iSign Solutions Inc. - Quarter Report: 2013 September (Form 10-Q)

frm_10q9302013.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2013

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-19301

COMMUNICATION INTELLIGENCE CORPORATION

(Exact name of registrant as specified in its charter)

	Delaware		94-2790442
	(State or other jurisdiction of		(I.R.S. Employer
	incorporation or organization)		Identification No.)

275 Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413

(Address of principal executive offices) (Zip Code)

(650) 802-7888

Registrant's telephone number, including area code

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

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

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 Exchange Act.

large accelerated filer

accelerated filer

non-accelerated filer

Smaller reporting Company

Indicate by check mark whether the registrant is a shell company (as defined in Section 12b-2 of the exchange Act)

Yes

Number of shares outstanding of the issuer's Common Stock, as of November 14, 2013: 225,824,328.

INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2013 (unaudited) and December 31, 2012	3
Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2013 and 2012 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2013 and 2012 (unaudited)	6
Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	23
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 2. Unregistered Sale of Securities and Use of Proceeds	24
Item 3. Defaults Upon Senior Securities	24
Item 4. Mine Safety Disclosures	24
Item 5. Other Information	24
Item 6. Exhibits
Signatures	27

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

Communication Intelligence Corporation

Condensed Consolidated Balance Sheets

(In thousands)

	September 30,			December 31,
	2013			2012
Assets	Unaudited
Current assets:
Cash and cash equivalents	$	287		$	486
Accounts receivable, net of allowance of $0 at September 30, 2013 and $27 at December 31, 2012		259			701
Prepaid expenses and other current assets		78			73

Total current assets		624			1,260
Property and equipment, net		20			28
Patents, net		1,380			1,655
Other assets		29			29

Total assets	$	2,053		$	2,972

Liabilities and Stockholders' Equity
Current liabilities:
Short-term notes payable		750			-
Accounts payable		256			75
Accrued compensation		256			289
Other accrued liabilities		190			150
Deferred revenue		589			569

Total current liabilities		2,041			1,083
Deferred revenue long-term		−			249
Deferred rent		99			125
Derivative liability		37			128
Total liabilities		2,177			1,585
Commitments and contingencies
Stockholders' (deficit) equity:
Series A-1 Preferred Stock, $.01 par value; 2,000 shares authorized; 1,011 and 953 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively, ($1,011 liquidation preference at September 30, 2013)		1,011			953
Series B Preferred Stock, $.01 par value; 14,000 shares authorized; 10,830 and10,058 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively, ($16,245 liquidation preference at September 30, 2013)		8,959			8,188
Series C Preferred Stock, $.01 par value; 9,000 shares authorized; 4,496 and 4,175 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively, ($6,743 liquidation preference at September 30, 2013)		4,920			4,754
Series D-1 Preferred Stock, $.01 par value; 3,000 shares authorized; 1,449 and 1,124 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively, ($1,449 liquidation preference at September 30, 2013)		2,278			2,158
Series D-2 Preferred Stock, $.01 par value; 8,000 shares authorized; 4,511 and 3,302 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively, ($4,511 liquidation preference at September 30, 2013)		4,282			3,073
Common Stock, $.01 par value; 1,500,000 shares authorized; 232,324 issued, 225,824 outstanding at September 30, 2013 and 231,023 shares issued and 224,523 shares outstanding at December 31, 2012		2,322			2,309
Treasury shares, 6,500 shares at September 30, 2013 and December 31, 2012, respectively		(325	)		(325	)
Additional paid in capital		94,664			95,262
Accumulated deficit		(117,684	)		(114,420	)
Accumulated other comprehensive loss		(15	)		(29	)
Total CIC stockholders' equity		412			1,923
Non-Controlling interest		(536	)		(536	)
Total Stockholders’ (deficit) equity		(124	)		1,387
Total liabilities and stockholders' (deficit) equity	$	2,053		$	2,972

See accompanying notes to these Condensed Consolidated Financial Statements

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Communication Intelligence Corporation

Condensed Consolidated Statements of Operations

Unaudited

(In thousands, except per share amounts)

	Three Months Ended						Nine months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Revenue:
Product	$	195		$	355		$	358		$	1,231
Maintenance		175			161			509			477
Total Revenue		370			516			867			1,708

Operating costs and expenses:

Cost of sales:
Product		54			87			63			308
Maintenance		45			9			194			48
Research and development		471			441			1,563			1,247
Sales and marketing		291			329			884			1,059
General and administrative		414			426			1,506			1,388
Total operating costs and expenses		1,275			1,292			4,210			4,050

Loss from operations		(905	)		(776	)		(3,343	)		(2,342	)

Other income (expense), net		(2	)		(3	)		(3	)		(9	)
Interest expense:
Related party		(6	)		(30	)		(9	)		(88	)
Other	─				(34	)	─				(57	)
Amortization of loan discount and deferred financing:
Related party	─				(5	)	─				(13	)
Other	─				(7	)	─				(16	)
Gain on derivative liability		26			43			91			149
Net loss		(887	)		(812	)		(3,264	)		(2,376	)

Accretion of beneficial conversion feature, Preferred shares:
Related party		(23	)		(93	)		(164	)		(767	)
Other		(14	)		(58	)		(195	)		(201	)

