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

frm_10q6302013.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: June 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 August 14, 2013: 225,824,328.

INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2013 (unaudited) and December 31, 2012	3
Condensed Consolidated Statements of Operations for the Three and Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 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	22
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	23
Item 3. Defaults Upon Senior Securities	23
Item 4. Mine Safety Disclosures	24
Item 5. Other Information	24
Item 6. Exhibits
(a) Exhibits	24
Signatures	27

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

Communication Intelligence Corporation

Condensed Consolidated Balance Sheets

(In thousands)

	June 30,			December 31,
	2013			2012
Assets	Unaudited
Current assets:
Cash and cash equivalents	$	406		$	486
Accounts receivable, net of allowance of $28 at June 30, 2013 and $27 at December 31, 2012		161			701
Prepaid expenses and other current assets		22			73

Total current assets		589			1,260

Property and equipment, net		24			28
Patents, net		1,472			1,655
Other assets		29			29

Total assets	$	2,114		$	2,972

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		203			75
Accrued compensation		253			289
Other accrued liabilities		169			150
Deferred revenue		545			569

Total current liabilities		1,170			1,083
Deferred revenue long-term		144			249
Deferred rent		106			125
Derivative liability		63			128
Total liabilities		1,483			1,585
Commitments and contingencies
Stockholders' equity:
Series A-1 Preferred Stock, $.01 par value; 2,000 shares authorized; 991 and 953 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively, ($991 liquidation preference at June 30, 2013)		991			953
Series B Preferred Stock, $.01 par value; 14,000 shares authorized; 10,564 and10,058 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively, ($15,846 liquidation preference at June 30, 2013)		8,693			8,188
Series C Preferred Stock, $.01 par value; 4,100 shares authorized; 4,385 and 4,175 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively, ($6,577 liquidation preference at June 30, 2013)		4,836			4,754
Series D-1 Preferred Stock, $.01 par value; 3,000 shares authorized; 1,413 and 1,124 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively, ($1,413 liquidation preference at June 30, 2013)		2,570			2,158
Series D-2 Preferred Stock, $.01 par value; 8,000 shares authorized; 4,400 and 3,302 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively, ($4,400 liquidation preference at June 30, 2013)		4,171			3,073
Common Stock, $.01 par value; 1,500,000 shares authorized; 232,324 issued, 225,824 outstanding at June 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 June 30, 2013 and December 31, 2012, respectively		(325	)		(325	)
Additional paid in capital		94,722			95,262
Accumulated deficit		(116,798	)		(114,420	)
Accumulated other comprehensive loss		(15	)		(29	)
Total CIC stockholders' equity		1,167			1,923
Non-Controlling interest		(536	)		(536	)
Total Stockholders’ equity		631			1,387
Total liabilities and stockholders' equity	$	2,114		$	2,972

See accompanying notes to these Condensed Consolidated Financial Statements

- 3 -

Communication Intelligence Corporation

Condensed Consolidated Statements of Operations

Unaudited

(In thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Revenue:
Product	$	93		$	364		$	164		$	876
Maintenance		170			161			334			315
Total Revenue		263			525			498			1,191

Operating costs and expenses:

Cost of sales:
Product		5			155			9			222
Maintenance		76			16			150			38
Research and development		580			333			1,092			805
Sales and marketing		284			343			594			730
General and administrative		496			472			1,092			963
Total operating costs and expenses		1,441			1,319			2,937			2,758

Loss from operations		(1,178	)		(794	)		(2,439	)		(1,567	)

Other expense, net		(1	)		(2	)		(1	)		(6	)
Interest expense:
Related party		(3	)		(31	)		(3	)		(58	)
Other	─				(20	)		─			(23	)
Amortization of loan discount and deferred financing:
Related party	─				(4	)	─				(8	)
Other	─				(8	)	─				(9	)
Gain on derivative liability		1			113			65			106
Net loss		(1,181	)		(746	)		(2,378	)		(1,565	)

Accretion of beneficial conversion feature, Preferred shares:
Related party		(107	)		(96	)		(140	)		(674	)
Other		(159	)		(62	)		(181	)		(141	)

Preferred stock dividends:
Related party		(208	)		(144	)		(437	)		(213	)
Other		(195	)		(47	)		(389	)		(70	)
Income tax	─			─			─			─
Net loss before controlling interest		(1,850	)		(1,095	)		(3,525	)		(2,663	)
Net loss attributable to non-controlling interest	─			─			─			─
Net loss attributable to commonstockholders	$	(1,850	)	$	(1,095	)	$	(3,525	)	$	(2,663	)
Basic and diluted loss per common share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.01	)
Weighted average common shares outstanding, basic and diluted		225,824			222,474			225,803			222,260

