |
Related party | | | (726 | ) | | | (292 | ) |
Other | | | (281 | ) | | | (102 | ) |
| Income tax tax expense | | | − | | | | − | |
| Net loss attributable to common stockholders | | $ | (6,663 | ) | | $ | (4,553 | ) |
Basic and diluted loss per common share | | $ | (0.03 | ) | | $ | (0.02 | ) |
Weighted average common shares outstanding, basic and diluted | | | 192,032 | | | | 190,721 | |
| Other comprehensive loss | | | | | | | | |
| Foreign currency translation adjustment (loss) Gain | | $ | (5 | ) | | $ | 8 | |
| | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
Net loss: | | $ | (3,115 | ) | | $ | (4,502 | ) |
Other comprehensive loss, net of tax | | | | | | | | |
Foreign currency translation adjustment | | | 14 | | | | (5 | ) |
| | | | | | | | | |
Total comprehensive loss | | $ | (3,101 | ) | | | (4,507 | ) |
| | | | | | | | | |
| | | | | | | | | |
The
See accompanying notes form an integral part ofto these Consolidated Financial Statements
Communication Intelligence Corporation
Consolidated StatementsStatement of Changes in Stockholders' (Deficit) Equity – (Deficit)
Year Ended December 31, 2012
(In thousands except per share amounts)thousands)
| | | Series A-1Preferred Shares Outstanding | | | Series A-1Preferred Shares Amount | | | Series B Preferred Shares Outstanding | | | Series B Preferred Shares Amount | | | Series C Preferred Shares Outstanding | | | Series C Preferred Shares Amount | | | Common Shares Outstanding | | | Common Stock Amount | | | Additional Paid-In Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
| Balance as of December 31, 2009 | | | 751 | | | $ | 751 | | | | − | | | $ | − | | | | − | | | $ | − | | | | 190,026 | | | $ | 1,900 | | | $ | 101,221 | | | $ | (103,178 | ) | | $ | (46 | ) | | $ | 648 | |
| Conversion of long-term notes into Series B Preferred Shares, net of unamortized discount of $1,509 | | | | | | | | | | | 6,608 | | | | 6,608 | | | | | | | | | | | | | | | | | | | | (1,509 | ) | | | | | | | | | | | 5,099 | |
| Issuance of Series B Preferred Shares | | | | | | | | | | | 1,440 | | | | 1,440 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,440 | |
| Financing cost on conversion of long-term notes and issuance of Series B Preferred Shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (580 | ) | | | | | | | | | | | (580 | ) |
| Conversion feature associated with the Series B Preferred Shares | | | | | | | | | | | | | | | (2,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,000 | ) |
| Warrants issued for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (153 | ) | | | | | | | | | | | (153 | ) |
| Stock based employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 93 | | | | | | | | | | | | 93 | |
| Shares issued for services | | | | | | | | | | | | | | | | | | | | | | | | | | | 750 | | | | 8 | | | | 58 | | | | | | | | | | | | 66 | |
| Restricted common stock issued in lieu of salaries | | | | | | | | | | | | | | | | | | | | | | | | | | | 713 | | | | 7 | | | | (7 | ) | | | | | | | | | | | − | |
| Restricted stock expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 40 | | | | | | | | | | | | 40 | |
| Issuance of Series C Preferred Shares | | | | | | | | | | | | | | | | | | | 2,211 | | | | 2,211 | | | | | | | | | | | | | | | | | | | | | | | | 2,211 | |
| Financing cost on issuance of Series C Preferred Shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (422 | ) | | | | | | | | | | | (422 | ) |
| Conversion feature associated with the Series C Preferred Shares | | | | | | | | | | | | | | | | | | | | | | | (179 | ) | | | | | | | | | | | | | | | | | | | | | | | (179 | ) |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,159 | ) | | | | | | | (4,159 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8 | | | | 8 | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,151 | ) |
| Preferred share dividends | | | 62 | | | | 62 | | | | 332 | | | | 332 | | | | | | | | | | | | | | | | | | | | (394 | ) | | | | | | | | | | | − | |
| Conversion feature, Preferred Share dividends | | | | | | | | | | | | | | | (30 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (30 | ) |
| Balances as of December 31, 2010 | | | 813 | | | $ | 813 | | | | 8,380 | | | $ | 6,350 | | | | 2,211 | | | $ | 2,032 | | | | 191,489 | | | $ | 1,915 | | | $ | 98,347 | | | $ | (107,337 | ) | | $ | (38 | ) | | $ | 2,082 | |
| Stock-based employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 804 | | | | | | | | | | | | 804 | |
| Restricted stock expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3 | | | | | | | | | | | | 3 | |
| Forfeiture of restricted stock | | | | | | | | | | | | | | | | | | | | | | | | | | | (260 | ) | | | (3 | ) | | | (9 | ) | | | | | | | | | | | (12 | ) |
| Shares issued for services | | | | | | | | | | | | | | | | | | | 195 | | | | 195 | | | | | | | | | | | | | | | | | | | | | | | | 195 | |
| Series C Preferred Shares issued in separation agreement | | | | | | | | | | | | | | | | | | | 36 | | | | 36 | | | | | | | | | | | | | | | | | | | | | | | | 36 | |
| Issuance of Series C Preferred Shares for cash | | | | | | | | | | | | | | | | | | | 800 | | | | | | | | | | | | | | | | 800 | | | | | | | | | | | | 800 | |
| Reclassification of conversion feature associated with the Series B and Series C Preferred Shares from derivative liability to equity | | | | | | | | | | | | | | | 160 | | | | | | | | 203 | | | | | | | | | | | | | | | | | | | | | | | | 363 | |
| Financing cost on issuance of Series C Preferred Shares | | | | | | | | | | | | | | | | | | | | | | | (121 | ) | | | | | | | | | | | | | | | | | | | | | | | (121 | ) |
| Accretion of Beneficial Conversion Feature on preferred shares | | | | | | | | | | | | | | | 22 | | | | | | | | 1,132 | | | | | | | | | | | | (1,154 | ) | | | | | | | | | | ─ | |
| Preferred share dividends, paid in kind | | | 67 | | | | 67 | | | | 870 | | | | 848 | | | | 305 | | | | 92 | | | | | | | | | | | | (1,007 | ) | | | | | | | | | | ─ | |
| Cashless Exercise of warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,959 | | | | 69 | | | | (69 | ) | | | | | | | | | | ─ | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,502 | ) | | | | | | | (4,502 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (5 | ) | | | (5 | ) |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,507 | ) |
| Balances as of December 31, 2011 | | | 880 | | | $ | 880 | | | | 9,250 | | | $ | 7,380 | | | | 3,547 | | | $ | 3,569 | | | | 198,188 | | | $ | 1,981 | | | $ | 97,715 | | | $ | (111,839 | ) | | $ | (43 | ) | | $ | (357 | ) |
| | | Series A-1Preferred Shares Outstanding | | | Series A-1Preferred Shares Amount | | | Series B Preferred Shares Outstanding | | | Series B Preferred Shares Amount | | | Series C Preferred Shares Outstanding | | | Series C Preferred Shares Amount | | | Series D-1 Preferred Shares Outstanding | | | Series D-1 Preferred Shares Amount | | | Series D-2 Preferred Shares Outstanding | | | Series D-2 Preferred Shares Amount | | | Common Shares Outstanding | | | Common Stock Amount | | | Treasury Stock | | | Additional Paid-In Capital | | | Accumulated Deficit | | | Non-Controlling Interest | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
| Balances as of December 31, 2010 | | | 813 | | | $ | 813 | | | | 8,380 | | | $ | 6,350 | | | | 2,211 | | | $ | 2,032 | | | | | | | | | | | | | | | | 191,489 | | | $ | 1,915 | | | | | | $ | 98,347 | | | $ | (106,803 | ) | | $ | (534 | ) | | $ | (38 | ) | | $ | 2,082 | |
| Stock-based employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 804 | | | | | | | | | | | | | | | | 804 | |
| Restricted stock expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3 | | | | | | | | | | | | | | | | 3 | |
| Forfeiture of restricted stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (260 | ) | | | (3 | ) | | | | | | (9 | ) | | | | | | | | | | | | | | | (12 | ) |
| Shares issued for services | | | | | | | | | | | | | | | | | | | 195 | | | | 195 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 195 | |
| Series C preferred shares issued in separation agreement | | | | | | | | | | | | | | | | | | | 36 | | | | 36 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 36 | |
| Issuance of Series C preferred shares for cash | | | | | | | | | | | | | | | | | | | 800 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 800 | | | | | | | | | | | | | | | | 800 | |
| Reclassification of conversion feature associated with the Series B and Series C preferred shares from derivative liability to equity | | | | | | | | | | | | | | | 160 | | | | | | | | 203 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 363 | |
| Financing cost on issuance of Series C preferred shares | | | | | | | | | | | | | | | | | | | | | | | (121 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (121 | ) |
| Accretion of beneficial conversion feature on preferred shares | | | | | | | | | | | | | | | 22 | | | | | | | | 1,132 | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,154 | ) | | | | | | | | | | | | | | ─ | |
| Preferred share dividends, paid in kind | | | 67 | | | | 67 | | | | 870 | | | | 848 | | | | 305 | | | | 92 | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,007 | ) | | | | | | | | | | | | | | ─ | |
| Cashless exercise of warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,959 | | | | 69 | | | | | | | (69 | ) | | | | | | | | | | | | | | ─ | |
| Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,502 | ) | | ─ | | | | | | | | (4,502 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (5 | ) | | | (5 | ) |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,507 | ) |
| Balances as of December 31, 2011 | | | 880 | | | $ | 880 | | | | 9,250 | | | $ | 7,380 | | | | 3,547 | | | $ | 3,569 | | | | - | | | $ | - | | | | - | | | | - | | | | 198,188 | | | $ | 1,981 | | | | | | $ | 97,715 | | | $ | (111,305 | ) | | | (534 | ) | | $ | (43 | ) | | $ | (357 | ) |
| Receipt of 6.5M common shares in settlement of the 16b action | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (6,500 | ) | | | | | | | (325 | ) | | | | | | | | | | | | | | | | | | | (325 | ) |
| Series C preferred shares issued in settlement of an indemnification claim related to the 16b settlement | | | | | | | | | | | | | | | | | | | 278 | | | | 417 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 417 | |
| Stock-based employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 461 | | | | | | | | | | | | | | | | 461 | |
| Common shares issued in connection with the cashless exercise of warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20,186 | | | | 202 | | | | | | | | (202 | ) | | | | | | | | | | | | | | ─- | |
| Common shares issued in connection with the exercise of warrants for cash | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,439 | | | | 74 | | | | | | | | 138 | | | | | | | | | | | | | | | | 212 | |
| Common shares issued in connection with the exercise of stock options option for cash | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 203 | | | | 2 | | | | | | | | 11 | | | | | | | | | | | | | | | | 13 | |
| Common stock issued as restricted stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 46 | | | | | | | | | | | | 2 | | | | | | | | | | | | | | | | 2 | |
| Common shares issued in connection with the conversion of Series B preferred shares | | | | | | | | | | | (140 | ) | | | (140 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,232 | | | | 33 | | | | | | | | 107 | | | | | | | | | | | | | | | ─ | |
| Common shares issued in connection with the conversion of Series C preferred shares | | | | | | | | | | | | | | | | | | | (39 | ) | | | (39 | ) | | | | | | | | | | | | | | | | | | | 1,729 | | | | 17 | | | | | | | | 22 | | | | | | | | | | | | | | | ─ | |
| Accretion of beneficial conversion feature on Series C preferred shares issued in settlement of the indemnification claim | | | | | | | | | | | | | | | | | | | | | | | 417 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (417 | ) | | | | | | | | | | | | | | ─ | |
| Series D-1 preferred shares issued in a private placement upon the conversion of short-term debt net of offering expenses of $76 | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,110 | | | | 1,034 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,034 | |
| Series D-2 preferred shares issued in a private placement upon the conversion of short-term debt, net of offering expenses of $114 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,179 | | | | 2,065 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,065 | |
| Series D-2 preferred shares issued in a private placement for cash, net of offering expenses of $115 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,082 | | | | 967 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 967 | |
| Accretion of beneficial conversion feature on Series D-1 preferred shares issued in a private placement upon the conversion of short term debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,110 | | | | | | | | | | | | | | | | | | | | | | | | (1,110 | ) | | | | | | | | | | | | | | ─ | |
| Accretion of beneficial conversion feature on preferred shares dividends issued in kind | | | | | | | | | | | | | | | 268 | | | | | | | | 385 | | | | | | | | 13 | | | | | | | | | | | | | | | | | | | | | | | | (666 | ) | | | | | | | | | | | | | | ─- | |
| Preferred share dividends, paid in kind | | | 73 | | | | 73 | | | | 948 | | | | 680 | | | | 389 | | | | 4 | | | | 14 | | | | 1 | | | | 41 | | | | 41 | | | | | | | | | | | | | | | | (799 | ) | | | | | | | | | | | | | | ─ | |