Preferred stock dividends:
Related party		(281	)		(158	)		(717	)		(370	)
Other		(225	)		(51	)		(614	)		(121	)
Income tax	─			─			─			─
Net loss before non-controlling interest		(1,430	)		(1,172	)		(4,954	)		(3,835	)
Net loss attributable to non-controlling interest	─			─			─			─
Net loss attributable to commonstockholders	$	(1,430	)	$	(1,172	)	$	(4,954	)	$	(3,835	)
Basic and diluted loss per common share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)
Weighted average common shares outstanding, basic and diluted		225,824			224,492			225,810			222,198

See accompanying notes to these Condensed Consolidated Financial Statements

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Communication Intelligence Corporation

Condensed Consolidated Statements Comprehensive Loss

Unaudited

(In thousands, except per share amounts)

	Three Months Ended						Nine months Ended
	September 30,						September 30,
	2013			2012			2013			2012

Net loss:	$	(887	)	$	(812	)	$	(3,264	)	$	(2,376	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment	─				1		─				5
Total comprehensive loss	$	(887	)	$	(811	)	$	(3,264	)	$	(2,371	)

See accompanying notes to these Condensed Consolidated Financial Statements

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Communication Intelligence Corporation

Condensed Consolidated Statements of Cash Flows

Unaudited

(In thousands)

	Nine months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(3,264	)	$	(2,376	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		287			365
Amortization of debt discount and deferred financing costs		−			29
Stock-based employee compensation		560			376
Restricted stock expense		−			2
Series C Preferred Shares issued in settlement of indemnity claim		−			417
Common Stock received as settlement of 16b claim		−			(325	)
Warrants issued for services		−			3
Gain on derivative liability		(91	)		(149	)
Changes in operating assets and liabilities:
Accounts receivable		442			(216	)
Prepaid expenses and other assets		(5	)		(165	)
Accounts payable		181			75
Accrued compensation		(33	)		76
Other accrued liabilities		28			(37	)
Deferred revenue		(229	)		(136	)
Net cash used for operating activities		(2,124	)		(2,061	)

Cash flows from investing activities: Acquisition of property and equipment		(4	)		(8	)
Net cash used for investing activities		(4	)		(8	)

Cash flows from financing activities:
Proceeds from issuance of short-term notes payable		1,000			2,328
Proceeds from exercise of warrants for cash		29			213
Proceeds from exercise of stock options	─				12
Proceeds from issuance of Series D-1 Preferred shares		230			-
Proceeds from issuance of Series D-2 Preferred shares		920			-
Payment of short-term notes payable		(250	)		(225	)
Net cash provided by financing activities		1,929			2,328

Effect of exchange rate changes on cash and cash equivalents		−			−

Net (decrease) increase in cash and cash equivalents		(199	)		259
Cash and cash equivalents at beginning of period		486			307
Cash and cash equivalents at end of period	$	287		$	566

See accompanying notes to these Condensed Consolidated Financial Statements

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Communication Intelligence Corporation

Condensed Consolidated Statements of Cash Flows (Continued)

Unaudited

(In thousands)

	Nine months Ended September 30,
	2013		2012
Supplementary disclosure of cash flow information
Interest paid	$	2	$	─
Income tax paid	$	─	$	─

Non-cash financing and investing transactions
Dividends on preferred shares	$	1,331	$	491
Accretion of beneficial conversion feature for dividends on preferred shares	$	201	$	968
Accretion of beneficial conversion feature on issuance of Series D-1 Preferred Shares	$	158	$	−
Cashless exercise of warrants	$	─	$	202
Conversion of Series B Preferred Stock into Common Stock	$	─	$	140
Conversion of Series C Preferred Stock into Common Stock	$	─	$	39

See accompanying notes to these Condensed Consolidated Financial Statements

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

1.	Nature of business and summary of significant accounting policies

Basis of Presentation

The financial information contained herein should be read in conjunction with the Company's consolidated audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2012.

The accompanying unaudited condensed consolidated financial statements of Communication Intelligence Corporation and its subsidiary (the “Company” or “CIC”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements included in this quarterly report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at the dates presented and the Company’s results of operations and cash flows for the periods presented. The Company’s interim results are not necessarily indicative of the results to be expected for the entire year.

The Company 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 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® Ceremony® Server, the iSign® suite of products and services, including iSign® Enterprise and iSign® Console™, Sign-it® and the iSign® toolkits.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2013, the Company’s accumulated deficit was approximately $ 117,684, and for the nine months ended September 30, 2013, the Company had incurred a net loss of $3,264. The Company also has a working capital deficit at September 30, 2013, of approximately $1,417. The Company has primarily met its working capital needs through the issuance of debt and sale of equity securities. As of September 30, 2013, the Company’s cash balance was approximately $287. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

1.	Nature of business and summary of significant accounting policies

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.

Revenue recognition

For products sold under perpetual license, the Company recognizes revenue 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. For software sold under a term license, the Company recognizes revenue over the term of the license granted. Revenue from customization of software is recognized when all 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.

Software license agreements may contain multiple elements, including upgrades and enhancements, products deliverable on a when and if available basis and post contract support.

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, Management’s best estimate of the selling prices is 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.

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). At September 30, 2013, the total value of treasury stock was $325.

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

1.	Nature of business and summary of significant accounting policies

Accounting Changes and Recent Accounting Pronouncements

Accounting Standards Issued But Not Yet Adopted

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 Company’s financial position, results of operations and cash flows.

