UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________

FORM 10-K

X  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20082011

___  Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 For the transition period from ___ to ___

Commission File No. 000-19301

Communication Intelligence Corporation
 (Exact name of registrant as specified in its charter)

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

275 Shoreline Drive, Suite 500 Redwood Shores, California
(Address of principal executive offices)
 
94065
(Zip Code)

Registrant’s telephone number, including area code: 650-802-7888

Securities registered under Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes[   ]   No. [ Yes __  No X ].

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [   ]   No.  [X ].__    No X

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ]   No [   ]__

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  X   No __

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K.   [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the act (check one): Large accelerated filer [   ]___  Accelerated filer [   ]___  Non-accelerated filer [   ]___ Smaller reporting company   [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)
Yes  [   ]__   No [ X ]

The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant as of June 30, 20082011, was approximately $20,105,160$3,796,067 based on the closing sale price of $0.20$0.0335 on such date, as reported by the Over-the-Counter Bulletin Board.OTC Markets Group Inc. The number of shares of Common Stock outstanding as of the close of business on March 6, 200920, 2012, was 130,516,981.228,974,338.




COMMUNICATION INTELLIGENCE CORPORATION

TABLE OF CONTENTS

 Page
PART I
3
Item 1. Business
3
Item 1A. Risk Factors
87
Item 1B.  Unresolved Staff Comments
97
Item 2. Properties
97
Item 3. Legal Proceedings
97
Item 4. Submission of Matters to a Vote of Security Holders9
PART II
97
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities97
Item 6. Selected Financial Data
108
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
 
108
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
2015
Item 8. Consolidated Financial Statements and Supplementary Data
2016
Item 9. Changes in and Disagreements withWith Accountants on Accounting
and Financial Disclosure
 
2116
Item 9A. Controls and Procedures
2116
Item 9B.  Other Information
2217
PART III
2217
Item 10. Directors and Executive Officers and Corporate Governance
2217
Item 11. Executive Compensation
2520
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters2722
Item 13. Certain Relationships and Related Transactions and Director Independence
3026
Item 14. Principal Accountant Fees and Services
3228
PART IV
3329
Item 15. Exhibits, Financial Statement Schedules
3329
___________

CIC® and itsCIC’s logo, Handwriter®, Jot®, iSign®, InkSnap®, InkTools®, RecoEcho® SIGVIEW®, Sign-On®, QuickNotes®, Sign-it®, WordComplete®, INKshrINK®, SigCheck®, SignatureOne®, Ceremony® and The Power To Sign Online® are registered trademarks of the Company. HRSä, PenXä, KnowledgeMatchä, and Spellerä are trademarks is a trademark of the Company. Applications for registration of various trademarks are pending in the United States, Europe and Asia. The Company intends to register its trademarks generally in those jurisdictions where significant marketing of its products will be undertaken in the foreseeable future.

Note Regarding Forward Looking Statements

Certain statements contained in this Annual Report on Form 10-K, including without limitation, statements containing the words “believes”, “anticipates”, “hopes”, “intends”, “expects”, and other words of similar import, constitute “forward looking” statements within the meaning of the Private Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual events to differ materially from expectations. Such factors include the following: (1) technological, engineering, quality control or other circumstances which could delay the sale or shipment of products; (2) economic, business, market and competitive conditions in the software industry and technological innovations which could affect the Company’s business; (3) the Company’s ability to protect its trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others or prevent others from infringing on the proprietary rights of the Company; and (4) general economic and business conditions and the availability of sufficient financing.

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PART I
Item 1. Business

Unless otherwise stated all amounts in PartsPart I through Part IV are stated in thousands (“000s”).

General

Communication Intelligence Corporation (the “Company” or “CIC”) was incorporated in Delaware in October 1986. Communication Intelligence Corporation and its joint venture (the “Company” or “CIC”)CIC is a leading supplier of electronic signature solutions for business process automation in the financial industry as well asproducts and the recognized leader in biometric signature verification. CIC’s products enableCIC enables companies to achieve truly paperless workflow in their eBusinesselectronic business processes withby providing multiple signature technologies across virtually all applicationsapplications. CIC’s solutions are available both in SaaSsoftware-as-a-service (“SaaS”) and fully deployedon-premise delivery models. To date, the Company has delivered biometricmodels and electronic signature solutions to over 400 channel partners and enterprises  worldwide, representing hundreds users, with over 500 million electronic signatures captured, eliminating the need for over a billion pieces of paper. These deployments are primarily in the financial industry and include AEGON/World Financial Group, AGLA, Allstate Insurance Company, Charles Schwab & Co., Prudential Financial, Inc., Snap-On-Credit, State Farm Insurance Co., Travelers Indemnity Company, and Wells Fargo Bank, NA. The Company provides the most comprehensive and scalable electronic signature solutions based on over 20 years ofafford “straight-through-processing,” which can increase customer revenue by enhancing user experience and significant input from CIC’s valued financial industry client base. The Company iscan also a leading supplier of natural input/text entry software for handheld computersreduce costs through paperless and smartphones. Major customers for natural input software are Palm Inc. and Sony Ericsson Corp.. CIC sells directly to enterprises and through system integrators, channel partners and OEMs.virtually error-free electronic transactions that can be completed significantly faster than paper-based procedures. The Company is headquartered in Redwood Shores, California and has a joint venture, Communication Intelligence Computer Corporation Limited ("CICC"), in Nanjing, China.California.

RevenueFor the year ended December 31, 2011 total revenue was $1,546, an increase of $695, or 82%, compared to total revenue of $851 in the prior year. For the year ended December 31, 2011, product revenue was $915, an increase of $718, or 364%, compared to product revenue of $197 in the prior year. Maintenance revenue for the year ended December 31, 2008211 was $2,401$631, a decrease of $23, or 4%, compared to $2,145maintenance revenue of $654 in the prior year. The increase in product revenue is due primarily to new product offerings and an increased demand for electronic signature solutions. The decrease in maintenance revenue is a reflection of the Company’s shift in focus from one-time, on-premise sales to a recurring revenue model.

For the year ended December 31, 2007 an increase of $256 or 12%. Revenue for 2008 was primarily attributable to AEGON/World Financial Group, AGLA, Allscripts-Misys, Allstate Insurance Company (“Allstate”), Charles Schwab & Co., Oracle Corporation, Palm Inc., Prudential Financial Inc., SnapOn Credit LLC, Sony Ericsson Corp., Tennessee Valley Authority, Travelers Indemnity Company (“Travelers”), and Wells Fargo Bank NA.

The insurance industry is focusing on its eBusiness strategies not only to reduce transaction costs but to forge closer relationships with their customers and agents. According to2011, the September 2008 Forrester Research report “North American Insurance IT Spending in 2008,” 49% of US insurance companies surveyed indicated that increasing or expanding their online presence and eCommerce capabilities was a critical or high priority for them. This shift to eBusiness is a fundamental change for the industry, since insurance is all about producing documents, whether the paper that document is “printed” on is real or virtual. Technologies like electronic signature figure prominently in successful eBusiness strategies, since they accelerate the quote to revenue process while fostering better customer experiences.  Based upon prior large scale deployments at AEGON/World Financial Group, AGLA, Prudential, State Farm, and two recent wins with Travelers and Allstate in the last half of 2008, together with pending orders from other insurance carries, the Company believes CIC is emerging as the leading and preferred supplier of electronic signature solutions for property/casualty and life insurance applications.

Regarding the banking sector, according to the  Forrester research entitled “Industry Essentials: US Retail Banking”, US banks and lenders are challenged with the need to increase revenue while improving the effectiveness and efficiency of their processes in the face of increased regulatory and compliance demands exacerbated by the recent subprime and credit crisis. This crisis is driving increased regulatory controls and the need to administer the billions of bailout dollars to settle troubled mortgages and CIC believes this will accelerate the deployment of electronic signature technology based solutions to address those challenges.  In addition, regional and mid-size banks, unencumbered by the Troubled Asset Relief Program (“TARP”) related difficulties, appear to be pursuing automation more actively than in the past.

CIC was recently named to Forrester Research’s “Hot Companies to Watch in 2009” Report. The Company is pleased to be recognized for its contribution to automating the mortgage workout process. Partnering with Computer Sciences Corporation ("CSC") to integrate our technologies to deliver a "software as a service" ("SaaS")-based electronic signature solution reduces a very lengthy and painful
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process involving many parties that can often take several months to less than three days, alleviating borrower stress along with significant expense reductions. This product offering reflects the timeliness and benefits of our technology coupled with our ability to effectively and efficiently integrate our technology with selected partner offerings to significantly enhance the value of the end solution.

Currently, the Company is  experiencing what it  believes are normal delays in IT orders consistent with  standard procedure as enterprises enter a new year and budget period. Although the Company sees no significant indications suggesting that the adverse market conditions impacting our customer base of financial institutions have resulted in any delays or cancellation of IT spending that would significantly impact planned automation programs involving our technology, the elevated review and prioritization purchase processes have delayed anticipated early 2009 deployments.  In recognition that such delays could result in the short-term need for additional funds, prior to achievement of cash flow positive operations, we are investigating alternative financing sources, including investments from selected strategic partners.

The net loss attributable to Common Stockholders forcommon stockholders was $6,663, an increase of $2,110, or 51%, compared to $4,553 in the prior year. For the year ended December 31, 2008 was $3,727 compared to $3,399 in the prior year. Non-cash2011, non-cash charges attributable to interest expense for deferred financing costs and loan discount amortization related to the Company’s debt and the accretion of the beneficial conversion feature of the shares of Series A-1 Preferred contributed $1,220 to that loss representing an increase of $251was $1,181 compared to $969$2,039 in the prior year. OperatingThere was a loss of $113 on the derivative liability value for the year ended December 31, 2011 compared to a gain of $3,136 in the prior year. For the year ended December 31, 2011, operating expenses, including amortization of software development costs, increased approximately 7%were $5,829, a decrease of $276, or 5%, or $307, from $4,338compared to operating expenses of $6,105 for the year ended December 31, 2007 to $4,645 for the year ended December 31, 2008.prior year. The increasedecrease in operating expense resulted primarily reflectsfrom a charge in the increases inprior year of $1,009 related to the accelerated amortization of certain capitalized software development costs, relatedoffset by a $700 increase in the amount of software development cost expensed in 2011 compared to product development and enhancements, and increaseswhat would have been capitalized in direct engineering costs, charged to cost of sales, related to meeting customer specific requirements associated with integration of our standard products into customer systems.the prior year.

Core Technologies

The Company's core technologies are classified into two broad categories: "transaction and communication enabling technologies" and "natural input technologies".can be referred to as "transaction-enabling” technologies. These technologies include multi-modalvarious forms of electronic signature technologies, such as handwritten, biometric, click-to-sign and others, as well as technologies related to signature verification, cryptography (Sign-it, iSign, and SignatureOne)the logging of audit trails to show signers’ intent. These technologies enable secure, legal and multilingual handwriting recognition software (Jot).

Transaction and Communication Enabling Technologies. The Company's transaction and communication enabling technologies are designed to provide a cost-effective means for securingregulatory compliant electronic transactions providing networkcompleted through an enhanced customer experience, all at a fraction of the time and device access control and enabling workflow automation ofcost required by traditional, paper form processing. The Company believes that these technologies offer more efficient methods for conducting electronic transactions while providing more functional user authentication and heightened data security. The Company's transaction and communication enabling technologies have been fundamental to its development of software for multi-modal electronic signatures, handwritten biometric signature verification, and data security.

Natural Input Technologies. CIC's natural input technologies are designed to allow users to interact with a computer or handheld device by using an electronic pen or stylus as the primary input device. CIC's natural input offering includes multilingual handwriting recognition software for such devices as electronic organizers, pagers and smart cellular phones that do not have a keyboard. For such devices, handwriting recognition offers the most viable solutions for performing text entry and editing.paper-based processes.

Products

KeyThe Company’s enterprise-class SignatureOne® suite of electronic signature solutions enables businesses to implement truly paperless, electronic signature-driven business processes. Many applications provide electronic forms and allow users to fill in information, but most of these applications still require users to print out a paper copy for a handwritten, ink signature. Solutions powered by CIC products includeallow legally binding electronic signatures to be added to digital documents, eliminating the need for paper copies. This allows users to reduce transaction times and processing costs and to increase their time available for revenue generating activities.

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The SignatureOne® suite of products includes the following:

SignatureOne Profile ServerSignatureOne Profile Server is the server compliment to CIC's Sign-it software, which enables the real-time capture of electronic and digital signatures in various application environments. All user enrollment, authentication and transaction tracking in SignatureOne are based on data from the Sign-it client software.

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SignatureOne Ceremony ServerSignatureOne® Ceremony® Server™
The SignatureOne SignatureOne® Ceremony® Server™ (“Ceremony ServerServer”) is a J2EEâ server product that provides the capability to define and manage an electronic signature process within a Service Oriented Architectureservice oriented architecture and that can be deployed both on-premise and in the Cloud as a SaaS solution. Application program interfaces, web services, notification services, reporting, tracking and flexible XML schema enable virtually seamless integration with most electronic content management, enterprise resource planning or other workflow, content management and storage/repository systems for the automation of any document process that requires signatures.
iSign® Console™
The iSign® Console™ (“Console”) product is a server-based offering that leverages CIC’s patented Ceremony® process and allows users to be implementedmanage and control the set up and delivery of documents for electronic signatures in an On-Premise Deployed Model easy and flexible way, and with a comprehensive audit trail for non-repudiation. The Console works independently from advanced document management systems and represents an intuitive front-end solution for small-to-medium enterprises to rapidly integrate electronic signatures in their business processes. Its principal features include the ability to upload multiple documents for review and/or through a Softwareexecution, to select an electronic signature method, such as a Service (SaaS) environment. This product enablesclick-to-sign or biometric, choose signature field placement, manage the use of web services to facilitate end to end management of multi-party approvals of documents.signature process via invites and pre-set email reminders, and secure the entire process with passcodes.
Sign-it®iSignA suite
Sign-it® is a family of application development tools forsoftware products that enable the real-time capture of electronic digitizedand digital signatures, biometric signatureas well as their verification and cryptography for custom developedbinding within a standard set of applications, and web based development.
Sign-itMulti-modal electronic signature software for common applications including; Microsoft Word,including Adobe Acrobat AutoDesk AutoCAD,and Microsoft Word, web based applications using HTML, XML &and XHTML, and custom applications for .NET, C# and similar development environments for the enterprise marketmarket. The Sign-it® family of products combines the strengths of biometrics, and other forms of electronic signatures, with cryptography in a patented process that insures the creation of documents containing legally compliant electronic signatures. These signatures have the same legal standing as a traditional so-called wet signature on paper and are created pursuant to the Electronic Signature in National and Global Commerce Act, as well as other related legislation and regulations. With Sign-it® products, organizations wishing to process electronic forms, requiring varying levels of security, can reduce the cost and other inefficiencies inherent with paper documents by adding electronic signature technologies to their workflow solutions.
iSign® ToolkitsJotMulti-lingual handwriting recognitionThe iSign® suite of application development tools for electronic signature capture, encryption and verification in custom applications and web-based processes captures and analyzes the image, speed, stroke sequence and acceleration of a person's handwritten electronic signature and can provide an effective and inexpensive solution for immediate authentication of handwritten signatures. iSign® toolkits also store certain forensic elements of an electronic signature for use in determining whether a person’s electronic signature is legally valid and include software libraries for industry standard encryption and hashing to protect the sensitive nature of a user’s signature, as well as the data captured in the Ceremony® process. iSign® toolkits are used internally by the Company as an underlying technology for its SignatureOne® and Sign-it® suite of products.

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Products and upgrades that were introduced and first shipped in 20082011 include the following:

SignatureOne® Ceremony® Server v1.0iSign® for Windows®, Version 4.7
SignatureOne® Sign-it® v6.3 for Acrobat®iSign® Mobility Suite, Version 1.5
SignatureOne® Sign-it® v6.31 for Acrobat®
SignatureOne® Sign-it® v7.0 for Acrobat®
SignatureOne® Sign-it® v7.01 for Acrobat®
SignatureOne® Sign-it® v7.02 for Acrobat®
Sign-it® Viewer v2.0 for Acrobat®
SignatureOne® Sign-it® v7.0 for Word
SignatureOne® Profile Server v3.0iSign® Mobility Suite, Version 1.5.1
SignatureOne® Ceremony® Server, v1.1Version 2.4
SignatureOne® Ceremony® Server, v1.11Version 2.5
SignatureOne® Ceremony® Server, v1.2
iSign® v4.311Version 2.6
SignatureOne® Sign-it® XF v1.3.0.1Ceremony® Server, Version 2.6.1
SignatureOne® Sign-it® XF v1.3.0.2Ceremony® Server, Version 2.7
Sign-it Tools v7.0 for WordSignatureOne® Ceremony® Server, Version 3.0.4
SignatureOne® Ceremony® Server Migration Toolkit
iSign ® Console™, Version 1.5
SignatureOne® Standard, Version 1.5

The SignatureOne Profile Server provides server-based enterprise administration and authentication of user eSignatures and maintenance of signature transaction logs for eSigned documents. The SignatureOne architecture implements a common process and methodology that provides a uniform program interface for multiple signature methods and multiple capture devices, simplifying enterprise wide integration of business process automation tasks requiring eSignature.

The SignatureOne Ceremony Server is a J2EE server product that provides the capability to define and manage an electronic signature process within a Service Oriented Architecture (SOA) to be implemented in an On-Premise Deployed Model or through a Software as a Service (SaaS) environment. This product enables the use of web services to pass documents and/or packages of documents and related XML data to a server that facilitates end to end management of multi-party approvals of documents.

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iSign is an electronic signature and handwritten signature verification software developer’s kit for custom applications or Web based processes. It captures and analyzes the image, speed, stroke sequence and acceleration of a person's handwritten electronic signature. iSign provides an effective and inexpensive handwriting security check for immediate authentication. It also stores certain forensic elements of a signature for use in determining whether a person actually electronically signed a document. The iSign kit includes software libraries for industry standard encryption and hashing to protect the sensitive nature of a user signature and the data captured in association with that signature. This software toolkit is used internally by the Company as the underlying technology in its SignatureOne and Sign-it products.

Sign-it is a family of electronic signature products for recording multi-modal electronic signatures as they are being captured as well as binding and verifying electronic signatures within standard consumer applications. These products combine the strengths of biometrics, and electronic signatures and cryptography with a patented process to insure legally compliant electronic signatures to process, transact and create electronic documents that have the same legal standing as a traditional wet signature on paper in accordance with the Electronic Signature in National and Global Commerce Act, and other related legislation and regulations. Organizations wishing to process electronic forms, requiring varying levels of security, can reduce the need for paper forms by adding electronic signature technologies to their workflow solution. Currently, Sign-it is available for MS Word, AutoCAD, Adobe Acrobat, Web based transactions using common formats like XML, HTML, or XHTML, and custom application development with .NET, C# or similar development environments.

Jot software analyzes the individual strokes of characters written with a pen/stylus and converts these strokes into machine-readable text characters. Jot recognizes handwritten input and is specifically designed for small devices. Unlike many recognizers that compete in the market for handheld data input solutions, Jot offers a user interface that allows for the input of natural upper and lowercase letters, standard punctuation and European languages without requiring the user to learn and memorize unique characters or symbols. Jot has been ported to numerous operating systems, including Palm OS, Windows, Windows Mobile, VT-OS, UIO, QNX, Linux and OS/9. The standard version of Jot, which is available through OEM customers, recognizes and supports input of Roman-based Western European languages.

Copyrights, Patents and Trademarks

The Company relies on a combination of patents, copyrights, trademarks, trade secrets and contractual provisions to protect its software offerings and technologies. The Company has a policy of requiring its employees and contractors to respect proprietary information through written agreements. The Company also has a policy of requiring prospective business partners to enter into non-disclosure agreements before disclosure of any of its proprietary information.

Over the years, the Company has developed and patented major elements of its software offerings and technologies. In addition, in October 2000 the Company acquired, from PenOp, Inc. and its subsidiary, a significant patent portfolio relevant to the markets in which the Company sells its products. The Company’s patents and the years in which they each expire are as follows:

Patent No.Expiration
55442552013
56470172014
58189552015
59335142016
60647512017
60918352017
62122952018
63813442019
64873102019

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The Company believes that these patents provide a competitive advantage in the electronic signature and biometric signature verification markets. The Company believes the technologies covered by the patents are unique and allow it to produce superior products. The Company also believes these patents are broad in their coverage. The technologies go beyond the simple handwritten signature and include measuring electronically the manner in which a person signs to ensure tamper resistance and security of the resultant documents and the use of other systems for identifying an individual and using that information to close avalidate the signer and the transaction. The Company believes that the patents are sufficiently broad in coverage that products with substantially similar functionality would infringe its patents. Moreover, because the majority of these patents do not expire for another four to 10, the Company believes that it has sufficient time to develop new related technologies, which may be patentable, and to establish CIC as market leader in these product areas. Accordingly, the Company believes that for a significant period of time its patents will deter competitors from introducing competing products without creating substantially different technology or licensing or infringing its technology.

The Company has an extensive list of registered and unregistered trademarks and applications in the United States and other countries. The Company intends to register its trademarks generally in those jurisdictions where significant marketing of its products will be undertaken in the foreseeable future.

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Material Customers

Historically, the Company’s revenues haverevenue has been derived from hundreds of customers, however,but a significant percentage of the revenue has been attributable to a limited number of customers. Two customers accounted for 39%28% and 10%, respectively of total revenue for the year ended December 31, 2008.  Allstate Insurance Company accounted for 19% and Travelers Indemnity Company accounted for 20%. Four customers accounted for 57% of total revenues in 2007. Access Systems Americas, Inc. (formerly PalmSource, Inc.) accounted for 24%, Tennessee Valley Authority accounted for 10%, World Financial Group accounted for 13% and Wells Fargo Bank, NA accounted for 10%.2011.

Seasonality of Business

The Company believes that its products are not subject to seasonal fluctuations.

Backlog

Backlog approximates $344was approximately $914 and $431$1,097 at December 31, 20082011 and 2007,2010, respectively, representing advanced payments on product and service maintenance agreements. In 2009, the Company negotiated several long term maintenance agreements, that areof which the remaining balance of approximately $397 will be recognized over one to two years. The remaining backlog is expected to be recognized over the next twelve months.

Competition

The Company faces competition at different levels.levels both domestically and internationally. The technology-neutral nature of the laws and regulations related to what constitutes an “electronic signature” and CIC’s multi-modal enterprise-wide suite of products causes the Company to compete with different companies depending upon the specific type of electronic signature sought by a prospective customer. Our principalCurrently, CIC’s primary competition for handwritten biometric signatures includes SoftPro, Wondernet, and low-end tablet vendors. CIC faces additional competition primarily fromis Silanis andand/or DocuSign when the application is click-wrap, voice, fingerprint, password, and basic clickclick-to-sign technology. Principal competition for handwritten biometric signatures includes SoftPro, Wondernet and signature pad vendors. The Company believes it has a competitive advantage by offering solutions with a multitude of different electronic signature methods that enable users to sign technology.

Certain of the Company’s significant competitorsvirtually any document format, in the natural input market segment include PenPower Groupany software environment, and Advanced Research Technology, Inc.on any hardware platform.

The Company believes that it has a competitive advantage, in part, due to CIC’s range of product offeringsclear differentiation from its competitors and enjoys certain advantages, including its patent portfolio. ThereHowever, there can be no assurance however, that competitors, including some with greater financial or other resources, will not succeed in developing products or technologies that are more effective, easier to use or less expensive than our products or technologies whichand that could render our products or technologies obsolete or non-competitive.

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Employees

As of December 31, 2008,2011, the Company employed 2319 full-time employees 22 of which are in the United States and 1 of which is in China.two consultants. The Company as a strategy, has been focused for years on being at its core “lean and agile” while establishing long standingestablished long-standing strategic relationships that allow the Companyit to rapidly access product development and deployment capabilities that could be required to address virtually any business requirement. The company believes it has scalability to virtually any business requirement through existing agreements with specialized development teams (well versed in the area of signature technology and processes), mid-size vertical market IT services groups (with explicit knowledge of the intricacies of the financial services industry) and with tier one IT Services firms with virtually limitless resources available.most customer requirements. None of the Company’s employees are a party to aany collective bargaining agreement.agreements.  We believe our employee relations are good.

Geographic Areas

For the years ended December 31, 2008,2011 and 2007, the Company’s2010, sales in the United States as a percentage of total sales were 96%,93% and 92%93%, respectively. For the years endedAt December 31, 2008,2011 and 2007, the Company’s export sales as a percentage of total revenues were approximately 4% and  8%, respectively. Foreign sales are based on the countries to which the Company’s products are shipped.  Long lived2010, long-lived assets located in the United States were $4,603$2,159 and $4,714 for the years ended December 31, 2008 and 2007,$2,899, respectively. There were no long livedlong-lived assets located in China or elsewhere as of December 31, 20082011 and 2007, respectively.2010.

Segments

The Company reports its financial results in one segment.

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Available Information

Our web site is located at www.cic.com.www.cic.com. The information on or accessible through our web sitessite is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available, free of charge, on our web site as soon as reasonably practicable after we electronically file with or furnish such material to the SEC. Further,Securities and Exchange Commission (“SEC”). Furthermore, a copy of this Annual Report on Form 10-K is locatedand other reports filed by CIC with the SEC may be read and copied by the public at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.20549 on official business days during the hours of 10 a.m. and 3 p.m. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filingsissuers, including CIC, that file electronically with the SEC at www.sec.gov.

Note Regarding Forward Looking Statements

Certain statements contained in this Annual Report on Form 10-K, including without limitation, statements containing the words “believes”, “anticipates”, “hopes”, “intends”, “expects”, and other words of similar import, constitute “forward looking” statements within the meaning of the Private Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual events to differ materially from expectations. Such factors include the following: (1) technological, engineering, quality control or other circumstances which could delay the sale or shipment of products; (2) economic, business, market and competitive conditions in the software industry and technological innovations which could affect the Company’s business; (3) the Company’s ability to protect its trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others or prevent others from infringing on the proprietary rights of the Company; and (4) general economic and business conditions and the availability of sufficient financing.

Item 1A               Risk Factors

Not applicable.

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Item 1B.               Unresolved Staff Comments

NoneNone.

Item 2.               Properties

The Company leases its principal facilities, consisting of approximately 9,600 square feet, in Redwood Shores, California, pursuant to a lease that expires in 2011. The Company’s China-based joint venture leases approximately 392 square feet in Nanjing, China. The Company believes that its current facilities are suitable for our current needs.2016.

Item 3.               Legal Proceedings

None

Item 4.               Submission of Matters to a Vote of Security Holders

NoneNone.
PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Market Information

The Company’s Common Stock is listedquoted on OTC Markets Group Inc.’s OTCQB quotation system under the trading symbol CICI. Trading activity for the Company’s Common Stock can be viewed at www.otcmarkets.com. Prior to March 1, 2010, the Company’s Common Stock was also quoted on the Over the CounterOver-the-Counter Bulletin Board under the trading symbol CICI.OB. Prior to March 14, 2003 it was listed on the Nasdaq Capital Market (formerly known as the SmallCap Market) under the symbol CICI. The following table sets forth the high and low sale prices of the Common Stock for the periods noted.

   
Sale Price
Per Share
 
Year
Period
 High  Low 
        
2007
First Quarter                                                                                              
 $0.32  $0.20 
 
Second Quarter                                                                                              
 $0.27  $0.13 
 
Third Quarter                                                                                              
 $0.28  $0.15 
 
Fourth Quarter                                                                                              
 $0.42  $0.20 
2008
First Quarter 
 $0.27  $0.13 
 
Second Quarter                                                                                              
 $0.27  $0.13 
 
Third Quarter                                                                                              
 $0.23  $0.10 
 
Fourth Quarter                                                                                              
 $0.16  $0.05 
  
Sale Price
Per Share
Year
Period
HighLow
    
2010
First Quarter                                                                                              
$   0.14
$   0.08
 
Second Quarter                                                                                              
$   0.14
$   0.05
 
Third Quarter                                                                                              
$   0.08
$   0.03
 
Fourth Quarter                                                                                              
$   0.06
 $   0.03
2011
First Quarter 
$   0.10
$   0.03
 
Second Quarter                                                                                              
$   0.07
$   0.03
 
Third Quarter                                                                                              
$   0.05
$   0.02
 
Fourth Quarter                                                                                              
$   0.06
 $   0.02

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Holders

As of March 3, 200920, 2012 there were approximately 931853 holders of record of our Common Stock.

Dividends

To date, the Company has not paid any dividends on its Common Stock and does not anticipate paying any such dividends in the foreseeable future. The declaration and payment of dividends on the Common Stock is at the discretion of the Board of Directors and will depend on, among other things, the Company's operating results, financial condition, capital requirements, contractual restrictions or such other factors as the Board of Directors may deem relevant.
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Recent Sales of Unregistered Securities

All securities sold during 20082011 by the Company were either previously reported on quarterly reportsa Quarterly Report on Form 10-Qs10-Q or in a Current Report on Form 8-K filed with the Securities and Exchange Commission or sold pursuant to registration statements filed under the Securities Act of 1933, as amended (the “Securities Act”).

The information required by Item 201(d) of Regulation S-K is incorporated by reference to Note 5 (“Stockholders Equity”) of the Notes to Consolidated Financial Statements for the Year Ended December 31, 2008, included on page F-20 on this report on Form 10-K.SEC.

Issuer Purchases of Equity Securities

NoneNone.

Item 6. Selected Financial Data

Not applicable.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our financial statements and related notes appearing elsewhere in this Form 10-K. The following discussion relating to projected growth and future results and events constitutes forward-looking statements. Actual results in future periods may differ materially from the forward-looking statements due to a number of risks and uncertainties. We cannot guarantee future results, levels of activity, performance or achievements. Except as otherwise required under applicable law, we disclaim any obligation to revise or update forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Unless otherwise stated herein, all figures in this Item 7, other than price per share data, are stated in thousands (“000s”).