See accompanying notes to these Condensed Consolidated Financial Statements

- 4 -

Communication Intelligence Corporation

Condensed Consolidated Statements Comprehensive Loss

Unaudited

(In thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012

Net loss:	$	(1,181	)	$	(746	)	$	(2,378	)	$	(1,565	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment	─				6			14			4
Total comprehensive loss	$	(1,181	)		(740	)	$	(2,364	)	$	(1,561	)

See accompanying notes to these Condensed Consolidated Financial Statements

- 5 -

Communication Intelligence Corporation

Condensed Consolidated Statements of Cash Flows

Unaudited

(In thousands)

	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(2,378	)	$	(1,565	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		191			271
Amortization of debt discount and deferred financing costs	─				18
Stock-based employee compensation		429			267
Restricted stock expense	─				3
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		(65	)		(106	)
Changes in operating assets and liabilities:
Accounts receivable		540			(39	)
Prepaid expenses and other assets		51			(4	)
Accounts payable		128			(20	)
Accrued compensation		(36	)		30
Other accrued liabilities		16			(80	)
Deferred revenue		(130	)		(21	)
Net cash used for operating activities		(1,254	)		(1,151	)

Cash flows from investing activities: Acquisition of property and equipment		(5	)		(3	)
Net cash used for investing activities		(5	)		(3	)

Cash flows from financing activities:
Proceeds from issuance of short-term debt		250			1,125
Proceeds from exercise of warrants for cash		29			213
Proceeds from exercise of stock options	─				10
Proceeds from Issuance of Series D-1 Preferred shares		230			−
Proceeds from issuance of Series D-2 Preferred shares		920			−
Payments on short term debt		(250	)		−
Net cash provided by financing activities		1,179			1,348

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

Net (decrease) increase in cash and cash equivalents		(80	)		194
Cash and cash equivalents at beginning of period		486			307
Cash and cash equivalents at end of period	$	406		$	501

See accompanying notes to these Condensed Concolidated Financial Statements

- 6 -

Communication Intelligence Corporation

Condensed Consolidated Statements of Cash Flows (Continued)

Unaudited

(In thousands)

	Six Months Ended June 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	$	826	$	283
Accretion of beneficial conversion feature on preferred shares	$	321	$	815
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

- 7 -

Communication Intelligence Corporation

Notes to Unausited 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 June 30, 2013, the Company’s accumulated deficit was approximately $116,798, and for the six months ended June 30, 2013, the Company had incurred a net loss of $2,378. The Company also has a working capital deficit at June 30, 2013, of approximately $581. The Company has primarily met its working capital needs through the issuance of debt and sale of equity securities. As of June 30, 2013, the Company’s cash balance was approximately $406. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

- 8 -

Communication Intelligence Corporation

Notes to Unausited 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 June 30, 2013, the total value of treasury stock was $325.

- 9 -

Communication Intelligence Corporation

Notes to Unausited 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. Concentrations

Three customers accounted for 81% of gross accounts receivable at June 30, 2013. Customer #1 accounted for 13%, Customer #2 accounted for 14% and Customer #3 accounted for 54%, respectively. Two customers accounted for 81% of gross accounts receivable at June 30, 2012. Customer #2 accounted for 24% and Customer #3 accounted for 57%, respectively.

Two customers accounted for 27% of total revenue for the three months ended June 30, 2013. Customer #1 accounted for 13% and Customer #2 accounted for 14%. Two customers accounted for 49% of total revenue for the three months ended June 30, 2012. Customer #3 accounted for 33% and Customer #4 accounted for 16%.

Two customers accounted for 28% of total revenue for the six months ended June 30, 2013. Each customer accounted for 14% of total revenue. Two customers accounted for 22% of total revenue for the six months ended June 30, 2012. Customer #4 accounted for 7% and Customer #3 accounted for 15% of total revenue.

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 six months ended June 30, 2013, and therefore concluded that no impairment in the carrying values of the patents existed at June 30, 2013.

Amortization of patent costs was $91 and $183 for the three and six-month periods ended June 30, 2013 and $91 and $184 for the three and six month periods ended June 30, 2012, respectively.