2.	Accounts receivable and revenue concentrations

The following table summarizes accounts receivable and revenue concentrations:

	Accounts Receivable As of September 30,						Total Revenue for the three months ended September 30,						Total Revenue for the nine months ended September 30,
	2013			2012			2013			2012			2013			2012
Customer #1		26	%
Customer #2		47	%		37	%		31	%					18	%		10	%
Customer #3					10	%
Customer #4					13	%					13	%
Customer #5					22	%					29	%					10	%
Customer #6																	26	%
Customer #7								10	%					12	%
Total concentration		73	%		82	%		41	%		42	%		30	%		46	%

Patents

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. Fair value is determined by estimating future cash flows from the products that are and will be protected by the patents and taking into account the factors listed in Critical Accounting Policies in the Company’s Annual Report on Form 10-K.

Management completed an analysis of the Company’s patents as of December 31, 2012. Based on that analysis, the Company concluded that no impairment of the carrying value of the patents existed. The Company believes that no events or circumstances occurred or changed during the three and nine months ended September 30, 2013, and therefore concluded that no impairment in the carrying values of the patents existed at September 30, 2013.

Amortization of patent costs was $92 and $275 for the three and nine-month periods ended September 30, 2013 and $90 and $274 for the three and nine-month periods ended September 30, 2012, respectively.

Intangible Assets

The following table summarizes intangible assets:

	September 30, 2013					December 31, 2012
	Carrying Amount		Accumulated Amortization			Carrying Amount		Accumulative Amortization
Amortizable intangible assets:
Patents	$	6,746	$	(5,366	)	$	6,746	$	(5,091	)

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

4.	Short-term notes payable

The Company borrowed $250 from Phoenix Banner Holding LLC, $250 from Kendu Partners Company and $250 from Michael W. Engmann, each a related party, on August 3, 2013, September 3, 2013, and September 27, 2013, respectively. The aggregate $750 was borrowed in exchange for three unsecured demand notes that bear interest at the rate of 10% per annum. At September 30, 2013 accrued interest associated with the above notes was $6. The Company used the proceeds for working capital and general corporate purposes.

In April 2013, the Company borrowed $250 in the form of a demand note from Phoenix Banner Holdings LLC, with an interest rate of 10% per annum. The note plus $2 of accrued interest was paid in May 2013.

5.	Derivative liability

The Company has 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”) require liability classification because of certain provisions that may result 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 September 30, 2013, and December 31, 2012, was insignificant.

In December 2010, the Company determined that the embedded conversion feature of its Series B Participating Convertible Preferred Stock (the “Series B Preferred Stock”) and Series C Participating Convertible Preferred Stock (the “Series C Preferred Stock”) required liability classification due to the impact the anti-dilution provisions could have had on the number of shares issuable upon conversion. 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 by amending 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 and/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 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, Series B and Series C Preferred Stock, and were filed with the Delaware Secretary of State on March 31, 2011. As a result of these amendments, the Series B Preferred Stock and Series C Preferred Stock no longer require liability classification.

The fair value of the outstanding derivative liabilities at September 30, 2013, and December 31, 2012, was $37 and $128, respectively.

The Company uses the Black-Scholes pricing model to calculate fair value of its warrant derivative liabilities. Key assumptions used to apply these models are as follows:

	September 30, 2013	December 31, 2012
Expected term	0.3 to 2.1 years	0.3 to 2.8 years
Volatility	202.1%	205.3%
Risk-free interest rate	2.64%	1.78%
Dividend yield	0%	0%

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

5.	Derivative liability

Fair value measurements:

Assets and liabilities measured at fair value as of September 30, 2013 and December 31, 2012, are as follows:

	Value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
	September 30, 2013		(Level 1)		(Level 2)		(Level 3)
Derivative liability	$	37	$	−	$	−	$	37

	December 31, 2012
Derivative liability	$	128	$	−	$	−	$	128

The fair value framework requires a categorization of assets and liabilities into three levels based upon the assumptions (inputs) 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:

Level 1: Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2: Applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in 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: Applies to assets or liabilities for which there are unobservable inputs to 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 September 30, 2013, and December 31, 2012, and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category.

Changes in the fair market value of the Level 3 derivative liability for the nine-month period ended September 30, 2013 are as follows:

	Derivative Liability
Balance at January 1, 2013	$	128
Gain on derivative liability		(91	)
Balance at September 30, 2013	$	37

6.	Net loss per share

The Company calculates basic net loss per share, based on the weighted average number of shares outstanding, and when applicable, diluted income per share, which is based on the weighted average number of shares and potential dilutive shares outstanding.

For the nine-months ended September 30, 2013, 70,017 shares of Common Stock subject to outstanding options, 7,222 shares of Series A-1 Preferred Stock, 249,941 shares of Series B Preferred Stock, 199,801 shares of Series C Preferred Stock, 64,401 shares of Series D-1 Convertible Preferred Stock (the “Series D-1

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

6.	Net loss per share

Preferred Stock”) and 90,215 shares of Series D-2 Convertible Preferred Stock (the “Series D-2 Preferred Stock”) on an as converted basis and 129,335 shares issuable upon exercise of warrants were excluded from

the calculation of dilutive earnings per share as the exercise of such options and warrants would be anti-dilutive.