Overview and Recent Developments

The Company is a leading supplier of electronic signature solutions for business process automation in the financial industry and is the recognized leader in biometric signature verification technology. Our products enable companies to achieve trulysecure paperless workflow in their eBusiness processesbusiness transactions with multiple signature technologies, across virtually all applications in SaaS and fully deployed delivery models.hardware platforms, and that are legally binding and compliant with applicable laws and regulations and that can provide a higher level of security than paper-based processes. The Company has been a leading supplier of electronic signature solutions within the financial services and insurance industries and has delivered significant expense reduction by enabling complete document and workflow automation.

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 three-yeartwo-year period ended December 31, 2008,2011, net losses attributable to common stockholders aggregated approximately $10,412$11,216, and, at December 31, 2008,2011, the Company's accumulated deficit was approximately $95,000.$111,839.

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For the year ended December 31, 2011, total revenue was $1,546, an increase of $695, or 82%, compared to total revenue of $851 in the prior year. The increase in product revenue is primarily due to new product offerings and an increased demand for electronic signature solutions.

For the year ended December 31, 2008, total revenues were $2,401, an increase of $256, or 12%, compared to total revenues of $2,145 in2011, the corresponding prior year.

The loss from operations for the year ended December 31, 2008 increased $51 to $2,244,was $4,283, a decrease of $971, or 18%, compared with a loss from operations of $2,193$5,254 in the prior year.  The decrease in the operating loss is primarily attributable to a charge of $1,009 related to the acceleration of amortization of certain capitalized software development costs in the prior year. For the year ended December 31, 2011, operating expenses were $5,829, a decrease of $276, or 5%, compared to operating expense of $6,105 in the prior year. The decrease in operating expense resulted primarily from a charge in the prior year period.  This increase, is primarily attributedof $1,009 related to the net effect of higher recorded revenues, offset by a $539 increase in cost of sales to $1,064 in the current period compared to $525 in the
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prior year period. The increase in cost of sales is due to increasedaccelerated amortization of previouslycertain capitalized software development costs, related to product developments and enhancements and increases in direct engineering costs, charged to cost of sales, related to meeting customer specific  requirements associated with the integration of our standard products into customer systems.

The Company continues to experience demand for its electronic signature technology across the financial industry despite the turmoil and volatilityoffset by a $700 increase in the financial markets.

The insurance industry is focusing on its eBusiness strategies not onlyamount of software development cost expensed in 2011 compared to reduce transaction costs but to forge closer relationships with their customers and agents. According to the September 2008 Forrester Research report “North American Insurance IT Spending in 2008,” 49% of US insurance companies surveyed indicated that increasing or expanding their online presence and eCommerce capabilities was a critical or high priority for them. This shift to eBusiness is a fundamental change for the industry, since insurance is all about producing documents, whether the paper that document is “printed” on is real or virtual. Technologies like electronic signature figure prominently in successful eBusiness strategies, since they accelerate the quote to revenue process while fostering better customer experiences.  Based upon prior large scale deployments at AEGON/World Financial Group, AGLA, Prudential, State Farm, and two recent wins with Travelers and Allstatewhat would have been capitalized in the last half of 2008, together with pending orders from other insurance carries, the Company believes CIC is emerging as the leading and preferred supplier of electronic signature solutions for property/casualty and life insurance applications.prior year.

In March 2011, the banking sector, accordingCompany sold 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $121 in expenses, of which $50 went to SG Phoenix, LLC, an affiliated entity of the Company’s largest stockholder Phoenix Venture Fund, LLC (“Phoenix”), in payment of an administrative fee and $71 in expenses to third parties in connection with the financing.  The Company recorded a beneficial conversion feature of $800 related to the Forrester Research entitled “Industry Essentials: US Retail Banking”, US. banks and lenders are challenged withintrinsic value of the need to increase revenue while improvingconversion feature of the effectiveness and efficiencyshares of their processesSeries C Preferred Stock. The Company issued 305 shares of Series C Preferred Stock in payment of dividends for the face of increased regulatory and compliance demands exacerbated by the recent sub prime debt and credit crisis. This crisis is driving increased regulatory controls and the need to administer the billions of bailout dollars to settle troubled mortgages and CIC believes this will accelerate the deployment of electronic signature technology-based solutions to address those challenges.  In addition, regional and mid-size banks, unencumbered by the Troubled Asset Relief Program (“TARP”) related difficulties; appear to be pursuing automation more actively than in the past. The Company’s joint solution with Computer Science Corporation (CSC) which automates the mortgage workout process, introduced in late 2008 with a webinar featuring Forrester Research, CSC and CIC, focused on the benefits of CSC’s EarlyResoltion platform with the added benefits of CIC’s electronic signature technology and has generated encouraging interest and anticipated 2009 revenue from the larger banks/mortgage companies.

So although the turmoil and volatility in the financial markets has resulted in higher level review purchase processes which have delayed IT purchases beyond the historic first quarter purchase delays associated with a New Year and budget process, it seems increasingly apparent that financial institutions  recognize that  CIC’s technology addresses those institutions needs for both revenue growth and expense reduction and we anticipate that the financial crises may well accelerate the adoption of electronic signature solutions in the overall financial industry and the Company believes 2009 revenue will exceed 2008.year ended December 31, 2011.

In June 2008, the Company closed a financing transaction under which it raised capital through the issuance of secured indebtedness and equity and restructured a portion of the Company’s existing debt. In connection with the transaction,September 2011, the Company borrowed an aggregate of $3,000$100 from Phoenix and refinanced $638an employee of existing indebtednessthe Company and accruedissued unsecured demand notes to each. These notes are due on demand and bear interest onat the Company’s existing indebtedness.rate of 10% per annum. In partial consideration foraddition the respective loans made as described above,Company entered into a Note and Warrant Purchase Agreement (the “September 2011Purchase Agreement”) with Phoenix Banner Holdings, LLC (the “September 2011 Investor”), an entity affiliated with Phoenix.  Under the terms of the September 2011 Purchase Agreement, the Company issued an unsecured convertible promissory note in the amount of $500 (the “September 2011 Note”) to each creditorthe September 2011 Investor.  The September 2011 Note bears interest at the rate of 10% per annum, and has a maturity date of September 20, 2012.  The September 2011 Note is also convertible at the option of the September 2011 Investor into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100.  In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 Investor a warrant to purchase up to the number of5,556 shares of itsthe Company’s Common Stock obtained by dividing the amount of such creditor’s loan by 0.14.  A total of 25,982 shares of our Common Stock may be issued upon exercise of the warrants at an exercise price of $0.14$0.0225 per share.

Overview and Recent Developments (continued)

In December 2011, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Philip Sassower, the Company’s Chairman and CEO, and other investors (the “December 2011 Investors”). Under the terms of the Purchase Agreement, the Company issued unsecured convertible promissory notes in the aggregate amount of $500 (the “December 2011 Notes”) to the December 2011 Investors.  The December 2011 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 20, 2012.  The December 2011 Notes are also convertible at the option of the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100.  In connection with the issuance of the warrants was exempt from registration under Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

In June 2008, in connection with the closing of the financing transaction,December 2011 Notes, the Company also entered into a Securities Purchase Agreement and a Registration Rights Agreement. Under the Securities Purchase Agreement, in exchange for the cancellation of $995 in principal and $45 of interest accrued on our existing debt, the Company issued to the holders of such debtDecember 2011 Investors warrants to purchase an aggregate of 1,0405,556 shares of Series A Cumulative Convertible Preferred Stock
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(“Series A Preferred”).  The issuance and sale of such shares was exempt from registration under Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.  The shares of Series A Preferred were subsequently cancelled and exchanged for an equivalent number of shares of Series A-1 Cumulative Convertible Preferred Stock (“Series A-1 Preferred”).  The outstanding shares of Series A-1 Preferred carry an 8% annual dividend, payable quarterly in arrears in cash or in additional shares of Series A-1 Preferred, have a liquidation preference over Common Stock of $1.00 per share, and, subject to further adjustment as provided in the Certificate of Designations, Powers, Preferences and Rights of the Series A-1 Cumulative Convertible Preferred Stock, are presently convertible into shares ofCompany’s Common Stock at a ratioan exercise price of one share of Series A-1 Preferred for 7.1429 shares of Common Stock.$0.0225 per share.

New Accounting Pronouncements

See Note 1, Notes to Consolidated Financial Statements included under Part IV, Item 15 of this report on Form 10-K.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s
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consolidated financial statements and the accompanying notes. The amounts of assets and liabilities reported in its balance sheets and the amounts of revenuesrevenue and expenses reported for each period presented are affected by these estimates and assumptions that are used for, but not limited to, revenue recognition, allowance for doubtful accounts, intangible asset impairments, fair value of financial instruments, software development costs, research and development costs, foreign currency translation and net operating loss carryforwards.carry-forwards. Actual results may differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used by the Company’s management in the preparation of the consolidated financial statements.

Derivatives: The Company follows the relevant accounting guidance and records derivative instruments (including certain derivative instruments embedded in other contracts) in the balance sheet as either an asset or liability measured at their fair value, with changes in the derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. The Company values these derivative securities under the fair value method at the end of each reporting period (quarter), and their value is marked-to-market at the end of each reporting period with the gain or loss recognition recorded in earnings. The Company continues to revalue these instruments each quarter to reflect their current value in light of the current market price of our Common Stock. The Company utilizes a discounted Black-Scholes option-pricing model to estimate fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instrument’s expected remaining life. These assumptions require significant management judgment.

Revenue: Revenue is recognized when earned in accordance with the applicable accounting standards, including AICPA Statement of Position ("SOP") No. 97-2, “Software Revenue Recognition”, as amended, Staff Accounting Bulletin 104, “Revenue Recognition” ("SAB 104"), and the interpretive guidance issued by the Securities and Exchange Commission and EITF issue number 00-21, “Accounting for Revenue Arrangements with Multiple Elements”, of the FASB’s Emerging Issues Task Force.guidance. The Company recognizes revenuesrevenue from sales of software products upon shipment, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all non-recurring engineering work necessary to enable the Company's product to function within the customer's application has been completed and the Company's product has been delivered according to specifications. Revenue from service subscriptions is recognized as costs are incurred or over the service period, which-everwhichever is longer.

Software license agreements may contain multiple elements, including upgrades and enhancements, products deliverable on a when and if available basis and post contractpost-contract support. Revenue from software license agreements is recognized upon delivery of the software, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all nonrecurring engineering work necessary to enable the Company's products to function within the customer's application has been completed, and the Company has delivered its product according to specifications.

Maintenance revenue is recorded for post-contract support and upgrades or enhancements, which is paid for in addition to license fees, and is recognized as costs are incurred or over the support period, whichever is longer. For undelivered elements where objective and reliable evidence of fair value does not exist, revenue is deferred and subsequently recognized when delivery has occurred and when fair value has been determined.

The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s
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estimates of recoverability of amounts due could be affected and the Company would adjust the allowance accordingly.

Long-lived assets: The Company performs intangible asset impairment analyses in accordance with the guidance in Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” ("SFAS No. 142") and Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” ("SFAS No. 144").applicable accounting guidance. The Company uses SFAS 144the guidance in response to changes in industry and market conditions that affect its patents, the Company then determines if an impairment of its assets has occurred. The Company reassesses the lives of its patents and tests for impairment at least annually in order to determine whether the book value exceeds the fair value for each patent. Fair value is determined by estimating future cash flows from the products that are and will be protected by the patents and considering the following additional factors:

·  whether there are legal, regulatory or contractual provisions known to the Company that limit the useful life of any patent to less than the assigned useful life;

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·  whether the Company needs to incur material costs or make modifications in order for it to continue to be able to realize the protection afforded by the patents;

·  whether any effects of obsolescence or significant competitive pressure on the Company’s current or future products are expected to reduce the anticipated cash flow from the products covered by the patents;

·  whether demand for products utilizing the patented technology will diminish, remain stable or increase; and

·  whether the current markets for the products based on the patented technology will remain constant or will change over the useful lives assigned to the patents.

The Company had obtained an independent valuation from Strategic Equity Group of the carrying value of its patents as of December 31, 2005.  The Company believes that the biometric market potential identified in current year market research has improved over the data used to validate the carrying value of the Company’s patents at the end of 2005. Management updated this analysis at December 31, 20082011 and believes that that no impairment of the carrying value of the patents exists at December 31, 2008.2011.

Customer Base: To date, the Company's eSignature revenues haveelectronic signature revenue has been derived primarily from financial service industry end-users and from resellers and channel partners serving the financial service industry primarily in North America, the ASEAN Region including China (PRC), and Europe.  Natural Input (text entry) revenues have been derived primarily from hand held computer and smart phone manufacturers (OEMs) primarily in North America, Europe and the Pacific Rim. The Company performs periodic credit evaluations of its customers and does not require collateral.  The Company maintains reserves for potential credit losses.  Historically, such losses have been within management's expectations.

Software Development Costs: Software development costs are accounted for in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, capitalizationCapitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. The costs capitalized include the coding and testing of the product after technological feasibility has been established and ends upon the release of the product. The annual amortization is the greater of (a)equal to the straight-line amortization over the estimated useful life not to exceed three years or (b)lives of the amount based on the ratiosoftware and varies by type of current revenues to anticipated future revenues.software. The Company generally subdivides its software into product software, server software and Software-as-a-Service. The Company capitalized software development costs of $813,approximately $72 and $788$772 for the years ended December 31, 20082011 and 2007.2010, respectively. For the year ended December 31, 2010, the Company decided to accelerate the amortization of its software portfolio to better reflect the transition of its offering from being mostly product-based to becoming mostly server and service-based and to provide a closer match with the useful life of the development costs being capitalized. This acceleration resulted in an increase in amortization expense of $1,009.

Research and Development Costs: Research and development costs are charged to expense as incurred.

Net Operating Loss Carryforwards:Carry-forwards: Utilization of the Company's net operating losses may be subject to an annual limitation due to the ownership change limitations provided byunder Section 382 of the the Internal Revenue Code of 1986 and similar state provisions. As a result, a portion of the Company's net operating loss carryforwardscarry-forwards may not be
13
available to offset future taxable income. The Company has provided a full valuation allowance for deferred tax assets at December 31, 20082011 of approximately $27$27.4 million based upon the Company's history of losses.

Segments: The Company reports its financial results in one segment.

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Results of Operations – Years Ended December 31, 20082011 and December 31, 20072010

RevenuesRevenue

Total revenue forFor the year ended December 31, 20082011, total revenue was $1,546, an increase of $2,401 increased $256,$695, or 11%82%, compared to revenuestotal revenue of $2,145$851 in the prior year. ProductFor the year ended December 31, 2011, product revenue reflectswas $915, an increase of $492,$718, or 54%364%, in eSignature revenues and a decrease of $254, or 30%, in natural input revenues compared to $197 in the prior year. The increase in revenuesproduct revenue is primarily due to the relative size of orders between the comparable years offset by lower reported royalties from a major natural input/Jot customer. Maintenance revenue of $715new product offerings and an increased 2%, or $18,demand for electronic signature solutions. For the year ended December 31, 20082011, maintenance revenue was $631, a decrease of $23, or 4%, compared to $697maintenance revenue of $654 in the prior year period. The increase wasyear. This decrease is primarily due to new maintenance contracts associated with new product revenues and renewal of maintenance contracts from ongoing customers.

The September 2008 Forrester Research report “North American Insurance IT Spending in 2008,” indicates 49% of U.S. insurance companies surveyed indicated that increasing or expanding their online presence and eCommerce capabilities was a critical or high priority for them. Based upon our prior large scale deployments at AEGON/World Financial Group, AGLA, Prudential, State Farm, and two recent wins with Allstate and Travelers in the last half of 2008, together with pending orders from other insurance carriers, we believe CIC is emerging as the leading and preferred supplier of electronic signature solutions for property/casualty and life insurance applications.

In addition, we believe U.S. banks and lenders are challenged with the need to increase revenue while improving the effectiveness and efficiency of their processes in the face of increased regulatory and compliance demands exacerbated by the recent subprime debt and credit crisis. This crisis is driving increased regulatory controls and the need to administer the billions of bailout dollars to settle troubled mortgages and we believe this will accelerate the deployment of electronic signature technology based solutions to address those challenges.  Furthermore, regional and mid-size banks, unencumbered by TARP related difficulties, appear to be pursuing automation more actively than in the past.

Despite an extremely difficult economic environment, revenue of $1.6 million for the last half of 2008 was up 33% over the last half of 2007, which the Company believes reflects the sustained level of sales related activity we are experiencing going into 2009. We are encouraged by the increasing awareness and understandingreflection of the benefits associated with our technology andCompany’s shift in focus from one-time, on-premise sales to a heightened sense by financial institutions that they need to automate to survive.

Currently, we are experiencing what the Company  believes are normal delays in IT orders consistent with  standard procedure as enterprises enter a new year and budget period. Although  the Company sees no significant indications suggesting that the adverse market conditions impacting  financial institutions  have resulted in delays or cancellation of IT expenditures that would significantly impact expenditures involving CIC technology, there can be no assurance that this will not occur. recurring revenue model.

Cost of Sales

CostFor the year ended December 31, 2011, cost of sales was $663, a decrease of $216, or 25%, compared to cost of sales of $1,064 increased 102%, or $539, for the twelve months ended December 31, 2008, compared to $525$879 in the prior year. The increase isdecrease resulted primarily due tofrom a $381 reduction in capitalized software amortization offset by an increase of $394, or 338%, to $450 ofin direct engineering costs related to meeting customer specific requirements associated with integration of our standard products into customer systems, compared to $56 in the prior year.  In addition amortization of new and previously capitalized software development costs associated with the Company’s product and maintenance revenues increased $169, or 50%, to $504 compared to $335 in the prior year. Cost of sales is expected to increase near term as the Company closes additional contracts and capitalized engineering software development costs for new products are completed and amortization begins.contract services revenue.

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Operating Expenses

Research and Development Expenses

Research and development expenses decreased approximately 58%, or $278, to $198 forFor the year ended December 31, 20082011, research and development expenses were $1,498, an increase of $1,067, or 248%, compared to $476research and development expenses of $431 in the prior year.  Research and development expenses consist primarily of salaries and related costs, outside engineering as required, maintenance items, and allocated facilitiesfacility expenses. The most significant factor contributing to the $278 decreaseincrease in these expenses was an increase in the transferamount of $454 in direct engineering expenses associated with the contract revenues to cost of sales. In addition salaries and related expenses increased 13%software development costs expensed compared to what would have been capitalized in the prior year due to the addition of one engineer. The stock based compensation expense increased 105%, or $19, foryear. For the year ended December 31, 2008. The increase was due to options issued in July of 20082011, total research and vesting in the current year period. Totaldevelopment expenses, before capitalization of software development costs and other allocations was $1,712 for the year ended December 31, 2008were $2,055, an increase of $659, or 47%, compared to $1,507 in the prior year.  Research$1,396 of total 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 consistent with the 2008 amountand other allocations in the near term.prior year.  The increase is due primarily to an increase in salaries and related expenses, including stock compensation expense and contracted engineering expense.

Sales and Marketing Expenses

SalesFor the year ended December 31, 2011, sales and marketing expenses increased 6%,were $1,500, a decrease of $31, or $77, to $1,353 for the twelve months ended December 31, 2008,2%, compared to $1,276sales and marketing expenses of $1,531 in the prior year. The increasedecrease was primarily attributable to an increasedecreases in attendance at health caresalaries and insurance industry summits,general overhead expenses caused by the reallocation of the sales engineering function to research and increaseddevelopment, offset by increases in commissions and allocated charges from engineering for sales support associated with increased proposal activities.  Thesethe increases were off set by a decrease in salary and related expense, including stock based compensation, resulting from the reduction of the sales and marketing staff by two. The Company expects sales and marketing expenses to increase in the near term as sales related activities increase.sales.

General and Administrative Expenses

GeneralFor the year ended December 31, 2011, general and administrative expenses for the twelve months ended December 31, 2008 decreased 1%were $2,168, a decrease of $87, or 4%, or $31, to $2,030 from $2,061general and administrative expenses of $2,255 in the prior year. The decrease iswas primarily due to a reduction of $95decrease in the Company’s doubtful accountsinvestor relations expense compared to the prior year due to the collectionoffset by an increase in the current year of previously reserved accounts and the net effect of the following items. Salaries and related expense were consistent with the prior year. Stock based compensation, excluding director options, increased $62, or 476%, from $13 in the prior year to $76 due to options issued in July of 2008.  Other general and administrative expenses have for the most part remained relatively consistent when compared to the prior year. The Company anticipates that this trend in general and administrative expense will remain consistent over the near term.professional service fees, including legal expenses.

Interest Income and Other Income (Expense), Net

Interest income and other income, (expense), net, increased $98 to incomewas $79, an increase of $72,$77, compared to an expense of $26$2 in the prior year. The increase is due to the increase in cash balances during most of the current year,interest and cash payments received for interest on aged accounts receivable. There was no disposal of fixed assets and inventory by the joint venture as had occurred in the prior year.

Interest Expense

Interest expense related party increased $108 to $243 for the year ended December 31, 2008, compared to $135 in the prior year. The increaseother income, net was due to the financingsettlement of a Section 16b related lawsuit filed on behalf of a stockholder in June of 2008. Interest expense-other for the year ended December 31, 2008 decreased 63%, or $94, to $45, compared to $149 in the prior year period.  The decrease was primarily due to the June financings mentioned above.  See Notes 3 and 4April 2011. (See Note 13 in the Consolidated Financial Statements of this report on Form 10-K.10-K).

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Interest Expense

AmortizationFor the year ended December 31, 2011, related party interest expense was $21, a decrease of $234, or 92%, compared to related party interest expense of $255 in the prior year. The decrease was due to the restructuring of the Company’s debt in the August 5, 2010 Recapitalization through the issuance of Series B Preferred Stock in exchange for all outstanding secured indebtedness. For the year ended December 31, 2011, interest expense-other was $3, a decrease of $5, or 63%, compared to interest expense-other of $8 in the prior year. The decrease was primarily due to the factors discussed above.  For the year ended December 31, 2011, amortization of related party loan discount related party,and deferred financing, which includes warrant and beneficial conversion feature costs associated with the Company’s debt and deferred financing costs associated with the notes and warrant purchase agreements dividendswas $3, a decrease of $1,716, or 99%, compared to amortization of related party loan discount and deferred financing of $1,719 in the prior year.  The decrease was primarily due to the restructuring of the Company’s debt. (See Note 7 to the Consolidated Financial Statements of this report on the shares of Series A-1 Preferred and beneficial conversion feature increased 228%, orForm 10-K.)

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$698, to $1,003 forFor the year ended December 31, 2008, compared to $305 in the prior year period.  The increase was primarily due to the June 2008 financing.

Amortization2011, amortization of loandebt discount and deferred financing-other, which includes warrant beneficial conversion feature and deferred financing costs associated with the notes and warrant purchase agreements decreased 67%,$57, or $447, for the year ended December 31, 2008 compared to $664 in the prior year period. The decrease was due to the decrease in borrowings from other than related parties during the year ended December 31, 2008100%, compared to the prior year. SeeThe decrease was primarily due to the factors discussed in interest expense above. (See Note 3 and 4 in7 to the Consolidated Financial Statements of this report on Form 10-K.)

The Companychange in the fair value of the derivative liabilities resulted in a non-cash loss of $113, an increase of $3,249 compared to a gain of $3,136 in the prior year that resulted from the revaluation of the Company’s derivatives at December 31, 2010.  The loss recorded at December 31, 2011, is the result of an increase in the price of the Company’s Common Stock at December 31, 2011, compared to December 31, 2010. The fair value of the Company’s derivative instruments is based on the fair value of our stock as such gain/loss is dependent upon our stock price and will amortize an additional $878 of warrant cost and $301 in deferred financing costs related to the note and warrant purchase agreements entered into June 2008 to interest expense through June 2010.fluctuate accordingly.

Liquidity and Capital Resources

Cash and cash equivalents totaled $307 at December 31, 2008 totaled $929,2011, compared to cash and cash equivalents of $1,144$1,879 at December 31, 2007. This2010. The decrease is primarily attributable to $1,774$3,255 of funds used inby operating activities and $840$96 of funds used in investing activities. These amountsuses of funds were offset by $2,398$1,779 of funds provided by financing activities.activities in the form of short-term notes and the sale of additional shares of Series C Preferred s Stock.

The cash used by operations was primarily attributable to athe net loss of $3,309. Other net$4,502, and changes in operating assets and liabilities accounted for uses of $425.  The cash used in operations was$697. These amounts were offset by non-cash charges of depreciation and amortization of $951, amortization$838, loss on derivative liabilities of the loan discount, deferred financing and warrant costs of $848, and stock based113, stock-based employee compensation of $161.$807, restricted stock expense and stock issued for services of $195.

The cash used in investing activities of $840$96 was primarily due to the capitalized software development costs of $813$72 and the acquisition of office and computer equipment of $27.$24.

Proceeds from financing activities consisted primarily of $2,575$1,100 in net proceeds from the issuance of long-termshort-term debt, and $125$679 in proceeds from short term debt with an employee of the Company (see “Financing” below). Thenet proceeds from the issuance of short-term notes and long term debtSeries C Preferred Stock. These proceeds were offset by the payment of $302$121 related to the debt.Series C Preferred Stock issued in March 2011.

Accounts receivable increased 55%, or $248, to $700were $298 at December 31, 2008,2011, an increase of $195, or 189%, compared to $452accounts receivable of $103 at December 31, 2007.2010. Accounts receivable at December 31, 20082011 and 20072010, are net of $104$3 and $117,$9, respectively, in reservesallowances provided for potentially uncollectible accounts. Sales in the Company’s fourth quarter of 20082011 were 5%60% higher than 2007. The Company expects that there will be fluctuations in accounts receivable in the foreseeable future due to volumes and timing of revenues from quarter to quarter.

The deferred financing costs increased by $425 associated with the June 2008 financing. Deferred financing costs expensed amounted to $124 through December 31, 2008.  The remaining $301 will be charged to operations through June 2010 (see “Financing” below).2010.

Prepaid expenses and other current assets decreased 40%, or $55, to $80were $29 at December 31, 20082011, a decrease of $15, or 34%, compared to $135prepaid expenses and other current assets of $44 at December 31, 2007.2010.  The decrease is primarily due to the timing of the billings and payments of annual
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maintenance and other prepaid contracts. Prepaid expenses generally fluctuate due to the timing of annual insurance premiums and maintenance and support fees, which are prepaid in December and June of each year.

Accounts payable decreased 32%were $261 at December 31, 2011, a decrease of $189, or 42%, or $43,from accounts payable of $450 at December 31, 2010. The decrease in accounts payable is primarily due to reductionsdecreases in liabilities associated with prepaid duesprofessional fees incurred in connection with the Recapitalization, Series B Financing, and fees for programs that occur inSeries C Financing during the first partsecond half of the year.2010.

Other current liabilities, which include accrued compensation of $221, were $464 at December 31, 2011, a decrease of $141, or 23%, compared to other current liabilities of $605 at December 31, 2010.  The decrease is primarily due to the payment in 2011 of severance pay for three senior level executives that left the company in December 2010.

Deferred revenue was $914 at December 31, 2011, a decrease of $192, or 17%, compared to deferred revenue of $343 and notes of $60, becoming due in October, of 2009, were $1,100$1,106 at December 31, 2008, compared to $2,598 at December 31, 2007, a net increase of $1,498. Deferred revenue decreased $88, to $343, at December 31, 2008, compared to $431 at December 31, 2007.2010.  The decrease in current liabilities is due to primarily to the refinancing oflong-term maintenance contracts that were renewed at a discount compared to the related party notes as part of the June 2008 financing (see Financing below).annual renewal amounts.

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Financing Transactions

Note FinancingsIn March 2011, the Company sold 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $121 in expenses, of which $50 went to SG Phoenix, LLC in payment of an administrative fee and $71 in expenses to third parties in connection with the financing.  In connection with the sale of the shares of Series C Preferred Stock, the Company issued warrants to purchase an aggregate of 35,556 shares of Common Stock with an exercise price of $0.0225 per share, which warrants are exercisable for a period of three years from the date of issuance. The Company recorded a beneficial conversion feature of $800 related to the intrinsic value of the conversion feature of the shares of Series C Preferred Stock.  The Company issued 305 shares of Series C Preferred Stock in payment of dividends for the year ended December 31, 2011.

On June 5, 2008,In September 2011, the Company effected a financing transaction under which the Company raised capital through the issuanceborrowed an aggregate of new secured indebtedness$100 from Phoenix and equity, and restructured a portionan employee of the Company’s existing short-term debt (collectively, the “Financing Transaction”). Certain parties to the Financing Transactions (Phoenix Venture Fund LLC and Michael Engmann) had a pre-existing relationship with the Company and with respectissued unsecured demand notes to such parties,each. These notes are due on demand and bear interest at the Financing Transaction may be considered a related party transaction.

Under the Financing Transaction,rate of 10% per annum. In addition the Company entered into a Creditthe September 2011 Purchase Agreement (the “Credit Agreement”) and a Pledge and Security Agreement (the “Pledge Agreement”), each dated as of June 5, 2008, with Phoenix Venture Fund LLC (“Phoenix”), Michael Engmann and an unrelated creditor (collectively with Phoenix, the “Creditors,” and each individually a “Creditor”).September 2011 Investor.  Under the terms of the CreditSeptember 2011 Purchase Agreement, the Company received an aggregate of $3,000 and refinanced $638 of existing indebtedness and accrued interest on that indebtedness (individually, a “Loan” and collectively,issued the “Loans”).September 2011 Note to the September 2011 Investor.  The Loans, which are represented by secured promissory notes (each a “Note” and collectively, the “Notes”), bearSeptember 2011 Note bears interest at eight percent (8%)the rate of 10% per annum, which,and has a maturity date of September 20, 2012.  The September 2011 Note is also convertible at the option of the Company, may be paidSeptember 2011 Investor into securities sold in cash or in kind and mature June 5, 2010.  The Company used a portion of the proceeds from the Loans to pay the Company’s existing indebtedness and accrued interest on that indebtedness that was not exchanged for preferred stock as described below, and may usenext equity financing with gross proceeds to the remaining proceeds for working capital and general corporate purposes,Company in each case in the ordinary courseexcess of business; and to pay fees and expenses in$100.  In connection with the Financing Transaction, which were approximately $475.  Additionally, a portionissuance of the proceeds of the Loans were used to repay a short term loan from a Company employee in the amount of $125, plus accrued interest, that was made prior to and in anticipation of the closing of the Financing Transaction.  Under the terms of the Pledge Agreement,September 2011 Note, the Company and its subsidiary, CIC Acquisition Corp., granted the Creditors a first priority security interest in and a lien upon all of the assets of the Company and CIC Acquisition Corp.