| Net loss attributable to non-controlling interest | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2 | ) | | | | | | | (2 | ) |
| Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | | | | | | | (3,115 | ) | | | | | | | | | | | (3115 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14 | | | | 14 | |
| Balance as of December 31, 2012 | | | 953 | | | $ | 953 | | | | 10,058 | | | $ | 8,188 | | | | 4,175 | | | $ | 4,754 | | | | 1,124 | | | $ | 2,158 | | | | 3,302 | | | $ | 3,073 | | | | 224,523 | | | $ | 2,309 | | | $ | (325 | ) | | $ | 95,262 | | | $ | (114,420 | ) | | $ | (536 | ) | | $ | (29 | ) | | $ | 1,387 | |
The
See accompanying notes form an integral part ofto these Consolidated Financial Statements
Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands)
| | | December 31, | | | December 31, | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (4,502 | ) | | $ | (4,159 | ) | | $ | (3,115 | ) | | $ | (4,502 | ) |
Adjustments to reconcile net loss to net cash used for operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 842 | | | | 1,224 | | | | 459 | | | | 842 | |
Accelerated amortization of certain capitalized softwaredevelopment costs | | | − | | | | 1,009 | | |
Amortization of debt discount and deferred financing costs | | | 3 | | | | 1,776 | | | | 64 | | | | 3 | |
Stock-based employee compensation | | | 807 | | | | 133 | | | | 461 | | | | 804 | |
Shares issued for services | | | 195 | | | | 66 | | |
Series C Preferred Shares issued in separation agreement | | | 36 | | | | | | |
Restricted stock expense | | | | 2 | | | | 3 | |
Series C preferred shares issued for services | | | | − | | | | 195 | |
Series C preferred shares issued in separation agreement | | | | − | | | | 36 | |
Series C preferred shares issued in settlement of indemnity claim | | | | 417 | | | | − | |
Common Stock received as settlement of 16b claim | | | | (325 | ) | | | − | |
(Gain) loss on derivative liability | | | 113 | | | | (3,136 | ) | | | (211 | ) | | | 113 | |
Non cash interest expense | | | − | | | | 291 | | |
Forfeiture of restricted stock | | | (12 | ) | | | − | | | | − | | | | (12 | ) |
| | | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | (195 | ) | | | 124 | | | | (403 | ) | | | (195 | ) |
Prepaid expenses and other assets | | | 16 | | | | 22 | | |
Prepaid expenses and other current assets | | | | (44 | ) | | | 16 | |
Accounts payable | | | (189 | ) | | | 332 | | | | (188 | ) | | | (189 | ) |
Accrued compensation | | | (225 | ) | | | 119 | | | | 68 | | | | (225 | ) |
Other accrued liabilities | | | 48 | | | | 173 | | | | (93 | ) | | | 48 | |
Deferred revenue | | | (192 | ) | | | (219 | ) | | | (96 | ) | | | (192 | ) |
Net cash (used for) provided by operating activities | | | (3,255 | ) | | | (2,245 | ) | |
Net cash (used for) operating activities | | | | (3,004 | ) | | | (3,255 | ) |
| | | | | | | | | | | | | | | | | |
Cash flows from investing activities: Acquisition of property and equipment | | | (24 | ) | | | (14 | ) | | | (12 | ) | | | (24 | ) |
Capitalized software development costs | | | (72 | ) | | | (772 | ) | | | - | | | | (72 | ) |
Net cash used for investing activities | | | (96 | ) | | | (786 | ) | | | (12 | ) | | | (96 | ) |
| | | | | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Net proceeds from issuance of short-term debt | | | 1,100 | | | | 1,390 | | | | 2,328 | | | | 1,100 | |
Net proceeds from issuance of Series B preferred shares | | | − | | | | 860 | | |
Net proceeds from issuance of Series C preferred shares | | | 679 | | | | 1,789 | | | | − | | | | 679 | |
Principal payments on short term debt | | | − | | | | (150 | ) | |
Net proceeds from issuance of Series D-2 preferred shares | | | | 967 | | | | − | |
Proceeds from exercise of warrants for cash | | | | 212 | | | | − | |
Proceeds from exercise of stock options | | | | 13 | | | | − | |
Principal payments on short term notes payable | | | | (325 | ) | | | − | |
Net cash provided by financing activities | | | 1,779 | | | | 3,889 | | | | 3,195 | | | | 1,779 | |
| | | | | | | | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | − | | | | − | | | | − | | | | − | |
| | | | | | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (1,572 | ) | | | 858 | | | | 179 | | | | (1,572 | ) |
| Cash and cash equivalents at beginning of period | | | 1,879 | | | | 1,021 | | | | 307 | | | | 1,879 | |
| Cash and cash equivalents at end of period | | $ | 307 | | | $ | 1,879 | | | $ | 486 | | | $ | 307 | |
| | | | | | | | | | | | | | | | | |
TheSee accompanying notes form an integral part ofto these Consolidated Financial Statements
Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands)
Supplemental disclosure of cash flow information:
| | | December 31 | | | December 31 | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Supplementary disclosure of cash flow information | | | | | | | | | | | | |
| Interest paid | | $ | 3 | | | $ | − | | | $ | 21 | | | $ | 3 | |
| Income taxes paid | | $ | − | | | $ | − | | | $ | − | | | $ | − | |
| | | | | | | | | | | | | | | | | |
| Non-cash financing and investing transactions | | | | | | | | | | | | | | | | |
Secured indebtedness and accrued interest exchanged for Series B convertible preferred stock | | $ | − | | | $ | 6,608 | | |
Conversion feature of Series B preferred shares classified as a derivative liability | | $ | − | | | $ | 2,000 | | |
Cashless exercise of warrants | | | $ | 202 | | | $ | − | |
Dividends on preferred shares | | $ | 1,007 | | | $ | 394 | | | $ | 799 | | | $ | 1,007 | |
Conversion feature of Series B preferred shares dividends issued as payment in-kind classified as a derivative liability | | $ | − | | | $ | 30 | | |
Debt discount recorded in connection with short-term debt �� | | $ | 20 | | | $ | − | | |
Conversion of Series B Preferred shares into Common Stock | | | $ | 140 | | | $ | − | |
Conversion of Series C Preferred Stock into Common Stock | | | $ | 39 | | | $ | − | |
Debt discount recorded in connection with short-term debt | | | $ | 64 | | | $ | 20 | |
| Conversion of short term notes plus accrued interest into Series D-1 preferred shares | | | $ | 1,034 | | | $ | − | |
| Conversion of short term notes plus accrued interest into Series D-2 preferred shares | | | $ | 2,065 | | | $ | − | |
Accretion of beneficial conversion feature on Preferred Shares | | $ | 1,154 | | | $ | − | | | $ | 2,193 | | | $ | 1,154 | |
| Warrants issued as payment of financing services | | $ | − | | | $ | 153 | | |
| Warrants issued in connection with bridge loans recorded as derivative liabilities | | $ | − | | | $ | 682 | | |
Warrants issued for interest recorded as a derivative liability | | $ | 26 | | | $ | 170 | | | $ | − | | | $ | 26 | |
Reclassification of beneficial conversion feature | | $ | 363 | | | $ | − | | | $ | − | | | $ | 363 | |
Conversion feature of Series C preferred shares classified as a derivative liability | | $ | − | | | $ | 179 | | |
TheSee accompanying notes form an integral part ofto these Consolidated Financial Statements
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies:
The Company:
Communication Intelligence Corporation (the "Company" or "CIC") is a leading supplier of electronic signature products and the recognized leader in biometric signature verification. CIC enables companies to achieve truly paperless workflow in their electronic business processes by providing multiple signature technologies across virtually all applications. CIC’s solutions are available both in SaaS and on-premise delivery models and afford “straight-through-processing,” which can increase customer revenue by enhancing user experience and can also reduce costs through paperless and virtually error-free electronic transactions that can be completed significantly quicker than paper-based procedures. To date, the Company primarily has delivered biometric and electronic signature solutions to channel partners and end-user customers in the financial services industry.
The Company's research and development activities have given rise to numerous technologies and products. The Company's core technologies can be referred to as "transaction-enabling” technologies. These technologies include various forms of electronic signatures, such as handwritten biometric, click-to-sign and others, as well signature verification, cryptography and the logging of audit trails to show signers’ intent. These technologies can enable secure, legal and regulatory compliant electronic transactions that can enhance customer experience at a fraction of the time and cost required by traditional, paper-based processes. The Company’s products include SignatureOne®SignatureOne®, Ceremony® Server™, Sign-it® iSign®Ceremony® Serve, Sign-it® iSign® Console™ and the iSign®iSign® toolkits.
Going concern and management plans:
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Except for 2004, the Company has incurred significant losses since its inception and, at December 31, 2011,2012, the Company’s accumulated deficit was approximately $111,839.$114,420. The Company has primarily funded these lossesmet its working capital needs through the sale of debt and equity securities. As of December 31, 2011,2012, the Company’s cash balance was approximately $307.$486. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In June 2008 and May 2009 the Company raised funds through debt and equity financings and converted short-term notes payable to equity. In May, June and July 2010, the Company amended its credit agreement to provide for an additional $1,260 in short term funding. On August 4, 2010, stockholders approved the issuance of a Series B Participating Convertible Preferred Stock and the Company converted approximately $6,608 of long-term debt due in December 2010 into shares of Series B Preferred Stock. In addition the Company sold, for cash in a private placement, 1,440 additional shares of Series B Preferred Stock at a purchase price of $1.00 per share (Note 11 to the Consolidated Financial Statements). In December 2010 the stockholders approved the issuance of a Series C Participating Convertible Preferred Stock and the Company sold, for cash in a private placement, 2,211 shares of Series C Preferred Stock at a purchase price of $1.00 per share (Note 11 to the Consolidated Financial Statements). In March 2011, the Company sold for cash in a private placement an additional 800 shares of Series C Preferred Stock at a purchase price of $1.00.
In September 2011,February and March 2012, the Company borrowed $25 and $100 at 10% per annum in the form of two demand notes. The February and March notes andwere repaid in September 2012.
In April 2012, the Company borrowed an additional $500$1,000 at 10% per annum in the form of an unsecured convertible promissory notenotes, which were due in April 2013. In September 20, 2012. In December 2011,2012, the Company borrowed $500$1,103 at 10% per annum in the form of unsecured convertible promissory notes due December 2,31, 2012. (Note 7 to
In November 2012, shareholders approved an increase in the Consolidated Financial Statements)Company’s authorized capital and the issuance of Series D-1 Convertible Preferred Stock (the “Series D-1 Preferred Stock”) and Series D-2 Convertible Preferred Stock (the “Series D-2 Preferred Stock”; together with the Series D-1 Preferred Stock, the “Series D Preferred Stock”). In November 2012 the Company converted approximately $3,099 of short-term debt and accrued interest, net of offering costs of $190, into shares of Series D Preferred Stock. The Company sold for cash in a private placement, 1,082 of additional shares of Series D Preferred Stock at a purchase price of $1.00 per share and received $967 net of offering costs of $115.
There can be no assurance that the Company will be successful in securing adequate capital resources to fund planned operations or that any additional funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on the Company's business, results of operations and ability to operate as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):Policies:
Basis of consolidation:
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, and include the accounts of Communication Intelligence Corporation and its 90%-owned Joint Venture in the People's Republic of China. All inter-company accounts and transactions have been eliminated. All amounts shown in the accompanying consolidated financial statements are in thousands of dollars except per share amounts.
Reclassifications:
Certain amounts in the consolidated financial statements for 2011 have been reclassified to conform to the
2012 presentation. These reclassifications have no effect on net income, earnings per share, or cash flows as
previously reported.
Use of estimates:
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.
Fair value of financial instruments:measures:
The carrying amounts ofFair value is the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximateprice that would be received to sell an asset, or paid to transfer a liability, in theprincipal or most advantageous market for the asset or liability in an ordinary transaction between market participants on the measurement date. Our policy on fair value duemeasures requires us to their relatively short maturities.maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Derivative liabilities are stated atpolicy establishes a fair value using a discounted Black-Sholes option pricing model (Note 8).
Thehierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value framework requires a categorizationhierarchy is based upon the lowest level of assets and liabilitiesinput that is significant to the fair value measurement. The policy prioritizes the inputs into three levels based upon the assumptions (inputs)that may be used to price the assets and liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:value:
Level 1: UnadjustedApplies to assets or liabilities for which there are quoted prices in active markets for identical assets andor liabilities.
Level 2: ObservableApplies to assets or liabilities for which there are inputs other than those included in Level 1. For example,quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets ormarkets; quoted prices for identical assets or liabilities in inactive markets.markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3: UnobservableApplies to assets or liabilities for which there are unobservable inputs reflecting management’sto the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company’s assets and liabilities measured at fair value, whether recurring or non-recurring, at December 31, 2012 and December 31, 2011, and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category.
Fair Value of Financial Instruments:
The Company carries financial instruments on the consolidated balance sheet at the fair value of the instruments as of the consolidated balance sheet date. At the end of each period, management assesses the fair value of each instrument and adjusts the carrying value to reflect its assessment. At December 31, 2012 and December 31, 2011, the carrying values of accounts receivable and accounts payable approximated their fair values.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies:
Treasury Stock:
Shares of common stock returned to, or repurchased by, the Company are recorded at cost and are included as a separate component of stockholders’ equity.
Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account entitled treasury stock. The equity accounts that were credited for the original share issuance (common stock, paid-in capital in excess of par, etc.) remain intact. When the treasury shares are reissued, proceeds in excess of cost are credited to a paid-in capital account. Any deficiency is charged to retained earnings (unless paid-in capital from previous treasury share transactions exists, in which case the deficiency is charged to that account, with any excess charged to retained earnings).
Derivatives:
The Company from time to time, enters into transactions which contain conversion privileges, the settlement of which may entitle the holder or us to settle the obligation(s) by issuance of Company securities. The Company applies a two-step model in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own assumptions aboutstock and thus able to qualify for the inputs used in pricing the asset or liability.scope exception. The fair value of each derivative estimated each reporting period.
Cash and cash equivalents:
The Company considers all highly liquid investments with maturities at the date of purchase of three months or less to be cash equivalents.
Cash and cash equivalents:
The Company's cash and cash equivalents, at December 31, consisted of the following:
| | | 2011 | | 2010 | | | 2012 | | | 2011 | |
Cash in bank | Cash in bank | $ 281 | | $1,852 | | | $ | 486 | | | $ | 281 | |
Money market funds | Money market funds | 26 | | 27 | | | | – | | | | 26 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ 307 | | $1,879 | | | $ | 486 | | | $ | 307 | |
| | | | | | | | | | | | |
Concentrations of credit risk:
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company maintains its cash and cash equivalents with
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):
Concentrations of credit risk (continued):
various financial institutions. This diversification of risk is consistent with Company policy to maintain liquidity, and mitigate risk of loss as to principal.
To date, accounts receivable have been derived principally from revenue earned from end users, manufacturers, and distributors of computer products in North America. The Company performs periodic credit evaluations of its customers, and does not require collateral. The Company maintains reserves for potential credit losses; historically, such losses have been within management's expectations.
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s estimates of recoverability of amounts due could be affected and the Company will adjust the allowance accordingly.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies:
Deferred financing costs:
Deferred financing costs include costs paid in cash, such as professional fees and commissions. The costs are amortized to interest expense over the life of the notes or upon early payment using the effective interest method. The costs amortized to interest expense amounted to $0$64 and $218$3 for the years ended December 31, 20112012 and 2010,2011, respectively.
Property and equipment, net:
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized over their estimated useful lives, not to exceed the term of the related lease. The cost of additions and improvements is capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation expense was $17$12 and $19$17 for the years ended December 31, 20112012 and 2010,2011, respectively.
Patents:
Patents are stated at cost less accumulated amortization that, in management’s opinion, does not exceed fair value. Amortization is computed using the straight-line method over the estimated lives of the related assets, ranging from five to seventeen years. Amortization expense was $372$365 and $379$372 for the years ended December 31, 20112012 and 2010,2011, respectively. The estimated remaining weighted average useful lives of the patents are 5 years.
Patents:
Future patent amortization is as follows:
| Year Ended December 31, | | | | |
| 2012 | | $ | 366 | | |
| 2013 | | | 366 | | | 365 |
| 2014 | | | 357 | | | 357 |
| 2015 | | | 342 | | | 342 |
| 2016 | | | 322 | | | 322 |
| Thereafter | | | 269 | | | 269 |
| Total | | $ | 2,022 | | $ | 1,655 |
The Company performs intangible asset impairment analysis at least annually in accordance with the relevant accounting guidance. The Company periodically reassesses the lives of its patents and tests for impairment in order to determine whether the book value of each patent exceeds the fair value of each patent. The Company uses the
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):
Patents (continued):
relevant accounting in response to changes in industry and market conditions that affect its patents; the Company then determines if an impairment of its assets has occurred. Fair value is determined by estimating future cash flows from the products that are and will be protected by the patents and considering the additional factors listed in Critical Patents (continued):Accounting Policies in Item 7 of this Form 10-K. The Company believes that no significant events or circumstances occurred or changed during the year ended December 31, 2011, and therefore concluded that no impairment in the carrying values of the patents existed at December 31, 2011.patents..
Long-lived assets:
The Company evaluates the recoverability of its long-lived assets at least annually or whenever circumstances or events indicate such assets might be impaired. The Company would recognize an impairment charge in the event the net book value of such assets exceeded the future undiscounted cash flows attributable to such assets. No such impairment charges have been recorded in the two years ended December 31, 2011.2012 and 2011, respectively.
Software development costs:
Capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. The costs capitalized include the coding and testing of the product after the technological feasibility has been established and ends upon the release of the product. The annual amortization is equal to the straight-line amortization over the estimated useful life of the software and varies by type of software. The Company performs periodic impairment reviews to ensure that unamortized deferred development costs remain
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies:
recoverable from the projected future net cash flows that they are expected to generate. The capitalized costs are amortized to cost of sales.
Share-based payment:
Share-based compensation expense is based on the estimated grant date fair value of the portion of share-based payment awards that are ultimately expected to vest during the period. The grant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholessingle option pricing modelvaluation approach. Forfeitures of share-based payment awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Material commitments:
The Company hadweighted-average fair value of stock-based compensation is based on the following commitments at December 31, 2011:
| | | Payments due by period | |
| Contractual obligations | | Total | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | |
| Short-term note payable (1) | | | 1,100 | | | | 1,100 | | | | − | | | | − | | | | − | | | − | | | | − | |
| Operating lease commitments (2) | | | 1,366 | | | | 267 | | | | 375 | | | | 283 | | | | 292 | | | | 249 | | | | − | |
| Total contractual cash obligations | | $ | 2,466 | | | $ | 1,367 | | | $ | 375 | | | $ | 283 | | | $ | 292 | | | $ | 249 | | | $ | − | |
1. | The Company issued demand notes in September 2011 in the amount of $100, and convertible notes in September and December 2011 in the amount of $500 and $500, respectively. The notes bear interest at the rate of 10% per annum. The Convertible notes are due in September and December 2012. |
2. | The Company extended the lease on its offices in April 2010. The base rent decreased by approximately 6% in November 2011 and will increase by approximately 3% per annum over the term of the new lease, which expires on October 31, 2016. |
Communication Intelligence Corporation
Notessingle option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to Consolidated Financial Statements
(In thousands except per share amounts)
1. Natureemployees is amortized over the vesting period of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):the options.
Revenue recognition:
The Company recognizes revenue from sales of software products upon shipment, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all non-recurring engineering work necessary to enable the Company's product to function within the customer's application has been completed and the Company's product has been delivered according to specifications. Revenue from service subscriptions is recognized as costs are incurred or over the service period which everwhichever is longer. Software license agreements may contain multiple elements, including upgrades and enhancements, products deliverable on a when and if available basis and post contract support. Revenue from software license agreements is recognized upon delivery of the software, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all nonrecurring engineering work necessary to enable the Company's products to function within the customer's application has been completed, and the Company has delivered its product according to specifications.
For arrangements with multiple deliverables the Company allocates consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, and Management’s best estimate of the selling prices is use.used. For the Company’s tangible products containing software and hardware elements that function together and deliver the tangible products’ essential functionality is accounted for under the multiple-element arrangements revenue recognition guidance discussed above.
Maintenance revenue is recorded for post-contract support and upgrades or enhancements, which is paid for in addition to license fees, and is recognized as costs are incurred or over the support period whichever is longer. For undelivered elements where objective and reliable evidence of fair value does not exist, revenue is deferred and subsequently recognized when delivery has occurred and when fair value has been determined.
For each of the years ended December 31, 2010 and 2011, the Company’s sales in the United States as a percentage of total sales were 93% and 92%, respectively. For the years ended December 31, 2011 and 2010, the Company’s export sales as a percentage of total revenue were approximately 4% and 8%, respectively. Foreign sales are sales to customers in all countries other than the U.S.
Research and development:
Research and development costs are charged to expense as incurred.
Marketing:
The Company expenses advertising (marketing) costs as incurred. These expenses are outbound marketing expenses associated with participation in industry events, related sales collateral and email campaigns aimed at generating customer participation in webinars. The expense for the years ended December 31, 20112012 and 20102011 was $15 and $20,$15, respectively.
Net loss per share:
The Company calculates net loss per share under the provisions of the relevant accounting guidance. That guidance requires the disclosure of both basic net loss per share, which is based on the weighted average number of
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies:
shares outstanding, and diluted loss per share, which is based on the weighted average number of shares and dilutive potential shares outstanding.
Communication Intelligence Corporation
NotesThe number of shares of common stock subject to Consolidated Financial Statements
(In thousands exceptoutstanding options, preferred shares on an as converted basis and shares issuable upon exercise of warrants excluded from the calculation of earnings per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):
Net loss per share (continued):are as follows:
For the year ended December 31, 2011, 51,3532012, 44,529 shares of Common Stock subject to outstanding options, 6,806 shares of series A-1 Preferred Stock, 232,142 shares of Series B Preferred Stock, 185,572 shares of Series C Preferred Stock, 49,961 shares of Series D-1 Preferred Stock and 182,64466,053 shares of Series D-2 Preferred Stock on an as converted basis and 151,722 shares issuable upon exercise of warrants were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants would be anti-dilutive.
For the year ended December 31, 2010, 10,0282011, 51,353 shares of Common Stock subject to outstanding options, 6,288 shares of series A-1 Preferred Stock, 213,488 shares of Series B Preferred Stock, 157,637 shares of Series C Preferred Stock, on an as converted basis and 135,131182,644 shares issuable upon exercise of warrants were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants would be anti-dilutive.
Foreign currency translation:
The Company considers the functional currency of the Joint Venture, CICC to be the local currency of China, which is the RMBRenminbi (“RMB”) and, accordingly, gains and losses from the translation of the local foreign currency financial statements are included as a component of "accumulatedaccumulated other comprehensive loss in”in the accompanying consolidated balance sheets. Foreign currency assets and liabilities are translated into U.S. dollars at the end-of-period exchange rates except for long-term assets and liabilities, which are translated at historical exchange rates. Revenue and expenses are translated at the average exchange rates in effect during each period except for those expenses related to consolidated balance sheet amounts which are translated at historical exchange rates.
Foreign currency translation:
Net foreign currency transaction gains and losses are included in "Interestinterest and other income, net"net in the accompanying consolidated statements of operations. Foreign currency transaction gains and losses in 20112012 and 20102011 were insignificant.
Comprehensive income:
The relevant accounting guidance requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual statement that is displayed with the same prominence as other annual financial statements. The guidance also requires that an entity classify items as other comprehensive earnings by their nature in an annual financial statement.
Income taxes:
Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts and for tax loss and credit carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.
There have been no unrecognized tax benefits and, accordingly, there has been no effect on the Company's financial condition or results of operations.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2004,2005, and state tax examinations for years before 2003.2004. Management does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies:
1. | Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued): |
component of income tax expense.
Recently issued accounting pronouncement:
In May 2011,Comprehensive Income:
On January 1, 2012, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-04 Fair Value Measurement (Topic 820) which amended standards to achieve a consistent definitionCompany adopted an accounting standard that modifies the presentation of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards. For assets and liabilities categorized as Level 3 and recognized at fair value, these amended standards require disclosure of quantitative information about unobservable inputs, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. In addition, these amended standards require that we disclose the levelcomprehensive income in the fair value hierarchy for financial instruments disclosed at fair valuestatements. The standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but not recorded at fair value.consecutive statements. The amendments inCompany elected the latter presentation option upon adopting this ASU are effective during interim and annual periods beginning after December 15, 2011.accounting standard. The adoption of this ASU isguidance did not have a significant effect on the consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of ASU No. 2011-05 will not have any material impact on the Company’s consolidated financial position and results of operations.