For the nine-months ended September 30, 2012, 46,080 shares of Common Stock subject to outstanding options, 6,540 shares of Series A-1 Preferred Stock, 226,434 shares of Series B Preferred Stock and 181,010 shares of Series C Preferred Stock on an as converted basis and 149,831 shares issuable upon exercise of warrants were excluded from the calculation of dilutive earnings per share as the exercise of such options and warrants would be anti-dilutive.

The following table is a reconciliation of the numerator (net loss) and the denominator (number of shares) used in the basic and diluted EPS calculations and sets forth potential shares of common stock that are not included in the diluted net loss per share calculation as the effect is antidilutive:

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2013			2012			2013			2012

Numerator-basic and diluted net loss	$	(1,430	)	$	(1,172	)	$	(4,954	)	$	(3,835	)
Denominator-basic or diluted weighted average number of common shares outstanding		225,824			224,492			225,810			222,198
Net loss per share – basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)

Equity

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 single option valuation 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. The estimated average forfeiture rate for the nine-months ended September 30, 2013 and 2012, was approximately 9.73% and 9.60%, respectively, based on historical data.

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:

	Nine-months Ended September 30, 2013	Nine-months Ended September 30, 2012
Risk free interest rate	0.35% - 4.92%	0.62% – 5.11%
Expected life (years)	2.82 – 7.00	2.82 – 7.00
Expected volatility	91.99% – 198.38%	91.99% – 180.36%
Expected dividends	None	None

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

Equity

The Company granted 26,554 stock options during the three and nine months ended September 30, 2013. There were no stock options exercised during the three and nine months ended September 30, 2013.

The Company granted 2,000 stock options during the three and nine months ended September 30, 2012, and 184 stock options were exercised for $12 in cash.

The following table summarizes the allocation of stock-based compensation expense related to stock option grants for the three and nine months ended September 30, 2013 and 2012.

	Three Months Ended September 30,				Nine months Ended September 30,
	2013		2012		2013		2012
Research and development	$	36	$	45	$	153	$	166
Sales and marketing		13		27		55		70
General and administrative		75		30		320		117
Director options		7		7		32		23
Stock-based compensation expense	$	131	$	109	$	560	$	376

A summary of option activity under the Company’s plans as of September 30, 2013 and 2012 is as follows:

	2013									2012
Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1,		44,529		$	0.05			$	−		51,353		$	0.09			$	4,449
Granted		26,554		$	0.04			$	−		2,000		$	0.06			$	120
Exercised		-		$	-			$	-		(184	)	$	0.07			$	(2	)
Forfeited or expired		(1,066	)	$	0.13			$	−		(7,089	)	$	0.26			$	(1,830	)
Outstanding at September 30		70,017		$	0.05		5.24	$	−		46,080		$	0.06		5.38	$	2,237
Vested and expected to vest at September 30		63,204		$	0.05		5.24	$	−		41,656		$	0.06		5.38	$	2,465
Exercisable at September 30		38,793		$	0.05		4.73	$	−		21,411		$	0.07		4.96	$	1,603

The following tables summarize significant ranges of outstanding and exercisable options as of September 30, 2013:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price
$	0.02 – $0.50		70,017		5.24	$	0.05		38,793	$	0.05

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

Equity

The following tables summarize the Company’s unvested shares as of September 30, 2013:

Nonvested Shares	Shares			Weighted Average Grant-Date Fair Value
Unvested at January 1, 2013		21,210		$	0.05
Granted		26,554		$	0.04
Forfeited		(682	)	$	0.14
Vested		(15,858	)	$	0.06
Unvested at September 30, 2013		31,224		$	0.04

As of September 30, 2013, there was $ 399 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the plans. The unrecognized compensation expense is expected to be realized over a weighted average period of 2.75 years.

Information with respect to the class of Preferred Stock at September 30, 2013 is as follows:

Class of Preferred Stock	Issue Date	Annual Dividend			Annual Dividend Payable, in Cash or In Kind	Liquidation Preference		Conversion Price		YTD Dividend Shares in Kind		Total Preferred Shares Outstanding		Common Shares to be issued if Fully Converted

Series A-1	May 2008		8	%	Quarterly in Arrears	$	1.00	$	0.1400		58		1,011		7,221
Series B	August 2010		10	%	Quarterly in Arrears	$	1.50	$	0.0433		771		10,830		250,115
Series C	December/March 2011		10	%	Quarterly in Arrears	$	1.50	$	0.0225		320		4,496		199,822
Series D-1	November 2012/May 2013		10	%	Quarterly in Arrears	$	1.00	$	0.0225		95		1,449		64,400
Series D-2	November 2012/May 2013		10	%	Quarterly in Arrears	$	1.00	$	0.0500		288		4,511		90,220
Total											1,532

Series A-1 Preferred Stock

In May 2008, the Company issued shares of the Company’s Series A Cumulative Convertible Preferred Stock in exchange for certain debt. The Series A Cumulative Convertible Preferred Stock was subsequently exchanged in October 2008 for an equivalent number of shares of Series A-1 Preferred Stock. The shares of Series A-1 Preferred Stock are convertible any time and are subordinate to the Series B, Series C and Series D Preferred Stock.

Series B Preferred Stock

In August 2010, the Company completed the conversion of all of its outstanding indebtedness and issued shares of 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 (the “Recapitalization”). The Company sold additional shares of Series B Preferred Stock for cash (the “Series B Financing”) in addition to the conversion of its outstanding debt. The proceeds were 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 and Series B Financing. The shares of Series B Preferred Stock are convertible at any time and are subordinate to the Series C and Series D Preferred Stock.