Under the terms of the Credit Agreement and in partial consideration for the Creditors’ respective Loans made pursuantalso issued to the terms of the Credit Agreement as described above, the Company issued to each CreditorSeptember 2011 Investor a warrant to purchase up to the number of5,556 shares of the Company’s Common Stock obtained by dividingat an exercise price of $0.0225 per share. The Company ascribed a value of $7 to the amountwarrants, which was recorded as a discount to short-term debt in the balance sheet.

In December 2011, the Company entered into a the December 2011 Purchase Agreement with the December 2011 Investors. Under the terms of such Creditor’s Loan by 0.14 (eachthe December 2011 Purchase Agreement, the Company issued the December 2011 Notes to the December 2011 Investors.  The December 2011 Notes bear interest at the rate of 10% per annum, and have a “Warrant” and collectively,maturity date of December 20, 2012.  The December 2011 Notes are also convertible at the ‘Warrants”).  A totaloption of 25,982the December 2011 Investors into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100.  In connection with the issuance of the December 2011 Note, the Company also issued to the December 2011 Investors warrants to purchase an aggregate of 5,556 shares of the Company’s Common Stock may be issued upon exercise of the Warrants.  The Warrants are exercisable beginning June 30, 2008 until their expiration on June 30, 2011. The Warrants haveat an exercise price of fourteen cents ($0.14)$0.0225 per share. Additional Warrants may be issued if the Company exercises its option to make interest payments on the Loans in kind. The Company ascribed the relative faira value of $1,231$13 to the warrants, which iswas recorded as a discount to “Long-term debt”short-term debt in the balance sheet.  The fair value of
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    During the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 2.73%; expected life of 3 years; expected volatility of 82.3%; and expected dividend yield of 0%.

In connection with the closing of the Financing Transaction,year ended December 31, 2011, the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008, (See Note 4 in Notesexercised its option related to the Consolidated Financial Statements).

The offerterms of its classes of preferred stock and salemade dividend payments in kind. For the year ended December 31, 2011, the Company issued an aggregate of the Warrants and67 shares of Series A-1 Preferred Shares as detailed above, including the Common Stock, issuable upon exercise or conversion thereof, was made in reliance upon exemptions from registration afforded by Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D, as promulgated by the Securities and Exchange Commission under the Securities Act and under exemptions from registration available under applicable state securities laws.

In 2006 and 2007, the Company entered into long-term financing agreements with Michael Engmann, a stockholder of the Company owning approximately 7% of the Company’s then outstanding870 shares of CommonSeries B Preferred Stock and with unrelated third parties. The cash received from the financing agreements aggregated $1,720. Each financing included a Note and Warrant Purchase Agreement and a Registration Rights Agreement.  The notes bore interest at a
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rate of 15% per annum, payable quarterly in cash.  The proceeds from these financings were used for working capital purposes. As part of the 2006 and 2007 financings the Company issued 10,012 warrants, 3,168 warrants with an exercise price of $0.25, and 6,585 warrants with an exercise price of $0.51. The fair value ascribed to the warrants issued in connection with the financings created a debt discount that was amortized to interest expense over the life of the respective loans. All of the shares underlying the warrants discussed above were registered with the Company’s Form S-1/A, which was declared effective December 28, 2007.  See Note 4 in Notes to the Consolidated Financial Statements.

A portion of the above referenced debt held by Michael Engmann, including accrued and unpaid interest through May 31, 2008, was exchanged for Series A-1 Preferred (See Note 3 in the Notes to Consolidated Financial Statements included with this report on Form 10-K ). The remainder of the debt held by Michael Engmann, and part of the debt held by certain third parties, including accrued and unpaid interest through May 31, 2008, was refinanced pursuant to the Credit Agreement (See Note 4 in the Notes to Consolidated  Financial Statements included with this report on Form 10-K). The related Note and Warrant Purchase Agreements were terminated in connection with the June 2008 Financing Transactions.  The warrants to acquire 10,012305 shares of the Company’s CommonSeries C Preferred Stock issued as partin payment of the above reference financings remain outstanding.  These warrants are exercisable until June 30, 2010. The remaining $125 debt plus accrued but unpaid interest was paid on September 30, 2008.

The warrants to purchase 4,850 shares of the Company’s Common Stock issued under the 2004 Purchase Agreement expire on October 28, 2009. The Company may call the warrants if the Company’s Common Stock trades at $1.00 or above for 20 consecutive trading days after the date that is 20 days following the effectiveness of a registration statement providing for the resale of the shares issued upon exercise of the warrants. The placement agent in connection with this financing will be paid approximately $28 in the aggregate if all of the investor warrants are exercised.  The Company will receive additional proceeds of approximately $1,845 if all of the investor warrants are exercised.dividends.

Interest expense associated with the Company’s short and long-term debtindebtedness for the yearyears ended December 31, 20082011 and 20072010, was $1,137$27 and $1,253,$2,039, respectively, of which $973$24 and $440$1,974, respectively, was related party expense. Amortization of debt discount and deferred financing costs included in interest expense for the year ended December 31, 20082011 and 20072010, was $849$3 and $969,$1,776, respectively, of which $730$3 and $305$1,719, respectively, was related party expense.

The Company accrued $47 in dividends related to the preferred shares issued as part of the June 2008 financing.  At December 31, 2008 approximately $19 of the accrued dividends are payable.

August 2007 Private Placement

On August 24, 2007, the Company entered into a Securities Purchase and Registration Rights Agreement (the “August 2007 Purchase Agreement”) with Phoenix Venture Fund LLC (the “Purchaser”). On September 14, 2007, the transactions closed and the Company issued to the Purchaser 21,500 shares of the Company’s Common Stock (the “Shares”) at a price per share of approximately $0.14, for an aggregate purchase price of $3,000. An advisory fee of $250 was paid to the managing member of the Purchaser for services rendered in connection with the sale of the Shares and $61 to the Purchaser’s legal counsel for services associated with the financing transactions.  In addition the Company paid $87 in professional fees associated with the sale of the shares. The Company used the proceeds of the sale of the Shares for payment of outstanding indebtedness and additional working capital. The Company was permitted under the terms of the Purchase Agreement to use up to $1,400 of the net proceeds to repay outstanding indebtedness. Under the August 2007 Purchase Agreement, so long as the Purchaser holds shares of Common Stock of the Company representing at least fifty-percent of the Shares purchased pursuant to the August 2007 Purchase Agreement and at least five-percent of the outstanding capital stock of the Company, the managing
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member of the Purchaser is entitled to a right of first offer to exclusively provide debt or equity financing to the Company prior to the Company’s pursuing debt or equity financing from another party, subject to certain conditions and exclusions. Additionally, provided the Purchaser meets the foregoing ownership requirements, the managing member of the Purchaser is permitted to designate up to two non-voting observers to attend meetings of the Company’s board of directors and, for a period of twenty-four months following the date a registration statement pertaining to the Shares is first declared effective by the Securities and Exchange Commission (the “Commission”), the Company is prohibited from selling or otherwise disposing of material properties, assets or rights of the Company without the consent of the managing member of the Purchaser.

The Company was obligated under the Purchase Agreement to use its best efforts to prepare and file with the Commission a registration statement covering the resale of the securities sold pursuant to the Purchase Agreement. The registration statement provides for the offering to be made on a continuous basis pursuant to Rule 415 under the Securities Act. The Company filed the registration statement on November 15, 2007, and an amended registration statement on December 20, 2007. The revised registration statement was declared effective on December 28, 2007. The Company must also use its best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144(k). The Company was obligated to pay the costs and expenses of such registration, which were $147.

The August 2007 Purchase Agreement provides for certain registration rights whereby the Company could be required to make liquidated damages payments if a registration statement is not filed or declared effective by the SEC within a specified timeframe and if after being declared effect the registration statement is not kept effective. The Company filed the registration statement within the required timeframe and it is currently effective.  Should the Company fail to keep the registration statement effective, it will upon that event and each thirty days thereafter until the registration statement is again effective, be subject to making payments to the Purchaser in an amount equal to one and a half percent (1.5%) of the greater of: (i) the weighted average market price of the Shares during such 30-day period, or (ii) the market price of the Shares five (5) days after the closing (the “Closing Market Price”), until the registration statement is again declared effective, or as to any Shares, until such Shares can be sold in a single transaction pursuant to SEC Rule144; provided, however, that the liquidated damages amount under this provision shall be paid in cash and the total amount of payments shall not exceed, when aggregated with all such payments, ten percent (10%) of the Closing Market Price. The Company has not recorded a liability in connection with the liquidated damages provisions of the August 2007 Purchase Agreement because it believes that it is not probable that an event will occur which will trigger a liquidated damages payment under the agreement.

Contractual Obligations

The Company had the following material commitments as of December 31, 2008:2011:

  Payments due by period 
Contractual obligations Total  2009  2010  2011  2012  2013  Thereafter 
Short-term debt related party (1) $65  $65  $–  $–  $–  $–  $– 
Long-term debt related party (2)  3,638   –   3,638   –   –   –   – 
Operating lease commitments (3)  792   272   280   240   –   –   – 
Total contractual cash obligations $4,495  $337  $3,918  $240  $–  $–  $– 
  Payments due by period 
Contractual obligations Total  2012  2013  2014  2015  2016  Thereafter 
Short-term note payable (1)  1,100   1,100   -   -   -   -   - 
Operating lease commitments (2)  1,366   267   275   283   292   249   - 
Total contractual cash obligations $2,466  $1,367  $275  $283  $292  $249  $- 

1.  Short-term debt reportedThe Company extended the lease on the balance sheet is net of approximately $5its offices in discounts representing the fair value of warrants issued in connection with the Company’s debt financings.

2.  Long-term debt related party reported on the balance sheet is net of approximately $873 in discounts representing the fair value of warrants issued to the debt holders.

3.  The operating lease commenced on November 1, 2002. The lease was renegotiated in December 2005 and extended for an additional 60 months.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, 2011.2016.

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As of December 31, 2008,2011, the Company leased facilities in the United States and China totaling approximately 10,1009,600 square feet. The Company’s rental expense was $271 and $281 for the years ended December 31, 20082011 and 2007 was approximately $279, and $333,2010, , respectively. In December 2005 the Company extended its existing lease in Redwood Shores an additional 60 months. In addition to the base rent, in the United States, the Company pays a percentage of the increase, if any, in operating cost incurred by theits landlord in such year, over the operating expenses incurred by theits landlord in the base year.  The Company believes the leased offices in the United States and China will be adequate for the Company’s needs over the term of the leases.

As of December 31, 2008,2011, the Company's principal source of liquidity was its cash and cash equivalents of $929.  With$307. Revenues increased in 2011 compared to 2010. Delays in closing new sales at the exception of 2004, in each year since the Company’s inception the Company has incurred losses. Currently, the Company is  experiencing what it  believes are normal delays in IT orders consistent with  standard procedure as enterprises enter a new year and budget period. Although the Company sees no significant indications suggesting that the adverse market conditions impacting our customer base of financial institutions have resulted in delays or cancellation of IT expenditures that would significantly impact planned automation programs involving our technology, the elevated review and prioritization purchase processes have delayed anticipated early 2009 deployments.  In recognition that such delaysvolumes required could result in the short-term need for additional funds, prior to achievement of cash flow positive operations, the Company is investigating various alternative financing sources, including investments from selected strategic partners.

funds. However, there can be no assurance that additional funds will be available when needed or, if available, will be on favorable terms or in the amounts the Company may require. If adequate funds are not available when needed, the Company may be required to delay, scale back or eliminate some or all of its marketing and development efforts or other operations, which could have a material adverse effect on the Company's business, results of operations and prospects. In addition, as a result of the 2008 financing transaction, the holders of the Company’s debt that matures in 2011 hold a first position security interest in all of the assets. As a result of this uncertainty, our auditors have expressed substantial doubt abouton our ability to continue as a going concern.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. The Company has an investment portfolio ofAny investments in fixed income securities that are classified as cash equivalents. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if the market interest rates increase. The Company attempts to limit this exposure by investing primarily in short-term securities. The Company did not enter into any short-term security investments during the twelve months ended December 31, 2008.2011.

Foreign Currency Risk. The Company operates a joint venture in China and from time to time makestime-to-time could make certain capital equipment or other purchases denominated in foreign currencies. As a result, the Company's cash flows and earnings arecould be exposed to fluctuations in interest rates and foreign currency exchange rates. The Company attemptswould attempt to limit these exposuresany such exposure through operational strategies and generally has not hedged currency exposures.exposure.

Future Results and Stock Price Risk. The Company's stock price may be subject to significant volatility. The public stock markets have experienced significant volatility in stock prices in recent years. The stock prices of technology companies have experienced particularly high volatility, including, at times, severe price changes that are unrelated or disproportionate to the operating performance of such companies. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to, among other factors, quarter-to-quarter variations in operating results, announcements of technological innovations or new products by the Company or its competitors, announcements of new strategic relationships by the Company or its competitors, general conditions in the computer industry or the global
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economy generally, or market volatility unrelated to the Company's business and operating results. The impact and severity of the above factors could be exacerbated by the Company’s small public float and a lack of market liquidity for its Common Stock.

Item 8. Consolidated Financial Statements and Supplementary Data

The Company's audited consolidated financial statements for the years ended December 31, 20082011 and 2007,2010, and for each of the years in the two-year period ended December 31, 20082011, begin on page F-1 of this Annual Report on Form 10-K, and are incorporated into this item by reference.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

NoneNone.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

UnderThe Company carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of the Company’sour management, including the Company’sour Chief Executive Officer and our Chief Financial Officer, the Company has evaluatedof the effectiveness of the design and operation of itsour disclosure controls and procedures pursuant to applicable rulesparagraph (b) of Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, as of December 31, 2008.Act. Based on that evaluation,review, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded that theseour disclosure controls and procedures are effective.effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedures are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The Company considered these limitations during the development of its disclosure controls and procedures, and will continually reevaluate them to ensure they provide reasonable assurance that such controls and procedures are effective.

Internal Controls and ProceduresControl over Financial Reporting

Management’s Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management including our CEOChief Executive Officer and our CFO,Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its internal controls and procedurescontrol over financial
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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). AsBased on this evaluation, the Company’s management has concluded that, as of December 31, 2008, and based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the internal controls and procedures are effective.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding2010, our internal control over financial reporting. Management’s reportreporting was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

effective.There are inherent limitations to the effectiveness of any system of internal control over financial reporting. Accordingly, even an effective system of internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation and presentation in accordance with accounting principles generally accepted in the United States of America. Our internal controls over financial reporting are subject to
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various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time.
Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this reportquarter ended December 31, 2011 that haveour certifying officers concluded materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

The following table sets forth certain information concerning the Directors:Company’s directors and executive officers:

NameAge
Year First Elected
or Appointed
   
Guido D. DiGregorio (5)701997
Garry Meyer (5)592007
Louis P. Panetta (1), (2), (3), (4) (5)592000
Chien-Bor Sung (1), (2), (3), (4)841986
David E. Welch (1), (4), (3)622004

1.Member of the Audit Committee (Chairman David E. Welch)
2.Member of the Finance Committee (Chairman Chien-Bor. Sung)
3.Member of the Compensation Committee (Chairman Louis P. Panetta)
4.Member of the Nominating Committee (Chairman Chien-Bor Sung)
5.Member of the Best Practices Committee (Chair Garry Meyer)
NameAgePositions with the Company
Philip S. Sassower, Chairman72Chairman and Chief Executive Officer
Andrea Goren44Director and Chief Financial Officer
William Keiper61President and Chief Operating Officer
Stanley Gilbert71Director
Jeffrey Holtmeier54Director
David E. Welch63Director

The business experience of each of the directors and executive officers for at least the past five years includes the following:

Guido D. DiGregorioPhilip S. Sassower has served as the Company’s Chairman and Chief Executive Officer since August 2010.  Mr. Sassower is a Managing Director of SG Phoenix LLC, a private equity firm, and has served in that capacity since May 2003. Mr. Sassower has also been Chief Executive Officer of Phoenix Enterprises LLC, a private equity firm, and has served in that capacity since 1996. In addition, Mr. Sassower has served as Chief Executive Officer of Xplore Technologies Corp. (OTCQB: XLRT) since February 2006 and has been a director of Xplore Technologies Corp. and served as Chairman of its board of directors since December 2004. On May 13, 2008, Mr. Sassower was electednamed Chairman of the Board of The Fairchild Corporation (NYSE: FA), a motorcycle accessories and aerospace parts and services company. On March 18, 2009, The Fairchild Corporation and 61 subsidiaries filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in Februarythe U.S. Bankruptcy Court, District of Delaware. On January 7, 2010, The Fairchild Corporation’s plan of liquidation was declared effective and the company’s board of directors was relieved of its duties. Mr. Sassower also served as Chairman of the Board of the Company from 1998 to 2002 Chiefand as Co-Chief Executive Officer of the Company from 1997 to 1998. Mr. Sassower is co-manager of the managing member of Phoenix
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Venture Fund LLC. Mr. Sassower’s qualifications to serve on the Board of Directors include more than 40 years of business and investment experience. Mr. Sassower has developed extensive experience working with management teams and boards of directors, and in acquiring, investing in and building companies and implementing changes.

Andrea Goren has served as a director since August 2010.  Mr. Goren was appointed the Company’s Chief Financial Officer in December 2010.  Mr. Goren is a Managing Director of SG Phoenix LLC, a private equity firm, and has served in that capacity since May 2003 and has been associated with Phoenix Enterprises LLC since January 2003. Prior to that, Mr. Goren served as Vice President of Shamrock International, Ltd., a private equity firm, from June 1999 to December 2002. Mr. Goren has been a director of Xplore Technologies Corp. (OTCQB: XLRT) since December 2004 and of The Fairchild Corporation (NYSE: FA) from May 2008 to January 2010. On March 18, 2009, The Fairchild Corporation and 61 subsidiaries filed a petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court, District of Delaware. Mr. Goren is co-manager of the managing member of Phoenix Venture Fund LLC. Mr. Goren’s qualifications to serve on the Board of Directors include his experience and knowledge acquired in approximately 12 years of private equity investing. Mr. Goren has played a significant role in SG Phoenix LLC’s private equity investments and has developed extensive experience working with management teams and boards of directors, including at numerous public companies affiliated with SG Phoenix LLC.

William Keiper was appointed the Company’s President &and Chief Operating Officer in NovemberDecember 2010. Mr. Keiper is Managing Partner of First Global Partners LLC where he specializes in working with investors and Boards of Directors in resolving issues related to business continuity, performance and sustainable value creation. Mr. Keiper has over 30 years of business experience, more than 18 of which have been in the management of software, technology and IT product distribution and services organizations. He was President and Chief Executive Officer of Hypercom Corporation (NYSE: HYC) from 2005 to 2007 and served as a member of its Board of Directors from 2000 to 2007. He was Chairman and Chief Executive Officer of Arrange Technology LLC, a software development services outsourcing company, from 2002 to 2005. From 1997 to 2002, he served as a principal in mergers and acquisitions firms serving middle market software and IT services companies. He was Chief Executive Officer of Artisoft, Inc., a public networking and communications software company, from 1993 to 1997, and its Chairman from 1995 to 1997. He held several executive positions, including President and Chief Operating Officer, of MicroAge, Inc., an indirect sales-based IT products distribution and services company, from 1986 to 1993, where he was a key executive in helping to profitably drive more than a billion dollar revenue increase over the course of his tenure with the company.

Stanley L. Gilbert has served as a director since October 2011. Mr. DiGregorio beganGilbert has more than 45 years experience as a lawyer with primary specialties in wills, trusts, estate planning and administration, as well as tax planning. Mr. Gilbert is Founder, and, has been President of Stanley L. Gilbert PC since 1982. Mr. Gilbert has also been a partner of a number of law firms, including Nager Korobow, Bell Kallnick Klee and Green, and Migdal Pollack Rosenkrantz and Sherman. Mr. Gilbert has served as a Director of Planned Giving at Columbia University Medical Center’s Nathaniel Wharton Fund, which supports a broad variety of projects in basic research, clinical care and teaching since 2001. Mr. Gilbert was elected by a majority of CIC’s Series C and Series B Preferred stockholders voting together as a separate class on an as converted to common stock basis, and serves on CIC’s audit and compensation committees. Mr. Gilbert’s qualifications to serve on the Board of Directors include his career with General Electric, from 1966 to 1986, where after successive promotions in product development, sales, strategic marketingsignificant tax and venture management assignments, he rose to the positionaccounting expertise acquired through his years of General Manager of an industrial automation business. Prior to joining CIC, Mr. DiGregorio was recruited as CEO of several companies to position those businesses for sustained sales and earnings growth. Those companies include Exide Electronics, Maxitron Corp., Proxim and Display Technologies Inc.practicing law.

Garry S. MeyerJeffrey Holtmeier was elected has served as a director in November 2007. Dr. Meyer since August 2011. Mr. Holtmeier has more than 25 years of experiencesuccessful entrepreneurship in the financial services industry,technology and is currentlycommunications fields. As CEO of GENext from 2001 to present, and through its subsidiary China US Business Development, LLC, Mr. Holtmeier has assisted many US companies in establishing relationships in China, where he also co-founded Koncept International, Inc., a Principal of GSMeyer & Associates LLC,Chinese-based VoIP and digital media technology company. Prior to his involvement in the Chinese market, Mr. Holtmeier founded, built over seventeen years and successfully sold InfiNET in 2001 to Teligent, a private equity and technology consulting firm. From 2006 to 2007, he was the Chief Information Officer of Agency and Personal Markets at Liberty Mutual Insurance. From 1998 to 2006, Dr. Meyer was Senior Vice President & Global IT Quality Leader for General Electric. At General Electric he developed and implemented a strategy of core technology platforms and methods to enable leverage in multiple businesses andNASDAQ listed company. Mr. Holtmeier was a key contributor to LEAN Six Sigma new product introductions and best practice processes. Previously, Dr. Meyer was Managing Director, Trusted Services at SafeNet, Vice President at Marsh & McLennan, Principal & CIO at Smart Card International, Inc., Director, Information Technology at Citicorp
22
POS Information Services, Inc., and Vice President, Management Information System at Standard & Poor’s. Dr. Meyer holds a M.S. in electrical engineering and computer science from the Massachusetts Institute of Technology (M.I.T.), a B.S. and Ph.D. from the State University of New York, and is certified in Six Sigma.

Louis P. Panetta was elected a directorrecipient of the Company in October 2000. Mr. Panetta is currently the principal of Louis Panetta Consulting, a management consulting firm, and also teaches at the school of business at California State University, Monterey Bay. He served as Vice President-Client Services for Valley Oak Systems from September 2003 to December 2003. From November 2001 to September 2003 Mr. Panetta was a memberprestigious Ernst & Young, NASDAQ/USA Today “Entrepreneur of the BoardYear” award in 1999, and has served on the boards of Directors of Active Link.numerous corporations and non-profit organizations. He was Vice President of Marketingwill serve on CIC’s audit and Investor Relations with Mobility Concepts, Inc. (a wireless Systems Integrator), a subsidiary of Active Link Communications from February 2001compensation committees. Mr. Holtmeier’s qualifications to April 2003. He was President and Chief Operating Officer of PortableLife.com (eCommerce products provider) from September 1999 to October 2000 and President and Chief Executive Officer of Fujitsu Personal Systems (a computer manufacturer) from December 1992 to September 1999. From 1995 to 1999, Mr. Panetta servedserve on the Board of Directors of Fujitsu Personal Systems. Mr. Panetta’s prior positions include Vice President-Sales for Novell, Inc. (the leading supplier of LAN network software)his experience as a successful entrepreneur and Director-Product Marketing for Grid Systems (a leading supplier of Laptop & Pen Based Computers).his experience in establishing business relationships in China.

C.B. Sung was elected a director of the Company in 1986.  Mr. Sung has been the Chairman and Chief Executive Officer of Unison Group, Inc. (a multi-national corporation involved in manufacturing, computer systems, international investment and trade) since 1986 and Unison Pacific Corporation since 1979. Unison Group manages investment funds specializing in China-related businesses and is a pioneer in investing in China. Mr. Sung’s background includes over twenty years in various US high technology operating assignments during which time he rose to the position of Corporate Vice President-Engineering & Development for the Bendix Corporation. Mr. Sung was recently acknowledged and honored for his contributions by his native China (PRC) with a documentary produced by China’s National TV focusing on his life and career as an entrepreneurial scholar, successful US high technology executive and for his pioneering and continuing work in fostering capital investment and economic growth between the US and China.

18
David E. Welch was electedhas served as a director insince March 2004 and serves as the financial expert on the Audit Committee.2004. From July 2002 to present Mr. Welch has been the principal of David E. Welch Consulting, a financial consulting firm,firm. Mr. Welch has also been Vice President and Chief Financial Officer of American Millennium Corporation, Inc., a provider of satellite based asset tracking and reporting equipment, from April 2004 to present. Mr. Welch was Vice President and Chief Financial Officer of Active Link Communications, a manufacturer of telecommunications equipment, from 1999 to 2002.  Mr. Welch has held positions as Director of Management Information Systems and Chief Information Officer with Micromedex, Inc. and Language Management International from 1995 through 1998. Mr. Welch is a member of the Board of Directors ofother directorships have been with AspenBio Pharma, Inc., from 2004 to present, PepperBall Technologies, Inc. from January 2007 to January 2009 and AspenBio Pharma,Advanced Nutraceuticals, Inc., from 2003 to 2006. Mr. Welch is a Certified Public Accountant licensed in the state of Colorado.

Executive Officers

The following table sets forth the name and age of each executive officer of the Company, or named executive officers, and all positions and offices of the Company presently held by each of them.

Name
Age
Positions Currently Held
Guido D. DiGregorio70
Chairman of the Board,
Chief Executive Officer and President
Francis V. Dane57
Chief Legal Officer,
Secretary and Chief Financial Officer
Russel L. Davis44Chief Technology Officer & Vice President, Product Development
The business experience of each of the executive officers for at least the past five years includes the following:

23
Guido D. DiGregorio – see above under the heading “Directors and Executive Officers of the Company – Directors.”

Francis V. Dane was appointed the Company's Secretary in February of 2002, its Chief Financial Officer in October 2001, and its Human Resources Executive in September 1998, and he assumed the position of Chief Legal Officer in December of 1997.  From 1991 Mr. Welch’s qualifications to 1997 he served as a Vice President and Secretary of the Company, and from 1988 to 1992 as its Chief Financial Officer and Treasurer.  Since July of 2000, Mr. Dane has also been the Secretary and Treasurer of  Genyous Biomed International Inc. (including its predecessors and affiliates) a company in the biopharmaceutical field focusedserve on the developmentBoard of medical productsDirectors include his significant accounting and services for the prevention, detection and treatment of chronic illnesses such as cancer.  From October 2000 to April 2004, Mr. Dane served as a director of Perceptronix Medical, Inc. and SpectraVu Medical Inc., two companies focused on developing improved methods for the early detection of cancer. From October 2000 to June 2003 Mr. Dane was a director of CPC Cancer Prevention Centers Inc., a company focused on developing a comprehensive cancer prevention program based upon the detection of early stage, non-invasive cancer.  Prior to this Mr. Dane spent over a decade with PricewaterhouseCoopers, his last position was that of Senior Manager, Entrepreneurial Services Division.  Mr. Dane is a member of the State Bar of California and has earned a CPA certificate from the states of Connecticut and California.

Russel L. Davis rejoined the Company as Chief Product Officer in August of 2005 and now serves as its Chief Technology Officer and Vice President of Product Development.  He served as CTO of SiVault Systems, from November of 2004 to August of 2005.  Mr. Davis originally joined CIC in May of 1997 and was appointed Vice President of Product Development & Support in October of 1998. Prior to this, Mr. Davis served in a number of technical management roles including; Director of Service for Everex Systems, Inc., a Silicon Valley based PC manufacturer and member of the Formosa Plastics Group, managing regional field engineering operations for Centel Information Systems, which was acquired by Sprint. He also served in the United States Navy supervising shipboard Electronic Warfare operations.financial expertise.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company's officers, directors and persons who own more than ten percent of a registered class of the Company's equity securities to file certain reports with the Securities and Exchange Commission (the "SEC") regarding ownership of, and transactions in, the Company's securities. These officers, directors and stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) reports that are filed with the SEC.  Based solely on a review of copies of such forms received by the Company and written representations received by the Company from certain reporting persons, the Company believes thatThe following Section 16 filings were not timely filed for the year ended December 31, 2008 all Section 16(a) reports required to be filed by2011: the Company's executive officers, directorsForm 3 for MDNH Partners LP dated January 20, 2011, the three Form 4s for MDNH Partners LP dated January 20, 2011, the Form 4 for former director Francis Elenio dated February 4, 2011, the Form 4 for former director Kurt Amundson dated February 4, 2011, the Form 4 for Andrea Goren dated February 4, 2011, the Form 4 for Philip Sassower dated February 4, 2011, the Form 4 for David Welch dated February 4, 2011 the two Form 4s for William Keiper dated April 13, 2011, the Form 4 for Andrea Goren dated August 17, 2011, the Form 3 for Stan Gilbert dated November 3, 2011, the Form 3 for Jeffrey Holtmeier dated November 4, 2011, and 10% stockholders were filed on a timely basis.
the Form 4 for William Keiper dated November 4, 2011.
Code of Business Conduct and Ethics

We have adopted a written code of business conduct and ethics, referred to as our Code of Business Conduct and Ethics, which applies to all of our directors, officers, and employees, including our principal executive officer, our principal financial and accounting officer, and our Chief productTechnology officer. A copy of the Code of Business Conduct and Ethics is posted on the Company’s web site, at www.cic.com.www.cic.com.

Audit Committee Financial Expert

Mr. Welch serves as the Audit Committee’s financial expert. Each member of the Audit Committee is independent as defined under the applicable rules and regulations of the SEC and the director independence standards of the NASDAQ Stock Market, (“NASDAQ”), as currently in effect.