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08 Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment. The ASU simplifies how entities, both public and nonpublic, test goodwill for impairment. The revised standard allows an entity to first assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a likelihood of more than 50 percent. An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then perform the qualitative assessment in any subsequent period. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company does not believe this guidance will have any impact on its consolidated financial position, results of operations orand cash flows.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
| 2. | Major customers:Concentrations: |
Two customers accounted for 28%19% and 29%, respectively of total revenue for the year ended December 31, 2012. Two customers accounted for 10% and 28%, respectively, of total revenue for the year ended December 31, 2011. One customer
Two customers accounted for 20%83% of total revenue for the year endedgross accounts receivable at December 31, 2010.
2012. Customer one accounted for 16% and Customer two accounted for 67%. Four customers accounted for 87% of gross accounts receivable at December 31, 2011. Customer one, accounted for 40%, Customer two accounted for 25%, Customer three accounted for 12%, and Customer four accounted for 10%. Two customers accounted for 66% of gross accounts receivable at
For the year ended December 31, 2010. Customer one accounted for 49% and Customer two accounted for 17%2012, the Company’s sales in the United States as a percentage of total sales were 100%.
Communication Intelligence Corporation
Notes For the year ended December 31, 2011, the Company’s sales in the United States as a percentage of total sales were 93%. For the years ended December 31, 2012 the Company’s had no export sales. For the year ended December 31, 2011, the Company’s export sales as a percentage of total revenue were approximately 7%. Foreign sales are sales to Consolidated Financial Statements
(In thousands except per share amounts)
| 3. | Property plant and equipment: |
Property and equipment, net at December 31, consists of the following:
| | | 2011 | | | 2010 | | 2012 | | 2011 |
Machinery and equipment | | $ | 1,215 | | | $ | 1,224 | | $ | 1,227 | | $ | 1,215 |
Office furniture and fixtures | | | 435 | | | | 435 | | | 435 | | | 435 |
Leasehold improvements | | | 90 | | | | 90 | | | 90 | | | 90 |
Purchased software | | | 323 | | | | 323 | | | 323 | | | 323 |
| | | | | | | | | | | | | | |
| | | | 2,063 | | | | 2,072 | | | 2,075 | | | 2,063 |
Less accumulated depreciation and amortization | | | (2,031 | ) | | | (2,046 | ) | | (2,047 | ) | | (2,031 |
| | | | | | | | | | | | | | |
| | | $ | 32 | | | $ | 26 | | $ | 28 | | $ | 32 |
| | | | | | | | | | | | | | |
Material commitments:
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
The Company had the following commitments at December 31, 2011:
| | | Payments due by period− | |
| Contractual obligations | | Total | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | |
| Operating lease commitments (2) | | | 1,366 | | | | 267 | | | | 275 | | | | 283 | | | | 292 | | | | 249 | | | | − | |
1. | The Company extended the lease on its offices in April 2010. The base rent decreased by approximately 6% in November 2011 and will increase by approximately 3% per annum over the term of the new lease, which expires on October 31, 2016. |
Patents, net consists of the following at December 31:
| | | | | Expiration | | | Estimated Original Life | | | 2011 | | | 2010 | | | | Expiration | | Estimated Original Life | | 2012 | | 2011 | |
Patent (Various) | Patent (Various) | | | Various | | | | 5 | | | $ | 9 | | | $ | 9 | | Patent (Various) | | Various | | 5 | | $ | 9 | | $ | 9 | |
Patent (Various) | Patent (Various) | | | Various | | | | 7 | | | | 476 | | | | 476 | | Patent (Various) | | Various | | 7 | | | 476 | | | 476 | |
| | 5544255 | | | | 2013 | | | | 13 | | | | 93 | | | | 93 | | 5544255 | | 2013 | | 13 | | | 93 | | | 93 | |
| | 5647017 | | | | 2014 | | | | 14 | | | | 187 | | | | 187 | | 5647017 | | 2014 | | 14 | | | 187 | | | 187 | |
| | 5818955 | | | | 2015 | | | | 15 | | | | 373 | | | | 373 | | 5818955 | | 2015 | | 15 | | | 373 | | | 373 | |
| | 6064751 | | | | 2017 | | | | 17 | | | | 1,213 | | | | 1,213 | | 6064751 | | 2017 | | 17 | | | 1,213 | | | 1,213 | |
| | 6091835 | | | | 2017 | | | | 17 | | | | 4,394 | | | | 4,394 | | 6091835 | | 2017 | | 17 | | | 4,394 | | | 4,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 6,745 | | | | 6,745 | | | | | | | | | 6,745 | | | 6,745 | |
Less accumulated amortization | Less accumulated amortization | | | | | | | | | | | | (4,725 | ) | | | (4,353 | ) | Less accumulated amortization | | | | | | | (5,090 | ) | | (4,725 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | $ | 2,020 | | | $ | 2,392 | | | | | | | | $ | 1,655 | | $ | 2,020 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The nature of the underlying technology of each material patent is as follows:
• Patent numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the electronic capture of a handwritten signature utilizing an electronic tablet device on a standard computer system within an electronic document, (b) the verification of the identity of the person providing the electronic signature through comparison of stored signature measurements, and (c) a system to determine whether an electronic document has been modified after signature.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
• Patent number 6091835 involves all of the foregoing and the recording of the electronic execution of a document regardless of whether execution occurs through a handwritten signature, voice pattern, fingerprint or other identifiable means.
• Patent numbers 5933514, 6212295, 6381344, and 6487310 involve methods and processes related to handwriting recognition developed by the Company over the years. Legal fees associated with these patents were immaterial and expensed as the fees were incurred.
The Company does not foresee any effects of obsolescence or significant competitive pressure on its current or future products, anticipates increasing demand for products utilizing the patented technology, and believes that the current markets for its products based on the patented technology will remain constant or will grow over the remaining useful lives assigned to the patents because of a legal, regulatory and business environment encouraging the use of electronic signatures.
| 5. | Capitalized software development costs: |
During 2012, the Company did not capitalize any software development costs. During 2011, and 2010, the Company capitalized approximately $72 and $772 ofin software development costs. Amortization of capitalized software development costs for the years ended December 31, 2012 and 2011 was $78 and 2010 was $446, and $1,835, respectively. The decrease between periods is related to the Company’s decision to accelerate the amortization of its software portfolio to better reflect the transition of its offering from being mostly product-based to becoming mostly server and service-based and to provide a closer match with the useful life of the development costs being capitalized. This acceleration resulted in an increase in amortization expense of $1,009 in 2010.
Future amortization expense is a follows:
| Year Ended December 31, | | | |
| 2012 | | $ | 78 | |
| Thereafter | | | - | |
| 6. | Chinese Joint Venture:Venture (Non-Controlling Interest): |
The Company currently owns 90% of a joint venture (the “Joint Venture”) with the Jiangsu Hongtu Electronics Group, a provincial agency of the People's Republic of China (the "Agency"). The Joint Venture's business license expires October 18, 2043. There were no significant operations and no cash requirements in 20112012 or 2010.2011.
The Joint Venture had no revenue for the years ended December 31, 20112012 and 2010,2011, respectively. It had no long-lived assets as of December 31, 20112012 and 2010.2011.
7. | Short-term notes payable: |
Immediately prior to the conversion of debt (the “Recapitalization”) in August 2010, the Company had outstanding debt with a principal balance of $6,608 (recorded in the balance sheet net of a discount of $1,509). The outstanding balance included $1,260 of funds borrowed through bridge financing obtained in May, June and July 2010 with the following terms: an interest rate of 8% per annum and a maturity date of December 31, 2010. Warrants to purchase 18,000 shares of Common Stock with an exercise price of $0.06 per share expiring in periods from May 2013 through July 2013 were issued with the bridge financings. The remaining principal balance of $5,348 relates to funds raised in financing transactions in 2008 and 2009. The funds raised in these financings had the following terms: interest at 8% per annum and, at the option of the Company, interest could be paid in cash or in kind. Warrants to purchase 80,154 shares of Common Stock with an exercise price of $0.06 and an expiration date of June 30, 2012 were issued in the financing transactions. Upon execution of each financing a debt discount was recorded. At December 31, 2009, a discount of $2,222 was included in the debt balance. For the years ended
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
| 7. | Short-term notes payable: |
In February and March 2012, the Company borrowed $25 and $100 from Phoenix Venture Fund LLC, respectively, at 10% per annum in the form of demand notes. All principal and accrued interest was repaid in cash in the amount of $132 in September 2012.
In April 2012, the Company entered into the April 2012 Purchase Agreement with the April 2012 Investors, and issued the April 2012 Notes for $1,000, receiving $982 in cash, net of expenses of $17. In connection with the issuance of the notes, the Company recorded a discount on notes for $64, as the result of the conversion of the notes in November 2012, the discount was fully amortized to interest expense. The April 2012 Notes had an interest at the rate of 10% per annum and a maturity date of April 22, 2013. The April 2012 Notes automatically converted into shares of Series D-2 Preferred Stock at the Final Closing. In connection with the issuance of the April 2012 Notes, the Company also issued to the April 2012 Investors warrants to purchase 5,000 shares of Common Stock at an exercise price of $0.05 per share. The April 2012 Warrants are exercisable for a period of three years from the date of issue. The company ascribed a value of $47 to the April 2012 Warrants, which was recorded as a discount to notes payable and as a derivative liability. In connection with the April 2012 Purchase Agreement, the Company paid $17 in consulting fees and issued an aggregate of 349 warrants at an exercise price of $0.05 per share to two consultants. These warrants are exercisable for three years from the date of issue, and the Company ascribed to them a value of $3, using a modified Black Scholes pricing model with the following assumptions: risk free interest rate of 0.40; expected life of three years; expected volatility of 213%; and a dividend yield of zero. The related warrant value was recorded as a professional service fee expense and as a derivative liability. The April 2012 Notes and accrued interest was automatically converted into shares of Series D-2 Preferred Stock at a price of $1.00 per share upon the consummation of the Final Closing, which occurred on November 15, 2012 for $1,057.
In August and September 2012, the Company borrowed $50 and $50 from Phoenix Banner Holdings LLC, respectively, at 10% per annum in the form of demand notes. All principal and accrued interest was repaid in cash in the amount of $102 from the proceeds of the November 2012 closing.
In September 2012, the Company entered into the September 2012 Subscription Agreements with the September 2012 Investors. Under the terms of the September 2012 Subscription Agreements, the September 2012 Investors purchased approximately $1,103 of September 2012 Notes, and, subject to the satisfaction of certain closing conditions, agreed to purchase at the Final Closing approximately 1,103 shares of Series D-2 Preferred Stock at a purchase price of $1.00 per share. The Company received $778 net of expenses in cash for the September 2012 Notes, and proceeds of $967net of offering costs of $115 for 1,082 of Series D-2 Preferred Stock at the Final Closing. The September 2012 Notes had an interest at the rate of 10% per annum, and a maturity date of December 31, 2012. The September 2012 Notes and accrued unpaid interest were converted into 1,121 shares of Series D-2 Preferred Stock at a price of $1.00 per share upon the consummation of the Final Closing, which occurred on November 15, 2012. The Series D-2 Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion price of $0.05 per share (subject to adjustment). The Final Closing was subject to stockholder approvals and the satisfaction of customary closing conditions. A portion of the proceeds from the September 2012 Notes was used to repay approximately $225 in demand notes to a related party and an employee of the Company, and for working capital and general corporate purposes in the ordinary course of business. In connection with the September 2012 Subscription Agreements, the Company, after the Final Closing, the Company issued an aggregate of 294 warrants to four consultants and 3,000 warrants to Phoenix and as a finder’s fee in connection with the financing at an exercise price of $0.05 per share and recorded a derivative liability in the amount of $1 and $7, respectively..
In November 2012, shareholders approved an increase in the Company’s authorized capital and the issuance of Series D-1 Convertible Preferred Stock (the “Series D-1 Preferred Stock”) and Series D-2 Convertible Preferred Stock (the “Series D-2 Preferred Stock” together with the Series D-1 Preferred Stock, the “Series D Preferred Stock”). In November 2012 the Company converted approximately $3,099 of short-term debt and accrued interest into shares of Series D Preferred Stock net of offering costs of $190. The Company sold, for cash in a private placement, 1,082 of additional shares of Series D Preferred Stock at a purchase price of $1.00 per share and received $967 net of offering costs of $115.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
7. 7. Short-term notes payable (continued):payable:
December 31, 2010, amortization of the debt discount and deferred financing costs was $1,776. The unamortized discount of $1,509 was charged to paid-in capital in connection with conversion of the associated debt into shares of Series B Preferred Stock (Note 8). The warrants included in the financing transactions were determined to be derivative liabilities (Note 7).