Intangible Assets

The following table summarizes intangible assets:

	June 30, 2013					December 31, 2012
	Carrying Amount		Accumulated Amortization			Carrying Amount		Accumulative Amortization
Amortizable intangible assets:
Patents	$	6,746	$	(5,274	)	$	6,746	$	(5,091	)

- 10 -

Communication Intelligence Corporation

Notes to Unausited Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

FORM 10-Q

4. 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 June 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 June 30, 2013, and December 31, 2012, was $63 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:

	June 30, 2013	December 31, 2012
Expected term	0.1 to 2.3 years	0.3 to 2.8 years
Volatility	204.6%	205.3%
Risk-free interest rate	2.49%	1.78%
Dividend yield	0%	0%

Fair value measurements:

Assets and liabilities measured at fair value as of June 30, 2013, are as follows:

Value at

Quoted prices in active markets

Significant other observable inputs

Significant unobservable inputs

June 30, 2013

(Level 1)

(Level 2)

(Level 3)

Derivative liability

−

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:

- 11 -

Communication Intelligence Corporation

Notes to Unausited Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

FORM 10-Q

4.	Derivative liability

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 June 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 six-month period ended June 30, 2013 are as follows:

	Derivative Liability
Balance at January 1, 2013	$	128
Gain on derivative liability		(65	)
Balance at June 30, 2013	$	63

5.	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 six months ended June 30, 2013, 70,472 shares of Common Stock subject to outstanding options, 7,079 shares of Series A-1 Preferred Stock, 243,796 shares of Series B Preferred Stock, 194,888 shares of Series C Preferred Stock, 62,818 shares of Series D-1 Convertible Preferred Stock (the “Series D-1 Preferred Stock”) and 87,997 shares of Series D-2 Convertible Preferred Stock (the “Series D-2 Preferred Stock” and, together with the Series D-1 Preferred Stock, the “Series D Preferred Stock”) on an as converted basis and 135,359 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 six months ended June 30, 2012, 47,903 shares of Common Stock subject to outstanding options, 6,540 shares of Series A-1 Preferred Stock, 220,865 shares of Series B Preferred Stock and 176,600 shares of Series C Preferred Stock on an as converted basis and 149,893 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.

- 12 -

Communication Intelligence Corporation

Notes to Unausited Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

FORM 10-Q

5.	Net loss per share

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						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2013			2012			2013			2012

Numerator-basic and diluted net loss	$	(1,850	)	$	(1,095	)	$	(3,525	)	$	(2,663	)
Denominator-basic or diluted weighted average number of common shares outstanding		225,824			222,474			225,803			222,260
Net loss per share – basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.01	)

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 six months ended June 30, 2013 and 2012, was approximately 9.73% and 9.66%, 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:

	Six Months Ended June 30, 2013	Six Months Ended June 30, 2012
Risk free interest rate	0.39% – 5.11%	0.62% – 5.11%
Expected life (years)	2.82 – 7.00	2.82 – 7.00
Expected volatility	91.99% –198.38%	91.99% – 154.08%
Expected dividends	None	None

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

The Company granted 1,500 stock options during the three and six months ended June 30, 2012, 153 stock options were exercised and the Company issued 46 restricted shares of Common Stock.

- 13 -

Communication Intelligence Corporation

Notes to Unausited Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

FORM 10-Q

Equity

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Research and development	$	49	$	52	$	245	$	121
Sales and marketing		17		24		117		43
General and administrative		100		37		42		87
Director options		10		7		25		16
Stock-based compensation expense	$	176	$	120	$	429	$	267

A summary of option activity under the Company’s plans as of June 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			$	2,230			51,353		$	0.09			$	4,449
Granted		26,554		$	0.04			$	1,188			1,500		$	0.06			$	90
Exercised		-		$	-			$	-			(153	)	$	0.06			$	(2	)
Forfeited or expired		(610	)	$	0.14			$	(85	)		(4,797	)	$	0.34			$	(1,654	)
Outstanding at June 30		70,473		$	0.05		5.51	$	3,333			47,903		$	0.06		5.59	$	2,876
Vested and expected to vest at June 30		63,615		$	0.05		5.51	$	3,009			43,276		$	0.06		5.59	$	2,598
Exercisable at June 30		33,083		$	0.05		4.94	$	1,638			18,649		$	0.08		5.01	$	1,531

The following tables summarize significant ranges of outstanding and exercisable options as of June 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		70,435		5.5	$	0.05		33,045	$	0.05
	0.51 – 1.00		38		0.2	$	0.75		38	$	0.75
			70,473		5.5	$	0.05		33,083	$	0.05

- 14 -

Communication Intelligence Corporation

Notes to Unausited Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

FORM 10-Q

Equity

A summary of the status of the Company’s non-vested shares as of June 30, 2013, is as follows:

Nonvested Shares	Shares			Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2013		21,210		$	0.05
Granted		26,554		$	0.04
Forfeited		(277	)	$	0.03
Vested		(10,098	)	$	0.05
Non-vested at June 30, 2013		37,389		$	0.05

As of June 30, 2013, there was $534 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 1.3 years.