2419 


Item 11. Executive Compensation

Summary Compensation Table (in dollars)
 
 
 
 
 
Name and
Principal
Position
 
 
 
 
 
 
 
Year
 
 
 
 
 
 
Salary
($)
 
 
 
 
 
 
Bonus
($)
 
 
 
 
 
Stock
Awards
($)
 
 
 
 
 
Option
Awards
($) (3)(4)
 
 
 
 
Non-Equity
Incentive Plan
Compensation
($)
 
Change in
Pension Value
And
Nonqualified
Deferred Compensation
Earnings
($)
 
 
 
 
 
All Other
Compensation
($)
 
 
 
 
 
 
Total
($)
 
Guido DiGregorioPhilip S
President &Sassower
Chairman and CEO
      2008
      2007
 
 
2011
2010
     285,000(1)−(1)
     200,000(1)−(1)
−
−
−
−
 
    −$27,315
    −
 
−
−
 
−
−
           40,200
         −
     −
     −
   −
   −
            10,055
             9,486
      335,255
      209,486
Frank Dane
CLO & CFO
      2008
      2007
     160,000
     160,000
        −
        −
        −
        −
          20,100
         1,875
     −
     −
   −
                   −
 
 −
 −
$27,315
−
William Keiper, President
2011
2010
−(2)
−(2)
−
−
 
−
−
    $74,148
 −
 180,100
−
−
 161,875
−
−
 −
 −
$74,148
−
 
Russel Davis
CTOAndrea Goren, CFO
 
      20082011
      20072010
-(3)
-(3)
 
    165,000$59,615
   165,000
 
 25,000(2)
        −
 
 
$59,615
−
        −
          30,150
        −
     −
     −
                   −
                   −
                 −
                 −
      220,150
      165,000
 
1.  Mr. DiGregorio 2008 salary includes $85,000, paid in March 2008 that he voluntarily deferred from his 2007 salary.  Mr. DiGregorio has deferred receiptSassower was appointed Chairman of his 2008 deferred salary, payable in March 2009, intending to receive such payment when the company achieves quarterly cash flow positive operations. In addition, $85,000 of his 2009 salary is being voluntary deferred to March of 2010.Board and Chief executive officer on August 5, 2010, and receives no compensation.

2.  Bonus payment for leadingMr. Keiper was appointed President and Chief Operating Officer on December 7, 2010. Mr. Keiper receives no salary compensation from the design and development effort and delivery ahead of scheduled of the SignatureOne Ceremony Server product which was the basis for closing 2 orders with top-tier insurance companies which contributed over $1,000,000 to last half of 2008 revenue.Company.

3.  On January 1, 2006,Mr. Goren was appointed Chief Financial Officer on December 7, 2010. Mr. Goren receives no compensation from the Company adopted SFAS No. 123(R), “Share-Based Payment” Share-based compensation expense is based onCompany.

4.  The amounts provided in this column represent the estimatedaggregate grant date fair value of the portion of share-based paymentoption awards that are ultimately expectedgranted to vest during the period.  The grant date fair value of stock-based awards toour officers, employees and directors isas calculated using the Black-Scholes option pricing model.in accordance with FASB ASC Topic 718, Stock Compensation. Mr. DiGregorioSassower has 2,181,818333,600 options that are vested and exercisable within sixty days of December 31, 2008.2011.  Mr. DaneKeiper has 559,8521,999,996 options that are vested and exercisable within sixty days of December 31, 2008.2011. Mr. DavisGoren has 673,8631,168,600 options that are vested and exercisable within sixty days of December 31, 2007.2011. In accordance with applicable regulations, the value of such options does not reflect an estimate for features related to service-based vesting used by the Company for financial statement purposes. See footnote 610 in the Notes to Consolidated Financial Statements included with this report on Form 10-K.

There are no employment agreementsMr. Keiper is retained by the Company through an Advisory Services Agreement (“Agreement”) with First Global Partners, LLC (“FGP’). Mr. Keiper is Managing Partner of FGP. The term of the agreement is two years unless terminated earlier and will automatically renew for additional one year periods upon the same terms and conditions unless either party notifies the other in writing of its intent to terminate at least 90 days prior to the then-current term. FGP receives a cash sum payment of $20,000 (“Cash Fee”) per month. In addition, FPG is eligible for, but not entitled to receive, an annual cash performance fee of up to thirty-five percent (35%) of the Cash Fee during a given year or prorated portion thereof. Such performance fee, if any, named executives, eitherwill be awarded based upon the sole discretion of the Company’s Board of Directors. No performance fee was paid to FGP in 2011. FGP shall furnish, at FGP's own expense, all materials and equipment necessary to carry out the terms of this Agreement.  The Company agrees to pay FGP for reasonable and documented out of pocket expenses incurred for Services rendered by FGP during the term of the Agreement. FGP shall obtain written or oral.  All employment is at will.approval of the Company prior to incurring any significant expense.

2520 


Mr. Goren is retained by the Company through an Advisory Services Agreement (“Agreement”) with SG Phoenix, LLC (“SGP”). Mr. Goren and Mr. Sassower are managing members of SGP. The term of the agreement is two years unless terminated earlier and will automatically renew for additional one year periods upon the same terms and conditions unless either party notifies the other in writing of its intent to terminate at least 90 days prior to the then-current term. SGP receives a cash sum payment of $15,000 (“Cash Fee”) per month. In addition, SGP is eligible for, but not entitled to receive, an annual cash performance fee of up to thirty-five percent (35%) of the Cash Fee during a given year or prorated portion thereof. Such performance fee, if any, will be awarded based upon the sole discretion of the Company’s Board of Directors. No performance fee was paid to SGP in 2011. SGP shall furnish, at SGP's own expense, all materials and equipment necessary to carry out the terms of this Agreement.  The Company agrees to pay SGP for reasonable and documented out of pocket expenses incurred for Services rendered by SGP during the term of the Agreement. SGP shall obtain written approval of the Company prior to incurring any significant expense.

Outstanding Equity Awards at Fiscal 20082011 Year End

The following table summarizes the outstanding equity award holdings held by our named executive officers. The amounts are not stated in thousands.

 
 
 
 
 
Name and
Principal
Position
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
 
 
 
 
Option
Exercise
Price ($)
 
 
 
 
Option
Expiration
Date
 
Philip S. Sassower, Chairman and CEO
250,300(1)749,700(1)$0.064901/28/2018
 
 
William Keiper, President
 
1,333,330(2)
 
6,666,670(2)
 
$0.0250
 
 
08/11/2018
 
 
Andrea Goren, Chief Financial Officer
 
250,300(3)
418,500(4)
 
749,700(3)
4,581,500(4)
 
$0.0649
$0.0250
 
01/28/2018
08/11/2018

 
Name(1)Mr. Sassower’s 1,000,000 options were granted on January 28, 2011, vest pro rata quarterly over three years, and
Principal
Position
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
Option
Exercise
Price ($) (4)
Option
Expiration
Date (5)
��
Guido DiGregorio, President & CEO (1)
        190,909
        250,000
        425,000
             1,275,000
      409,091
             −
             −
             −
    $0.15
    $0.79
    $0.39
    $0.75
                2015
     2009
     2012
     2012
Frank Dane, CLO & CFO (2)
                  95,454
        100,000
        100,000
        100,000
          35,985
        107,958
       204,546
              −
              −
              −
              −
              −
    $0.15
    $0.79
    $0.33
    $0.55
    $0.39
    $0.75
2015
2009
2010
2011
2012
2012
Russel Davis, CTO (3)
        143,181
        125,000
        375,000
       306,819
              −
              −
    $0.15
    $0.57
    $0.75
2015
2012
2012
expire on January 28, 2018.

(1)           Mr. DiGregorio’s options vest as follows: 600,000 options will vest pro rata quarterly over three years, 250,000 options vested pro rata quarterly over three years; 425,000 options vested on the date of grant; and 1,275,000 options vested on the date of grant.
(2)Mr. Keiper's 8,000,000 options were granted on August 11, 2011, vest pro rata quarterly over three years, and expire on August 11, 2018.

(2)           Mr. Dane’s options vest as follows: 300,000 options will vest pro rata quarterly over three years, 100,000 options vested pro rata quarterly over three years; 100,000 options vested pro rata quarterly over three years; 100,000 options vested pro rata quarterly over three years; 35,985 options vested on the date of grant; and 107,958 options vested on the date of grant.
(3)Mr. Goren's 1,000,000 options were granted on January 28, 2011, vest pro rata quarterly over three years, and expire on January 28, 2018.

(3)           Mr. Davis’s options vest as follows: 112,500 options vested on the date of grant and 337,500 options will vest pro rata quarterly over three years, 125,000 options vested on the date of grant; and 375,000 options vested on the date of grant.

(4)           Mr. DiGregorio holds options to acquire 250,000 shares granted under the 1999 Option Plan and options to acquire 1,700,000 shares under Individual Plans. Mr. Dane holds 300,000 options to acquire shares granted under the 1999 Option Plan and options to acquire 143,943 shares granted under Individual Plans.  Mr. Davis holds options to acquire 500,000 shares granted under the 1999 Option Plan.

(5)           All options granted will expire seven years from the date of grant, subject to continuous employment with the Company.
(4) Mr. Goren's 5,000,000 options were granted on August 11, 2011, vest pro rata quarterly over three years, and expire on August 11, 2018.

Option Exercises and Stock Vested

In 2008,There were no stock options were exercised and 95,454 and 143,181 and 190,909 options to purchase stock granted to Mr. Dane, Mr. Davis and Mr. DiGregorio, respectively, vested during the period.  The Company does not grant or issue restricted stock or other equity-based incentives.in 2011.

2621 

Director Compensation

For their services as directors of the Company, all non-employee directors receive a fee of $1,000 for each board of directors meeting attended and all directors are reimbursed for all reasonable out-of-pocket expenses incurred in connection with attending such meetings. First time directors receive options to acquire 50,000 shares of the Company’s Common Stock upon joining the board and options to acquire 25,000 shares each time they are elected to the board thereafter.  The exercise prices of all options granted to directors are equal to the market closing price on the date of grant, vest immediately and have a seven year life.

In June 2008, Garry Meyer, Louis Panetta, C. B. Sung and David Welch were each granted immediately exercisable non-qualified options to purchase 25,000 shares of Common Stock at an exercise price of $0.20 per share (the then current market price of the Company’s stock), which options expire on June 30, 2015.

The following table sets forth a summaryprovides information regarding the compensation of the compensation paid to ourCompany’s non-employee directors during 2008.for the year ended December 31, 2011:

 
 
 
 
 
 
 
Name
 
 
 
 
Fees Earned
Or Paid in
Cash
($)
 
 
 
 
 
Stock
Awards
($)
 
 
 
 
 
Option
Awards
($)
 
 
 
Non-Equity
Incentive
Plan
Compensation
($)
 
 
 
Change in Pension
Value and
Nonqualified Deferred
Compensation
Earnings
($)
 
 
 
 
 
All Other
Compensation
($)
 
 
 
 
 
Total
($)
 
Garry Meyer (1)
 
$     2,000
 
$       −
 
$     3,995
 
$       −
 
$       −
 
$        −
 
$5,995
 
Louis P. Panetta (2)
 
$     2,000
 
$       −
 
$     3,995
 
$       −
 
$        −
 
$        −
 
$5,995
 
C. B. Sung (3)
 
$     2,000
 
$       −
 
$     3,995
 
$       −
 
$        −
 
$        −
 
$5,995
 
David E. Welch (4)
 
$     2,000
 
$       −
 
$     3,995
 
$       −
 
$        −
 
$        −
 
$5,995
 
Name
 
Fees Earned or Paid in Cash
 
Stock Awards
 
Option Awards (1)
Non-Equity Incentive Plan CompensationNon-qualified Deferred Compensation Earnings
 
All Other Compensation
 
Total
Current Directors       
Stanley Gilbert (2)
$    1,000
$        ─
$     17,900
$        ─
$         ─
$         ─
$    18,900
Jeffrey Holtmeier(3)
$    1,000
$        ─
$     19,900
$        ─
$         ─
$         ─
$    20,900
David Welch (4)
$    1,000
$        ─
$     50,500
$        ─
$         ─
$         ─
$    51,500
        
Former Directors       
Kurt Amundson (5)
$       ─
$        ─
$     50,500
$        ─
$         ─
$         ─
$    50,500
Francis Elenio (6)
$       ─
$        ─
$     50,500
$        ─
$         ─
$         ─
$    50,500

(1)  1.   The amounts provided in this column represent the aggregate grant date fair value of option awards granted to the Companies’ directors in the fiscal year ended December 31, 2011 as calculated in accordance with FASB ASC Topic 718, Stock Compensation. The aggregate number of option awards outstanding for each director as of December 31, 2011 is as follows:
(2)  Mr. Meyer holds optionsGilbert received a stock option grant on November 7, 2011, to acquire 75,000purchase 1,000,000 shares of stockthe Company’s Common Stock at December 31, 2008, allan exercise price of which were vested.$0.023 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant.
(3)  2.   Mr. Panetta holds options Holtmeier received a stock option grant on August 11, 2011,to acquire 225,000purchase 1,000,000 shares of stockthe Company’s Common Stock at December 31, 2008, allan exercise price of which were vested.$0.025 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant.
(4)  3.   Mr. Sung holds optionsWelch received a stock option grant on January 28, 2011 to acquire 210,000purchase 1,000,000 shares of stockthe Company’s Common Stock at December 31, 2008, allan exercise price of which were vested.$0.06 per share. The shares will vest quarterly over three years and have a seven year life from the date of grant.
(5)  4.   Mr. Welch holds optionsAmundson received a stock option grant on January 28, 2011 to acquire 175,000purchase 1,000,000 shares of the Company’s Common Stock at an exercise price of $0.06 per share. Mr. Amundson resigned from the Board on July 10, 2011.
(6)  Mr. Elenio received a stock option grant on January 28, 2011 to purchase 1,000,000 shares of the Company’s Common Stock at December 31, 2008, allan exercise price of which were vested.$0.06 per share. Mr. Elenio resigned from the Board on October 19, 2011.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information as of March 15, 2012, with respect to the beneficial ownership of (i) any person known to be the beneficial owner of more than 5% of any class of voting securities of the Company, (ii) each director and director nominee of the Company, (iii) each of the current executive officers of the Company named in the Summary Compensation Table under the heading "Executive Compensation" and (iv) all directors and executive officers of the Company as a group.  Except as indicated in the footnotes to this table (i) each person has sole voting and investment power with respect to all shares attributable to such person and (ii) each person’s address is c/o Communication Intelligence Corporation, 275 Shoreline Drive, Suite 500, Redwood Shores, California 94065-1413. The amounts are not stated in thousands.

 Common Stock Series A-1 Preferred Stock Series B Preferred Stock Series C Preferred Stock
 
 
Name of Beneficial Owner
 
Number of Shares (1)
Percent
Of Class (1)
 
 
Number of Shares (2)
Percent
Of Class (2)
 
 
Number of Shares (3)
Percent
Of Class (3)
 
 
Number of Shares (4)
Percent
Of Class (4)
Andrea Goren (5)
    341,687,228
66.7%
 −
−
 5,430,521
59.6%
 1,651,610
43.2%
Philip S. Sassower (6)
    340,204,822
66.9%
 −
−
 5,407,422
59.4%
 1,640,237
42.8%
Stanley Gilbert (7)
      39,130,028
15.0%
 −
−
   115,494
1.3%
    328,488
8.6%
Jeffrey Holtmeier (8)
        1,250,300
*
 −
−
 −
−
 −
−
David E. Welch (9)
    591,900
*
 −
−
 −
−
 −
−
        
2722
  Common Stock
 Name of Beneficial Owner
Number
of Shares**
Percent
of Class**
 Guido DiGregorio (1)
        2,325,718
        1.78%
 C. B. Sung (2)
        1,844,420
        1.41%
 Louis P. Panetta (3)                                                                           
           225,000
                 *
 David E. Welch, (4)
           175,000
                 *
 Garry Meyer (5)
             75,000
                 *
 Francis V. Dane (6)
           560,064
                 *
 Russel L. Davis (7)
           673,863
                 *
 All directors and executive officers as a group (6 persons)
        5,879,065
        4.50%
 5% Shareholders  
 Phoenix Venture Fund LLC (8)
              41,714,286
        31.96%
 Michael W. Engmann (9)
              14,611,241
        11.19%
        
 
 
Common Stock
 Series A-1 Preferred Stock Series B Preferred Stock Series C Preferred Stock
 
 
Name of Beneficial Owner
 
Number of Shares (1)
Percent
Of Class (1)
 
 
Number of Shares (2)
Percent
Of Class (2)
 
 
Number of Shares (3)
Percent
Of Class (3)
 
 
Number of Shares (4)
Percent
Of Class (4)
 
William Keiper (10)
 
20,870,128
 
8.4%
 
 
 
−
 
 
−
 
−
 
 
 207,078
 
5.8%
            
All directors and executive officers as a group (6 persons) (11)
 
406,002,039
 
71.7%
 
 
−
 
−
 
 
5,546,015
 
60.0%
 
 
2,187,176
 
57.2%
            
5% Shareholders           
Phoenix Venture Fund LLC (12)
337,731,632
66.5%
 −
−
 5,407,422
59.4%
 1,640,237
42.9%
Michael W. Engmann (13)61,034,902
22.0%
 523,987
59.5%
 1,502,612
16.5%
     220,764
6.2%
___________
*           Less than 1%.

**           Shares of Common Stock beneficially owned and the respective percentages of beneficial ownership of Common Stock assumes the exercise or conversion of all options, warrants and other securities convertible into Common Stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of the date hereof.
1.  Shares of Common Stock beneficially owned and the respective percentages of beneficial ownership of Common Stock assumes the exercise or conversion of all options, warrants and other securities convertible into Common Stock, including shares of Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of March 20, 2012. Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days, or securities convertible into Common Stock within 60 days are deemed outstanding and held by the holder of such shares of Common Stock, options, warrants, or other convertible securities for computing the percentage of outstanding Common Stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding Common Stock beneficially owned by any other person. The percentage of beneficial ownership of Common Stock beneficially owned is based on 130,516,981 shares of Common Stock outstanding as of March 6, 2009.

(1)  Represents (a) 143,900 shares held by Mr. DiGregorio and (b) 2,181,818 shares issuable upon the exercise of stock options and warrants exercisable within 60 days hereof.of March 20, 2012, or securities convertible into Common Stock within 60 days of March 20, 2012 are deemed outstanding and held by the holder of such shares of Common Stock, options, warrants, or other convertible securities, including shares of Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, for purposes of computing the percentage of outstanding Common Stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding Common Stock beneficially owned by any other person. The percentage of beneficial ownership of Common Stock beneficially owned is based on 228,974,338 shares of Common Stock, 880,352 shares of Series A-1 Preferred Stock, 9,110,618 shares of Series B Preferred Stock and 3,824,788 shares of Series C Preferred Stock outstanding as of March 15, 2012. The shares of Common Stock beneficially owned and the respective percentages of beneficial ownership of Common Stock stated in these columns assume conversion of shares of Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock.

(2)2.  IncludesEach outstanding share of Series A-1 Preferred Stock is presently convertible into 7.1429 shares of Common Stock. The shares of Series A-1 Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series A-1 Preferred Stock stated in these columns reflect ownership of shares of Series A-1 Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series A-1 Preferred Stock at this ratio. The percentage of beneficial ownership of Series A-1 Preferred Stock beneficially owned is based on 880,353 shares of Series A-1 Preferred Stock outstanding as of March 20, 2012.

3.  Each outstanding share of Series B Preferred Stock is presently convertible into 23.0947 shares of Common Stock. The shares of Series B Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series B Preferred Stock stated in these columns reflect ownership of shares of Series B Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock at this ratio. The percentage of beneficial ownership of Series B Preferred Stock beneficially owned is based on 9,110,618 shares of Series B Preferred Stock outstanding as of March 20, 2012.

4.  Each outstanding share of Series C Preferred Stock is presently convertible into 44.444 shares of Common Stock. The shares of Series C Preferred Stock beneficially owned and the respective percentages of beneficial ownership of Series C Preferred Stock stated in these columns reflect ownership of shares of Series C Preferred Stock, and not shares of Common Stock issuable upon conversion of shares of Series C Preferred Stock at this ratio. The percentage of beneficial ownership of Series C Preferred Stock beneficially owned is based on 3,824,789 shares of Series C Preferred Stock outstanding as of March 20, 2012.
23
5.  Represents (a) 1,631,05119,000 shares of Common Stock held by Mr. Goren (b) 1,668,400 shares issuable to Mr. Goren upon the Sung Family Trust,exercise of which Mr. Sung is a trustee, (b) 3,369options exercisable within 60 days here of, (c) 533,464 shares of Common Stock issuable upon the conversion of 23,099 shares of Series B Preferred Stock held by Andax LLC (d) 544,533 share of Common Stock issuable upon the Sung-Kwok Foundation,conversion of which Mr. Sung is the Chairman, and (c) 210,00012,252 shares of Series C Preferred Stock held by Andax LLC, (e) 1,189,464 shares of Common Stock issuable upon the exercise of stockwarrants held by Andax LLC and (f) includes Company securities beneficially owned by Phoenix. Please see footnote 12 below for information concerning Phoenix’s beneficial ownership.  Mr. Goren is managing member Andax LLC and disclaims beneficial ownership of the shares except to the extent of his pecuniary interest therein. Along with Mr. Sassower, Mr. Goren is the co-manager of SG Phoenix Ventures LLC, which has the power to vote and dispose of the shares held by Phoenix and, accordingly, Mr. Goren may be deemed to be the beneficial owner of the shares owned by Phoenix. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix, except to the extent of their respective pecuniary interests therein. Mr. Goren’s address is 110 East 59th Street, Suite 1901, New York, NY 10022.
6.  Represents (a) 2,055,556 shares of Common Stock held by Mr. Sassower (b) 416,900 shares issuable to Mr. Sassower upon the exercise of options exercisable within 60 days hereof.here of, and (c) includes shares of Common Stock Company securities beneficially owned by Phoenix. Please see footnote 12 below for information concerning shares of Common Stock beneficially owned by Phoenix’s beneficial ownership. Along with Mr. SungGoren, Mr. Sassower is the co-manager of SG Phoenix Ventures LLC, which has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, accordingly, Mr. Sassower may be deemed to beneficially ownbe the beneficial owner of the shares heldowned by Phoenix. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the Sung Family Trust andshares owned by Phoenix, except to the Sung-Kwok Foundation.extent of their respective pecuniary interests therein. In addition to the shares beneficially owned by Phoenix, Mr. Sassower owns 2,055,556 shares of Common Stock. Mr. Sassower’s address is 110 East 59th Street, Suite 1901, New York, NY 10022.

(3)7.  Represents 225,000(a) 3,734,749 shares of Common Stock held by Mr. Gilbert, (b) 28,485 shares of Common Stock held by Stanley Gilbert P.C., (c) 1,783,035 shares of Common Stock held by Galaxy LLC, (d) 2,147,117 shares of Common Stock held by Mrs. Stanley Gilbert, (e) 14,002,877 shares of Common Stock issuable upon the exercise of warrants held by Mr. Gilbert, (f) 167,000 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereof held by Mr. Gilbert, (g) 2,667,298 shares of Common Stock issuable upon the conversion of 115,494 shares of Series B Preferred Stock held by Mr. Gilbert, and (h) 14,599,467 shares of Common Stock issuable upon the exercise of 328,488 shares of Series C Preferred Stock held by Mr. Gilbert.  As manager of Galaxy LLC, Mr. Gilbert has the power to vote and dispose of the shares of Common Stock held by Galaxy LLC, and, accordingly, Mr. Gilbert may be deemed to be the beneficial owner of the shares owned by Galaxy LLC.

8.  Represents (a) 250,300 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereof and (b) 1,000,000 shares of Common Stock issuable upon the exercise of warrants exercisable within 60 days hereof beneficially owned by China U.S. Business Development, LLC (“CUBD”).  As manager of CUBD, Mr. Holtmeier has the power to vote and dispose of the shares of Common Stock held by CUBD and, accordingly, Mr. Holtmeier may be deemed to be the beneficial owner of the shares owned by CUBD.

9.  Represents 591,900 shares of Common Stock issuable upon the exercise of options exercisable within 60 days hereof.

(4)10.  Represents 175,000(a) 2,999,994 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days hereof.

(5)  Represents 75,000hereof (b) 9,203,467 shares issuable upon the conversion of 207,078 shares of Series C Preferred Stock, and (b) an aggregate of 8,666,667 shares of Common Stock issuable upon exercise of stock optionswarrants exercisable within 60 days hereof.

(6)  Represents (a) 212 shares heldhereof beneficially owned by FirstGlobal Partners LLC (“FirstGlobal”). As manager of FirstGlobal, Mr. Dane and (b) 559,852 shares issuable upon the exercise of stock options exercisable within 60 days hereof.

(7)  Represents 673,863 shares issuable upon the exercise of stock options within 60 days hereof.

(8)  Represents (a) 21,500,000 shares held by SG Phoenix Ventures LLC and (b) 20,214,286 shares issuable upon the exercise of warrants. SG Phoenix Ventures LLC is the Managing Member of Phoenix Venture Fund LLC (the “Phoenix Fund”), withKeiper has the power to vote and dispose of the shares of Common Stock held by FirstGlobal and, accordingly, Mr. Keiper may be deemed to be the beneficial owner of the shares owned by FirstGlobal.
24
11.  Includes shares of Common Stock beneficially owned by Phoenix. Please see footnote 12 below for information concerning shares of Common Stock beneficially owned by Phoenix. Mr. Sassower and Mr. Goren are the co-managers of SG Phoenix Fund.Ventures LLC, which has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, accordingly, Mr. Sassower and Mr. Goren may be deemed to be the beneficial owner of the shares owned by Phoenix. SG Phoenix Ventures LLC, Mr. Sassower and Mr. Goren each disclaim beneficial ownership of the shares owned by Phoenix, except to the extent of their respective pecuniary interests therein. The amount stated above includes 2,085,300 shares issuable upon the exercise of options within 60 days of March 15, 2011.

12.  Represents (a) 58,576,054 shares of Common Stock, (b) 81,374,096 shares of Common Stock issuable upon the conversion of warrants (c) 124,882,789 share of Common Stock issuable upon the conversion of 5,407,422 shares of Series B Preferred stock and (d) 72,898,693 shares of Common Stock issuable upon the conversion of 1,640,237 shares of Series C Preferred Stock. See the following table for more detail.

 
 
 
Common Shares
 
 
Warrants
 
 
Series B Preferred Stock As If Converted to Common Stock
 
 
Series C Preferred Stock As If Converted to Common Stock
 
 
Series B Preferred Stock
 
 
Series C Preferred Stock
Phoenix Venture Fund LLC
    55,783,562
    63,548,571
    124,882,789
    71,222,977
    5,407,422
    1,602,533
SG Phoenix Ventures LLC
      2,792,492
    10,714,414
    
Phoenix Enterprises Family Fund LLC 
 
      1,555,556
 
 
      1,675,717
 
 
        37,704
Phoenix Banner Holdings LLC 
 
      5,555,555
    
 
    58,576,054
    81,374,096
    124,882,789
    72,898,694
    5,407,422
    1,640,237

SG Phoenix Ventures LLC is the Managing Member of Phoenix, with the power to vote and dispose of the shares of Common Stock held by Phoenix. Accordingly, SG Phoenix Ventures LLC may be deemed to be the beneficial owner of such shares. Andrea Goren is the co-manager of SG Phoenix Ventures LLC, has the shared power to vote and dispose of the shares of Common Stock held by the Phoenix Fund and, as such, may be deemed to be the beneficial owner of the common shares owned by the Phoenix Fund. Philip Sassower is the co-manager of SG Phoenix Ventures
28
LLC, has the shared power to vote and dispose of the shares of Common Stock held by the Phoenix Fund and, as such, may be deemed to be the beneficial owner of the common shares owned by Phoenix and by SG Phoenix LLC, of which he is a member. Philip Sassower is the co-manager of SG Phoenix Fund.Ventures LLC, has the shared power to vote and dispose of the shares of Common Stock held by Phoenix and, as such, may be deemed to be the beneficial owner of the common shares owned by Phoenix and by SG Phoenix LLC, of which he is a member. SG Phoenix Ventures LLC, Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by Phoenix, and Mr. Goren and Mr. Sassower each disclaim beneficial ownership of the shares owned by SG Phoenix Fund,LLC, except to the extent of their respective pecuniary interests therein. The address of such stockholderthese stockholders is 110 East 59th Street, Suite 1901, New York, NY 10022.