On December 2, 2011, the Company entered into a Note and Warrant Purchase Agreement (the “December 2011 Purchase Agreement”) with Philip Sassower, the Company’s Chairman and CEO, and other investors (the “December 2011 Investors”). Under the terms of the December 2011 Purchase Agreement, the Company issued unsecured convertible promissory notes in the aggregate amount of $500 (the “December 2011 Notes”) to the December 2011 Investors. The December 2011 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 20, 2012. The December 2011 Notes are also convertible at the option of the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $1. In connection with the issuance of the December 2011 Notes, the Company also issued to the December 2011 Investors warrants to purchase an aggregate of 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share. The company ascribed a value of $13 to the warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.39, expected life of three years, expected volatility of 202%, and a dividend yield of 0. The warrant value was recorded as a discount to notes payable and as a derivative liability. The discount will be amortized over the life of the note. The warrant is exercisable for a period of three years. As of December 31, 2011,2012, the fair value of the warrant was $13.$1. The December 2011Notes and accrued interest were converted into 550 shares Series D-1 Preferred Stock at the November Closing. The remaining discount was amortized to expense.
On September 20, 2011, the Company entered into a Note and Warrant Purchase Agreement (the “September 2011 Purchase Agreement”) with Phoenix Banner Holdings, LLC (the “September 2011 Investor”), an entity affiliated with Phoenix Venture Fund LLC (“Phoenix”), the Company’s largest stockholder. Under the terms of the September 2011 Purchase Agreement, the Company issued an unsecured convertible promissory note in the amount of $500 (the “September 2011 Note”) to the September 2011 Investor. The September 2011 Note bears interest at the rate of 10% per annum, and hashad a maturity date of September 20, 2012 which was subsequently amended to extend the due date through December 31, 2012. The September 2011 Note is also convertible at the option of the September 2011 Investor into securities sold in the Company’sCompany��s next equity financing with gross proceeds to the Company in excess of $1. In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 Investor a warrant to purchase 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share. On September 20, 2011 the company ascribed a value of $7 to the warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.42, expected life of three years, expected volatility of 204%, and a dividend yield of 0. The warrant value was recorded as a discount to notes payable and as a derivative liability. The discount will be amortized over the life of the note. The warrant is exercisable for a period of three years. As of December 31, 2011,2012, the fair value of the warrant was $13.$9. The September 2011Note and accrued interest were converted into 560 shares of Series D-1 Preferred Stock at the November 2012 closing.
On September 2, 2011 the Company borrowed an aggregate of $100 from Phoenix Venture Fund LLC and an employee of the Company and issued unsecured demand notes to each. These notes are due on demand and bear interest at the rate of 10% per annum. All principal and interest were paid in cash in September 2012, in the amount of $107.
The Company used the net proceeds from the transaction for working capital and general corporate purposes.
Interest expense associated with the Company’s debtindebtedness for the yearyears ended December 31, 2012 and 2011, was $189 and 2010, was $27 and $2,039,$24, respectively, of which $24$100 and $1,974$21, respectively, was related party expense. Amortization of debt discount and deferred financing costs included in interest expense for the year ended December 31, 2012 and 2011, was $64 and 2010, was $3, and $1,776, respectively, of which $14 and $3, and $1,719respectively, was related party expense.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
7. | Short-term notes payable (continued): |
Material commitments:
The Company had the following commitments at December 31, 2011:
| | | Payments due by period | |
| Contractual obligations | | Total | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | 2016 | | Thereafter | |
| Short-term note payable (1) | | | 1,100 | | | | 1,100 | | | | − | | | | − | | | | − | | | | | − | |
1. | The Company issued demand notes in September 2011 in the amount of $100, and convertible notes in September and December 2011 in the amount of $500 and $500, respectively. The notes bear interest at the rate of 10% per annum. The Convertible notes are due in September and December 2012. |
| 8. | Other accrued liabilities: |
The Company records liabilities based on reasonable estimates for expenses, or payables that are known or estimated including deposits, taxes, rents and services. The estimates are for current liabilities that should be extinguished within one year.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
| 8. | Other accrued liabilities: |
The Company had the following other accrued liabilities at December 31, 2011:31:
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Accrued professional services | | $ | 96 | | | $ | 100 | | | $ | 12 | | | $ | 96 | |
| Rents | | | 19 | | | | 19 | | | | 23 | | | | 19 | |
| Interest | | | 21 | | | | – | | | | – | | | | 21 | |
| Other | | | 107 | | | | 40 | | | | 115 | | | | 107 | |
| Total | | $ | 243 | | | $ | 159 | | | $ | 150 | | | $ | 243 | |
The Company has determined that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. The Company applies a two-step model in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception.
The Company determined that certain warrants related to the Company’s financings and the embedded conversion feature on the Series A-1 Cumulative Convertible Preferred Stock (the “Series A-1 Preferred Stock”) required liability classification because of certain provisions that may have resulted in an adjustment to the number of shares upon settlement and an adjustment to their exercise or conversion. The fair value of the embedded conversion feature for the Series A-1 Preferred Stock at December 31, 20112012 and December 31, 20102011 was insignificant.
In August 2010 and December 2010, the Company issued 8,048 shares of Series B Preferred Stock and 2,211 shares of Series C Preferred Stock, respectively. At December 31, 2010, theStock. The Company determined that the embedded conversion feature on these shares required liability classification due to the impact the anti-dilution provisions could have had on the number of shares issuable upon conversion. The aggregate fair value of the embedded conversion feature on the Series B Preferred Stock at December 31, 2010, was approximately $130, and the fair value of the embedded conversion feature on the Series C Preferred Stock was approximately $179. On$309 at December 31, 2010. In March, 31, 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock and its Certificate of Designation for its Series C Preferred Stock by amending the anti-dilution.anti-dilution provisions. As a result of these amendments, the Series B Preferred Stock and Series C Preferred Stock no longer required liability classification. On the date of
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
9. | Derivative liability (continued): |
these amendments, the Company revalued the conversion features on these shares, resulting in a loss of $47, and reclassified the derivative value to equity, resulting in a decrease in the derivative liability of $363.
In March 2011, the Company issued fee warrants to related parties to purchase 1,778 shares of common stock in connection with a private placement sale of 800 shares of Series C Preferred Stock and recorded a derivative liability of $4 as ofat March 30, 2011, and the2011.The fair market value of the derivative liability at December 31, 2011,2012, was $4.$3.
In August 2011, the Company issued 1,000 warrants as part of consulting agreements and recorded a derivative liability. The Company ascribed a value of $1 to the warrants using a modified Black Scholes pricing model with the following assumptions: risk free interest rate of 7%, expected life of three years, expected volatility of 190%, and a dividend yield of 0. The warrants have a three year life and expire on August 11, 2014. As of December 31, 2011,2012, the fair value of the warrants was $1.$2.
The Company issued an aggregate of 8,643 warrants related to the bridge financings in April and November 2012. Included in the April 2012 warrants were 349 warrants issued as finder’s fees. The November warrants issued included 3,000 warrants issued to related parties as administrative fees and 294 warrants issued as finder’s fees. The warrants were valued using a modified Black Scholes pricing model. Additional information with respect to these warrants is presented in the table below.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
| Issue Date | | Number of warrants issued | | Exercise price | | Risk free interest rate | | Expected life | | Expected volatility | | | Dividend yield | | | Derivative liability value on date of issue | |
| 4/23/2012 | | 5,349 | | $ | 0.05 | | | 1.78 | % | 3 years | | 205.3 | % | | $ | – | | | $ | 50 | |
| 11/15/2012 | | 3,294 | | $ | 0.05 | | | 1.58 | % | 3 years | | 202.2 | % | | $ | – | | | $ | 8 | |
The fair value of the outstanding derivative liabilities at December 31, 2011,2012, and December 31, 2010,2011, was $281$128 and $499,$281, respectively.
The Company uses a discounted Black-Scholes pricing model to calculate the fair value of its preferred share and warrant liabilities. Key assumptions used to apply these models are as follows:
| | December 31, 2011 | December 31, 2010 | December 31, 2012 | December 31, 2011 |
| Expected term | 0.5 to 2.90 years | 0.5 to 4.00 years | 0.3 to 2.80 years | 0.5 to 2.90 years |
| Volatility | 204.7% - 315.2% | 141.5% - 184.1% | 205.3% | 204.7% - 315.2% |
| Risk-free interest rate | 0.06 – 0.36% | 0.29 – 1.02% | 1.78 | 0.06 – 0.36% |
| Dividend yield | 0% | 0% | 0% | 0% |
Fair value measurements:
Assets and liabilities measured at fair value as of December 31, 2011, are as follows:
| | | Value at December 31, 2011 | | | Quoted prices in active markets | | | Significant other observable inputs | | | Significant unobservable inputs | |
| | | | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Derivative liability | | $ | 281 | | | $ | − | | | $ | − | | | $ | 281 | |
Changes in the fair value of the level 3 derivative liability for the year ended December 31, 2011,2012, are as follows:
| | | Derivative Liability | |
| Balance at January 1, 2011 | | $ | 499 | |
| Additional liabilities recorded related to warrants issued for services | | | 32 | |
| Reclassification of conversion feature on the Series B and Series C Preferred Stock to equity | | | (363 | ) |
| Loss on derivative liability | | | 113 | |
| Balance at December 31, 2011 | | $ | 281 | |
| | Derivative Liability | |
| Balance at January 1, 2011 | $ | 281 | |
| Additional liabilities recorded related to warrants issued for services | | 55 | |
| Additional liabilities recorded related to warrants issued for services | | 3 | |
| Gain on derivative liability | | (211 | ) |
| Balance at December 31, 2012 | $ | 128 | |
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)Assets and liabilities measured at fair value as of December 31, 2012, are as follows:
| | Value at December 31, 2012 | | Quoted prices in active markets | | Significant other observable inputs | | Significant unobservable inputs |
| | | | (Level 1) | | (Level 2) | | (Level 3) |
| Derivative liability | $128 | | $ − | | $ − | | $ 128 |
| 10. | Stockholders' equity: |
Common stock options:
At December 31, 2011,2012, the Company has two stock-based employee compensation plans, the 2009 Stock Compensation Plan, and the 2011 Stock Compensation Plan. The Company may also grants options to employees, directors and consultants outside of the 2009 and 2011 Stock Compensation Plans under individual plans.
In April 1999, the Company adopted and, in June 1999, the stockholders approved, the 1999 Option Plan. Incentive and non-qualified options under the 1999 Option Plan were granted to employees, officers, and consultants of the Company. The 1999 Option Plan expired in April 2009 (options outstanding under that plan are not affected by its expiration). There were 4,000 shares of Common Stock authorized for issuance under the 1999 Option Plan.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
| 10. | Stockholders' equity: |
The options had a seven year term and generally vested quarterly over three years. As of December 31, 2012, 345 plan options were outstanding and 345 plan options were exercisable with a weighted average exercise price of $0.389 per share.
The 2009 Stock Compensation Plan was adopted by the Board of Directors on July 1, 2009. Non-qualified options under the 2009 Stock Compensation Plan can be granted to employees, officers, and consultants of the Company. There were 7,000 shares of Common Stock authorized for issuance under the 2009 Stock Compensation Plan. The options have a term of three to seven years and can vest immediately or quarterly over three years, as defined. As of December 31, 2011, 2,3792012, 425 plan options were outstanding, and 2,158379 plan options were exercisable with a weighted average exercise price of $0.0995$0.105 per share.
The 2011 Stock Compensation Plan was adopted by the Board of Directors on January 28, 2011. Incentive and non-qualified options under the 2011 Stock Compensation Plan can be granted to employees, officers, and consultants of the Company. There wereIn November 2012, shareholder approved an increase in the number of shares from 50,000 shares to 100,000 shares of Common Stock authorized for issuance under the 2011 Stock Compensation Plan. The options have a term seven years and can vest immediately or quarterly over three years, as defined. As of December 31, 2011, 44,5712012, 43,609 plan options were outstanding, and 8,01122,445 plan options were exercisable with a weighted average exercise price of $0.0546$0.0464 per share.
In April 1999, the Company adopted and, in June 1999, the stockholders approved, the 1999 Option Plan. Incentive and non-qualified options under the 1999 Option Plan were granted to employees, officers, and consultants of the Company. The 1999 Option Plan expired in April 2009 (options outstanding under that plan are not affected by its expiration). There were 4,000 shares of Common Stock authorized for issuance under the 1999 Option Plan. The options had a seven year term and generally vested quarterly over three years. As of December 31, 2011, 924 plan options were outstanding and 924 plan options were exercisable with a weighted average exercise price of $0.558 per share.