- 15 -

Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

Equity

Series C Preferred Stock

In December 2010, the Company completed the sale of shares of Series C Preferred Stock through a Securities Purchase Agreement with Phoenix Venture Fund LLC and certain other investors. The proceeds were 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 sale of the Series C Preferred Stock. The shares of Series C Preferred Stock are convertible into Common Stock at any time and are subordinate to the Series D Preferred Stock.

In March 2011, the Company issued shares of its Series C Preferred Stock and warrants to purchase shares of Common Stock to its President as part of a professional services agreement. In addition the Company sold additional shares of Series C Preferred Stock for cash.

In January 2012, the Company received 6,500 shares of Common Stock from Phoenix Venture Fund LLC (“Phoenix”) in settlement of a 16b claim brought by a Company stockholder against Phoenix, certain affiliates and the Company, as a nominal defendant. The Common Stock was valued at $325. In settlement of an indemnification claim brought by Phoenix in March 2012, resulting from the settlement of the 16b claim in January 2012, the Company issued to Phoenix 278 shares of Series C Preferred Stock valued at $417. The Company booked a $418 accretion amount for the beneficial conversion feature on the 278 shares of Series C Preferred Stock.

Series D Preferred Stock

In November 2012, stockholders approved an increase in the Company’s authorized capital and the issuance of Series D-1 and Series D-2 Preferred Stock.

In May 2013, the Company completed a private placement of 230 units of Series D Preferred Stock consisting of one (1) share of Series D-1 Preferred Stock and four (4) shares of Series D-2 Preferred Stock. The Series D-1 Preferred Stock can convert to Common Stock at a price of $0.0225 per share, and the Series D-2 Preferred Stock can convert to Common Stock at a price of $0.05 per share. The private placement provided $1,150 in proceeds to the Company. The proceeds were used for general working capital purposes and to repay a bridge loan that was secured in April 2013 from Phoenix Banner Holdings LLC in the amount of $250 plus $2 in accrued interest.

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-2 Preferred Stock at a purchase price of $1.00 per share and received $967 net of offering costs of $115. The material terms of the Series D-1 and Series D-2 Preferred Stock, other than the initial conversion price, are essentially the same. The shares of Series D Preferred Stock are convertible at any time and rank senior to the Company’s outstanding shares of Series A-1, Series B and Series C Preferred Stock, and of Common Stock with respect to dividend rights and liquidation preferences.

Preferred Stock Voting and Other Rights

Generally, the Company’s Preferred Stock votes together on an as converted basis with the holders of Common Stock. In addition, the Company’s Preferred Stock enjoys certain protective provisions, a liquidation preference and anti-dilution protection that are similar to one another.

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Communication Intelligence Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

Form 10-Q

Equity

Warrants

Series C Preferred Stock Warrants

Each investor who purchased shares of Series C Preferred Stock in the financing transactions which closed on December 31, 2010 and March 31, 2011 received a warrant to purchase a number of shares of Common Stock equal to the aggregate number of shares of Series C Preferred Stock purchased by 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 February and March 2012, an aggregate of 35,162 warrants were exercised, 28,678 warrants were exercised by holders of the Series C Preferred Stock warrants and 6,484 warrants were exercised by the holders of the warrants other than the Series C Preferred Stock warrants. Of the Series C Preferred Stock warrants exercised, 6,222 were exercised for cash for which the Company received $213 and 22,456 were exercised on a cashless basis. The Company issued 23,928 shares of Common Stock related to these exercises. If the remaining outstanding Series C Warrants are exercised in their entirety, the Company would issue 107,623 shares of Common Stock.

Other Warrants

In January 2013, 1,300 warrants were exercised for $29 in cash. In February and March 2012, 6,484 warrants were exercised by the holders of the warrants other than the Series C Preferred Stock warrants described above. At September 30, 2013, 21,712 shares of Common Stock were reserved for issuance upon exercise of other outstanding warrants, in addition to the 107,623 shares of Common Stock issuable upon exercise of the Series C Warrants described above.

A summary of the warrant activity is as follows:

	September 30, 2013					December 31, 2012
	Warrants			Weighted Average Exercise Price		Warrants			Weighted Average Exercise Price

Outstanding at beginning of period		151,722		$	0.0269		182,644		$	0.0261
Issued		−			−		8,643		$	0.0500
Exercised		(1,300	)	$	0.0225		(35,162	)	$	0.0264
Expired		(21,087	)	$	0.0369		(4,403	)		−
Outstanding at end of period		129,335		$	0.0252		151,722		$	0.0269
Exercisable at end of period		129,335		$	0.0252		151,722		$	0.0269

A summary of the status of the warrants outstanding and exercisable as of September 30, 2013, is as follows:

Number of Warrants		Weighted Average Remaining Life		Weighted Average Exercise Price per share

	120,692		0.44	$	0.0225
	8,643		1.86	$	0.0500
	129,335		0.53	$	0.0252

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Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

Forward Looking Statements

Certain statements contained in this quarterly report on Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”, “hopes”, “intends”, “expects”, and other words of similar import, constitute “forward looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors which may cause actual events to differ materially from expectations. Such factors include those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, including the following:

·	Technological, engineering, manufacturing, quality control or other circumstances that could delay the sale or shipment of products;

·	Economic, business, market and competitive conditions in the software industry and technological innovations that could affect the Company’s business;

·	The Company’s inability to protect its trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on the proprietary rights of the Company; and

·	General economic and business conditions and the availability of sufficient financing.