(9)13.  Represents (a) 10,575,527 warrants12,778,049 shares of Common Stock beneficially owned by Mr. Engmann, of which 1,187,9624,041,140 are held by MDNH Partners, L.P. and 1,659,2001,243,564 are held by KENDU Partners Company, (b) 3,742,764 shares of which Mr. Engmann is a partner and (b) 4,750,000 sharesCommon Stock issuable upon the conversion of shares of Series A-1 Preferred Stock beneficially owned by Mr. Engmann, of which 1,138,393621,350 are issuable to MDNH Partners, L.P. and 2,248,5713,083,743 are issuable to KENDU Partners Company, (c) 34,702,356 shares of Common Stock issuable upon the conversion of shares of Series B Preferred Stock beneficially owned by Mr. Engmann, of which Mr. Engmann is a partner. Mr. Engmann was issued warrants8,126,582 are issuable to purchase 2,333,250 shares of the Company’s Common Stock at $0.51 per share, warrants to purchase 1,979,936 shares of the Company’s Common Stock at $0.25 per share and  warrants to purchase 3,415,179 shares of the Company’s Common Stock at $0.14 per share. MDNH Partners, L.P. was issued warrants to purchase 1,659,200 shares of the Company’s Common Stock at $0.51 per share, and MDNH Partners, L.P. was issued warrants to purchase 1,187,962 shares of the Company’s Common Stock at $0.25 per share. Such warrants were issued in connection with notes issued in 2006 and 2007. In addition, Mr. Engmann, MDNH Partners, L.P. and 2,916,697 are issuable to KENDU Partners Company converted a portionCompany; and (d) 9,811,733 shares of outstanding indebtedness and interest accrued thereon intoCommon Stock issuable upon the conversion of shares of Series A-1C Preferred in connection with the Company’s June 2008 financing transaction.  Each share of Series A-1 Preferred heldStock beneficially owned by Mr. Engmann, of which 4905867 are issuable to MDNH Partners, L.P. and KENDU Partners Company is presently convertible into 7.1429 shares of Common Stock. Mr. Engmann has 65,250 shares of Series A-1 Preferred that can be converted into 466,071 shares of Common Stock. MDNH Partners, L.P. refinanced their existing debt and unpaid interest into 159,375 shares of Series A-1 Preferred that are convertible into 1,138,393 common shares at $0.14 per share. KENDU Partners, Company refinanced their existing debt and unpaid interest into 340,000 shares of Series A-1 Preferred that are convertible into 2,428,571 common shares at $0.14 per share Mr. Engmann’s address is 220 Bush Street, No. 660, San Francisco, CA 94104. (See note 5 to the Consolidated Financial Statements).
25

Equity Compensation Plan Information

The following table provides information as of December 31, 2008,2011, regarding our compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance:

Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants and RightsWeighted-Average Exercise Price Of Outstanding Options, Warrants and RightsNumber of Securities Remaining Available For Future Issuance Under Equity Compensation PlansNumber of Securities To Be Issued Upon Exercise of Outstanding Options and Rights
 
Weighted-Average Exercise Price Of Outstanding Options and Rights
Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans
Equity Compensation Plans Approved by Security Holders  
1999 Stock Option Plan
 
                   3,543
$        0.54
 
 72
 
924
 
$          0.56
 
−
Equity Compensation Plans Not Approved by Security Holders
 
                   4,065
 
$        0.42
 
 
−
 
 
2009 Stock Compensation Plan
2,379
0.10
4,548
Non Plan Stock Options
3,479
0.50
−
2011 Stock Compensation Plan
 
44,571
 
$          0.05
 
5,429
Total:
               7,608
$        0.48
           72
51,353
$          0.09
9,977
 


29
Item 13. Certain Relationships and Related Transactions, and Director Independence

Procedures for Approval of Related Person Transactions

In accordance with our Code of Business Conduct and Ethics, we submit all proposed transactions involving our officers and directors and related parties, and other transactions involving conflicts of interest, to the Board of Directors or the Audit Committee for approval. Each of the related party transactions listed below that were submitted to our board were approved by a disinterested majority of our Board of Directors after full disclosure of the interest of the related party in the transaction.

Director Independence

The Board of Directors has determined that Messrs. Panetta, Sung,Gilbert, Holtmeier, and Welch and Meyer are “independent,” as defined under and required by the federal securities laws and the rules of the NasdaqNASDAQ Stock Market.Market relating to director independence, and that Messrs. Sassower and Goren are not independent under such rules.  Messrs. Welch, Gilbert, and Holtmeier serve on the Compensation Committee of the Board of Directors.  Each of the members of the Compensation Committee are independent under the rules of the NASDAQ Stock Market relating to director independence.  Messrs. Welch, Gilbert and Holtmeier serve on the Audit Committee of the Board of Directors.  Under the applicable rules of the NASDAQ Stock Market and the SEC relating to independence of Audit Committee members, the Board of Directors has determined that Mr. Welch is independent and that Mr. Gilbert and Mr. Holtmeier are not.  Mr. Gilbert’s lack of independence stems solely from his beneficial ownership of 15.0% of the Company’s common stock, when such beneficial ownership is calculated in accordance with Exchange Act Rule 13d-3.  When calculated on a fully diluted basis, Mr. Gilbert beneficially owns only approximately 5% of the Company’s common stock.  For this reason, the Board of Directors has determined that Mr. Gilbert remains well suited to serving on the Company’s Audit Committee. Mr. Holtmeier's lack of independence stems solely from the fact that he was party to a consulting agreement under which he was paid $15,000 in the year ended December 31, 2011.  The Board has determined that the amount paid to Mr. Holtmeier under this contract is not material, and thus Mr. Holtmeier remains well suited to serving on the Audit Committee.

26
Related Party Transactions

    SG Phoenix Venture Fund LLC (“Phoenix”) is the beneficial owner of approximately 32%66.5% of the Company’s common stock.Common Stock of the Company when calculated in accordance with Rule 13d-3, and Michael W. Engmann, together with his affiliates,two affiliated entities, is the beneficial owner of approximately 11%22.0% of the Company’s common stock.
On June 5, 2008, the Company effected a financing transaction under which the Company raised capital through the issuance of new secured indebtedness and equity, and restructured a portion of the Company’s existing short-term debt (collectively, the “Financing Transaction”). Certain parties to the Financing Transactions (Phoenix Venture Fund LLC and Michael Engmann) had a pre-existing relationship with the Company and with respect to such parties the Financing Transaction may be considered a related party transaction.

Under the Financing Transaction, the Company entered into a Credit Agreement (the “Credit Agreement”) and a Pledge and Security Agreement (the “Pledge Agreement”), each dated as of June 5, 2008, with Phoenix Venture Fund LLC (“Phoenix”), Michael Engmann and Ronald Goodman (collectively with Phoenix, the “Creditors,” and each individually a “Creditor”).  Under the terms of the Credit Agreement, the Company received an aggregate of $3,000 and refinanced $638 of existing indebtedness and accrued interest on that indebtedness (individually, a “Loan” and collectively, the “Loans”).  The Loans, which are represented by secured promissory notes (each a “Note” and collectively, the “Notes”), bear interest at eight percent (8%) per annum which, at the optionCommon Stock of the Company may be paidwhen calculated in cash oraccordance with Rule 13d-3.

In March 2011, the Company sold 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $121 in kindexpenses, of which $50 went to SG Phoenix, LLC in payment of an administrative fee and mature June 5, 2010.  The Company used a portion of the proceeds from the Loans$71 in expenses to pay the Company’s existing indebtedness and accrued interest on that indebtedness that was not exchanged for preferred stock as described below, and may use the remaining proceeds for working capital and general corporate purposes, in each case in the ordinary course of business; and to pay fees and expensesthird parties in connection with the Financing Transaction, which were approximately $475.  Additionally, a portionfinancing.  In connection with the sale of the proceedsshares of the Loans were used to repay a short term loan from a Company employee in the amount of $125, plus accrued interest, that was made prior to and in anticipation of the closing of the Financing Transaction.  Under the terms of the Pledge Agreement, the Company and its subsidiary, CIC Acquisition Corp., granted the Creditors a first priority security interest in and lien upon all of the assets of the Company and CIC Acquisition Corp.

Under the terms of the Credit Agreement and in partial consideration for the Creditors’ respective Loans made pursuant to the terms of the Credit Agreement as described above,Series C Preferred Stock, the Company issued to each Creditor a warrantwarrants to purchase up to the numberan aggregate of 35,556 shares of the Company’s Common Stock obtained by dividing the amount of such Creditor’s Loan by 0.14 (each a “Warrant” and collectively, the ‘Warrants”).  A total of 25,982 shares of the Company’s Common Stock may be issued upon exercise of the Warrants.  The Warrants are exercisable beginning June 30, 2008 until their expiration on June 30, 2011. The Warrants havewith an exercise price of fourteen cents ($0.14)$0.0225 per share. Additional Warrants may be issued ifshare, which warrants are exercisable for a period of three years from the Company exercises its option to make interest payments on the Loans in kind.date of issuance. The Company ascribed the relative fair value of $1,231 to the warrants, which is recorded as a discount to “Long-term debt” in the balance sheet.  The fair value of the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 2.73%; expected life of 3 years; expected volatility of 82.3%; and expected dividend yield of 0%.

30
In connection with the closing of the Financing Transaction, the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008, (See Note 5).  Under the Purchase Agreement, in exchange for the cancellation of $995 in principal and $45 of interest accrued thereon of the Company’s outstanding indebtedness and interest accrued thereon, the Company issued to the holders of such debt an aggregate of 1,040 shares of the Company’s Series A-1 Preferred.  Mr. Engmann and entities controlled by Mr. Engmann cancelled an aggregate of $720 in principal and $45 of interest accrued thereon, and, accordingly, the Company issued an aggregate of 765 shares of the Company’s Series A-1 Preferred to Mr. Engmann and entities controlled by Mr. Engmann.  These shares of Series A-1 Preferred carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional shares of Series A-1 Preferred, had a liquidation preference over Common Stock of one dollar ($1.00) per share, and are convertible into shares of Common Stock at a ratio of one share of Series A-1 Preferred for 7.1429 shares of Common Stock.  Series A-1 Preferred may vote on matters put to the Company’s stockholders on an as-converted-to-Common-Stock basis.  Subject to further adjustment as provided in the Certificate of Designations, Powers, Preferences and Rights of the Series A-1 Cumulative Convertible Preferred Stock, shares of Series A-1 Preferred are presently convertible into shares of Common Stock at a ratio of one share of Series A-1 Preferred for 7.1429 shares of Common Stock.  If all shares of Series A-1 Preferred were converted into Common Stock at the above conversion ratio, the Company would issue 7,429 shares of Common Stock.  As of December 31, 2008, holders of Series A-1 Preferred have converted an aggregate of 184 shares of Series A-1 Preferred into 1,317 shares of Common Stock.  As of December 31, 2008, Mr. Engmann and entities controlled by Mr. Engmann have converted an aggregate of 109 shares of Series A-1 Preferred into 781 shares of Common Stock.

The issuance of shares of Series A-1 Preferred Stock resulted in a beneficial conversion feature of $371, of which $273 is attributable to Michael Engmann and $98$800 related to the other creditors.  The beneficialintrinsic value of the conversion feature was recorded as a charge to loss applicable to holders of Common Stock for the quarter ended June 30, 2008. The Company has accrued dividends on the shares of Series A-1 Preferred of $47.  As of December 31, 2008, $29 of the accrued dividends have been paid in cash.  As of December 31, 2008, Mr. Engmann and entities controlled by Mr. Engmann have been paid $19 in accrued dividends.

Under the terms of the Registration Rights Agreement, the Company was obligated to prepare and file with the SEC a registration statement under the Securities Act covering the resale of the shares of Common Stock issued upon conversion of the shares of Series A-1C Preferred Stock and exercise of the Warrants as described above.  The Company must also use its reasonable best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date that is two years after its Effective Date or until the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144.  The Registration Rights Agreement provided for certain registration rights whereby the Company would have incurred penalties if a registration statement was not filed or declared effective by the SEC on a timely basis. The Company filed the required registration statement on August 18, 2008, which was declared effective on October 10, 2008. The Company was obligated to pay the costs and expenses of such registration.

On January 9, 2008, the Company entered into the Company’s standard form of Consulting Agreement (the “Consulting Agreement”) with GSMeyer & Associates LLC (the “Consultant Entity”), an entity of which Garry Meyer, a director of the Company, is a principal. Mr. Meyer owns 50% of the Consultant Entity’s outstanding equity, and Mr. Meyer’s spouse owns the other 50% of the Consultant Entity’s outstanding equity. Mr. Meyer and his spouse share in the profits of the Consultant Entity in accordance with their ownership percentages. Under the terms of the Consulting Agreement, the Consultant Entity is authorized to market the Company’s products as an independent contractor of the Company. The Consultant Entity is paid commissions equal to seven percent (7%) of the license fees, professional service fees and of first year maintenance fees on sales closed with State Street Bank, and ING (of Eastern Europe), subject to the Company having received payment of such fees from such customers prior to the payment of the above described commissions. The Consultant Entity is also entitled to reimbursement of reasonable travel and other out-of-pocket expenses incurred in the performance of its obligations under the Consulting Agreement, provided that the Consultant Entity provides receipts and obtains prior approval from the Company’s Chief Executive Officer for such expenses. Either the Company or the Consultant Entity may terminate the Consulting Agreement at any time upon thirty days’ written notice to the other party.

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In August 2006, the Company entered into the August 2006 Purchase Agreement to which Mr. Engmann was a party. The Company secured the right to borrow up to $600 under the August 2006 Purchase Agreement.  In November 2006 the Company borrowed the full amount of $600, of which $450 pertains to Mr. Engmann and the remaining $150 to an unrelated third party.Stock.  The Company issued warrants to purchase 3,111305 shares of Series C Preferred Stock in payment of dividends for the Company’s Common Stock related to the August 2006 Purchase Agreement.  The notes were due May 17, 2008 and bore interest at the rate of 15% per annum payable quarterly in cash. The warrants have a term of three years beginning June 30, 2007 and an exercise price of $0.51.year ended December 31, 2011.

In February 2007,July 2011, the Company entered into a Notesigned an agreement with China-US Business Development Corporation, (“CUBD”), to provide certain advisory and Warrant Purchase Agreement (the “February 2007 Purchase Agreement”)consulting services in relation to expanding distribution for certain CIC products in the People’s Republic of China. Specifically, introductions to targeted IT service companies, as well as facilitating meetings and a Registration Rights Agreement (the “February 2007 Registration Rights Agreement”), each dated asassistance in negotiations for prospective partnerships. Jeffrey Holtmeier is the managing member of February 5, 2007, with the Affiliated Stockholder where defined.  The Company secured the rightCUBD. Mr. Holtmeier was appointed to borrow up to six hundred thousand dollars ($600). On March 15, 2007 the Company and the Affiliated Stockholder amended the February 2007 Purchase Agreement to increase the maximum amount of borrowing from $600, to $1,000. The terms of the February 2007 Purchase Agreement and 2006 Purchase Agreement are identical with the exception that the maximum number of warrants that may be issued under the February 2007 Purchase Agreement is 5,185 rather than 3,111. On March 30, 2007, and April 1, 2007 the Company borrowed $670 and $50 under the February 2007 Purchase Agreement of which $320 pertained to Mr. Engmann and the remaining $400 from unrelated third parties.  The proceeds were used for working capital purposes. The warrants have a three year life, became exercisable on June 30, 2007, and have an exercise price of $0.51.  The warrants included piggyback registration rights for the underlying shares to participate in any future registrations of the Company’s Common Stock.  The shares were registered with the Company’s Form S-1/A which was declared effective December 28, 2007.board of directors on August 11, 2011.

On June 15, 2007,Per the Company entered into a Note and Warrant Purchase Agreement (the “June 2007 Purchase Agreement”) and a Registration Rights Agreement (the “June 2007 Registration Rights Agreement”), each dated as of June 15, 2007. The Company secured the rightagreement CUBD is to borrow up to $1,000.  The June 2007 Purchase Agreement required the Company to draw $400 of the fundsbe paid $20,000 in installments based upon signing.reaching certain milestones. As of December 31, 2007,2011, the Company had borrowed $400 under this facility, all pertaininghas paid to Mr. Engmann,CUBD $15,000. In addition, CUBD will receive a performance fee on any revenue it secured for the Company from a Chinese customer and/or partner equal to 7%, 5% and 3% of net revenue from such customer and/or partners during the option to borrow the remaining $600 lapsed as of that date. The Company used the proceedsfirst, second and third twelve months periods, respectively, of the financing for working capital purposes.  The note bore interest atCompany’s relationship with such customer and/or partner.

On August 7, 2011, the rateboard of 15% per annum payable quarterly in cash. The Company issued 3,168 warrantsdirectors approved and CUBD received a warrant to purchase one (1) million shares of itsthe Company’s Common Stock at an exercise price of $0.25.$0.025 per share. The warrants havewarrant will vest in equal quarterly installments over a period of (18) eighteen months commencing on the date of issue. The vesting will accelerate upon attainment of $100,000 in net revenue, pursuant to CUBD’s agreement with the Company. The warrant has a three year life and included piggyback registration rights forexpires on August 11, 2014.

In September 2011, the underlyingCompany borrowed an aggregate of $100 from Phoenix and an employee of the Company and issued unsecured demand notes to each. These notes are due on demand and bear interest at the rate of 10% per annum. In addition the Company entered into the September 2011 Purchase Agreement the September 2011 Investor, an entity affiliated with Phoenix, the Company’s largest stockholder.  Under the terms of the September 2011 Purchase Agreement, the Company issued the September 2011 Note to the September 2011 Investor.  The September 2011 Note bears interest at the rate of 10% per annum, and has a maturity date of September 20, 2012.  The September 2011 Note is also convertible at the option of the September 2011 Investor into securities sold in the Company’s next equity financing with gross proceeds to the Company in excess of $100.  In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 Investor a warrant to purchase 5,556 shares to participate in any future registrations of the Company’s Common Stock.Stock at an exercise price of $0.0225 per share. The Company ascribed a value of $7 to the warrants, which was recorded as a discount to short-term debt in the balance sheet.

In December 2011, the Company entered into the December 2011 Purchase Agreement with the December 2011 Investors, which December 2011 Investors included Philip Sassower. Under the terms of the December 2011 Purchase Agreement, the Company issued the December 2011 Notes to the December 2011 Investors.  The Notes bear interest at the rate of 10% per annum, and have a maturity date of December 20, 2012.  The December 2011 Notes are also convertible at the option of the December 2011 Investors into securities sold in the Company’s
27
next equity financing with gross proceeds to the Company in excess of $100.  In connection with the issuance of the December 2011 Notes, the Company also issued to the December 2011 Investors warrant to purchase an aggregate of 5,556 shares were registeredof the Company’s Common Stock at an exercise price of $0.0225 per share. The Company ascribed a value of $13 to the warrants, which was recorded as a discount to short-term debt in the balance sheet.

During the year ended December 31, 2011, the Company exercised its option related to the terms of the preferred stock-related financing transactions and made dividend payments in kind. For the year ended December 31, 2011, the Company issued 67 shares of Series A-1 Preferred Stock, 870 shares of Series B Preferred Stock and 305 shares of Series C Preferred Stock in payment of dividends.

Interest expense associated with the Company’s Form S-1/Aindebtedness for the years ended December 31, 2011 and 2010, was $27 and $2,039, respectively, of which $24 and $1,974, respectively, was declared effectiverelated party expense. Amortization of debt discount and deferred financing costs included in interest expense for the year ended December 28, 2007.31, 2011 and 2010 was $3 and $1,776, respectively, of which $3 and $1,719, respectively, was related party expense.

The Company paid approximately $78 and $74 in interest to SG Phoenix LLC and Mr. Engmann, respectively, as of December 31, 2008 related to the above Notes. (See Note 3 and 4 of Notes to Consolidated Financial Statements on page F-17 for additional details.)

Item 14. Principal Accounting Fees and Services

The aggregate fees billedAudit and expected to be billed for professional services byother Fees. PMB Helin Donovan has been the Company’s auditors since May 2011. GHP Horwath, P.C. was the Company’s auditors from September 2006 to September 2011. During fiscal years 2011 and 2010, the fees for 2008 are approximately $136audit and in 2007 were $169other services performed by PMB Helin Donovan and GHP Horwath for the following services for fiscal year 2007 and fiscal year 2008:Company were as follows:
 Amount and percentage of fees
Nature of Services2011 2010
      
Audit FeesAudit fees are expected to be
 
$     65,000 (72%)
 Audit fees are expected to be
 
$ 109,000 (76%)
Audit-Related Fees 
$     18,000 (20%)
  
$   25,000 (18%)
Tax FeesTax fees are expected to be
 
$       7,000 (8%)
 Tax fees are expected to be
 
 $       9,000 (6%)
All Other Fees 
$                       −
  $                −
Total 
$               90,000
  $     143,000
Pre-Approval Policies.

Audit Fees:  GHP Horwath, P.C. fees in connection with the year end audit for 2007 were approximately $134. Fees in connection with the 2008 quarterly reviews and the 2008 year end audit and consent procedures are expected to be $123 which represents approximately 82% of the aggregate fees billed and expected to be billed by GHP Horwath, P.C.

Audit-Related Fees.  GHP Horwath, P.C. fees for assurance and related work in fiscal year 2008 was approximately $16 and represented approximately 10% of the aggregate fees billed in 2008. GHP Horwath, P.C. did not have any such fees in 2007.

Tax fees: GHP Horwath, P.C. fees in connection with the Company’s 2007 federal and state tax returns was $9. Fees in connection with the Company’s 2008 federal and state tax returns are expected to be approximately $10.  The fees represent 6% of the aggregate fees.

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Financial Information Systems Design and Implementation Fees or any other fees not discussed above.:  GHP Horwath, P.C. did not bill the Company for any fees in fiscal year 2007 and 2008 for financial information systems design and implementation services or any other fees not discussed above..

Pre-Approval Policies. It is the policy of the Company not to enter into any agreement with its auditors to provide any non-audit services unless (a) the agreement is approved in advance by the Audit Committee or (b) (i) the aggregate amount of all such non-audit services constitutes no more than 5% of the total amount the Company pays to the auditors during the fiscal year in which such services are rendered, (ii) such services were not recognized by the Company as constituting non-audit services at the time of the engagement of the non-audit services and (iii) such services are promptly brought to the attention of the Audit Committee and prior to the completion of the audit are approved by the Audit Committee or by one or more members of the Audit Committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the Audit Committee.  The Audit Committee will not approve any agreement in advance for non-audit services unless (x) the procedures and policies are detailed in advance as to such services, (y) the Audit Committee is informed of such services prior to commencement and (z) such policies and procedures do not constitute delegation of the Audit Committee’s responsibilities to management under the Securities Exchange Act of 1934, as amended.

The Audit Committee has considered whether the provision of non-audit services has impaired the independence of GHP Horwath, P. C. and PMB Helin Donovan has concluded that GHP Horwath, P.C. isand PMB Helin Donovan are independent under applicable SEC and NasdaqNASDAQ rules and regulations.

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PART IV

Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements

Index to Financial Statements
  Page
(a)(1)Financial Statements 
 
Report of PMB Helin Donovan, Independent Registered Public Accounting Firm
F-1
Report of GHP Horwath, P.C., Independent Registered Public Accounting Firm
F-1F-2
 
Consolidated Balance Sheets at December 31, 20082011 and 20072010
F-2F-3
 Consolidated Statements of Operations for the years ended December 31, 20082011 and 20072010F-3F-4
 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 20082011 and 20072010
 
F-4F-5
 Consolidated Statements of Cash Flows for the years ended December 31, 20082011 and 20072010F-5F-6
 
Notes to Consolidated Financial Statements
F-7F-8


(2) Financial Statement Schedules
 
    NoneAll schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
 
(3) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in paragraph (b) below.
(b) Exhibits.
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC as indicated below:

29 


Exhibit
Number
 
Document
3.1Certificate of Incorporation of the Company, as amended, incorporated herein by reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to the Company's Registration Statement on Form 10 (File No. 000-19301).
3.2Certificate of Amendment to the Company's Certificate of Incorporation (authorizing the reclassification of the Class A Common Stock and Class B Common Stock into one class of Common Stock) filed with the Delaware Secretary of State on November 1, 1991, incorporated herein by reference to Exhibit 3 to Amendment 1 on Form 8 to the Company's Form 8-A (File No. 000-19301).

33
Exhibit
Number
3.3
Document
3.3
Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State June 12, 1998, incorporated herein by reference to Exhibit 10.24 to the Company’s 1998 Form 10-K filed on April 6, 1999.
3.4By-laws of the Company adopted on October 6, 1986, incorporated herein by reference to Exhibit 3.5 to the Company's Registration Statement on Form 10 (File No. 000-19301).
3.5Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State January 24, 2001, incorporated herein by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007.
3.6Certificate of Elimination of the Company’s Certificate of Designation of the Series A Preferred Stock filed with the Delaware Secretary of State August 17, 2001, incorporated herein by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S/1 filed on December 28, 2007.
3.7Certificate 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.
3.8Amended 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.
3.9Certificate 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.
3.10Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 30, 2008, incorporated herein by reference to Exhibit 3.7 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
*3.11Certificate 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, 2008.2008, incorporated herein by reference to Exhibit 3.11 to the Company’s Annual Report on Form 10-K filed on March 12, 2009.
*3.12Certificate of Elimination of the Company’s Series A Cumulative Convertible Preferred Stock filed with the Delaware Secretary of State on December 30, 2008.2008, incorporated herein by reference to Exhibit 3.12 to the Company’s Annual Report on Form 10-K filed on March 12, 2009.
3.13Certificate 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.
3.14Amendment 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.
3.15Certificate 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.
3.16Amended 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.
30
Exhibit
Number
Document
3.17Certificate of Designation of Series B Participating Convertible Preferred Stock filed with the Delaware Secretary of State on August 4, 2010, incorporated herein by reference to Exhibit 3.17to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010.
3.18Certificate 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.
3.19Second 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.
3.20Second 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.
3.21Certificate 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.
3.22Amendment 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.
3.23Amendment to the Amended And Restated Certificate of Designation of the Series C Participating Convertible Preferred Stock, incorporated herein by reference to Exhibit 10.60 to the Company’s Current Report on Form 8-K filed March 31, 2011.
†4.101999 Stock Option Plan, as amended, incorporated herein by reference to Exhibit 4.2 to the Company's Form S-8 filed on September 19, 2008.
4.11Form of Convertible Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.3 to the Company's Form 8-K filed on November 3, 2004.
4.12Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.4 to the Company's Form 8-K filed on November 3, 2004.
4.13Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company's Form 8-K filed on August 12, 2006.
4.14Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.37 to the Company's Form 8-K filed on August 12, 2006.
4.15Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company’s Form 8-K filed on February 9, 2007.
4.16Form of Warrant issued by the Company, incorporated herein by reference to Exhibit 10.37 to the Company’s Form 8-K filed on February 9, 2007.
4.17Form of Promissory Note issued by the Company, incorporated herein by reference to Exhibit 10.36 to the Company’s Form 8-K filed on June 20, 2007.
4.18Form of Warrant issued the Company, incorporated herein by reference to Exhibit 10.37 to the Company’s Form 8-K filed on June 20, 2007.
4.19Form of Common Stock Purchase Warrant issued by the Company, incorporated herein by reference to Exhibit 4.19 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.

34
Exhibit
Number
4.20
Document
4.20
Form of Additional Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
4.21Form of Secured Promissory Note issued by the Company dated June 5, 2008, incorporated herein by reference to Exhibit 4.21 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
4.22Form of Additional Secured Promissory Note, incorporated herein by reference to Exhibit 4.22 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
*
31
Exhibit
Number
Document
4.23Certificate 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, 2008.2008, incorporated herein by reference to Exhibit 4.23 to the Company’s Annual Report on Form 10-K filed on March 12, 2009.
4.24Form of Secured Promissory Note issued by the Company dated May 28, 2009, incorporated herein by reference to Exhibit 4.24 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009.
4.25Form of Additional Secured Promissory Note, incorporated herein by reference to Exhibit 4.25 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009.
4.26Form of Common Stock Purchase Warrant issued by the Company, incorporated herein by reference to Exhibit 4.26 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009.
4.27Form of Additional Common Stock Purchase Warrant, incorporated herein by reference to Exhibit 4.27 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009.
††10.19Software Development and License Agreement dated December 4, 1998 between Ericsson Mobile Communications AB and the Company incorporated herein by reference to Exhibit 10.26 of the Company's 1998 Form 10-K (File No. 0-19301).
10.24Form of Note and Warrant Purchase Agreement dated October 28, 2004, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K filed on November 3, 2004.
10.25Form of Registration Rights Agreement dated October 28, 2004, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K filed on November 3, 2004.
10.26Form of Note and Warrant Purchase Agreement dated August 10, 2006, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on August 12, 2006.
10.26Form of Note and Warrant Purchase Agreement dated August 10, 2006, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on August 12, 2006.
10.27Form of Registration Rights Agreement dated August 10, 2006, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on August 12, 2006.
†††10.28Amendment dated May 31, 2005 to the License agreement dated December 22, 2000 between the Company and eCom Asia Pacific, Ltd., incorporated by reference to Exhibit 10.26 of the Company’s Form 10-K/A filed on September 15, 2005.
†††10.29License agreement dated June 2, 2005 between the Company and SnapOn Credit LLC, incorporated herein by reference to Exhibit 10.27 of the Company’s Form 10-K/A filed on September 15, 2005.
†10.30Amendment to employment agreement with Guido DiGregorio, incorporated herein by reference to the Company's Form 8-K filed on September 21, 2005.
†10.31Amendment to employment agreement with Francis V. Dane, incorporated herein by reference to the Company's Form 8-K filed on September 21, 2005.
†10.32Form of stock option agreement dated August 31, 2005 with Russel L. Davis, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006.
†10.33Form of stock option agreement dated December 19, 2005 with Guido DiGregorio, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006.
†10.34Form of stock option agreement dated August 31, 2005 with Francis V. Dane, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006.
†10.35Form of stock option agreement dated August 31, 2005 with C. B. Sung, incorporated by reference to Exhibit 10.30 of the Company’s Form 10-K/A filed on September 15, 2006.
10.36Form of Note and Warrant Purchase Agreement dated February 5, 2007, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on February 5, 2007.
32
Exhibit
Number
Document
10.37Form of Registration Rights Agreement dated February 5, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on February 5, 2007.
10.38Amendment to the Note and Warrant Purchase Agreement dated February 5, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 99.1 to the Company's Form 8-K filed on March 15, 2007.