The Company has issued options under individual plans to its employees and directors. The individual plan options generally vest over four years or pro rata quarterly over three years. Non-plan options are generally exercisable over a period not to exceed seven years. As of December 31, 2011, 3,4792012, 150 non-plan options were outstanding and 3,446150 non-plan options were exercisable with a weighted average exercise price of $0.463$0.192 per share.
Share-based payment:
The cash flows from tax benefits for deductions in excess of the compensation costs recognized for share-based payment awards would be classified as financing cash flows. Due to the Company’s loss position, there was no such tax benefits during the year ended December 31, 2011.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
10. | Stockholders' equity (continued): |
Common stock options (continued):
Valuation and Expense Information:
The weighted-average fair value of stock-based compensation is based on the single option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to employees is amortized using the accrual method over the vesting period of the options. The fair value calculations are based on the following assumptions:
| | | Year Ended December 31, 2011 | Year Ended December 31, 2010 | | Year Ended December 31, 2012 | Year Ended December 31, 2011 |
| Risk free interest rate | | 0.62% - 5.11% | 1.12% - 5.11% | | 0.62% - 5.11% | 0.62% - 5.11% |
| Expected life (years) | | 2.82 – 7.00 | 2.82 – 7.00 | | 2.82 – 7.00 | 2.82 – 7.00 |
| Expected volatility | | 93.63% - 147.4% | 91.99% - 147.4% | | 91.99% - 180.36% | 93.63% - 147.4% |
| Expected dividends | | None | None | | None | None |
| Estimated average forfeiture rate | | 11% | 24% | | 10% | 11% |
The following table summarizes the allocation of stock-based compensation expense related to stock option grants for the years ended December 31, 20112012 and 2010.2011. The Company granted 2,500 options at a weighted average exercise price of $0.06 per share with a valuation of $43 on the date of grant. There were no203 stock option exercisesexercised for cash proceeds of $13 during the year ended December 31, 2011 or 2010.2012. There were no stock options exercised during the year ended December 31, 2011.
| | | Year Ended December 31, 2011 | | | Year Ended December 31, 2010 | |
| Research and development | | $ | 347 | | | $ | 21 | |
| Sales and marketing | | | 161 | | | | 52 | |
| General and administrative | | | 204 | | | | 20 | |
| Director options | | | 92 | | | ─ | |
| Stock-based compensation expense included in operating expenses | | $ | 804 | | | $ | 93 | |
The summary activity under the Company’s 2009 Stock Compensation Plan, the 1999 Option Plan and Individual Plans is as follows:
| | | December 31, 2011 | | December 31, 2010 | |
| | | Shares | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life | | | Shares | | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life | |
| | | | | | | | | | | | | | | | | | | | | |
| Outstanding at beginning of period | | | 10,028 | | | $ | 0.33 | | | | | | | | 10,231 | | | $ | 0.34 | | | | | |
Granted | | | 44,971 | | | $ | 0.05 | | | | | | | | 2,550 | | | $ | 0.08 | | | | | |
Exercised | | | – | | | $ | 0.00 | | | | | | | ─ | | | $ | − | | | | | |
Forfeited/ Cancelled | | | (3,645 | ) | | $ | 0.27 | | | | | | | | (2,753 | ) | | $ | 0.15 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at period end | | | 51,353 | | | $ | 0.09 | | | | | 3.2 | | | | 10,028 | | | $ | 0.33 | | | | | 3.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options vested and exercisable at period end | | | 14,539 | | | $ | 0.19 | | | | | 2.6 | | | | 8,309 | | | $ | 0.38 | | | | | 2.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average grant-date fair value of options granted during the period | | $ | 0.05 | | | | | | | | | | | | $ | 0.08 | | | | | | | | | | |
| | | Year Ended December 31, 2012 | | | Year Ended December 31, 2011 | |
| Research and development | | $ | 206 | | | $ | 347 | |
| Sales and marketing | | | 91 | | | | 161 | |
| General and administrative | | | 137 | | | | 204 | |
| Director options | | | 27 | | | | 92 | |
| Stock-based compensation expense included in operating expenses | | $ | 461 | | | $ | 804 | |
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
| 10. | Stockholders' equity (continued):equity: |
Common stock options (continued):The cash flows from tax benefits for deductions in excess of the compensation costs recognized for share-based payment awards would be classified as financing cash flows. Due to the Company’s loss position, there was no such tax benefits during the year ended December 31, 2012.
The summary activity under the Company’s 2011 and 2009 Stock Compensation Plans, the 1999 Option Plan and Individual Plans is as follows:
| | | December 31, 2012 | | December 31, 2011 | |
| | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | | Weighted Average Remaining Contractual Life | |
| Outstanding at beginning of period | | | 51,353 | | $ | 0.09 | | | | | | | 10,028 | | $ | 0.33 | | | | | | |
Granted | | | 2,500 | | $ | 0.06 | | | | | | | 44,971 | | $ | 0.05 | | | | | | |
Exercised | | | (203 | ) | $ | 0.07 | | $ | 2 | | | | ─ | | ─ | | $ | - | | | | |
Forfeited/ Cancelled | | | (9,121 | ) | $ | 0.26 | | | | | | | | (3,645 | ) | $ | 0.27 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at period end | | | 44,529 | | $ | 0.05 | | | | | 3.2 | | | 51,353 | | $ | 0.09 | | | | | | 3.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Options vested and exercisable at period end | | | 23,319 | | $ | 0.05 | | | | | 2.6 | | | 14,539 | | $ | 0.19 | | | | | | 2.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average grant-date fair value of options granted during the period | | $ | 0.06 | | | | | | | | | | $ | 0.05 | | | | | | | | | | |
Valuation and Expense Information:
The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2011:2012:
| | | | | Options Outstanding | | | Options Exercisable | | | | Options Outstanding | | Options Exercisable | |
Range of Exercise Prices | Range of Exercise Prices | | | Options Outstanding | | | Weighted Average Remaining Contractual Life(in years) | | | Weighted Average Exercise Price | | | Number Outstanding | | | Weighted Average Exercise Price | | Range of Exercise Prices | | Options Outstanding | | Weighted Average Remaining Contractual Life(in years) | | Weighted Average Exercise Price | | Number Outstanding | | Weighted Average Exercise Price | |
| $ | 0.00 – $0.50 | | | | 49,390 | | | | 5.8 | | | $ | 0.15 | | | | 12,576 | | | $ | 0.10 | | 0.00 – $0.50 | | 44,472 | | | 5.3 | | $ | 0.05 | | 23,262 | | $ | 0.05 | |
| $ | 0.51 – $1.00 | | | | 1,900 | | | | 1.0 | | | $ | 0.72 | | | | 1,900 | | | $ | 0.75 | | 0.51 – $1.00 | | 44 | | | 0.7 | | $ | 0.79 | | 44 | | $ | 0.79 | |
| $ | 1.01 – $2.00 | | | | 63 | | | | 0.4 | | | $ | 1.66 | | | | 63 | | | $ | 1.75 | | 1.01 – $2.00 | | 13 | | | 0.2 | | $ | 1.75 | | 13 | | $ | 1.75 | |
| | | | | | 51,353 | | | | | | | | | | | | 14,539 | | | | | | | | 44,529 | | | | | | | | 23,319 | | | | |
A summary of the status of the Company’s non-vested shares as of December 31, 20112012 is as follows:
Non-vested Shares | | Shares | | | Weighted Average Grant-Date Fair Value | | | Shares | | | Weighted Average Grant-Date Fair Value | |
Non-vested at January 1, 2011 | | | 1,719 | | | $ | 0.06 | | |
Non-vested at January 1, 2012 | | | 36,814 | | | $ | 0.05 | |
| Granted | | | 44,971 | | | $ | 0.05 | | | 2,500 | | | $ | 0.06 | |
| Forfeited | | | (3,645 | ) | | $ | 0.18 | | | (2,149 | ) | | $ | 0.18 | |
| Vested | | | (6,231 | ) | | $ | 0.20 | | | (15,955 | ) | | $ | 0.20 | |
| Non-vested | | | 36,814 | | | $ | 0.05 | | | 21,210 | | | $ | 0.05 | |
As of December 31, 2011,2012, there was $578$187 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted average period of 3.01.1 years.
Share-based payment (continued):
The Company expects to make additional option grants in future years. The options issued to employees and directors will be subject to the same provisions outlined above, which may have a material impact on the Company’s financial statements.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
| 10. | Stockholders' equity: |
As of December 31, 2011, 51,3532012, 44,529 shares of Common Stockcommon stock were reserved for issuance upon exercise of outstanding options.
Treasury Stock:
The Company received 6,500 shares of its Common Stock having a fair value under the cost method of $325 in January 2012, in settlement of a 16b suit brought by a shareholder against Phoenix Venture Fund, LLC. At December 31, 2012, the total value of treasury stock was $325.
Preferred Shares:
The Company has five series of Preferred Stock; Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock Series D-1 Preferred Stock and Series D-2 Preferred Stock.
The Company has amended its Amended and Restated Certificate of Incorporation to increase the number of authorized shares of capital stock. The Company solicited its stockholders and its stockholders approved an amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of capital stock from 1,050,000 to 1,536,000 (the “Charter Amendment”). Of these authorized shares, 1,500,000 have been designated as Common Stock, 2,000 as Series A-1 Preferred Stock, 14,000 as Series B Preferred Stock, 9,000 as Series C Preferred Stock, 3,000 as Series D-1 Preferred Stock and 8,000 as Series D-2 Preferred Stock. The Charter Amendment allows the Company to and have additional shares of stock available for possible future capital raising activities as approved by the Board of Directors.
The Company has amended and restated the Certificates of Designation for the Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock to, among other things, subordinate the Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, in terms of dividend rights, liquidation preferences and other rights, to the Series D Preferred Stock. Holders of at least a majority of the shares of the Company’s Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock have approved the amendment and restatement of the Certificate of Designation applicable to such holders.
In March, 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock and its Certificate of Designation for its Series C Preferred Stock to modify the anti-dilution provisions. Under the amendments, in the event additional stock is issued at a price lower than the conversion price then in effect, the new conversion price of the Series B Preferred Stock or Series C Preferred Stock cannot be (A) lower than the average closing market price for the Common Stock for the twenty (20) trading days prior to the closing date of a transaction requiring an adjustment in the conversion price (the “Market Price”) or (B) greater than the conversion price then in effect. The amendments were approved by the Company’s Board of Directors and the necessary majorities of the Company’s Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, and were filed with the Delaware Secretary of State on March 31, 2011. As of December 31, 2012 and 2011, the Company issued $73 and $67 in Dividends on its Series A-1 Preferred Stock, respectively. If the outstanding Series A-1 Preferred Stock had been converted in it entirety on December 31, 2012, the Company would have issued 6,806 shares of Common Stock. As od December 31, 2012 and 2011, the Company had 953 and 880 shares of Series A-1 Preferred Stock outstanding, respectively.
The Company’s Preferred Stock is more fully described below.
Series A-1 Preferred Stock
The Series A-1 Preferred Stock carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional shares of Series A-1 Preferred Stock, have a liquidation preference over Common Stock of one dollar ($1.00) per share and are convertible into shares of Common Stock at the conversion price of fourteen cents ($0.14) per share. If all outstanding shares of Series A-1 Preferred Stock were to convert to Common Stock, the Company would issue 6,807 shares of Common Stock. The Series A-1 Preferred Stock are convertible any time after June 30, 2008.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
| 10. | Stockholders' equity: |
In connection with the closing of the June 2008 Financing Transaction,financing transaction, the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008. Under the Securities Purchase Agreement, in exchange for the cancellation of $995 in principal amount and $45 of interest accrued thereon of the Company’s aggregate outstanding $2,071 in existing debt and interest accrued thereon through May 31, 2008, the Company issued to the holders of such debt an aggregate of
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
10. Stockholders' equity (continued):
Preferred Shares:
Series A-1
1,040 shares of the Company’s Series A Cumulative Convertible Preferred Stock, which shares were subsequently exchanged in October 2008 for an equivalent number of shares of Series A-1 Cumulative Convertible Preferred Stock (the “Series A-1 Preferred Shares”). During 2009, 146 Series A-1 Preferred Shares were converted into 1,005 shares of the Company’s Common Stock. As of December 31, 2011, there are 880 Series A-1 Preferred Shares outstanding. The Series A-1 Preferred Shares carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional Series A-1 Preferred Shares have a liquidation preference over Common Stock of one dollar ($1.00) per share and are convertible into shares of Common Stock at the conversion price of fourteen cents ($0.14) per share. If the outstanding Series A-1 Preferred Shares are converted in their entirety, the Company would issue 6,286 shares of Common Stock. The Series A-1 Preferred Shares are convertible any time after June 30, 2008. As of December 31, 2011, the Company has accrued dividends on the preferred shares of $237.