Preferred Shares

Information with respect to the class of Preferred Stock at June 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		38		991		7,079
Series B	August 2010		10	%	Quarterly in Arrears	$	1.50	$	0.0433		505		10,564		243,797
Series C	December/March 2011		10	%	Quarterly in Arrears	$	1.50	$	0.0225		210		4,385		194,889
Series D-1	November 2012/May 2013		10	%	Quarterly in Arrears	$	1.00	$	0.0225		59		1,413		62,800
Series D-2	November 2012/May 2013		10	%	Quarterly in Arrears	$	1.00	$	0.0500		177		4,400		88,000

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

- 15 -

Communication Intelligence Corporation

Notes to Unausited Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

FORM 10-Q

Equity

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.

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 March 2012, the Company issued 278 shares of Series C Preferred Stock valued at $417 in settlement of an indemnification claim brought by Phoenix Venture Fund LLC, 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 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 Convertible 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 are being 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.

- 16 -

Communication Intelligence Corporation

Notes to Unausited 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, 28,678 warrants were exercised by holders of the Series C Preferred Stock warrants. Of these warrants exercised, 6,222 were exercised for cash for which the Company received $140 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 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 June 30, 2013, 27,736 shares of Common Stock were reserved for issuance upon exercise of 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:

	June 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		(15,063	)	$	0.0343		(4,403	)		−
Outstanding at end of period		135,359		$	0.0252		151,722		$	0.0269
Exercisable at end of period		135,359		$	0.0252		151,722		$	0.0269

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

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

	6,024		0.14	$	0.0433
	120,691		0.64	$	0.0225
	8,643		2.11	$	0.0500
	135,359		0.71	$	0.0252

- 17 -

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 $12,772, and, at June 30, 2013, the Company's accumulated deficit was approximately $116,798.

During the three months ended June 30, 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 private placement provided $1,150 in proceeds to the Company. The proceeds are being used for general working capital purposes and to repay a bridge loan from Phoenix Banner Holdings LLC in the amount of $250 plus $2 in accrued interest.

For the three months ended June 30, 2013, total revenue was $263, a decrease of $262, or 50%, compared to total revenue of $525 in the prior year period. For the six months ended June 30, 2013, total revenue was $498, a decrease of $693, or 58%, compared to total revenue of $1,191 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 six months, respectively.

- 18 -

Communication Intelligence Corporation

(In thousands, except per share amounts)

FORM 10-Q

For the three months ended June 30, 2013, the loss from operations was $1,178, an increase of $384, or 48%, compared with a loss from operations of $794 in the prior year period. The increase in the loss for the three months ended June 30, 2013 was due to decrease in sales of $262, or 50%, and an increase of $122, or 9%, in operating costs and expenses compared to the prior year. For the six months ended June 30, 2013, the loss from operations was $2,439, an increase of $872, or 56%, compared with a loss from operations of $1,567 in the prior year period. The increase in the loss from operations for the six months ended June 30, 2013, is primarily attributable to a decrease in sales of $693, or 58%, and an increase of $179, or 6%, in operating costs and expenses compared to the prior year period.

Non-operating expense for the three months ended June 30, 2013, was $3, an increase of $51, or 106%, compared to non-operating income of $48 in the prior year period. The increase in non-expenses for the three-months ended June 30, 2013, was primarily due to a decrease of $112, or 99%, in gains on derivative liabilities compared to the prior year period. Non-operating income for the six months ended June 30, 2013, was $61, an increase of $59, or 2,950%, compared to non-operating income of $2 in the prior year. The increase in non-operating income for the six-months ended June 30, 2013, was primarily due to a decrease in interest expense and loan discount amortization of $95, or 97%, 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 second quarter of fiscal 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 June 30, 2013, product revenue was $93, a decrease of $271, or 74%, compared to product revenue of $364 in the prior year period. The decrease in revenue is primarily attributable to delays in the timing of the Company’s sales opportunities for the quarter. For the three months ended June 30, 2013, maintenance revenue was $170, an increase of $9, or 6%, compared to maintenance revenue of $161 in the prior year period. This increase is primarily due to new maintenance contracts entered into during the last twelve months.