Except as otherwise required by applicable laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, as a result of new information, future events or otherwise.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this quarterly report on Form 10-Q and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Company’s Annual report on Form 10-K for the fiscal year ended December 31, 2012.

Overview

The Company 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 faster 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 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, 2012, net losses attributable to common stockholders aggregated approximately $12,770, and, at September 30, 2013, the Company's accumulated deficit was approximately $117,684.

For the three months ended September 30, 2013, total revenue was $370, a decrease of $146, or 28%, compared to total revenue of $516 in the prior year period. For the nine months ended September 30, 2013, total revenue was $867, a decrease of $841, or 49%, compared to total revenue of $1,708 in the prior year period. These decreases in revenue are primarily attributable to delays in the timing of the Company’s sales opportunities for the quarter and nine months, respectively.

For the three months ended September 30, 2013, the loss from operations was $905, an increase of $129, or 17%, compared with a loss from operations of $776 in the prior year period. For the nine months ended September 30, 2013, the loss from operations was $3,343, an increase of $1,001, or 43%, compared with a loss from operations of $2,342 in the prior year period. The increase in the loss from operations for the nine months ended September 30, 2013, is primarily attributable to a decrease in sales of $841, or 49%, and an increase of $160, or 4%, in operating expenses including cost of sales compared to the prior year period.

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Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

Non-operating income for the three months ended September 30, 2013, was $18, an increase of $54, or 150%, compared to a non-operating loss of $36 in the prior year period. The decrease in non-operating expenses for the three-months ended September 30, 2013, was primarily due to a decrease of $40, or 117%, in interest expense compared to the prior year period. Non-operating income for the nine months ended September 30, 2013, was $79, an increase of $113, or 332%, compared to non-operating expense of $34 in the prior year. The increase in non-operating income for the nine-months ended September 30, 2013, was primarily due to a decrease in interest expense and loan discount amortization of $171, or 93%, compared to the prior year period.

Critical Accounting Policies and Estimates

Refer to Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2012 Form 10-K.

Effect of Recent Accounting Pronouncements

In the third quarter of 2013, the adoption of accounting standards had no material impact on our financial position, results of operations or cash flows.

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 our financial position, results of operations and cash flows.

Results of Operations

Revenue

For the three months ended September 30, 2013, product revenue was $195, a decrease of $160, or 45%, compared to product revenue of $355 in the prior year period. The decrease in revenue is primarily attributable to delays in the availability of new products during the quarter. For the three months ended September 30, 2013, maintenance revenue was $175, an increase of $14, or 9%, compared to maintenance revenue of $161 in the prior year period. The increase in maintenance revenue is primarily due to new maintenance contracts associated with the increase in product sales in the prior year.

For the nine months ended September 30, 2013, product revenue was $358, a decrease of $873, or 71%, compared to product revenue of $1,231 in the prior year period. The decrease in revenue is primarily attributable to delays in the availability of new products during the nine-month period. For the nine months ended September 30, 2013, maintenance revenue was $509, an increase of $32, or 7%, compared to maintenance revenue of $477 in the prior year period. The increase in maintenance revenue is primarily due to new maintenance contracts associated with the increase in product sales in the prior year.

Cost of Sales

For the three months ended September 30, 2013, cost of sales was $99, an increase of $3, or 3%, compared to cost of sales of $96 in the prior year period. The increase in cost of sales was due to an increase in direct labor from NRE contracts.

For the nine months ended September 30, 2013, cost of sales was $257, a decrease of $99, or 28%, compared to cost of sales of $356 in the prior year period. The decrease in cost of sales was due primarily to lower non-recurring engineering contracts during the nine-month period.

Operating expenses

Research and Development Expenses

For the three months ended September 30, 2013, research and development expense was $471, an increase of $30, or 7%, compared to research and development expense of $441 in the prior year period. Research and development expenses consist primarily of salaries and related costs, outside engineering, maintenance items

- 19 -

Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

and allocated facilities expenses. Total expenses, before allocations, for the three months ended September 30, 2013, was $613, an increase of $44, or 8%, compared to $569 in the prior year period. These increases were primarily due to an increase in outsourced engineering services. Research and development expenses before capitalization of software development costs, as well as the amounts to be capitalized on future product development, are expected to remain at current levels in the near term.

For the nine months ended September 30, 2013, research and development expense was $1,563, an increase of $316, or 25%, compared to research and development expense of $1,247 in the prior year period. Total expenses, before capitalization of software development costs and other allocations, for the nine-months ended September 30, 2013, were $1,944, an increase of $288, or 17%, compared to $1,656 in the prior year period. These increases resulted primarily from the addition of two engineers that were hired late in 2012 and present for the full nine-month period, as well as expense relating to outside engineering services.

Sales and Marketing Expense

For the three months ended September 30, 2013, sales and marketing expense was $291, a decrease of $38, or 12%, compared to sales and marketing expense of $329 in the prior year period. For the nine months ended September 30, 2013, sales and marketing expenses was $884, a decrease of $175, or 17%, compared to sales and marketing expense of $1,059 in the prior year period. These decreases were primarily attributable to reductions in salary and related expense due to the elimination of one sales person in the first quarter of 2013, as well as reduced commissions on lower revenues.