Series B
On August 5, 2010, the Company completed the conversion of all of the Company’s outstanding indebtedness into shares of Series B Participating Convertible Preferred Stock (the “Series B Preferred Stock”) in accordance with an executed Exchange Agreement entered into with Phoenix Venture Fund LLC and certain other holders of the Company’s indebtedness and sold approximately 1.44 million shares of Series B Preferred Stock in accordance with an executed Series B Preferred Stock Purchase Agreement (the “Purchase Agreement”). The Company issued approximately 6,608 shares of Series B Preferred Stock in exchange for all of the Company’s outstanding secured indebtedness and issued 1,440 shares of Series B Preferred Stock for proceeds of $1,440, net of expenses of $437. In addition, the Company paid approximately $143 in expenses to a third party in connection with the financing. The expenses were recorded as a charge to additional paid in capital. The proceeds are to be used for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses associated with the Recapitalization.
The shares of Series B Preferred Stock carry a ten percent (10%) annual dividend, payable quarterly in arrears in cash or in additional shares of Series B Preferred Stock, and have a liquidation preference of $1.50 per share over shares of Series A-1 Preferred Stock and Common Stock of Common Stock.$1.50 per share. The shares of Series B Preferred Stock were initially convertible into shares of Common Stock at aan initial conversion price of six cents ($0.06) per share. However, as a result ofWhen the Company’s issuance of theCompany issued Series C Participating Convertible Preferred Stock (the “Series C Preferred Stock”) at athe lower price less thanof $0.0225 per share, the then current Series B Preferred Stock conversion price of $0.06, the conversion price of the Series B Preferred Stock was adjusted downwards to $0.0433 per share. This adjustment results in an increase inConsequently, the number of shares of Common Stock that would be issued upon conversion of the outstanding shares of Series B Preferred Stock.Stock is higher after the adjustment. The shares of Series B Preferred Stock are convertible at any time.
TheOn August 5, 2010, the Company completed the conversion feature was determined to be a derivative liability in the amount of $2,000 of which $1,498 was attributable to related parties and $502 to the other creditors. Due to the decline in the priceall of the Company’s Common Stockoutstanding indebtedness and the issuance of the Series C Preferred Stock, the fair value of the embedded conversion feature on the Series B Preferred Stock was reduced to approximately $130 at December 31, 2010. In March 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock, revising among other things the terms of conversion, thereby eliminating the accounting requirement to classify the conversion feature on the Series B Preferred Stock as a derivative liability. The Company issued 8706,608 shares of Series B Preferred Stock in paymentaccordance with the executed Exchange Agreement entered into with Phoenix and certain other holders of dividends for the year ended December 31, 2011. IfCompany’s indebtedness (the “Recapitalization”). In accordance with the outstandingexecuted Stock Purchase Agreement the Company issued an additional 1,440 shares of Series B Preferred Stock is converted in its entirety at December 31, 2011, the Company would issue 213,636 shares of Common Stock.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
10. | Stockholders' equity (continued): |
Series C
On December 31, 2010, the Company completed the sale of 2,211 shares of Series C Preferred Stock through a Purchase Agreement with Phoenix Venture Fund LLC and certain other investors for proceeds of $2,211$1,440, net of expenses of $437 (the “Series B Financing”). The Company paid approximately $422$143 in expenses to a third partiesparty in connection with the financing. The Series C Preferred Stock is senior to the outstanding Series B Preferred Stock and Series A-1 Preferred Stock and all shares of Common Stock with respect to dividend rights and rights on liquidation, winding-up and dissolution in accordance with its purchase agreement. The expenses were recorded as a charge to additional paid in capital. The proceeds are to bewere used for working capital and general corporate purposes, in each case in the ordinary course of business, and to pay fees and expenses associated with the saleRecapitalization and Series B Financing.
In January and March 2012, a total of 140 shares of Series B Preferred Stock were converted and the Company issued 3,232 shares of Common Stock. The Company issued 948 and 870 shares of Series B Preferred Stock in payment of dividends for year ended December 31, 2012, and 2011, respectively. The Company recorded a beneficial conversion feature associated with the issuance of the Series B Preferred dividends of $268 and $22, for the year ended December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, there are 10,058 and 9,250 shares of Series B Preferred Stock outstanding, respectively. If the outstanding Series B Preferred Stock had been converted in its entirety on December 31, 2012, the Company would have issued 232,142 shares of Common Stock.
Series C Preferred Stock.Stock
The shares of Series C Preferred Stock carriescarry a ten percent (10%) annual dividend, payable quarterly in arrears in cash or in additional Series C Preferred Stock. InStock, and have liquidation preference that is senior to all other shares of the Company’s capital stock, TheSeries A-1 Preferred Stock, Series B Preferred Stock and Common Stock, pursuant to which holders of shares of Series C Preferred Stock will receive liquidating distributions in the amount of $1.50 per share plus any accrued dividends. TheAfter receipt of the liquidation preference on the Company’s series of Preferred Stock, the shares of Series C Preferred Stock isand Series B Preferred Stock also are entitled to participate pro rata on an as-converted basis with the shares of Common Stock in any remaining liquidation proceeds. The shares of Series C Preferred Stock are convertible into Common Stock at any time at the option of the holder at an initial conversion price of $0.0225 per share, subject to adjustment for stock dividends, splits, combinations and similar events and, with certain exceptions, the issuance of additional securities at a purchase price less than the then current conversion price of the Series C Preferred Stock. The
During 2011, the Company issued 195 shares of its Series C Preferred Stock and warrants to purchase 8,622 shares of Common Stock, as part of a professional service agreement with FirstGlobal Partners LLC (“FGP”). William Keiper, CIC’s President and Chief Operating Officer, is convertible any time after December 31, 2010. On December 31, 2010, theManaging Director of FGP. These shares of Series C Preferred Stock’s conversion feature was determined to be a derivative liability inStock and warrants are convertible into Common Stock under the amount of $179, of which $113 is attributable to related parties and $66 to the other holders.same terms discussed above.
OnCommunication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
| 10. | Stockholders' equity: |
In March 31, 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock and its Certificate of Designation for its Series C Preferred Stock to modify the anti-dilution provisions. Under the amendments, in the event additional stock is issued at a price lower than the conversion price then in effect, the new conversion price of the Series B Preferred Stock or Series C Preferred Stock cannot be (A) lower than the average closing market price for the Common Stock for the twenty (20) trading days prior to the closing date of a transaction requiring an adjustment in the conversion price (the “Market Price”) or (B) greater than the conversion price then in effect. The amendments were approved by the Company’s Board of Directors and the necessary majorities of the Company’s Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, and were filed with the Delaware Secretary of State on March 31, 2011. As a result of the amendments, the Company reclassified $362$363 from derivative liabilities to equity on March 31, 2011 (Note 10),for 160 and recorded a beneficial conversion feature203 of $64 related to the intrinsic value of the conversion feature of the dividends issued on March 31, 2011.Preferred Series B and C Preferred Stock.
OnIn March 6, 2011, and again on August 11, 2011, the Company issued 97.5 and 97.5 shares of its Series C Preferred Stock and warrants to purchase 4,333 and 4,333 shares of Common Stock, respectively, to its President as part of a professional service agreement. On August 10, 2011, the Company issued 36 shares of its Series C Preferred Stock and warrants to purchase 1,624 shares of Common Stock to its former President as part of a separation agreement. The shares of Series C Preferred Stock and warrants are convertible into Common Stock under the same terms discussed above. The Company recorded a beneficial conversion feature of $134 related to the intrinsic value of conversion feature of the shares of Series C Preferred Stock discussed above.
On March 31, 2011, the Company sold an additional 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $121 in expenses, of which $50 went to SG Phoenix, LLC in payment of an administrative fee and $71 in expenses to third parties in connection with the financing. The Company recorded a beneficial conversion feature of $800 related to the intrinsic value of the conversion feature of the shares of Series C Preferred Stock. As of December 31, 2011, there were 3,547
In March 2012, the Company issue 278 shares of Series C Preferred Stock outstanding.valued at $417 in settlement of the indemnification claim brought by Phoenix, resulting from the settlement of a 16b claim in January 2012 brought by a Company shareholder against Phoenix, certain affiliates of Phoenix and the Company as a nominal defendant. The Company booked a $418 accretion amount for the beneficial conversion feature on the 278 shares of Series C Preferred Stock at March 31, 2012.
On August 10, 2011, the Company issued 36 shares of its Series C Preferred Stock and warrants to purchase 1,624 shares of Common Stock to its former President as part of a separation agreement.
In September 2012, an investor converted 39 shares of Series C Preferred Stock into 1,729 shares of the Company’s Common Stock.
The Company issued 389 and 305 shares of Series C Preferred Stock in payment of dividends for the yearyears ended December 31, 2011. If2012 and 2011, respectively. The Company recorded a beneficial conversion feature associated with the outstandingissuance of the Series C Preferred Stock is converted in its entirety,dividends of $385 and $198for the Company would issue 157,644 sharesyears ended December 31, 2012 and 2011, respectively. As of Common Stock.
After receipt of the liquidation preference, theDecember 31, 2012, there are 4,175 shares of Series C Preferred Stock outstanding. If the outstanding shares of Series C Preferred Stock were converted in their entirety, the Company would issue 185,572 shares of Common Stock.
Series D Preferred Stock
The material terms of the Series D-1 Preferred Stock and Series D-2 Preferred Stock, other than the initial conversion price, are essentially the same. The Series D-1 Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion price of $0.225 per share (subject to adjustment) and the Series D-2 Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion price of $0.05 per share (subject to adjustment). The Series D Preferred Stock accrues dividends at the rate of 10% per annum and will receive liquidating distributions in the amount of $1.00 per share plus any accrued dividends. Generally, the Series D Preferred Stock votes together on an as converted basis with the holders of Common Stock and the holders of Series A-1 Preferred Stock, Series B Preferred Stock will participate pro rataand Series C Preferred Stock. In addition, the Series D Preferred Stock enjoys protective provisions similar to those provided to the holders of Series C Preferred Stock. The Series D Preferred Stock ranks senior to the Company’s outstanding shares of Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common Stock with respect to dividend rights and liquidation preferences. The Company issued 14 and 41 shares of Series D-1 and D-2 Preferred Stock in payment of dividends for year ended December 31, 2012. The Company recorded a beneficial conversion feature associated with the issuance of the Series D-1 Preferred dividends of $13 for the year ended December 31, 2012. As of December 31, 2012, there are 1,124 and 3,302 shares of Series D-1 and D-2 Preferred Stock outstanding, respectively. If the outstanding Series D-1 and D-2 Preferred Stock had been converted in its entirety on an as-converted basis withDecember 31, 2012, the Company would have issued 49,961 and 66,053 shares of Common Stock in any remaining liquidationStock.
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
10. Stockholders' equity (continued):
Series C (continued)
proceeds (after payment of the liquidation preference on the Series C Preferred Stock, Series B Preferred Stock and Series A-1 Preferred Stock).| 10. | Stockholders' equity: |
Warrants:
Series C Warrants
Each investor receivedDuring 2012, 28,511 warrants were exercised on a warrant to purchase a number ofcashless basis and the Company issued 20,186 shares of Common Stock equalin exchange for such exercise. During 2012, the Company issued 7,439 shares of common stock for the exercise 6,651 warrants for $212 in cash. During 2011, 12,222 warrants were exercised on a cashless basis and the Company issued 5,239 shares of common stock in exchange for such exercise.
In 2102, the Company issued 5,349 warrants in connection with the April 2012 Notes. The Company issued 3,000 warrants to related parties and 294 warrants to unrelated parties as finder’s fees associated with the aggregate numberNovember Financing. In 2011, the Company issued 8,667 warrants to a related party for services, 18,833 and 32,235warrants to related parties and others, respectively, in connections with the issuance of additional 800 shares of Series C Preferred Stock purchased byin March and the investor divided by 0.0225. Each warrant issued in connection with the Series C Financing has an exercise price of $0.0225 per share and is exercisable in whole or in part, including by means of cashless exercise, for a period of three years from the date of issuance.
In August 2011, an investor exercised on a cashless basis, 3,333 warrants in exchange for 1,629 shares of the Company’s common stock. In December 2011 a related party exercised, on a cashless basis, 8,889 warrants in exchange for 5,239 shares of the Company’s Common Stock.