35
Exhibit
Number
10.39
Document
10.39
Form of Note and Warrant Purchase Agreement dated June 15, 2007, by and among the Company and the Purchasers identified therein, incorporated herein by reference to Exhibit 10.34 to the Company's Form 8-K filed on June 15, 2007.
10.40Form of Registration Rights Agreement dated June 15, 2007, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.35 to the Company's Form 8-K filed on June 15, 2007.
10.41Form of Securities Purchase and Registration Rights Agreement dated August 24, 2007, by and among the Company and Phoenix Venture Fund LLC, incorporated herein by reference to Exhibit 10.36 to the Company's Form 8-K filed on August 27, 2007.
†10.42Consulting Agreement dated January 9, 2008 between the Company and GS Meyer & Associates LLC - Incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K filed on March 12, 2007.
10.43Credit Agreement dated June 5, 2008, by and among the Company and the Lenders Party Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
10.44Pledge and Security Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.42 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
10.44Securities Purchase Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.43 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
10.45Registration Rights Agreement dated June 5, 2008, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.44 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008.
10.46Amendment No. 1 to Credit Agreement dated May 28, 2009, by and among the Company, the Lenders and Additional Lenders Parties Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009.
10.47Amendment No. 1 to Registration Rights Agreement dated May 28, 2009, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.47 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009.
10.48Salary Reduction Plan for Executive Officers of Communication Intelligence Corporation under Amendment No. 1 to Credit Agreement dated May 28, 2009, incorporated herein by reference to Exhibit 10.48 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009.
10.53Amendment No. 3 to Credit Agreement dated July 22, 2010, by and among the Company, the Lenders and Additional Lenders Parties Hereto and SG Phoenix as Collateral Agent, incorporated herein by reference to Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010.
10.54Amendment No. 3 to Registration Rights Agreement dated July 22, 2010, by and among the Company and the parties identified therein, incorporated herein by reference to Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010.
10.55Registration Rights Agreement dated August 5, 2010, by and among the Company and the Persons Executing the Agreement as Investors, incorporated herein by reference to Exhibit 10.55 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010.
33
Exhibit
Number
Document
10.56Investor Rights Agreement dated August 5, 2010, by and among the Company and Phoenix Venture Fund LLC, SG Phoenix LLC, Michael Engmann, Ronald Goodman, Kendu Partners Company and MDNH Partners L.P., incorporated herein by reference to Exhibit 10.56 to the Company’s Quarterly Report on Form 10-Q filed on November 12, 2010.
10.57Securities Purchase Agreement dated December 9, 2010, by and among the Company, Phoenix Venture Fund LLC, and the Investors signatory thereto, incorporated herein by reference to Exhibit 10.57 to the Company’s Current Report on Form 8-K filed on December 9, 2010.
10.58Registration Rights Agreement dated December 31, 2010, by and among the Company and the Persons Executing the Agreement as Investors, incorporated herein by reference to Exhibit 10.58 to the Company’s Current Report on Form 8-K filed on January 6, 2011.
10.59Form of Subscription Agreement dated March 31, 2011, by and among the Company and the Person Executing the Agreement as Subscribers, incorporated herein by reference to Exhibit 10.61 to the Company’s Current Report on Form 8-K filed on April 4, 2011.
10.60Amendment No. 1 to Registration Rights Agreement dated March 31, 2011, by and among the Company and the Persons Executing the Agreement as Required Holders, incorporated herein by reference to Exhibit 10.62 to the Company’s Current Report on Form 8-K filed on April 4, 2011.
10.61
Note and Warrant Purchase Agreement dated September 20, 2011 incorporated herein by reference to Exhibit 10.61 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2011.
*10.62Note and Warrant Purchase Agreement dated December 2, 2011.
14.1Code of Ethics, incorporated by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K filed on March 30, 2004.
*21.1Schedule of Subsidiaries.
*23.1Consent of GHP Horwath, P.C., Independent Registered Public Accounting Firm.
*23.2Consent of PMB Helin Donovan, LLP, Independent Registered Public Accounting Firm.
*31.1Certification of Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2Certificate of Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1Certification of Chief Executive Officer pursuant to 18 USC Section 1750, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2Certification 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.

†
Indicates management contract or compensatory plan, contract or arrangement.

††Confidential treatment of certain portions of this exhibit have been requested from the SEC pursuant to a request for confidentiality dated March 30, 1999, filed pursuant to the Securities and Exchange Act of 1934.

†††Confidential treatment of certain portions of this exhibit have been requested from the SEC pursuant to a request for confidentiality dated March 30, 2006 filed pursuant to the Securities and Exchange Act of 1934.

(b) Exhibits

The exhibits listed under Item 15(a)(3) hereofabove are filed as part of this Form 10-K other than Exhibits 32.1 and 32.2, which shall be deemed furnished.

 (c) Financial StatementsStatement Schedules

All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.


3634 


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Redwood Shores, State of California, on March 10, 2009.California.

 Communication Intelligence Corp.Corporation
 By:
 
/s/ Francis V. DaneAndrea Goren
Francis V. DaneAndrea Goren
(Principal Financial Officer and Officer Duly Authorized to Sign on Behalf of the Registrant)

Date:   March 30, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on March 10, 2009.15, 2012.

DateSignatureTitle
March 30, 2011
/s/ Guido DiGregorioPhilip S. Sassower
Guido DiGregorioPhilip S. Sassower
Chairman President and Chief Executive Officer
(Principal Executive Officer)
March 30, 2011
/s/ Francis V. DaneAndrea Goren
Francis V. DaneAndrea Goren
Chief Legal Officer andDirector, Chief Financial Officer
(Principal Financial and Accounting Officer)
March 30, 2011
/s/ Garry MeyerStanly Gilbert
Garry MeyerStanley Gilbert
Director
March 30, 2011
/s/ Louis P. PanettaJeffrey Holtmeier
Louis P. PanettaJeffrey Holtmeier
Director
/s/ Chien-Bor Sung
Chien-Bor Sung
March 30, 2011
Director
/s/ David Welch
David Welch
Director


3735 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
  Stockholders of Communication Intelligence Corporation

We have audited the accompanying consolidated balance sheet of Communication Intelligence Corporation and subsidiary as of December 31, 2011, and the related consolidated statement of operations, stockholders’ equity, and cash flows for year ended December 31, 2011. Communication Intelligence Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communication Intelligence Corporation and subsidiary as of December 31, 2011, and the results of its operations and its cash flows for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as going concern.  As discussed in Note 1 to the consolidated financial statements, the Company’s significant recurring losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are disclosed are described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


PMB Helin Donovan, LLP
San Francisco, CA
March 29, 2012

F- 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders
Communication Intelligence Corporation

We have audited the accompanying consolidated balance sheetssheet of Communication Intelligence Corporation and its subsidiary (“the Company”) as of December 31, 2008 and 2007,2010, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the two years in the periodyear ended December 31, 2008.2010.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.audit.

We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provideaudit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Communication Intelligence Corporation and its subsidiary as of December 31, 2008 and 2007,2010, and the results of their operations and their cash flows for each of the two years in the periodyear ended December 31, 2008,2010, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s significant recurring operating losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/S/ GHP Horwath, P.C.
Denver, Colorado
March 10, 200929, 2011

F- 2
 
F-1

Communication Intelligence Corporation
Consolidated Balance Sheets
(In thousands, except par value amounts)

    
  December 31, 
  2011  2010 
Assets      
Current assets:      
Cash and cash equivalents
 $307  $1,879 
Accounts receivable, net of allowance of $3 and $9 at December 31, 2011 and 2010, respectively
  298   103 
Prepaid expenses and other current assets
  29   44 
         
Total current assets
  634   2,026 
Property and equipment, net
  32   26 
Patents, net
  2,020   2,392 
Capitalized software development costs, net
  78   452 
Other assets
  29   29 
         
Total assets                                                                                       
 $2,793  $4,925 
         
Liabilities and Stockholders' Equity        
Current liabilities:        
Short-term Notes Payable (Note 7)
 $1,083  $– 
Accounts payable
  261   450 
Accrued compensation
  221   446 
Other accrued liabilities
  243   159 
Deferred revenue
  517   456 
         
Total current liabilities
  2,325   1,511 
Deferred revenue long-term
  397   650 
Deferred rent
  147   183 
Derivative liability
  281   499 
Total liabilities  3,150   2,843 
Commitments and contingencies (Note 10)        
Stockholders' equity:        
Series A-1 Preferred Stock, $.01 par value; 2,000 shares authorized; 880 and 813 shares outstanding at December 31, 2011 and 2010, respectively ($880 liquidation preference at December 31, 2011)
    880     813 
Series B Preferred Stock, $.01 par value; 14,000 shares authorized; 9,250 and 8,380 shares outstanding at December 31, 2011 and 2010 ($13,875 liquidation preference at December 31, 2011)
    7,380     6,350 
Series C Preferred Stock, $.01 par value; 4,100 shares authorized; 3,547 and 2,211 shares outstanding at December 31, 2011 and 2010 ($5,320 liquidation preference at December 31, 2011)
    3,569     2,032 
Common stock, $.01 par value; 1,050,000 shares authorized; 198,188 and 191,489 shares issued and outstanding at December 31, 2011 and 2010, respectively
  1,981   1,915 
Additional paid-in capital
  97,715   98,347 
Accumulated deficit
  (111,839)  (107,337)
Accumulated other comprehensive loss
  (43)  (38)
Total stockholders' equity (deficit)
  (357)  2,082 
Total liabilities and stockholders' equity
 $2,793  $4,925 
  December 31, 
  2008  2007 
Assets      
Current assets:      
Cash and cash equivalents
 $929  $1,144 
Accounts receivable, net of allowances of $104 and $117 at December 31, 2008 and 2007, respectively
  700   452 
Prepaid expenses and other current assets
  80   135 
         
Total current assets
  1,709   1,731 
Property and equipment, net  48   77 
Patents  3,149   3,528 
Capitalized software development costs  1,406   1,109 
Deferred financing costs (Note 3)  301   − 
Other assets  30   30 
         
Total assets
 $6,643  $6,475 
         
Liabilities and Stockholders' Equity        
Current liabilities:        
Short-term debt –net of discount of $5 at December 31, 2008 and $350 at December 31, 2007
 $60  $1,370 
Accounts payable
  92   135 
Accrued compensation
  369   364 
Other accrued liabilities
  236   298 
Deferred revenue
  343   431 
         
Total current liabilities
  1,100   2,598 
Long-term debt –net of discount of $873, including related party debt of $2,644, net of discount of $834 (Note 4)    2,765     − 
Long- term debt – other, net of discount of $21 at December 31, 2007 (Note 3)  –   96 
Commitments and contingencies (Note 6)        
     Total Liabilities  3,865    2,694  
         
Stockholders' equity:        
Preferred stock, $.01 par value; 10,000 shares authorized; 856 outstanding at December 31, 2008 and 0 at December 31, 2007, respectively; $883 liquidation preference
    856     – 
Common Stock, $.01 par value; 225,000 shares authorized; 130,374 and 130,307 shares issued and outstanding at December 31, 2008 and 2007, respectively
    1,304     1,291 
Additional paid-in capital
  95,174   93,785 
Accumulated deficit
  (94,569)  (91,260)
Accumulated other comprehensive income (loss)
  13   (35)
         
Total stockholders' equity  2,778   3,781 
         
Total liabilities and stockholders' equity $6,643  $6,475 
         

The accompanying notes form an integral part of these Consolidated Financial Statements

F- 3
F-2

Communication Intelligence Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts)

 Years Ended December 31,  Years Ended December 31, 
 2008  2007  2011  2010 
Revenues:      
Revenue:      
Product
 $1,686  $1,448  $915  $197 
Maintenance
  715   697   631   654 
  2,401   2,145   1,546   851 
Operating costs and expenses:                
Cost of sales:
                
Product
 895  367   416   635 
Maintenance
 169  158   247   244 
Acceleration of amortization of certain capitalized software
development costs
  −   1,009 
Research and development
 198  476   1,498   431 
Sales and marketing
 1,353  1,276   1,500   1,531 
General and administrative
 2,030  2,061   2,168   2,255 
                
  4,645   4,338   5,829   6,105 
                
Loss from operations (2,244) (2,193)  (4,283)  (5,254)
                
Interest income and other income (expense), net 72  (26)
Other expense, net
  (79)  (2)
Interest expense:                
Related party (Note 4) (243) (135)
Other (Note 3) (45) (149)
Related party (Note 7)
  (21)  (255)
Other (Note 7)
  (3)  (8)
Amortization of debt discount and deferred financing cost:                
Related party (Note 4) (730) (305)
Other (Note 3) (119) (664)
Minority interest  −   73 
Related party (Note 7)
  (3)  (1,719)
Other (Note 7)
  −   (57)
Gain (loss) on derivative liability
  (113)  3,136 
Net loss (3,309) (3,399)  (4,502)  (4,159)
Accretion of beneficial conversion feature, Preferred shares (Note 7):        
Preferred stock dividends:        
Accretion of beneficial conversion feature        
Related party (Note 9)
  (295)  − 
Other (Note 9)
  (859)  − 
Preferred stock dividends        
Related party (273) −   (726)  (292)
Other (98) −   (281)  (102)
Preferred stock dividends:        
Related party (34) − 
Other  (13)  − 
        
Income tax tax expense  −   − 
Net loss attributable to common stockholders $(3,727) $(3,399) $(6,663) $(4,553)
Basic and diluted loss per common share
 $(0.03) $(0.03) $(0.03) $(0.02)
Weighted average common shares outstanding, basic and diluted
  129,247   113,960   192,032   190,721 
Other comprehensive loss        
Foreign currency translation adjustment (loss) Gain $(5) $8 
                

The accompanying notes form an integral part of these Consolidated Financial Statements

F- 4
F-3

Communication Intelligence Corporation
Consolidated Statements of Changes in Stockholders' Equity – (Deficit)
(In thousands except per share amounts)
  
Preferred
Shares
Outstanding
  
Preferred
Shares
  
Common
Shares
Outstanding
  
 
Common
Stock
  
Additional
Paid-In
Capital
  
 
Accumulated
Deficit
  
Accumulated
Other
Comprehensive
Income (Loss)
  
 
 
Total
 
                         
Balances as of December 31, 2006  −  $−   107,557  $1,076  $90,497  $(87,861) $(128) $3,584 
Stock based employee compensation                  130           130 
Fair value of warrants issued  in connection with short-term
   debt
                    546             546 
Fair value of warrants issued in connection with long-term
   debt
                    23             23 
Adjustment to the fair value of beneficial conversion feature associated with the convertible notes (Note 5)                      202               202 
Sale of Common Stock at approximately $0.14 per share net of related costs of $398            21,500     215     2,387             2,602 
Comprehensive loss:                                
Net loss                      (3,399)      (3,399)
Foreign currency translation adjustment                          93   93 
Total comprehensive loss                              (3,306)
Balance as of September 30, 2007  −   −   129,057   1,291   93,785   (91,260)  (35)  3,781 
 
Stock based employee compensation
                  161           161 
Fair value of warrants issued  in connection with Long-term debt                  1,231           1,231 
Conversion of Short-term notes into Preferred Shares, net of expenses of $127    1,040     1,040           (127)            913 
Beneficial Conversion Feature associated with the Preferred Shares                    371             371 
Conversion of preferred shares into Common Stock  (184)  (184)  1,317   13   171           − 
Comprehensive loss:                                
Net loss                      (3,309)      (3,309)
 Foreign currency translation
     adjustment
                          48    48  
 Total comprehensive loss                              (3,261)
Accretion of beneficial conversion feature on preferred stock                  (371 )          (371)
Preferred share dividends                  (47 )           (47)
Balance as of December 31, 2008  856  $856   130,374  $1,304  $95,174  $(94,569) $13  $2,778 

  
Series A-1Preferred
Shares
Outstanding
  
Series A-1Preferred
Shares
Amount
  
Series B Preferred
Shares
Outstanding
  
Series B Preferred
Shares
Amount
  
Series C Preferred
Shares
Outstanding
  
Series C Preferred
Shares
Amount
  
Common
Shares
Outstanding
  
Common
Stock
Amount
  
Additional
Paid-In
Capital
  
 
Accumulated
Deficit
  
Accumulated
Other
Comprehensive
Income (Loss)
  
 
 
Total
 
Balance as of December 31, 2009  751  $751   −  $−   −  $−   190,026  $1,900  $101,221  $(103,178) $(46) $648 
Conversion of long-term notes into Series B Preferred Shares, net of unamortized discount of $1,509            6,608     6,608                   (1,509)            5,099 
Issuance of Series B Preferred Shares          1,440   1,440                               1,440 
Financing cost on conversion of long-term notes and issuance of Series B Preferred Shares                                  (580)          (580)
Conversion feature associated with the Series B Preferred Shares              (2,000)                              (2,000)
Warrants issued for services                                  (153)          (153)
Stock based employee compensation                                  93           93 
Shares issued for services                          750   8   58           66 
Restricted common stock issued in lieu of salaries                          713   7   (7)          − 
Restricted stock expense                                  40           40 
Issuance of Series C Preferred Shares                  2,211   2,211                       2,211 
Financing cost on issuance of Series C Preferred Shares                                  (422)          (422)
Conversion feature associated with the Series C Preferred Shares                      (179)                      (179)
Comprehensive loss:                                                
Net loss                                      (4,159)      (4,159)
Foreign currency translation adjustment                                          8   8 
Total comprehensive loss                                              (4,151)
Preferred share dividends  62   62   332   332                   (394)          − 
Conversion feature, Preferred Share dividends              (30)                              (30)
Balances as of December 31, 2010  813  $813   8,380  $6,350   2,211  $2,032   191,489  $1,915  $98,347  $(107,337) $(38) $2,082 
Stock-based employee compensation                                  804           804 
Restricted stock expense                                  3           3 
Forfeiture of restricted stock                          (260)  (3)  (9)          (12)
Shares issued for services                  195   195                       195 
Series C Preferred Shares issued in separation agreement                  36   36                       36 
Issuance of Series C Preferred Shares for cash                  800               800           800 
Reclassification of conversion feature associated with the Series B and Series C Preferred Shares from derivative liability to equity                160         203                         363 
Financing cost on issuance of Series C Preferred Shares                      (121)                      (121)
Accretion of Beneficial Conversion Feature on preferred shares              22       1,132           (1,154)         
─
 
Preferred share dividends, paid in kind  67   67   870   848   305   92           (1,007)         
─
 
Cashless Exercise of warrants                          6,959   69   (69)         
─
 
Comprehensive loss                                                
Net loss                                      (4,502)      (4,502)
Foreign currency translation adjustment                                          (5)  (5)
Total comprehensive  loss                                              (4,507)
Balances as of December 31, 2011  880  $880   9,250  $7,380   3,547  $3,569   198,188  $1,981  $97,715  $(111,839) $(43) $(357)
The accompanying notes form an integral part of these Consolidated Financial Statements

F- 5
F-4

Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands)
 December 31, 
 2008  2007  2011  2010 
Cash flows from operating activities:            
Net loss
 $(3,309) $(3,399) $(4,502) $(4,159)
Adjustments to reconcile net loss to net cash
used for operating activities:
                
Depreciation and amortization
 951  857   842   1,224 
Accelerated amortization of certain capitalized softwaredevelopment costs
  −   1,009 
Amortization of debt discount and deferred financing costs
 848  969   3   1,776 
Loss on disposal of property and equipment
 -  3 
Stock based employee compensation
 161  130 
Minority interest
 -  (73)
Stock-based employee compensation
  807   133 
Shares issued for services
  195   66 
Series C Preferred Shares issued in separation agreement
  36     
(Gain) loss on derivative liability
  113   (3,136)
Non cash interest expense
  −   291 
Forfeiture of restricted stock
  (12)  − 
Changes in operating assets and liabilities:
                
Accounts receivable, net
 (248) 35   (195)  124 
Prepaid expenses and other current assets
 55  (30)
Prepaid expenses and other assets
  16   22 
Accounts payable
 (43) 63   (189)  332 
Accrued compensation
 5  128   (225)  119 
Other accrued liabilities
 (106) 29   48   173 
Deferred revenue
  (88)  27   (192)  (219)
Net cash used for operating activities
  (1,774)  (1,261)
Net cash (used for) provided by operating activities
  (3,255)  (2,245)
                
Cash flows from investing activities:
Acquisition of property and equipment
 (27) (26)  (24)  (14)
Capitalized software development costs
  (813)  (788)  (72)  (772)
Net cash used for investing activities
  (840)  (814)  (96)  (786)
                
Cash flows from financing activities:                
Deferred financing costs
 (425) - 
Proceeds from issuance of short-term debt
 125  - 
Proceeds from the sale of common stock, net of expenses
 -  2,602 
Proceeds from issuance of long-term debt
 3,000  1,120 
Principal payments on debt
 (302) (1,265)
Principal payments on capital lease obligations
  -   (5)
Net proceeds from issuance of short-term debt
  1,100   1,390 
Net proceeds from issuance of Series B preferred shares
  −   860 
Net proceeds from issuance of Series C preferred shares
  679   1,789 
Principal payments on short term debt
  −   (150)
Net cash provided by financing activities
  2,398   2,452   1,779   3,889 
Effect of exchange rate changes on cash
  1   40 
        
Effect of exchange rate changes on cash and cash equivalents  −   − 
                
Net increase (decrease) in cash and cash equivalents (215) 417   (1,572)  858 
Cash and cash equivalents at beginning of period  1,144   727   1,879   1,021 
Cash and cash equivalents at end of period  $929  $1,144  $307  $1,879 
        
The accompanying notes form an integral part of these Consolidated Financial Statements

F- 6
F-5

Communication Intelligence Corporation
Consolidated Statements of Cash Flows
(In thousands)

Supplemental disclosure of cash flow information:
  December 31, 
  2008  2007 
 
Interest paid
 $226  $244 
 
Schedule of non-cash transactions:
        
Short-term notes and accrued interest exchanged for convertible preferred stock $1,040  $– 
Short term notes and accrued interest exchanged for long term notes $638  $– 
Accretion of beneficial conversion feature on convertible preferred shares $371  $– 
Fair value of warrants issued to the investors in connection with long –term debt $–  $23 
Fair value of warrants issued to the investors in connection with long –term debt $–  $546 
Fair value of the adjustment to the beneficial conversion feature associated with the convertible notes $–  $202 
  December 31 
  2011  2010 
Supplementary disclosure of cash flow information      
Interest paid                                                                               $3  $− 
Income taxes paid                                                                               $−  $− 
         
Non-cash financing and investing transactions        
Secured indebtedness and accrued interest exchanged for Series B convertible preferred stock
 $−  $6,608 
Conversion feature of Series B preferred shares classified as a derivative liability
 $−  $2,000 
Dividends on preferred shares
 $1,007  $394 
Conversion feature of Series B preferred shares dividends issued as payment in-kind classified as a derivative liability
 $−  $30 
Debt discount recorded in connection
with short-term debt                           ��                                            
 $20  $− 
Accretion of beneficial conversion feature on Preferred
Shares                                                                        
 $1,154  $− 
Warrants issued as payment of financing services $−  $153 
Warrants issued in connection with bridge loans recorded as derivative liabilities $−  $682 
Warrants issued for interest recorded as a derivative liability
 $26  $170 
Reclassification of beneficial conversion feature
 $363  $− 
Conversion feature of Series C preferred shares classified as a derivative liability
 $−  $179 


The accompanying notes form an integral part of these Consolidated Financial Statements

F- 7
F-6
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)


1. Nature of Business, Basis of Presentation and Summary of Significant Accounting PoliciesPolicies:

The Company:

Communication Intelligence Corporation and its joint venture (the "Company" or "CIC") developsis a leading supplier of electronic signature products and marketsthe recognized leader in biometric signature verification. CIC enables companies to achieve truly paperless workflow in their electronic business processes by providing multiple signature technologies across virtually all applications. CIC’s solutions are available both in SaaS and on-premise delivery models and afford “straight-through-processing,” which can increase customer revenue by enhancing user experience and can also reduce costs through paperless and virtually error-free electronic transactions that can be completed significantly quicker than paper-based procedures. To date, the Company primarily has delivered biometric and electronic signature solutions for business process automationto channel partners and biometric signature verification. The Company also develops and markets natural input/text entry software for handheld computers and smart phones.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 are classified into two broad categories: "transactioncan be referred to as "transaction-enabling” technologies. These technologies include various forms of electronic signatures, such as handwritten biometric, click-to-sign and communication enabling technologies"others, as well signature verification, cryptography and "natural input technologies”. CIC's transactionthe logging of audit trails to show signers’ intent. These technologies can enable secure, legal and communication enabling technologies provide a means for protectingregulatory compliant electronic transactions that can enhance customer experience at a fraction of the time and documents. CIC has developed products for dynamic signature verification, electronic signatures and encryption and a suite of development tools and applications which the Company believes could increase the functionality of its core products and facilitate their integration into original equipment manufacturers' ("OEM") hardware products and computer systems and networks. CIC's natural input technologies are designed to allow users to interact with a computer or handheld device through the use of an electronic pen or “stylus”. Suchcost required by traditional, paper-based processes. The Company’s products include the Company's SignatureOne®, Ceremony® Server, SignatureOne Profile Server,Server™, Sign-it®, iSign® Console™ and iSign®, biometric and electronic signature products, and multi-lingual Jot® handwriting recognition system.

The Company’s 90% owned joint venture, Communication Intelligence Computer Corporation, in China (the "Joint Venture"), has licensed eCom Asia Pacific Pty Ltd (“eCom”) as its master reseller for CIC products to end users and resellers with the authority and responsibility to create optimal distribution channels within the People’s Republic of China.iSign® toolkits.

Going concern:concern and management plans:

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Except for 2004, the Company has incurred significant losses since its inception and, at December 31, 2008,2011, the Company’s accumulated deficit was approximately $95,000.$111,839.  The Company has primarily funded these losses through the sale of debt and equity securities. As of December 31, 2011, the Company’s cash balance was approximately $307. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  TheIn June 2008 and May 2009 the Company has primarily funded these lossesraised funds through the sale of debt and equity securities.

In September 2007, the Company closed a Securities Purchase and Registration Rights Agreement aggregating $2,602, net of expenses, the proceeds of which were used for payment of outstanding indebtedness of $1,265 plus accrued interest thereon and working capital purposes. In June 2008, the Company raised $2,548 through a debt and equity financingfinancings and converted short-term notes payable to equity (see Notes 3equity. In May, June and 4)July 2010, the Company amended its credit agreement to provide for an additional $1,260 in short term funding. On August 4, 2010, stockholders approved the issuance of a Series B Participating Convertible Preferred Stock and the Company converted approximately $6,608 of long-term debt due in December 2010 into shares of Series B Preferred Stock. In addition the Company sold, for cash in a private placement, 1,440 additional shares of Series B Preferred Stock at a purchase price of $1.00 per share (Note 11 to the Consolidated Financial Statements).  TheIn December 2010 the stockholders approved the issuance of a Series C Participating Convertible Preferred Stock and the Company believes thatsold, for cash in a private placement, 2,211 shares of Series C Preferred Stock at a purchase price of $1.00 per share (Note 11 to the current pipelineConsolidated Financial Statements). In March 2011, the Company sold for cash in a private placement an additional 800 shares of Series C Preferred Stock at a purchase price of $1.00.

In September 2011, the Company borrowed $100 at 10% per annum in the form of two demand notes, and its growth rate hasborrowed an additional $500 at 10% per annum in the sales potential for achieving and sustaining profitability.form of an unsecured convertible promissory note due September 20, 2012. In December 2011, the Company borrowed $500 at 10% per annum in the form of unsecured convertible promissory notes due December 2, 2012. (Note 7 to the Consolidated Financial Statements).

There can be no assurance that the Company will havebe 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.

F- 8
F-7
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)


1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):

Basis of consolidation:

The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, and include the accounts of Communication Intelligence Corporation and its 90% owned-owned Joint Venture in the People's Republic of China. All inter-company accounts and transactions have been eliminated.  All amounts shown in the accompanying consolidated financial statements are in thousands of dollars except per share amounts.

Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenuesrevenue and expenses during the reporting periods. Actual results could differ from these estimates.

Fair value of financial instruments:

The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, short-term debt and long-termshort-term debt approximate fair value due to their relatively short maturities. The Derivative liabilities are stated at fair value using a discounted Black-Sholes option pricing model (Note 8).

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: Unadjusted quoted prices in active markets for identical assets and liabilities.

Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

Cash and cash equivalents:

The Company considers all highly liquid investments with maturities at the date of purchase of three months or less to be cash equivalents.

The Company's cash and cash equivalents, at December 31, consisted of the following:

 2008  2007  2011 2010 
Cash in bank $127  $89 
Cash in bank
$    281
 
$1,852
 
Money market funds  802   1,055 
Money market funds
26
 
27
 
             
Cash and cash equivalents
 $929  $1,144 
Cash and cash equivalents
$    307
 
$1,879
 
    

Concentrations of credit risk:

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company maintains its cash and cash equivalents with

F- 9
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)



1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):

Concentrations of credit risk (continued):

various financial institutions. This diversification of risk is consistent with Company policy to maintain liquidity, and mitigate risk of loss as to principal. At December 31, 2008, the Joint Venture had approximately $1 in cash accounts held by a financial institution in the People's Republic of China.

To date, accounts receivable have been derived principally from revenuesrevenue earned from end users, manufacturers, and distributors of computer products in North America and the Pacific Rim.America. The Company performs periodic credit evaluations of its customers, and does not require collateral. The Company maintains reserves for potential credit losses; historically, such losses have been within management's expectations.
F-8
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Concentrations of credit risk (continued):

The allowance for doubtful accounts is based on the Company’s assessment of the collectability of specific customer accounts and an assessment of international, political and economic risk as well as the aging of the accounts receivable. If there is a change in actual defaults from the Company’s historical experience, the Company’s estimates of recoverability of amounts due could be affected and the Company will adjust the allowance accordingly.

Deferred financing costs:

Deferred financing costs include costs paid in cash, such as professional fees and commissions.  The costs are amortized to interest expense over the life of the notes or upon early payment using the effective interest method.  The costs amortized to interest expense amounted to $124$0 and $75,$218 for the years ended December 31, 20082011 and 2007,2010, respectively.

Property and equipment, net:

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized over their estimated useful lives, not to exceed the term of the related lease. The cost of additions and improvements is capitalized, while maintenance and repairs are charged to expense as incurred.  Depreciation expense was $66$17 and $78$19 for the years ended December 31, 20082011 and 2007,2010, respectively. The Chinese Joint Venture disposed of certain assets at net book value of $3 in 2007.

Property and equipment, net at December 31, consists of the following:
  2008  2007 
Machinery and equipment $1,202  $1,179 
Office furniture and fixtures  435   435 
Leasehold improvements  90   90 
Purchased software  323   319 
         
   2,050   2,023 
Less accumulated depreciation and amortization  (2,002)  (1,946)
         
  $48  $77 
         

Patents:
The nature of the underlying technology of each material patent is as follows:

·  Patent numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the electronic capture of a handwritten signature utilizing an electronic tablet device on a standard computer system within an electronic document, (b) the verification of the identity of the person providing the electronic signature through comparison of stored signature measurements, and (c) a system to determine whether an electronic document has been modified after signature.
F-9
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Patents (continued):

·  Patent number 6091835 involves all of the foregoing and the recording of the electronic execution of a document regardless of whether execution occurs through a handwritten signature, voice pattern, fingerprint or other identifiable means.

·  Patent numbers 5933514, 6212295, 6381344, and 6487310 involve methods and processes related to handwriting recognition developed by the Company over the years.  Legal fees associated with these patents were immaterial and expensed as the fees were incurred.