For the six months ended June 30, 2013, product revenue was $164, a decrease of $712, or 81%, compared to product revenue of $876 in the prior year period. The decrease in product revenue is primarily due to delays in the timing of the Company’s sales opportunities for the first half of 2013. For the six months ended June 30, 2013, maintenance revenue was $334, an increase of $19, or 6%, compared to maintenance revenue of $315 in the prior year period. The increase in maintenance revenue is primarily due to new maintenance contracts entered into during the last twelve months.

Cost of Sales

For the three months ended June 30, 2013, cost of sales was $81, a decrease of $90, or 53%, compared to cost of sales of $171 in the prior year period. The decrease in cost of sales was due to a decrease in direct labor related to revenue generating contracts recognized during the three months ended June 30, 2013, compared to the prior year period.

- 19 -

Communication Intelligence Corporation

(In thousands, except per share amounts)

FORM 10-Q

For the six months ended June 30, 2013, cost of sales was $159, a decrease of $101, or 39%, compared to cost of sales of $260 in the prior year period. The decrease in cost of sales was due primarily to reduced amortization of previously capitalized software development costs, compared to the prior year period.

Operating expenses

Research and Development Expenses

For the three months ended June 30, 2013, research and development expense was $580, an increase of $247, or 74%, compared to research and development expense of $333 in the prior year period. Research and development expenses consist primarily of salaries and related costs, outside engineering, maintenance items, and allocated facilities expenses. The most significant factors in the $247 increase were $148, or 100%, increase in professional service expenses associated with product development and a reduction of $81, or 52%, in engineering expense transferred to cost of sales related to revenue generating contracts compared to the prior year period. Total expenses, before capitalization of software development costs and other allocations for the three months ended June 30, 2013, was $702, an increase of $174, or 33%, compared to $528 in the prior year period. The increase in gross expenses is primarily due to professional services discussed above. 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 six months ended June 30, 2013, research and development expense was $1,092, an increase of $287, or 36%, compared to research and development expense of $805 in the prior year period. Total expenses, before capitalization of software development costs and other allocations, for the six months ended June 30, 2013, were $1,331, an increase of $244, or 22%, compared to $1,087 in the prior year period. The increase in research and development expense for the six-months ended June 30, 2013, resulted from an increase in head count by one senior level engineer, and from the same factors discussed for the three month period above, compared to the prior year period.

Sales and Marketing Expense

For the three months ended June 30, 2013, sales and marketing expense was $284, a decrease of $59, or 17%, compared to sales and marketing expense of $343 in the prior year period. For the six months ended June 30, 2013, sales and marketing expenses was $594, a decrease of $136, or 19%, compared to sales and marketing expense of $730 in the prior year period. The decreases were primarily attributable to reductions in commissions due to lower sales, as well as to lower professional services and other administrative expenses.

General and Administrative Expense

For the three months ended June 30, 2013, general and administrative expense was $496, an increase of $24, or 5%, compared to general and administrative expense of $472 in the prior year period. The increase was primarily due to an increase in stock option expense. The increase in stock option expense was partially offset by reductions in other administrative expenses.

For the six months ended June 30, 2013, general and administrative expense was $1,092, an increase of $129, or 13%, compared to general and administrative expense of $963 in the prior year period. The increase was primarily due to the same factors discussed for the three-month period above.

Interest expense

For the three months ended June 30, 2013, interest expense was $3, a decrease of $48, or 94%, compared to interest expense of $51 in the prior year period. For the six months ended June 30, 2013, interest expense was $3, a decrease of $78, or 96%, compared to interest expense of $81 in the prior year period. The decreases resulted from the conversion of previously outstanding convertible notes and the payment of demand notes.

- 20 -

Communication Intelligence Corporation

(In thousands, except per share amounts)

FORM 10-Q

For the three months ended June 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 six months ended June 30, 2013, amortization of loan discount and deferred financing expense was $0, a decrease of $17, or 100%, compared to amortization of loan discount and deferred financing expense of $0 in the prior year period. The decrease is the result of fully amortizing the remaining cost of warrants issued with the above mentioned convertible notes through the time of conversion in November 2012.