If the outstanding Series C Warrants are executed for cash in their entirety, the Company would issue 132,601 shares of Common Stock.
Other Warrants
Note Financings. At December 31, 2011, 182,6442012, 151,722 shares of Common Stockcommon stock were reserved for issuance upon exercise of outstanding warrants. Including the 135,201 shares of Common Stock issuable upon exercise of the Series C Warrants described above.
A summary of the warrants issued areis as follows:
| | | December 31, 2011 | | | December 31, 2010 | |
| | | Warrants | | | Weighted Average Exercise Price | | | Warrants | | | Weighted Average Exercise Price | |
| Outstanding at beginning of period | | | 135,131 | | | $ | 0.0274 | | | | 6,482 | | | $ | 0.0433 | |
| Issued | | | 59,735 | | | $ | 0.0064 | | | | 128,649 | | | $ | 0.0266 | |
| Exercised | | | (12,222 | ) | | $ | 0.0225 | | | | − | | | | − | |
| Forfeited | | | − | | | | − | | | | − | | | | − | |
| Expired | | | − | | | | − | | | | − | | | | − | |
| Outstanding at end of period | | | 182,644 | | | $ | 0.0261 | | | | 135,131 | | | $ | 0.0274 | |
| Exercisable at end of period | | | 182,644 | | | $ | 0.0261 | | | | 135,131 | | | $ | 0.0274 | |
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
10. | Stockholders' equity (continued): |
Other Warrants| | | December 31, 2012 | | December 31, 2011 | |
| | | Warrants | | Weighted Average Exercise Price | | Warrants | | Weighted Average Exercise Price | |
| Outstanding at beginning of period | | 182,644 | | $ | 0.0261 | | 135,131 | | $ | 0.0274 | |
| Issued | | 8,643 | | $ | 0.0500 | | 59,735 | | $ | 0.0064 | |
| Exercised | | (35,162 | ) | $ | 0.0264 | | (12,222 | ) | $ | 0.0011 | |
| Forfeited | | − | | | − | | − | | | − | |
| Expired | | (4,403 | ) | | − | | − | | | − | |
| Outstanding at end of period | | 151,722 | | $ | (0.0269 | ) | 182,644 | | $ | 0.0261 | |
| Exercisable at end of period | | 151,722 | | $ | 0.0269 | | 182,644 | | $ | 0.0261 | |
A summary of the status of the warrants outstanding as of December 31, 20112012 is as follows:
| | | | December 31, 2011 | |
| Number of Warrants | | | Weighted Average Remaining Life | | | Weighted Average Exercise Price per share | | | Shares Exercisable | | | Weighted Average Exercise price | |
| | | | | | | | | | | | | | |
| | 31,974 | | | | 1.31 | | | $ | 0.0433 | | | | 31,974 | | | $ | 0.0433 | |
| | 150,670 | | | | 2.11 | | | $ | 0.0225 | | | | 150,670 | | | $ | 0.0225 | |
| | 182,644 | | | | 1.97 | | | $ | 0.0261 | | | | 182,644 | | | $ | 0.0261 | |
| | | December 31, 2012 |
| Number of Warrants | | Weighted Average Remaining Life | | Weighted Average Exercise Price per share | | Shares Exercisable |
| | | | | | | |
| 12,670 | | 0.51 | | $ | 0.0433 | | 12,670 |
| 130,409 | | 1.05 | | $ | 0.0225 | | 130,409 |
| 8,643 | | 2.56 | | $ | 0.0500 | | 8,643 |
| 151,722 | | 1.12 | | $ | 0.0269 | | 151,722 |
Restricted Share Grants
The Company issued 46 restricted shares during the twelve months ended December 31, 2012. As part of the Recapitalization in 2010, the Company issued restricted shares to four employees in exchange for reductions in their respective salaries payable in cash. The number of shares issued was calculated based on the amount of the annual salary reduction divided by $0.06 per share. Fifty percentAs of the shares vested on December 31, 2012, the company had issued 452 shares of restricted stock in connection with the recapitalization. No other restricted shares will be issued in connection with the 2010 and the remaining 50% vested on June 30, 2011.recapitalization.
Communication Intelligence CorporationNotes to Consolidated Financial Statements
(In thousands except per share amounts)
| 11. | Commitments:Commitments & Contingencies: |
Lease commitments:
The Company currently leases its principal facilities in Redwood Shores, California, pursuant to a sublease that expires in 2016. In addition to monthly rent, the facilities are subject to additional rental payments for utilities and other costs above the base amount. Facilities rent expense was approximately $275, and $271, in 2012 and $281, in 2011, and 2010, respectively.
| | | Payments due by period | | |
| Contractual obligations | | Total | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter |
| Operating lease commitments | | | 1,100 | | | | 275 | | | | 284 | | | | 292 | | | | 249 | | | | - | |
As of December 31, 2011,2012, the Company had federal net operating loss carry-forwards available to reduce taxable income of approximately $64,491.$64,182. The net operating loss carry-forwards expire between 20112016 and 2030.2032. The Company also had federal research and investment tax credit carry-forwards of approximately $128$165 that expire at various dates through 2012.2017. The Company also has state net operating loss carry-forwards available to reduce taxable income of approximately $31,200. The net operating loss carry-forwards expire between 20132016 through 2030.2031.
Deferred tax assets and liabilities at December 31, consist of the following:
| | | 2011 | | | 2010 | |
| Deferred tax assets: | | | | | | |
| Net operating loss carry-forwards | | $ | 25,796 | | | $ | 25,373 | |
| Credit carry-forwards | | | 128 | | | | 165 | |
| Deferred income | | | 514 | | | | 456 | |
| Intangibles | | | 839 | | | | 1,175 | |
| Other, net | | | 120 | | | | 210 | |
| | | | | | | | | |
| Total deferred tax assets | | | 27,397 | | | | 27,379 | |
| | | | | | | | | |
| Valuation allowance | | | (27,397 | ) | | | (27,379 | ) |
| | | | | | | | | |
| Net deferred tax assets | | $ | - | | | $ | - | |
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
12.Income taxes (continued):| | 2012 | | 2011 | |
| Deferred tax assets: | | | | |
| Net operating loss carry-forwards | $ | 28,243 | | $ | 25,796 | |
| Credit carry-forwards | | 165 | | | 128 | |
| Deferred income | | 399 | | | 514 | |
| Intangibles | | 484 | | | 839 | |
| Other, net | | 74 | | | 120 | |
| | | | | | | |
| Total deferred tax assets | | 29,365 | | | 27,397 | |
| | | | | | | |
| Valuation allowance | | (29,365 | ) | | (27,397 | ) |
| | | | | | | |
| Net deferred tax assets | | - | | | - | |
Income tax benefit differs from the expected statutory rate as follows:
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Expected federal income tax benefit | | $ | (1,150 | ) | | $ | (1,414 | ) | | $ | (1,534 | ) | | $ | (1,150 | ) |
| State income tax benefit | | | (299 | ) | | | (250 | ) | | | (195 | ) | | | (299 | ) |
| Other | | | (248 | ) | | | (548 | ) | | | (239 | ) | | | (248 | ) |
| Change in valuation allowance | | | 1,697 | | | | 2,212 | | | | 1,968 | | | | 1,697 | |
| Income tax benefit | | $ | – | | | $ | – | | | $ | – | | | $ | – | |
A full valuation allowance has been established for the Company's net deferred tax assets since the realization of such assets through the generation of future taxable income is uncertain.
Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net operating losses and tax credit carry-forwards may be impaired or limited in certain circumstances. These circumstances include, but are not limited to, a cumulative stock ownership change of greater than 50%, as defined, over a three-year period. During 1997, the Company experienced stock ownership changes which could limit the utilization of its net operating loss and research and investment tax credit carry-forwards in future periods. In addition, a study of recent transactions has not been preformedperformed to determine whether any further limitations might apply.
13.Employee benefit plans:
| 13. | Employee benefit plans: |
The Company sponsors a 401(k) defined contribution plan covering all employees meeting certain eligibility requirements. Contributions made by the Company are determined annually by the Board of Directors. To date, the Company has made no contributions to this plan.
In December 2010,
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Philip S. Sassower, certify that:
1. I have reviewed this report on Form 10-K of Communication Intelligence Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the Company received a demand letter from counsel from a Company stockholder alleging that Phoenix Venture Fund, LLC (“PVF”statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and its affiliates mayinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be liabledesigned under our supervision, to ensure that material information relating to the Companyregistrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for short swing profitsexternal purposes in connectionaccordance with generally accepted accounting principles;
c. Evaluated the cashless exerciseeffectiveness of certain warrants issuedthe registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to PVFmaterially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 1, 2013
/s/ Philip S. Sassower
Chairman, Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrea Goren, certify that:
1. I have reviewed this report on Form 10-K of Communication Intelligence Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the Companyfinancial statements, and other financial information included in connectionthis report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the Credit Agreementeffectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the “Warrants”),registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: April 1, 2013
/s/ Andrea Goren
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Philip S. Sassower, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 16(b)906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Communication Intelligence Corporation on Form 10-K for the year ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Communication Intelligence Corporation.
Date: April 1, 2013
By: /s/ Philip S. Sassower
Chairman and Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Communication Intelligence Corporation and will be retained by Communication Intelligence Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by Communication Intelligence Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “1934 Act)“Exchange Act”).
In January 2011 the Company received a letter from PVF concluding that the issuance (and/or modification) and cashless exercise of the Warrants were exempt transactions from Section 16(b) pursuant to Rules 16b-3(d) and (e) on the basis that PVF was a director by deputation since its co-managing members were Company board observers and thus functional directors.
The Company’s Board of Directors convened a Special Committee of Independent Directors (the “Special Committee”) to investigate the allegations and the Special Committee retained special independent counsel. After analyzing the transactions identified in the demand letter, and receiving advice from the special independent counsel, the Special Committee concluded that PVF and its affiliates were Such certification will not be deemed to be directors for purposes of Rule 16(b)incorporated by reference into any filing under the 1934Securities Act of 1933, as a result of their activities withamended, or the Company duringExchange Act, except to the time period 2007 to 2009. The full Board ratified the Special Committee’s conclusionextent that the transactions were exempt from Section 16(b), and the Company informed the stockholder that CIC would not commence litigation to recover the profit referred to in the demand letter.Communication Intelligence Corporation specifically incorporates it by reference.
In April 2011, despite the Special Committee’s finding, the stockholder commenced a civil action against PVF, an affiliate of PVF and the two co-manager of the managing member of PVF for alleged violations of Section 16(b) and included the Company as a nominal defendant. In December 2011, in order to avoid further significant costs and
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrea Goren, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)
14.Subsequent event (continued) on Form 10-K for the year ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Communication Intelligence Corporation.
expenses, and without admitting any liability or wrongdoing or the lackDate: April 1, 2013
By: /s/ Andrea Goren
Chief Financial Officer
(Principal Financial Officer)
A signed original of merit in any defense, PVF and its affiliates and the Company settled the action, and, in January 2012, PVF paid the Company $500 in the aggregate, consisting of $175 in cash and 6.5 million sharesthis written statement required by Section 906 of the Company’s Common Stock valued at $325.Sarbanes-Oxley Act of 2002 has been provided to Communication Intelligence Corporation and will be retained by Communication Intelligence Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
In January 2012, PVF requested indemnification from the Company for all costs and expenses incurred and amounts paid in settlement, net of any insurance payments receivedThis certification accompanies this Report on Form 10-K pursuant to Section 906 of the Company’s 1986 By-laws,Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by Communication Intelligence Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the ”By-laws”“Exchange Act”), and. Such certification will not be deemed to be incorporated by reference into any filing under the June 5, 2008, Credit Agreement,Securities Act of 1933, as amended, on May 28, 2009 (the Credit Agreement”).
In January 2012,or the Board requested that the Special Committee review PVF's request for indemnification and make a recommendationExchange Act, except to the Board. The Special Committee retained special independent counsel and, after receiving advice from such counsel, negotiated with PVF and settled the claim to avoid further costs and expenses, subject to the approval of the Board.
In February 2012, the Board approved the settlement. Pursuant to the terms of the settlement, the Company issued 277,957 shares of its Series C Preferred Stock to PVF and the Company and PVF exchanged mutual releases relating to the indemnification claim and the litigation. The shares of Series C Preferred Stock issued in connection with the settlement had an approximate of $417.
The Company has combined the PVF settlement with the cost of indemnification, and has recorded a net charge to expense of $71 at December 31, 2011.extent that Communication Intelligence Corporation specifically incorporates it by reference.