General and Administrative Expense

For the three months ended September 30, 2013, general and administrative expense was $414, a decrease of $12, or 3%, compared to general and administrative expense of $426 in the prior year period. The decrease was primarily due to reductions in professional service expenses and other general corporate expenses.

For the nine months ended September 30, 2013, general and administrative expense was $1,506, an increase of $118, or 9%, compared to general and administrative expense of $1,388 in the prior year period. The increase was primarily due to an increase in stock option expense offset by reductions in other general corporate expenses.

Interest expense

For the three months ended September 30, 2013, interest expense was $6, a decrease of $58, or 90%, compared to interest expense of $64 in the prior year period. For the nine months ended September 30, 2013, interest expense was $9, a decrease of $136, or 94%, compared to interest expense of $145 in the prior year period. The decreases resulted from the conversion of convertible notes outstanding during 2012.

For the three months ended September 30, 2013, amortization of loan discount and deferred financing expense was $0, a decrease of $12, or 100%, compared to amortization of loan discount and deferred financing expense of $12 in the prior year period. For the nine months ended September 30, 2013, amortization of loan discount and deferred financing expense was $0, a decrease of $29, or 100%, compared to amortization of loan discount and deferred financing expense of $29 in the prior year period. These decreases resulted from the complete amortization of the remaining capitalized value of warrants that were issued in connection with the abovementioned convertible notes.

For the three months ended September 30, 2013, the gain on derivative liability was $26, a decrease of $17, or 40%, compared to the gain on derivative liability of $43 in the prior year period. For the nine months ended September 30, 2013, the gain on derivative liability was $91, a decrease of $58, or 39%, compared to a gain on derivative liability of $149 in the prior year period. These decreases were primarily due to the exercise or expiration of approximately 21.6 million warrants, as well as a change in the closing price of the Company’s Common Stock between December 31, 2012 and September 30, 2013.

- 20 -*

Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

For the three months ended September 30, 2013, accretion of the beneficial conversion feature on the Company’s preferred stock with an exercise price less than the closing market price on June 28, 2013 (Series C and Series D-1 Preferred Stock) was $37, a decrease of $114, or 75%, compared to $151 in the prior year period.

For the nine months ended September 30, 2013, accretion of beneficial conversion feature on the Company’s preferred stock with an exercise price less than the closing market price on June 28, 2013 (Series B, Series C and Series D-1 Preferred Stock) was $359, a decrease of $609, or 63%, compared to $968 in the prior year period. The decrease is primarily due to a $418 beneficial conversion feature recorded in March 2012, on the 278 shares of Series C Preferred Stock issued to Phoenix Venture Fund LLC in settlement of the indemnification claim resulting from the settlement of a 16b claim in January 2012 brought by a Company stockholder against Phoenix Venture Fund LLC, certain affiliates and the Company as a nominal defendant.

The Company recorded the payment of dividends in kind on shares of the its Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. For the three months ended September 30, 2013, dividends on shares of Preferred Stock were $506, an increase of $297, or 142% compared to $209 in the prior year period. The increase was primarily due to the issuances of shares of Series D Preferred Stock in November 2012 and May 2013.

For the nine months ended September 30, 2013, dividends on shares of Preferred Stock were $1,331, an increase of $840, or 171%, compared to $491 in the prior year period. The increase was primarily due to the issuance of the above mentioned shares of Series C Preferred Stock to Phoenix Venture Fund LLC and shares of Series D Preferred Stock to investors.

Liquidity and Capital Resources

At September 30, 2013, cash and cash equivalents totaled $287, compared to cash and cash equivalents of $486 at December 31, 2012. The decrease in cash was primarily due to net cash used in operating activities of $2,124 and investing activities of $4. These amounts were offset by net cash provided by financing activities of $1,929. At September 30, 2013, total current assets were $624, compared to total current assets of $1,260 at December 31, 2012. At September 30, 2013, the Company's principal sources of funds included its $287 in cash and cash equivalents.

At September 30, 2013, accounts receivable net, was $259, a decrease of $442, or 63%, compared to accounts receivable net of $701 at December 31, 2012. The decrease is due primarily to the collection of accounts receivable from the fourth quarter 2012 billings and the decrease in sales during the three months ended September 30, 2013.

At September 30, 2013, prepaid expenses and other current assets were $78, an increase of $51, or 7%, compared to prepaid expenses and other current assets of $73 at December 31, 2012. The increase is due primarily to the prepayment of insurance premiums.

At September 30, 2013, accounts payable were $256, an increase of $181, or 241%, compared to accounts payable of $75 at December 31, 2012. The increase is due primarily to an increase in professional service and engineering fees. At September 30, 2013, accrued compensation was $256, a decrease of $33, or 11%, compared to accrued compensation of $289 at December 31, 2012. The decrease is due primarily to a decrease in sales commission accruals.

At September 30, 2013, total current liabilities were $2,041, an increase of $958, or 88%, compared to total current liabilities of $1,083 at December 31, 2012. At September 30, 2013, current deferred revenue was $589, an increase of $20, or 4%, compared to current deferred revenue of $569 at December 31, 2012. Deferred revenue is recorded when the Company receives advance payment from its customers and primarily reflects advance payments for maintenance fees from the Company's licensees that are generally recognized as revenue by the Company when all obligations are met or over the term of the maintenance agreement, whichever is longer.

In April 2013, the Company borrowed $250 in the form of a demand note from Phoenix Banner Holdings LLC, with an interest rate of 10% per annum.