For the three months ended June 30, 2013, the gain on derivative liability was $1, a decrease of $112, or 99%, compared to the gain on derivative liability of $113 in the prior year period. For the six months ended June 30, 2013, the gain on derivative liability was $65, a decrease of $41, or 39%, compared to a gain on derivative liability of $106 in the prior year period. The decreases in the gains on derivative liability are primarily due to the exercise and expiration of warrants and a minimal change in the closing price of the Company’s Common Stock at December 31, 2012.

For the three months ended June 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 $266, an increase of $108, or 68%, compared to $158 in the prior year period. The increase is primarily due to the accretion of $158 of beneficial conversion feature on the issuance of Series D-1 Preferred Stock in a private placement closed in May 2013.

For the six months ended June 30, 2013, accretion of beneficial conversion feature on the Company’s Preferred Stock with an exercise price less than the closing market price (Series B, Series C and Series D-1 Preferred Stock) was $321, a decrease of $494, or 61%, compared to $815 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 dividends on shares of the its Series A-1 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock in kind. For the three months ended June 30, 2013, dividends on shares of Preferred Stock were $403, an increase of $212, or 111% compared to $191 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 six months ended June 30, 2013, dividends on shares of Preferred Stock were $826, an increase of $543, or 192%, compared to $283 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 in settlement of an indemnification claim, and the issuance of the May 2013 shares of Series D Preferred Stock discussed above.

Liquidity and Capital Resources

At June 30, 2013, cash and cash equivalents totaled $406, compared to cash and cash equivalents of $486 at December 31, 2012. The increase in cash was primarily due to net cash provided by financing activities of $1,179 offset by net cash used in operating activities of $1,254 and investing activities of $5. At June 30, 2013, total current assets were $589, compared to total current assets of $1,260 at December 31, 2012. At June 30, 2013, the Company's principal sources of funds included its cash and cash equivalents aggregated $406.

At June 30, 2013, accounts receivable net, was $161, a decrease of $540, or 77%, 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 June 30, 2013.

At June 30, 2013, prepaid expenses and other current assets were $22, a decrease of $51, or 70%, compared to prepaid expenses and other current assets of $73 at December 31, 2012. The decrease is due primarily to expensing the prepaid annual insurance premiums.

- 21 -

Communication Intelligence Corporation

(In thousands, except per share amounts)

FORM 10-Q

At June 30, 2013, accounts payable were $203, an increase of $128, or 171%, 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 June 30, 2013, accrued compensation was $253, a decrease of $36, or 12%, compared to accrued compensation of $289 at December 31, 2012. The decrease is due primarily to a decrease in sales commission accruals.

At June 30, 2013, total current liabilities were $1,170, an increase of $87, or 8%, compared to total current liabilities of $1,083 at December 31, 2012. At June 30, 2013, current deferred revenue was $545, a decrease of $24, 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.

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.

For the six months ended June 30, 2013, the Company exercised its option to pay in kind the accrued dividends on Preferred Stock. For the three months ended June 30, 2013, the Company issued an aggregate of 19 shares of Series A-1 Preferred Stock, 257 shares of Series B Preferred Stock, 107 shares of Series C Preferred Stock, 31 shares of Series D-1 Preferred Stock and 96 shares of Series D-2 Preferred Stock, in payment of dividends.

Interest expense associated with the Company’s indebtedness for the three months ended June 30, 2013 and 2012, was $3 and $51, respectively, of which $3 and $0, respectively, was related party expense. Amortization of debt discount and deferred financing costs for the three months ended June 30, 2013 and 2012 was $0 and $12, respectively, of which $0 and $4, respectively, was related party expense.

Interest expense associated with the Company’s indebtedness for the six months ended June 30, 2013 and 2012, was $3 and $81, respectively, of which $3 and $58, respectively, was related party expense. Amortization of debt discount and deferred financing costs for the six months ended June 30, 2013 and 2012, was $0 and $17, respectively, of which $0 and $8, respectively, was related party expense.

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


Contractual obligations	Total		2013		2014		2015		2016		Thereafter
Operating lease commitments (2)		963		138		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 and six months ended June 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 six months ended June 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 June 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 June 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.

- 23 -

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.

- 24 -

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.

- 25 -

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.
*10.66	Form of Subscription Agreement dated May 17, 2013.
*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.

- 26 -

Communication Intelligence Corporation

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

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

- 27 -