Patents, net consists of the following at December 31:

  
 
 
Expiration
 
Estimated Original
Life
  
 
2008
  
 
2007
 
Patent (Various) Various  5  $9  $9 
Patent (Various) Various  7   476   476 
 5544255 2013  13   93   93 
 5647017 2014  14   187   187 
 5818955 2015  15   373   373 
 6064751 2017  17   1,213   1,213 
 6091835 2017  17   4,394   4,394 
                
          6,745   6,745 
Less accumulated amortization        (3,596)  (3,217)
                
         $3,149  $3,528 
                

Patents are stated at cost less accumulated amortization that, in management’s opinion, does not exceed fair value. Amortization is computed using the straight-line method over the estimated lives of the related assets, ranging from five to seventeen years. Amortization expense was $379$372 and $378$379 for the years ended December 31, 20082011 and 2007,2010, respectively.  Amortization expense is estimated to be $379 for each of the five years through December 31, 2013.   The estimated remaining weighted average useful lives of the patents are 85 years.  The patents identified

Future patent amortization is as "various" are technically narrow or dated patents that the Company believes the expiration of which will not be material to its operations.  At December 31, 2008, the net carrying value of those patents is $0.follows:

Year Ended December 31,   
2012 $366 
2013  366 
2014  357 
2015  342 
2016  322 
Thereafter  269 
Total $2,022 

The usefulCompany performs intangible asset impairment analysis at least annually in accordance with the relevant accounting guidance. The Company periodically reassesses the lives assignedof its patents and tests for impairment in order to determine whether the patents are based uponbook value of each patent exceeds the following assumptions and conclusions:

·  The estimated cash flow from products based upon each patent are expected to exceedfair value of each patent The Company uses the value assigned to each patent;

·  There are no legal, regulatory or contractual provisions known to the Company that limit the useful life of each patent to less than the assigned useful life;

·  No additional material costs need to be incurred or modifications made in order for the Company to continue to be able to realize the protection afforded by the patents; and

·  The Company, does not foresee any effects of obsolescence or significant competitive pressure on its current or future products, anticipates increasing demand for products utilizing the patented technology, and believes that the current markets for its products based on the patented technology will remain constant or will grow over the useful lives assigned to the patents because of a legal, regulatory and business environment encouraging the use of electronic signatures.
 
F-10
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)

 
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):

Patents (continued):

The Company performs intangible asset impairment analyses at least annually in accordance with the guidance in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” ("SFAS 142") and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” ("SFAS 144"). The Company uses SFAS 144relevant accounting in response to changes in industry and market conditions that affectsaffect its patents; the Company then determines if an impairment of its assets has occurred. The Company reassesses the lives of its patents and tests for impairment at least annually in order to determine whether the book value 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 considering the additional factors listed in Critical Patents (continued):Accounting Policies in Item 7 of this Form 10-K. The Company believes that no significant events or circumstances occurred or changed during the year ended December 31, 2011, and therefore concluded that no impairment in the carrying values of the patents existed at December 31, 2011.

Long-lived assets:

The Company evaluates the recoverability of its long-lived assets at least annually or whenever circumstances or events indicate such assets might be impaired. The Company would recognize an impairment charge in the event the net book value of such assets exceeded the future undiscounted cash flows attributable to such assets. No such impairment charges have been recorded in the two years ended December 31, 2008.2011.

Software development costs:

Software development costs are accounted for in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, capitalizationCapitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. The costs capitalized include the coding and testing of the product after the technological feasibility has been established and ends upon the release of the product. The annual amortization is the greater of (a)equal to the straight-line amortization over the estimated useful life not to exceed three years or (b)of the amount based on the ratiosoftware and varies by type of current revenues to anticipated future revenues.software. The Company performs periodic impairment reviews to ensure that unamortized deferred development costs remain recoverable from the projected future net cash flows that they are expected to generate.

The capitalized costs are amortized to cost of sales. At December 31, 2008, and 2007 the Company had capitalized approximately $813, and $788 of software development costs, respectively. Amortization of capitalized software development costs for the years ended December 31, 2008 and 2007 was $504 and $335, respectively.

Other current liabilities:Share-based payment:
Share-based compensation expense is based on the estimated grant date fair value of the portion of share-based payment awards that are ultimately expected to vest during the period. The grant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. 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 Company records liabilities based on reasonable estimates for expenses, or payables that are known but some amounts must be estimated such as deposits, taxes, rents and services.  The estimates are for current liabilities that should be extinguished within one year.Material commitments:

The Company had the following other accrued liabilitiescommitments at December 31:31, 2011:

  2008  2007 
Accrued professional services $110  $134 
Rents  47   43 
Interest  75   66 
Other  4   55 
Total $236  $298 
  Payments due by period 
Contractual obligations Total  2012  2013  2014  2015  2016  Thereafter 
Short-term note payable (1)  1,100   1,100   −   −   −  
−
   − 
Operating lease commitments (2)  1,366   267   375   283   292   249   − 
Total contractual cash obligations $2,466  $1,367  $375  $283  $292  $249  $− 

1.  The Company issued demand notes in September 2011 in the amount of $100, and convertible notes in September and December 2011 in the amount of $500 and $500, respectively. The notes bear interest at the rate of 10% per annum. The Convertible notes are due in September and December 2012.
2.  The Company extended the lease on its offices in April 2010.  The base rent decreased by approximately 6% in November 2011 and will increase by approximately 3% per annum over the term of the new lease, which expires on October 31, 2016.
 
F-11F- 11
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)

 
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Other current liabilities (continued):

Material commitments:

The Company had the following commitments at December 31, 2008:

  Payments due by period 
Contractual obligations Total  2009  2010  2011  2012  2013  Thereafter 
Short-term debt related party (1) $65  $65  $–  $–  $–  $–  $– 
Long-term debt related party (2)  3,638   –   3,638   –   –   –   – 
Operating lease commitments (3)  792   272   280   240   –   –   – 
Total contractual cash obligations $4,495  $337  $3,918  $240  $–  $–  $– 

1.  Short-term debt reported on the balance sheet is net of approximately $5 in discounts representing the fair value of warrants issued in connection with the Company’s debt financings.

2.  Long-term debt related party reported on the balance sheet is net of approximately $873 in discounts representing the fair value of warrants issued to the debt holders.

3.  The operating lease commenced on November 1, 2002. The lease was renegotiated in December 2005 and extended for an additional 60 months. The base rent will increase approximately 3% per annum over the term of the lease, which expires on October 31, 2011.

Revenue recognition:

Revenue is recognized when earned in accordance with applicable accounting standards, including AICPA Statement of Position ("SOP") No. 97-2, “Software Revenue Recognition”, as amended, Staff Accounting Bulletin 104, “Revenue Recognition” ("SAB 104"), and the interpretive guidance issued by the Securities and Exchange Commission and EITF issue number 00-21, “Accounting for Revenue Arrangements with Multiple Elements”, of the FASB’s Emerging Issues Task Force. The Company recognizes revenuesrevenue from sales of software products upon shipment, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all non-recurring engineering work necessary to enable the Company's product to function within the customer's application has been completed and the Company's product has been delivered according to specifications. Revenue from service subscriptions is recognized as costs are incurred or over the service period which-everwhich ever is longer. Software license agreements may contain multiple elements, including upgrades and enhancements, products deliverable on a when and if available basis and post contract support. Revenue from software license agreements is recognized upon delivery of the software, provided that persuasive evidence of an arrangement exists, collection is determined to be probable, all nonrecurring engineering work necessary to enable the Company's products to function within the customer's application has been completed, and the Company has delivered its product according to specifications.

For arrangements with multiple deliverables the Company allocates consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, Management’s best estimate of the selling prices is use. 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 contractpost-contract support and upgrades or enhancements, which is paid for in addition to license fees, and is recognized as costs are incurred or over the support period whichever is longer. For undelivered elements where objective and reliable evidence of fair value does not exist, revenue is deferred and subsequently recognized when delivery has occurred and when fair value has been determined.

For each of the years ended December 31, 20082010 and 2007,2011, the Company’s sales in the United States as a percentage of total sales were 96%93% and 92%, respectively. For the years ended December 31, 2008,2011 and 2007,2010, the Company’s export sales as a percentage of total revenuesrevenue were approximately 4% and 8%, respectively. Foreign sales are determined based onsales to customers in all countries other than the countries to which the Company’s products are shipped.
F-12
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Major customers:

Two customers accounted for 39% of total revenue for the year ended December 31, 2008.  Allstate Insurance Company accounted for 19% and Travelers Indemnity Company accounted for 20%. For the year ended December 31, 2007, four customers accounted for 57% of total revenues. Access Systems Americas, Inc. (formerly PalmSource, Inc.) accounted for 24%, Tennessee Valley Authority accounted for 10%, World Financial Group accounted for 13%, and Wells Fargo Bank, NA accounted for 10%.

Four customers accounted for 82% of accounts receivable at December 31, 2008.  Allstate Insurance Company accounted for 37%, SHI Inc. accounted for 18%, Travelers Indemnity Company accounted for 15% and eCom Asia Pacific, Ltd accounted for 12%. Four customers accounted for 92% of accounts receivable at December 31, 2007.  eCom Asia Pacific, Ltd accounted for 22%, Access Systems Americas, Inc, (formerly PalmSource) accounted for 28%, Sony Ericsson accounted for 10% and Tennessee Valley Authority accounted for 32%.U.S.

Research and development:

Research and development costs are charged to expense as incurred.

Marketing:

The Company expenses advertising (marketing) costs as incurred. These expenses are outbound marketing expenses associated with participation in industry events, related sales collateral and email campaigns aimed at generating customer participation in webinars. The expense for the years ended December 31, 20082011 and 20072010 was $180$15 and $100,$20, respectively.

Net (loss) incomeloss per share:

The Company calculates net (loss) incomeloss per share under the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). SFAS 128the relevant accounting guidance.  That guidance requires the disclosure of both basic net income (loss)loss per share, which is based on the weighted average number of shares outstanding, and diluted income (loss)loss per share, which is based on the weighted average number of shares and dilutive potential shares outstanding.

F- 12
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)



1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):

Net loss per share (continued):

For the year ended December 31, 2008, 7,6082011, 51,353 shares of Common Stock subject to outstanding options and 41,131182,644 shares issuable upon exercise of the warrants were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants would be anti-dilutive.

For the year ended December 31, 2007, 6,0362010, 10,028 shares of Common Stock subject to outstanding options, and  15,149135,131 shares issuable upon exercise of the warrants were excluded from the calculation of dilutive earnings per share because the exercise of such options and warrants would be anti-dilutive.

Foreign currency translation:

The Company considers the functional currency of the Joint Venture, CICC to be the local currency which is the RMB and, accordingly, gains and losses from the translation of the local foreign currency financial statements are included as a component of "accumulated other comprehensive loss" inloss in” the accompanying consolidated balance sheets. Foreign currency assets and liabilities are translated into U.S. dollars at the end-of-period exchange rates except for long-term assets and liabilities, which are translated at historical exchange rates. RevenuesRevenue and expenses are translated at the average exchange rates in effect during each period except for those expenses related to balance sheet amounts which are translated at historical exchange rates.
F-13
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued)

Net foreign currency transaction gains and losses are included in "Interest income and other income, (expense), net" in the accompanying consolidated statements of operations. Foreign currency transaction gains and losses in 20082011 and 20072010 were insignificant.

Comprehensive income:

Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”),The relevant accounting guidance requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual statement that is displayed with the same prominence as other annual financial statements. SFAS 130The guidance also requires that an entity classify items as other comprehensive earnings by their nature in an annual financial statement.

Income taxes:

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts and for tax loss and credit carryforwards.carry-forwards. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ("FIN 48"), on January 1, 2007. There werehave been no unrecognized tax benefits and, accordingly, there has been no effect on the Company's financial condition or results of operations as a result of implementing FIN 48.operations.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003,2004, and state tax examinations for years before 2002.2003. Management does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, there was no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the twelve month period ended December 31, 2008.


F- 13
Recent pronouncements:

In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations”, which becomes effective for fiscal periods beginning after December 15, 2008.  The standard changes the accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs, and the recognition of changes in the acquirer’s income tax valuation allowance.  SFAS 141(R) became effective for the Company on January 1, 2009.  The Company does not expect the adoption of this statement to have a material impact on its financial statements.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.”  The standard changes the accounting for non-controlling (minority) interests in consolidated financial statements, including the requirements to classify non-controlling interests as a component of consolidated stockholders’ equity, and the elimination of :minority interest” accounting in results of operations with earnings attributable to non-controlling interests reported a part of consolidated earnings.  Purchases ad sales of minority interests will be reported in equity similar to treasury stock transactions.  SFAS 160 is effective for the first annual reporting period beginning on or after December 15, 2008.  Thus, SFAS 160 became effective for the Company on January 1, 2009.  The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements.
 
F-14
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)


1.  Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies (continued):

Recently issued accounting pronouncement:

In February 2007,May 2011, the FASBFinancial Accounting Standards Board (FASB) issued SFASASU No. 159, “The2011-04 Fair Value OptionMeasurement (Topic 820) which amended standards to achieve a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”  SFAS No. 159 provides companies with an option to report selected financialReporting Standards. For assets and liabilities categorized as Level 3 and recognized at fair value, these amended standards require disclosure of quantitative information about unobservable inputs, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. In addition, these amended standards require that we disclose the level in the fair value hierarchy for financial instruments disclosed at fair value but not recorded at fair value. The standard establishes presentationamendments in this ASU are effective during interim and disclosure requirements designedannual periods beginning after December 15, 2011. The adoption of this ASU is not expected to facilitate comparisons between companies that choose different measurement attributeshave a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” Under the amendments in this ASU, an entity has two options for similar typespresenting its total comprehensive income: to present total comprehensive income and its components along with the components of assetsnet income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and liabilities.  SFAG No. 159 wasare effective for fiscal years, and interim periods within those years, beginning after NovemberDecember 15, 2007.2011, with early adoption permitted. The Company did not elect to report any of its financial assets or liabilities at fair value, and as a result, the adoption of SFAS 159 had noASU No. 2011-05 will not have any material impact on itsthe Company’s consolidated financial position and results of operations.

Recent pronouncements(continued):In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08 Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment. The ASU simplifies how entities, both public and nonpublic, test goodwill for impairment. The revised standard allows an entity to first assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a likelihood of more than 50 percent. An entity can choose to perform the qualitative assessment on none, some, or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then perform the qualitative assessment in any subsequent period. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company does not believe this guidance will have any impact on its consolidated financial position, results of operations, or cash flows.

Effective January 1, 2008, the Company partiallyManagement does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, SFAS No. 157, “Fair Value Measurements”.  This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principals, and expands disclosures about fair value measurements.  As permitted by FSP FAS 157-2, the Company elected to defer the adoption of the nonrecurring fair value measurement disclosure of nonfinancial assets and liabilities.  The partial adoption of SFAS No. 157 did notwould have a material impacteffect on the Company’s results of operations, cash flows oraccompanying consolidated financial position.statements.

To increase consistency
2.  Major customers:

Two customers accounted for 28% and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes10%, respectively of total revenue for the inputsyear ended December 31, 2011. One customer accounted for 20% of total revenue for the year ended December 31, 2010.

Four customers accounted for 87% of gross accounts receivable at December 31, 2011.  Customer one, accounted for 40%, Customer two accounted for 25%, Customer three accounted for 12%, and Customer four accounted for 10%. Two customers accounted for 66% of gross accounts receivable at December 31, 2010. Customer one accounted for 49% and Customer two accounted for 17%.

F- 14
Communication Intelligence Corporation
Notes to valuation techniques used to measure fair value into three levelsConsolidated Financial Statements
(In thousands except per share amounts)


3.  Property plant and equipment:

Property and equipment, net at December 31, consists of the following:

  2011  2010 
Machinery and equipment
 $1,215  $1,224 
Office furniture and fixtures
  435   435 
Leasehold improvements
  90   90 
Purchased software
  323   323 
         
   2,063   2,072 
Less accumulated depreciation and amortization
  (2,031)  (2,046)
         
  $32  $26 
         

Material commitments:

The Company had the following commitments at December 31, 2011:

  Payments due by period− 
Contractual obligations Total  2012  2013  2014  2015  2016  Thereafter 
Operating lease commitments (2)  1,366   267   275   283   292   249   − 

1.  The Company extended the lease on its offices in April 2010.  The base rent decreased by approximately 6% in November 2011 and will increase by approximately 3% per annum over the term of the new lease, which expires on October 31, 2016.
4.  Patents:

Patents, net consists of the following at December 31:

   
 
Expiration
  
Estimated Original
Life
  
 
2011
  
 
2010
 
Patent (Various)
  Various   5  $9  $9 
Patent (Various)
  Various   7   476   476 
 5544255   2013   13   93   93 
 5647017   2014   14   187   187 
 5818955   2015   15   373   373 
 6064751   2017   17   1,213   1,213 
 6091835   2017   17   4,394   4,394 
                   
             6,745   6,745 
Less accumulated amortization
           (4,725)  (4,353)
                   
            $2,020  $2,392 
                   

The nature of the underlying technology of each material patent is as follows:

Level 1—quoted prices (unadjusted) in active•      Patent numbers 5544255, 5647017, 5818955 and 6064751 involve (a) the electronic capture of a handwritten signature utilizing an electronic tablet device on a standard computer system within an electronic document, (b) the verification of the identity of the person providing the electronic signature through comparison of stored signature measurements, and (c) a system to determine whether an electronic document has been modified after signature.

F- 15
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)


4.Patents (continued):

•      Patent number 6091835 involves all of the foregoing and the recording of the electronic execution of a document regardless of whether execution occurs through a handwritten signature, voice pattern, fingerprint or other identifiable means.

•      Patent numbers 5933514, 6212295, 6381344, and 6487310 involve methods and processes related to handwriting recognition developed by the Company over the years.  Legal fees associated with these patents were immaterial and expensed as the fees were incurred.

The Company does not foresee any effects of obsolescence or significant competitive pressure on its current or future products, anticipates increasing demand for products utilizing the patented technology, and believes that the current markets for identical asset or liabilities;

Level 2—observable inputs other than Level I, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and

Level 3—assets and liabilities whose significant value drivers are unobservable.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs areits products based on the patented technology will remain constant or will grow over the remaining useful lives assigned to the patents because of a legal, regulatory and business environment encouraging the use of electronic signatures.

5.  Capitalized software development costs:

During 2011 and 2010, the Company capitalized approximately $72 and $772 of software development costs. Amortization of capitalized software development costs for the years ended December 31, 2011 and 2010 was $446 and $1,835, respectively. The decrease between periods is related to the Company’s market assumptions.  Unobservable inputs require significant management judgment or estimation.  In some cases,decision to accelerate the inputs usedamortization of its software portfolio to measure an asset or liability may fall into different levelsbetter reflect the transition of its offering from being mostly product-based to becoming mostly server and service-based and to provide a closer match with the useful life of the fair value hierarchy.  In those instances, the fair value measurement is required to be classified using the lowest leveldevelopment costs being capitalized. This acceleration resulted in an increase in amortization expense of input that is significant to the fair value measurement.  Such determination requires significant management judgment.$1,009 in 2010.

There were no financial assets or liabilities measured at fair value as of December 31, 2008 with the exception of cash whichFuture amortization expense is measured using level 1 inputs.  There were no changes in the Company’s valuation techniques used to measure fair value on a recurring basis as a result of partially adopting SFAS 157.follows:

2.
Year Ended December 31,   
2012 $78 
Thereafter  - 

6.  Chinese Joint Venture:

The Company currently owns 90% of a joint venture (the “Joint Venture”) with the Jiangsu Hongtu Electronics Group, a provincial agency of the People's Republic of China (the "Agency"). In June 1998, the registered capital of the Joint Venture was reduced from $10,000 to $2,550. As of December 31, 2005, the Company had contributed an aggregate of $1,800 in cash to the Joint Venture and provided it with non-exclusive licenses to technologies and certain distribution rights and the Agency had contributed certain land use rights. Following the reduction in registered capital of the Joint Venture, neither the Company nor the Agency is required to make further contributions to the Joint Venture. Prior to the reduction in the amount of registered capital, the Joint Venture was subject to the annual licensing requirements of the Chinese government. Concurrent with the reduction in registered capital, theThe Joint Venture's business license has been renewed throughexpires October 18, 2043. There were no significant operations and no cash requirements in 2011 or 2010.

Revenues from theThe Joint Venture were $0 and $39had no revenue for the years ended December 31, 20082011 and 2007,2010, respectively.  There wereIt had no long livedlong-lived assets as of December 31, 2011 and 2010.

7.  Short-term notes payable:

Immediately prior to the conversion of debt (the “Recapitalization”) in August 2010, the Company had outstanding debt with a principal balance of $6,608 (recorded in the balance sheet net of a discount of $1,509). The outstanding balance included $1,260 of funds borrowed through bridge financing obtained in May, June and July 2010 with the following terms: an interest rate of 8% per annum and a maturity date of December 31, 2010. Warrants to purchase 18,000 shares of Common Stock with an exercise price of $0.06 per share expiring in periods from May 2013 through July 2013 were issued with the bridge financings. The remaining principal balance of $5,348 relates to funds raised in financing transactions in 2008 and 2007.2009. The funds raised in these financings had the following terms: interest at 8% per annum and, at the option of the Company, interest could be paid in cash or in kind. Warrants to purchase 80,154 shares of Common Stock with an exercise price of $0.06 and an expiration date of June 30, 2012 were issued in the financing transactions. Upon execution of each financing a debt discount was recorded. At December 31, 2009, a discount of $2,222 was included in the debt balance. For the years ended
 
F-15F- 16
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)

 
3. 7. Short-term debt:notes payable (continued):

Short-termDecember 31, 2010, amortization of the debt asdiscount and deferred financing costs was $1,776. The unamortized discount of $1,509 was charged to paid-in capital in connection with conversion of the associated debt into shares of Series B Preferred Stock (Note 8). The warrants included in the financing transactions were determined to be derivative liabilities (Note 7).

On December 2, 2011, the Company entered into a Note and Warrant Purchase Agreement (the “December 2011 Purchase Agreement”) with Philip Sassower, the Company’s Chairman and CEO, and other investors (the “December 2011 Investors”). Under the terms of the December 2011 Purchase Agreement, the Company issued unsecured convertible promissory notes in the aggregate amount of $500 (the “December 2011 Notes”) to the December 2011 Investors.  The December 2011 Notes bear interest at the rate of 10% per annum, and have a maturity date of December 31, 2008 consists20, 2012.  The December 2011 Notes are also convertible at the option of a principal balance of $65, net of a remaining debt discount of $5 (recorded as long-term debt as ofthe December 31, 20072011 Investors into securities sold in the amountCompany’s next equity financing with gross proceeds to the Company in excess of $117, net of debt discount of $21). The note agreement, originally entered into in 2004, was modified in October 2007. The modification extended$1.  In connection with the maturityissuance of the note through October 2009 and terminatedDecember 2011 Notes, the conversion feature ofCompany also issued to the note. In addition, the note holder receivedDecember 2011 Investors warrants to purchase two shares per one dollaran aggregate of principal outstanding (234 warrants exercisable at the 20 day volume weighted average price of the Company’s Common Stock ending October 25, 2007 ($ 0.29)). Holders of additional principal outstanding at the modification date of October 2007 in the amount of $1,265, did not except the modification terms and were repaid the outstanding principal and interest thereon on October 26, 2007.

Short-term debt as of December 31, 2007 consisted of a principal balance of $1,720, net of a remaining debt discount of $350. The outstanding debt included $1,170, net of a remaining debt discount of $247, due to a related party. The debt originated from three financing arrangements. One in November 2006, the second in March and April of 2007 and the third financing occurred in June 2007.

In November 2006, the Company borrowed $600, of which $450 was borrowed from Michael Engmann and the remaining $150 from an unrelated third party.  The notes were due in May 2008, incurred interest at 15% and included warrants to purchase 3,111 shares of Common Stock (exercisable for three years commencing June 2007 with an exercise price of $0.51). The Company ascribed a fair value of $336 to warrants, which was recorded as a debt discount in the balance sheet. The fair value ascribed to the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.68%; expected life of 3 years; expected volatility of 54%; and expected dividend yield of 0%.

In June 2008, the $600 principal balance and unpaid interest thereon related to the November 2006 debt financing was exchanged and refinanced pursuant to the Credit Agreement (see Note 4).

In March and April 2007, the Company borrowed $720, of which $320 was borrowed from Michael Engmann and the remaining $400 from unrelated third parties. The notes were due in August 2008, incurred interest at 15%, and included warrants to purchase 3,474 shares of Common Stock (exercisable for three years commencing June 2007 with an exercise price of $0.51).  The Company ascribed a fair value of $359 to the warrants, which was recorded as a debt discount in the balance sheet.  The fair value ascribed to the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.68%; expected life of 3 years; expected volatility of 45%; and expected dividend yield of 0%.

In June 2007, the Company borrowed $400 under a financing agreement with Michael Engmann.  The notes were due in December 2008, incurred interest at 15%, and included warrants to purchase 3,168 shares of Common Stock (exercisable for three years commencing June 2007 with an exercise price of $0.25). The Company ascribed a fair value of $187 to the warrants, which was recorded as a debt discount in the balance sheet. The fair value ascribed to the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.90%; expected life of 3 years; expected volatility of 69%; and expected dividend yield of 0%.

In June 2008, outstanding principal balances of $995 plus accrued and unpaid interest of $45 relating to the 2007 financing arrangements, were exchanged for Series A-1 Preferred Shares (the “Preferred Shares”) (see Note 5). The remaining $125 of outstanding principal and unpaid interest thereon related to the 2007 financings were repaid in September 2008.

The warrants to acquire 9,6535,556 shares of the Company’s Common Stock issuedat an exercise price of $0.0225 per share. The company ascribed a value of $13 to the warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.39, expected life of three years, expected volatility of 202%, and a dividend yield of 0. The warrant value was recorded as parta discount to notes payable and as a derivative liability. The discount will be amortized over the life of the above referenced financings remain outstanding. These warrants arenote. The warrant is exercisable until June 2010. Allfor a period of three years. As of December 31, 2011, the fair value of the shares underlying the warrants discussed above were registered with the Company’s Form S-1/A, whichwarrant was declared effective December 28, 2007.
F-16
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
4. Long-term debt:$13.

On June 5, 2008, the Company effected a financing transaction under which the Company raised capital through the issuance of new secured indebtedness and equity, and restructured a portion of the Company’s existing short-term debt (collectively, the “Financing Transaction”). Certain parties to the Financing Transactions (Phoenix Venture Fund LLC and Michael Engmann) had a pre-existing relationship with the Company and, with respect to such parties, the Financing Transaction may be considered a related party transaction.

Under the Financing Transaction,September 20, 2011, the Company entered into a CreditNote and Warrant Purchase Agreement (the “Credit“September 2011 Purchase Agreement”) and a Pledge and Security Agreement (the “Pledge Agreement”), each dated as of June 5, 2008, with Phoenix Venture FundBanner Holdings, LLC (“Phoenix”(the “September 2011 Investor”), Michael Engmann and Ronald Goodman (collectivelyan entity affiliated with Phoenix, the “Creditors,” and each individually a “Creditor”).Company’s largest stockholder.  Under the terms of the CreditSeptember 2011 Purchase Agreement, the Company receivedissued an aggregateunsecured convertible promissory note in the amount of $3,000 and refinanced $638 of existing indebtedness and accrued interest on that indebtedness (individually, a “Loan” and collectively,$500 (the “September 2011 Note”) to the “Loans”).September 2011 Investor.  The Loans, which are represented by secured promissory notes (each a “Note” and collectively, the “Notes”), bearSeptember 2011 Note bears interest at eight percent (8%)the rate of 10% per annum, which,and has a maturity date of September 20, 2012.  The September 2011 Note is also convertible at the option of the September 2011 Investor into securities sold in the Company’s next equity financing with gross proceeds to the Company mayin excess of $1.  In connection with the issuance of the September 2011 Note, the Company also issued to the September 2011 Investor a warrant to purchase 5,556 shares of the Company’s Common Stock at an exercise price of $0.0225 per share. On September 20, 2011 the company ascribed a value of $7 to the warrants using a modified Black Scholes pricing model with the following assumptions; risk free interest rate of 0.42, expected life of three years, expected volatility of 204%, and a dividend yield of 0. The warrant value was recorded as a discount to notes payable and as a derivative liability. The discount will be paid in cash or in kindamortized over the life of the note. The warrant is exercisable for a period of three years. As of December 31, 2011, the fair value of the warrant was $13.

On September 2, 2011 the Company borrowed an aggregate of $100 from Phoenix and mature June 5, 2010.  an employee of the Company and issued unsecured demand notes to each. These notes are due on demand and bear interest at the rate of 10% per annum.

The Company used a portion of the net proceeds from the Loans to pay the Company’s existing indebtedness and accrued interest on that indebtedness that was not exchanged for preferred stock as described below, and may use the remaining proceedstransaction for working capital and general corporate purposes, in each case in the ordinary course of business; and to pay fees and expenses in connection with the Financing Transaction, which were approximately $452. Additionally, a portion of the proceeds of the Loans were used to repay a short term loan from a Company employee in the amount of $125, plus accrued interest, that was made prior to and in anticipation of the closing of the Financing Transaction.  Under the terms of the Pledge Agreement, the Company and its subsidiary, CIC Acquisition Corp., granted the Creditors a first priority security interest in and lien upon all of the assets of the Company and CIC Acquisition Corp.

Under the terms of the Credit Agreement and in partial consideration for the Creditors’ respective Loans made pursuant to the terms of the Credit Agreement as described above, the Company issued to each Creditor a warrant to purchase up to the number of shares of the Company’s Common Stock obtained by dividing the amount of such Creditor’s Loan by 0.14 (each a “Warrant” and collectively, the ‘Warrants”).  A total of 25,982 shares of the Company’s Common Stock may be issued upon exercise of the Warrants.  The Warrants are exercisable beginning June 30, 2008 until their expiration on June 30, 2011. The Warrants have an exercise price of fourteen cents ($0.14) per share. Additional Warrants may be issued if the Company exercises its option to make interest payments on the Loans in kind.  The Company ascribed the relative fair value of $1,231 to the warrants, which is recorded as a discount to “Long-term debt” in the balance sheet.  The fair value of the warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 2.73%; expected life of 3 years; expected volatility of 82.3%; and expected dividend yield of 0%.