- 21 -

Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

In May 2013, the Company completed a private placement of 230,000 units of Series D Preferred Stock. Each unit consisted of one (1) share of Series D-1 Preferred Stock and four (4) shares of Series D-2 Preferred Stock. The Series D-1 Preferred Stock can convert to Common Stock at a price of $0.0225 per share, and the Series D-2 Preferred Stock can convert to Common Stock at a price of $0.05 per share. The Company received $1,150 in proceeds from private placement. The proceeds were used for general working capital purposes and to repay a demand note from Phoenix Banner Holdings LLC in the amount of $250 plus $2 in accrued interest.

The Company borrowed $250 from Phoenix Banner Holding LLC, $250 from Kendu Partners Company and $250 from Michael W. Engmann, each a related party, on August 3, 2013, September 3, 2013, and September 27, 2013, respectively. The aggregate $750 was borrowed in exchange for three unsecured demand notes that bear interest at the rate of 10% per annum. The Company used the proceeds for working capital and general corporate purposes. At September 30, 2013 accrued interest associated with the above notes was $6.

For the nine months ended September 30, 2013, the Company exercised its option to pay in kind the accrued dividends on Preferred Stock. For the three months ended September 30, 2013, the Company issued an aggregate of 20 shares of Series A-1 Preferred Stock, 266 shares of Series B Preferred Stock, 111 shares of Series C Preferred Stock, 36 shares of Series D-1 Preferred Stock and 111 shares of Series D-2 Preferred Stock, in payment of dividends.

Interest expense associated with the Company’s indebtedness for the three months ended September 30, 2013 and 2012, was $6 and $64, respectively, of which $6 and $30, respectively, was related party expense. Amortization of debt discount and deferred financing costs for the three months ended September 30, 2013 and 2012 was $0 and $12, respectively, of which $0 and $5, respectively, was related party expense.

Interest expense associated with the Company’s indebtedness for the nine months ended September 30, 2013 and 2012, was $9 and $145, respectively, of which $9 and $88, respectively, was related party expense. Amortization of debt discount and deferred financing costs for the nine months ended September 30, 2013 and 2012 was $0 and $29, respectively, of which $0 and $13, respectively, was related party expense.

The Company had the following material commitments as of September 30, 2013:


Contractual obligations	Total		2013		2014		2015		2016		Thereafter
Operating lease commitments (2)		895		70		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.

The Company has experienced recurring losses from operations that raise a substantial doubt about its ability to continue as a going concern. There can be no assurance that the Company will have adequate capital resources to fund planned operations or that any additional funds will be available to it when needed, or if available, will be available on favorable terms or in amounts required by it. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on the Company's business, results of operations and ability to operate as a going concern.

- 22 -

Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

The Company did not enter into any short-term security investments during the three months ended September 30, 2013.

Foreign Currency Risk

From time to time, the Company makes certain capital equipment or other purchases denominated in foreign currencies. As a result, the Company’s cash flows and earnings are exposed to fluctuations in interest rates and foreign currency exchange rates. The Company attempts to limit these exposures through operational strategies and generally has not hedged currency exposures. During the three and nine months ended September 30, 2013 and 2012, foreign currency translation gains and losses were insignificant.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We carried out an evaluation as of the end of period covered by this report, 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 its assessment, our management concluded that, as of September 30, 2013, our internal control over financial reporting was not effective. Management believes that the identified weaknesses have not affected our ability to present GAAP-compliant financial statements in this Form 10-Q. Management does not believe that its weakness with respect to its procedures and controls have had a pervasive effect upon our financial reporting and the overall control environment due to our ability to make the necessary reconciling adjustments to our financial statements as required.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II-Other Information

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors

Not applicable.

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Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

Item 2. Unregistered Sale of Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information.

None.

Item 6. Exhibits.

(a) Exhibits.

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. 0-19301).
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) as filed with the Delaware Secretary of State's office 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. 0-19301).
3.3	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. 0-19301).
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. 0-19301).
3.5	Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation dated January 24, 2001, incorporated herein by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S/1, filed December 28, 2007.
3.6	Certificate of Elimination of the Company’s Certificate of Designation of the Series A Preferred Stock dated August 17, 2001, incorporated herein by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S/1, filed 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.

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Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

Exhibit Number	Document
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.
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 3.17 to 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.
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.
3.24	Third Amended and Restated Certificate of Designation of Series A-1 Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on November 13, 2012, incorporated herein by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on October 22, 2012.
3.25	Second Amended and Restated Certificate of Designation of Series B Participating Convertible Preferred Stock filed with the Delaware Secretary of State on November 13, 2012, incorporated herein by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on October 22, 2012.

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Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q


Exhibit Number	Document
3.26	Amended and Restated Certificate of Designation of Series C Participating Convertible Preferred Stock filed with the Delaware Secretary of State on November 13, 2012, incorporated herein by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on October 22, 2012.
3.27	Certificate of Designation of Series D Participating Convertible Preferred Stock filed with the Delaware Secretary of State on November 13, 2012, incorporated herein by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on October 22, 2012.
*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

*	Filed herewith.

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Communication Intelligence Corporation

(In thousands, except per share amounts)

Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		COMMUNICATION INTELLIGENCE CORPORATION
		Registrant

November 14, 2013		/s/ Andrea Goren
Date		Andrea Goren
		(Principal Financial Officer and Officer Duly Authorized to Sign on Behalf of the Registrant)