In connection with the closing of the Financing Transaction, the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008, (See Note 7).

The offer and sale of the Warrants and Preferred Shares as detailed above, including the Common Stock issuable upon exercise or conversion thereof, was made in reliance upon exemptions from registration afforded by Section 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation D, as promulgated by the Securities and Exchange Commission under the Securities Act and under exemptions from registration available under applicable state securities laws.purposes.

Interest expense associated with the Company’s short and long-term debt for the year ended December 31, 20082011 and 20072010, was $1,137$27 and $1,253,$2,039, respectively, of which $973$24 and $440$1,974 was related party expense. Amortization of debt discount and deferred financing costs included in interest expense for the year ended December 31, 20082011 and 20072010, was $849$3 and $969,$1,776, respectively, of which $730$3 and $305$1,719 was related party expense.

F- 17
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)


7. Short-term notes payable (continued):

Material commitments:

The Company had the following commitments at December 31, 2011:

  Payments due by period 
Contractual obligations Total  2012  2013  2014  2015 2016 Thereafter 
Short-term note payable (1)  1,100   1,100   −   −   −    − 

1.  The Company issued demand notes in September 2011 in the amount of $100, and convertible notes in September and December 2011 in the amount of $500 and $500, respectively. The notes bear interest at the rate of 10% per annum. The Convertible notes are due in September and December 2012.

8. Other accrued liabilities:

The Company records liabilities based on reasonable estimates for expenses, or payables that are known or estimated including deposits, taxes, rents and services.  The estimates are for current liabilities that should be extinguished within one year.

The Company had the following other accrued liabilities at December 31, 2011:

  2011  2010 
Accrued professional services $96  $100 
Rents  19   19 
Interest  21   – 
Other  107   40 
Total $243  $159 

9.  Derivative liability:

The Company has determined that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. The Company applies a two-step model in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception.

The Company determined that certain warrants related to the Company’s financings and the embedded conversion feature on the Series A-1 Preferred Stock required liability classification because of certain provisions that may have resulted in an adjustment to the number of shares upon settlement and an adjustment to their exercise or conversion.  The fair value of the embedded conversion feature for the Series A-1 Preferred Stock at December 31, 2011 and December 31, 2010 was insignificant.

In August 2010 and December 2010, the Company issued 8,048 shares of Series B Preferred Stock and 2,211 shares of Series C Preferred Stock, respectively. At December 31, 2010, the Company determined that the embedded conversion feature on these shares required liability classification due to the impact the anti-dilution provisions could have had on the number of shares issuable upon conversion. The fair value of the embedded conversion feature on the Series B Preferred Stock at December 31, 2010, was approximately $130, and the fair value of the embedded conversion feature on the Series C Preferred Stock was approximately $179. On March 31, 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock and its Certificate of Designation for its Series C Preferred Stock by amending the anti-dilution. As a result of these amendments, the Series B Preferred Stock and Series C Preferred Stock no longer required liability classification.  On the date of
 
F-17F- 18
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)

 
5.
9.  Derivative liability (continued):

these amendments, the Company revalued the conversion features on these shares, resulting in a loss of $47, and reclassified the derivative value to equity, resulting in a decrease in the derivative liability of $363.

In March 2011, the Company issued fee warrants to related parties to purchase 1,778 shares of common stock in connection with a private placement sale of 800 shares of Series C Preferred Stock and recorded a derivative liability of $4 as of March 30, 2011, and the fair market value of the derivative liability at December 31, 2011, was $4.

In August 2011, the Company issued 1,000 warrants as part of consulting agreements and recorded a derivative liability. The Company ascribed a value of $1 to the warrants using a modified Black Scholes pricing model with the following assumptions: risk free interest rate of 7%, expected life of three years, expected volatility of 190%, and a dividend yield of 0. The warrants have a three year life and expire on August 11, 2014. As of December 31, 2011, the fair value of the warrants was $1.

The fair value of the outstanding derivative liabilities at December 31, 2011, and December 31, 2010, was $281 and $499, respectively.

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

 December 31, 2011December 31, 2010
Expected term0.5 to 2.90 years0.5 to 4.00 years
Volatility204.7% - 315.2%141.5% - 184.1%
Risk-free interest rate0.06 – 0.36%0.29 – 1.02%
Dividend yield0%0%

Fair value measurements:

Assets and liabilities measured at fair value as of December 31, 2011, are as follows:

  
Value at
December 31, 2011
  Quoted prices in active markets  Significant other observable inputs  Significant unobservable inputs 
     (Level 1)  (Level 2)  (Level 3) 
Derivative liability $281  $−  $−  $281 

Changes in the fair value of the level 3 derivative liability for the year ended December 31, 2011, are as follows:

  Derivative Liability 
Balance at January 1, 2011 $499 
Additional liabilities recorded related to warrants issued for services  32 
Reclassification of conversion feature on the Series B and Series C Preferred Stock to equity  (363)
Loss on derivative liability  113 
Balance at December 31, 2011 $281 


F- 19
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)



10.  Stockholders' equity:

Common stock options:

TheAt December 31, 2011, the Company has onetwo stock-based employee compensation plan, (the "1999 Option Plan")plans, the 2009 Stock Compensation Plan, and the 2011 Stock Compensation Plan. The Company may also grants options to employees, directors and consultants outside of the 1999 Option2009 and 2011 Stock Compensation Plans under individual plans.

The 2009 Stock Compensation Plan was adopted by the Board of Directors on July 1, 2009. Non-qualified options under Individual Plans.the 2009 Stock Compensation Plan can be granted to employees, officers, and consultants of the Company. There were 7,000 shares of Common Stock authorized for issuance under the 2009 Stock Compensation Plan. The options have a term of three to seven years and can vest immediately or quarterly over three years, as defined. As of December 31, 2011, 2,379 plan options were outstanding, and 2,158 plan options were exercisable with a weighted average exercise price of $0.0995 per share.

The 2011 Stock Compensation Plan was adopted by the Board of Directors on January 28, 2011. Incentive and non-qualified options under the 2011 Stock Compensation Plan can be granted to employees, officers, and consultants of the Company. There were 50,000 shares of Common Stock authorized for issuance under the 2011 Stock Compensation Plan. The options have a term seven years and can vest immediately or quarterly over three years, as defined. As of December 31, 2011, 44,571 plan options were outstanding, and 8,011 plan options were exercisable with a weighted average exercise price of $0.0546 per share.

In April 1999, the Company adopted and, in June 1999, the shareholdersstockholders approved, the 1999 Option Plan. Incentive and non-qualified options under the 1999 Option Plan may bewere granted to employees, officers, and consultants of the Company. The 1999 Option Plan expired in April 2009 (options outstanding under that plan are not affected by its expiration). There arewere 4,000 shares of Common Stock authorized for issuance under the 1999 Option Plan. The options havehad a seven year lifeterm and generally vestvested quarterly over three years. At December 31, 2008, there were 275 shares available for future grants. As of December 31, 2008, 3,5442011, 924 plan options were outstanding and 3,263924 plan options were exercisable with a weighted average exercise price of $0.57$0.558 per share.

The Company has issued options under Individual Plansindividual plans to its employees and directors. The Individual Planindividual plan options generally vest over four years or pro rata quarterly over three years. Non-plan options are generally exercisable over a period not to exceed seven years. As of December 31, 2008, 4,0642011, 3,479 non-plan options were outstanding and 2,7803,446 non-plan options were exercisable with a weighted average exercise price of $0.55$0.463 per share.

Share-based payment:

The Company accounts for stock based compensation in accordance with SFAS No. 123(R), “Share-Based Payment”. SFAS No. 123(R) requires the recognition of the cost of employee services received in exchange for an award of equity instrument in the financial statements and is measured based on the grant date fair value of the award. The Company also applies the guidance from Staff Accounting Bulletin No. 107 (SAB 107) in its application of SFAS 123(R).

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.  Thegrant date fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model. SFAS No. 123(R) requires forfeitures of share-based payment awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated average forfeiture rates for the year ended December 31, 2008, was approximately 23.42%.

SFAS No. 123(R) requires the cash flows from tax benefits for deductions in excess of the compensation costs recognized for share-based payment awards towould be classified as financing cash flows.  Due to the Company’s loss position, there werewas no such tax benefits during the year ended December 31, 2008.2011.

F- 20
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)


10.  Stockholders' equity (continued):

Common stock options (continued):

Valuation and Expense Information under SFAS No. 123(R):Information:

The weighted-average fair value of stock-based compensation is based on the single option valuation approach.  Forfeitures are estimated and it is assumed no dividends will be declared.  The estimated fair value of stock-based compensation awards to employees is amortized using the accrual method over the vesting period of the options. The fair value calculations are based on the following assumptions:
Year Ended
December 31, 2008
Year Ended
December 31, 2007
Risk free interest rate2.64% - 5.11%3.32% - 5.11%
Expected life (years)3.58 – 6.883.21 – 3.77
Expected volatility91.99% - 99.98%93.68% - 98.25%
Expected dividendsNoneNone
F-18
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
5. Stockholders' equity (continued):

Share-based payment (continued):
  
Year Ended
December 31, 2011
Year Ended
December 31, 2010
Risk free interest rate 0.62% - 5.11%1.12% - 5.11%
Expected life (years) 2.82 – 7.002.82 – 7.00
Expected volatility 93.63% - 147.4%91.99% - 147.4%
Expected dividends NoneNone
Estimated average forfeiture rate 11%24%

The following table summarizes the allocation of stock-based compensation expense related to stock option grants under SFAS No. 123(R) for the years ended December 31, 20082011 and 2007.2010. There were no stock option exercises during the yearsyear ended December 31, 2008 and 2007.2011 or 2010.

 
Year Ended
December 31, 2008
  
Year Ended
December 31, 2007
  
Year Ended
December 31, 2011
  
Year Ended
December 31, 2010
 
Research and development $37  $18  $347  $21 
Sales and marketing 33  66   161   52 
General and administrative 75  13   204   20 
Director options  16   33   92  
─
 
Stock-based compensation expense included in operating expenses $161  $130  $804  $93 

The summary activity under the Company’s 2009 Stock Compensation Plan, the 1999 Option Plan and Individual Plans is as follows:

 December 31, 2008  December 31, 2007  December 31, 2011 December 31, 2010 
 
 
Shares
  
Weighted
Average
Exercise Price
 Aggregate Intrinsic Value Weighted Average Remaining Contractual Life  
 
Shares
  
Weighted
Average
Exercise Price
 Aggregate Intrinsic Value Weighted Average Remaining Contractual Life  
 
Shares
  
Weighted
Average
Exercise Price
 Aggregate Intrinsic Value Weighted Average Remaining Contractual Life  
 
Shares
  
Weighted
Average
Exercise Price
 Aggregate Intrinsic Value Weighted Average Remaining Contractual Life 
                                        
Outstanding at beginning of period 6,036  $0.59      5,893  $0.69       10,028  $0.33       10,231  $0.34     
Granted 1,975  $0.15      870  $0.21       44,971  $0.05       2,550  $0.08     
Exercised −  $0.00      −  $000       –  $0.00      
─
  $−     
Forfeited  (403) $0.47       (727) $0.98     
Forfeited/ Cancelled
  (3,645) $0.27       (2,753) $0.15     
                                                
Outstanding at period end
  7,608  $0.48    4.4   6,036  $0.59    4.7   51,353  $0.09    3.2   10,028  $0.33    3.2 
                                                    
Options vested and exercisable at period end  6,043  $0.56    3.9   5,364  $0.62    4.5   14,539  $0.19    2.6   8,309  $0.38    2.6 
                                                    
Weighted average grant-date fair value of options granted during the period $0.10           $0.14           $0.05           $0.08          

F-19F- 21
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)

 
5.
10.  Stockholders' equity (continued):

Common stock options (continued):

Share-based payment (continued):Valuation and Expense Information:

The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2008:2011:

  Options Outstanding  Options Exercisable    Options Outstanding  Options Exercisable 
Range of Exercise Prices
Range of Exercise Prices
  
 
 
Options
Outstanding
  Weighted Average Remaining Contractual Life(in years)  
Weighted Average Exercise Price
  
 
 
Number Outstanding
  
Weighted Average Exercise Price
 
Range of Exercise Prices
  
 
 
Options
Outstanding
  Weighted Average Remaining Contractual Life(in years)  Weighted Average Exercise Price  
 
 
Number Outstanding
  Weighted Average Exercise Price 
$
0.00 – $0.50  4,179  5.3  $0.24  2,614  $0.29 0.00 – $0.50   49,390   5.8  $0.15   12,576  $0.10 
$0.51 – $1.00  3,341  3.3  $0.73  3,341  $0.73   0.51 – $1.00    1,900   1.0  $0.72   1,900  $0.75 
$1.01 – $2.00  73  3.2  $1.66  73  $1.66    1.01 – $2.00      63   0.4  $1.66   63  $1.75 
$2.01 – $2.99  −  0.0  $0.00  −  $0.00 
$3.00 – $7.50   15   1.5  $3.56   15  $3.56 
    7,608           6,043         51,353           14,539     

A summary of the status of the Company’s nonvestednon-vested shares as of December 31, 20082011 is as follows:

Nonvested Shares
 
 
Shares
  
Weighted Average
Grant-Date
Fair Value
 
Nonvested at January 1, 2007
  672  $0.22 
Non-vested Shares
 
 
Shares
  
Weighted Average
Grant-Date
Fair Value
 
Non-vested at January 1, 2011
  1,719  $0.06 
Granted  1,975  $0.10   44,971  $0.05 
Forfeited  (403) $0.12   (3,645) $0.18 
Vested  (679) $0.16   (6,231) $0.20 
Nonvested  1,565  $0.30 
Non-vested  36,814  $0.05 

As of December 31, 2008,2011, there was $105$578 of total unrecognized compensation cost related to nonvestednon-vested share-based compensation arrangements.  The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.73.0 years.

Share-based payment (continued):

The Company expects to make additional option grants in future years. The options issued to employees and directors will be subject to the same provisions of FASB Statement 123(R),outlined above, which may have a material impact on the Company’s financial operations.statements.

As of December 31, 2008, 7,608 shares of common stock were reserved for issuance upon exercise of outstanding options.

Warrants:

At December 31, 2008, 41,1312011, 51,353 shares of Common Stock were reserved for issuance upon exercise of outstanding warrants.options.

Preferred Shares:

Series A-1

In connection with the closing of the June 2008 Financing Transaction, (see Note 4, Long-term debt), the Company also entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) each dated as of June 5, 2008.  Under the Purchase Agreement, in exchange for the cancellation of $995 in principal amount and $45 of interest accrued thereon of the Company’s thenaggregate outstanding aggregate balance of $2,071 in existing debt and interest accrued thereon through May 31, 2008, the Company issued to the holders of such debt an aggregate of 1,040 Preferred Shares.

F- 22
 
F-20
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)


5. 10.  Stockholders' equity (continued):

Preferred Shares (continued):Shares:

Series A-1

1,040 shares of the Company’s Series A Cumulative Convertible Preferred Stock, which shares were subsequently exchanged in October 2008 for an equivalent number of shares of Series A-1 Cumulative Convertible Preferred Stock (the “Series A-1 Preferred Shares”).  During 2009, 146 Series A-1 Preferred Shares were converted into 1,005 shares of the Company’s Common Stock. As of December 31, 2011, there are 880 Series A-1 Preferred Shares outstanding.  The Series A-1 Preferred Shares carry an eight percent (8%) annual dividend, payable quarterly in arrears in cash or in additional Series A-1 Preferred Shares have a liquidation preference over Common Stock of one dollar ($1.00) per share and are convertible into shares of Common Stock at a ratiothe conversion price of onefourteen cents ($0.14) per share.  If the outstanding Series A-1 Preferred Share for 7.1429Shares are converted in their entirety, the Company would issue 6,286 shares of Common Stock. The Series A-1 Preferred Shares may voteare convertible any time after June 30, 2008. As of December 31, 2011, the Company has accrued dividends on matters put tothe preferred shares of $237.

Series B

On August 5, 2010, the Company completed the conversion of all of the Company’s stockholders onoutstanding indebtedness into shares of Series B Participating Convertible Preferred Stock (the “Series B Preferred Stock”) in accordance with an as-converted-to-Common-Stock basis. Subjectexecuted Exchange Agreement entered into with Phoenix Venture Fund LLC and certain other holders of the Company’s indebtedness and sold approximately 1.44 million shares of Series B Preferred Stock in accordance with an executed Series B Preferred Stock Purchase Agreement (the “Purchase Agreement”). The Company issued approximately 6,608 shares of Series B Preferred Stock in exchange for all of the Company’s outstanding secured indebtedness and issued 1,440 shares of Series B Preferred Stock for proceeds of $1,440, net of expenses of $437. In addition, the Company paid approximately $143 in expenses to further adjustmenta third party in connection with the financing. The expenses were recorded as provideda charge to additional paid in capital. The proceeds are to be used for working capital and general corporate purposes, in each case in the Certificateordinary course of Designations, Powers, Preferencesbusiness, and Rights ofto pay fees and expenses associated with the Preferred Shares,Recapitalization.

The shares of Series B Preferred are presentlyStock carry a ten percent (10%) annual dividend, payable quarterly in arrears in cash or in additional shares of Series B Preferred Stock, and have a liquidation preference of $1.50 per share over shares of Series A-1 Preferred Stock and of Common Stock. The shares of Series B Preferred Stock were initially convertible into shares of Common Stock at a ratioconversion price of one sharesix cents ($0.06) per share. However, as a result of the Company’s issuance of the Series C Participating Convertible Preferred for 7.1429Stock (the “Series C Preferred Stock”) at a price less than the then current Series B Preferred Stock conversion price of $0.06, the conversion price of the Series B Preferred Stock was adjusted downwards to $0.0433 per share. This adjustment results in an increase in the number of shares of Common Stock. If allStock that would be issued upon conversion of the outstanding shares of Series A-1B Preferred were converted intoStock. The shares of Series B Preferred Stock are convertible at any time.
The conversion feature was determined to be a derivative liability in the amount of $2,000 of which $1,498 was attributable to related parties and $502 to the other creditors. Due to the decline in the price of the Company’s Common Stock and the issuance of the Series C Preferred Stock, the fair value of the embedded conversion feature on the Series B Preferred Stock was reduced to approximately $130 at December 31, 2010. In March 2011, the aboveCompany amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock, revising among other things the terms of conversion, ratio,thereby eliminating the accounting requirement to classify the conversion feature on the Series B Preferred Stock as a derivative liability. The Company issued 870 shares of Series B Preferred Stock in payment of dividends for the year ended December 31, 2011. If the outstanding Series B Preferred Stock is converted in its entirety at December 31, 2011, the Company would issue 7,429213,636 shares of Common Stock. As of

F- 23
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)


10.  Stockholders' equity (continued):

Series C

On December 31, 2008, holders2010, the Company completed the sale of Preferred Shares have converted an aggregate of 1842,211 shares of Series C Preferred Shares into 1,317Stock through a Purchase Agreement with Phoenix Venture Fund LLC and certain other investors for proceeds of $2,211 net of approximately $422 in expenses to third parties in connection with the financing. The Series C Preferred Stock is senior to the outstanding Series B Preferred Stock and Series A-1 Preferred Stock and all shares of Common Stock.Stock with respect to dividend rights and rights on liquidation, winding-up and dissolution in accordance with its purchase agreement. The preferred stock transaction resulted in a beneficial conversion feature of $371, of which $273 is attributable to Michael Engmann and $98 to the other creditors. The beneficial conversion feature wasexpenses were recorded as a charge to loss applicable to holders of Common Stock for the quarter ended June 30, 2008. The Company has accrued dividends on the shares of Series A-1 Preferred of $47. As of December 31, 2008, $29 of the accrued dividends have beenadditional paid in cash.

Undercapital. The proceeds are to be used for working capital and general corporate purposes, in each case in the termsordinary course of the Registration Rights Agreement, the Company was obligated to preparebusiness, and file with the Securities and Exchange Commission (the “Commission”) a registration statement under the Securities Act of 1933, as amended (the Securities Act”) covering the resale of the shares of Common Stock issued upon conversion of the shares of Preferred Stock and exercise of the Warrants as described above. The Company must also use its reasonable best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date that is two years after its Effective Date or until the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144. The Registration Rights Agreement provided for certain registration rights whereby the Company would have incurred penalties if a registration statement was not filed or declared effective by the SEC on a timely basis. The Company filed the required registration statement on August 18, 2008, which was declared effective on October 10, 2008. The Company was obligated to pay the costsfees and expenses of such registration.

In December 2008, three preferred shareholders converted an aggregate of 184 preferred shares into 1,317 shares of the Company’s Common Stock.

Private placement of Common Stock:

On August 24, 2007, the Company entered into a Securities Purchase and Registration Rights Agreement (the “August 2007 Purchase Agreement”) with Phoenix Venture Fund LLC (the “Purchaser”). On September 14, 2007, the transactions closed and the Company issued to the Purchaser 21,500 shares of the Company’s Common Stock (the “Shares”) at a price per share of approximately $0.14, for an aggregate purchase price of $3,000. An advisory fee of $250 was paid to the managing member of the Purchaser for services rendered in connection with the sale of the Shares and $61 to the Purchaser’s legal counsel for services associated with the financing transactions.  In addition the Company paid $87 in professional fees associated with the sale of the shares. Series C Preferred Stock.

The Company expectsSeries C Preferred Stock carries a ten percent (10%) annual dividend, payable quarterly in arrears in cash or in additional Series C Preferred Stock. In preference to use the proceedsall other shares of the saleCompany’s capital stock, The Series C Preferred Stock will receive liquidating distributions in the amount of $1.50 per share plus any accrued dividends. The Series C Preferred Stock is convertible into Common Stock at any time at the option of the Sharesholder at an initial conversion price of $0.0225 per share, subject to adjustment for paymentstock dividends, splits, combinations and similar events and, with certain exceptions, the issuance of outstanding indebtedness and additional working capital. The Company was permitted undersecurities at a purchase price less than the termsthen current conversion price of the Purchase AgreementSeries C Preferred Stock. The Series C Preferred Stock is convertible any time after December 31, 2010. On December 31, 2010, the Series C Preferred Stock’s conversion feature was determined to use upbe a derivative liability in the amount of $179, of which $113 is attributable to $1,400related parties and $66 to the other holders.

On March 31, 2011, the Company amended its Amended and Restated Certificate of Designation for its Series B Preferred Stock and its Certificate of Designation for its Series C Preferred Stock to modify the anti-dilution provisions. Under the amendments, in the event additional stock is issued at a price lower than the conversion price then in effect, the new conversion price of the net proceedsSeries B Preferred Stock or Series C Preferred Stock cannot be (A) lower than the average closing market price for the Common Stock for the twenty (20) trading days prior to repay outstanding indebtedness. Under the closing date of a transaction requiring an adjustment in the conversion price (the “Market Price”) or (B) greater than the conversion price then in effect. The amendments were approved by the Company’s Board of Directors and the necessary majorities of the Company’s Series A-1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, and were filed with the Delaware Secretary of State on March 31, 2011. As a result of the amendments, the Company reclassified $362 from derivative liabilities to equity on March 31, 2011 (Note 10), and recorded a beneficial conversion feature of $64 related to the intrinsic value of the conversion feature of the dividends issued on March 31, 2011.

On March 6, 2011, and again on August 2007 Purchase Agreement, so long as11, 2011, the Purchaser holdsCompany issued 97.5 and 97.5 shares of its Series C Preferred Stock and warrants to purchase 4,333 and 4,333 shares of Common Stock, respectively, to its President as part of a professional service agreement. On August 10, 2011, the Company issued 36 shares of its Series C Preferred Stock and warrants to purchase 1,624 shares of Common Stock to its former President as part of a separation agreement. The shares of Series C Preferred Stock and warrants are convertible into Common Stock under the same terms discussed above. The Company recorded a beneficial conversion feature of $134 related to the intrinsic value of conversion feature of the shares of Series C Preferred Stock discussed above.

On March 31, 2011, the Company representing at least fifty-percentsold an additional 800 shares of Series C Preferred Stock for proceeds of $800, net of approximately $121 in expenses, of which $50 went to SG Phoenix, LLC in payment of an administrative fee and $71 in expenses to third parties in connection with the financing.  The Company recorded a beneficial conversion feature of $800 related to the intrinsic value of the Shares purchased pursuant to the August 2007 Purchase Agreement and at least five-percentconversion feature of the shares of Series C Preferred Stock. As of December 31, 2011, there were 3,547 shares of Series C Preferred Stock outstanding. The Company issued 305 shares of Series C Preferred Stock in payment of dividends for the year ended December 31, 2011. If the outstanding capital stockSeries C Preferred Stock is converted in its entirety, the Company would issue 157,644 shares of Common Stock.

After receipt of the Company,liquidation preference, the managing membershares of Series C Preferred Stock and Series B Preferred Stock will participate pro rata on an as-converted basis with the Purchaser is entitled to a rightshares of first offer to exclusively provide debt or equity financing to the Company prior to the Company’s pursuing debt or equity financing from another party, subject to certain conditions and exclusions. Additionally, provided the Purchaser meets the foregoing ownership requirements, the managing member of the Purchaser is permitted to designate up to two non-voting observers to attend meetings of the Company’s board of directors and, for a period of twenty-four months following the date a registration statementCommon Stock in any remaining liquidation
 
F-21F-24
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)thousands except per share amounts)

 
5. 10. Stockholders' equity (continued):

Private placementSeries C (continued)

proceeds (after payment of the liquidation preference on the Series C Preferred Stock, Series B Preferred Stock and Series A-1 Preferred Stock).

Warrants:

Series C Warrants

Each investor received a warrant to purchase a number of shares of Common Stock (continued):

pertainingequal to the Shares is first declared effectiveaggregate number of shares of Series C Preferred Stock purchased by the Securities and Exchange Commission (the “Commission”), the Company is prohibited from selling or otherwise disposing of material properties, assets or rights of the Company without the consent of the managing member of the Purchaser.

The Company was obligated under the Purchase Agreement to use its best efforts to prepare and file with the Commission a registration statement covering the resale of the securities sold pursuant to the Purchase Agreement. The registration statement will provide for an offering to be made on a continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). The Company filed the registration statement on November 15, 2007, and the registration statement was declared effective on December 28, 2007. The Company must use its best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date that all shares purchased under the Purchase Agreement have been sold or can be sold publicly under Rule 144(k). The Company was obligated to pay the costs and expenses of such registration, which were approximately $147.

The August 2007 Purchase Agreement provides for certain registration rights whereby the Company could be required to make liquidated damages payments if a registration statement is not filed or declared effectiveinvestor divided by the SEC within a specified timeframe and if after being declared effective the registration statement is not kept effective. The Company filed the registration statement within the required timeframe and it is currently effective.  Should the Company fail to keep the registration statement effective, it will upon that event and each thirty days thereafter until the registration statement is again effective, be subject to making payments to the Purchaser in an amount equal to one and a half percent (1.5%) of the greater of: (i) the weighted average market price of the Shares during such 30-day period, or (ii) the market price of the Shares five (5) days after the closing (the “Closing Market Price”), until the registration statement is again declared effective, or as to any Shares, until such Shares can be sold in a single transaction pursuant to SEC Rule144; provided, however, that the liquidated damages amount under this provision shall be paid in cash and the total amount of payments shall not exceed, when aggregated with all such payments, ten percent (10%) of the Closing Market Price. The Company has not recorded a liability0.0225. Each warrant issued in connection with the liquidated damages provisionsSeries C Financing has an exercise price of $0.0225 per share and is exercisable in whole or in part, including by means of cashless exercise, for a period of three years from the date of issuance.

In August 2011, an investor exercised on a cashless basis, 3,333 warrants in exchange for 1,629 shares of the August 2007 Purchase Agreement because it believes that it is not probable that an event will occur which will triggerCompany’s common stock. In December 2011, a liquidated damages payment underrelated party exercised, on a cashless basis, 8,889 warrants in exchange for 5,239 shares of the agreement.Company’s Common Stock.

6. If the outstanding Series C Warrants are executed for cash in their entirety, the Company would issue 132,601 shares of Common Stock.

Other Warrants

At December 31, 2011, 182,644 shares of Common Stock were reserved for issuance upon exercise of outstanding warrants. Including the 135,201 shares of Common Stock issuable upon exercise of the Series C Warrants described above.

A summary of the warrants issued are as follows:

  December 31, 2011  December 31, 2010 
  
 
 
Warrants
  Weighted Average Exercise Price  
 
 
Warrants
  Weighted Average Exercise Price 
Outstanding at beginning of period  135,131  $0.0274   6,482  $0.0433 
Issued  59,735  $0.0064   128,649  $0.0266 
Exercised  (12,222) $0.0225   −   − 
Forfeited  −   −   −   − 
Expired  −   −   −   − 
Outstanding at end of period  182,644  $0.0261   135,131  $0.0274 
Exercisable at end of period  182,644  $0.0261   135,131  $0.0274 

F- 25
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)


10.  Stockholders' equity (continued):

Other Warrants

A summary of the status of the warrants outstanding as of December 31, 2011 is as follows:

   December 31, 2011 
Number of Warrants  Weighted Average Remaining Life  Weighted Average Exercise Price per share  Shares Exercisable  Weighted Average Exercise price 
              
 31,974   1.31  $0.0433   31,974  $0.0433 
 150,670   2.11  $0.0225   150,670  $0.0225 
 182,644   1.97  $0.0261   182,644  $0.0261 

Restricted Share Grants

As part of the Recapitalization in 2010, the Company issued restricted shares to four employees in exchange for reductions in their respective salaries payable in cash. The number of shares issued was calculated based on the amount of the annual salary reduction divided by $0.06 per share. Fifty percent of the shares vested on December 31, 2010 and the remaining 50% vested on June 30, 2011.


11.  Commitments:

Lease commitments:

The Company currently leases its principal facilities (the "Principal Offices) in Redwood Shores, California, pursuant to a sublease that expires in 2011. The Joint Venture leases space on a month to month basis in Nanjing, China.2016. In addition to monthly rent, the U.S. facilities are subject to additional rental payments for utilities and other costs above the base amount. Facilities rent expense was approximately $260,$271, and $333,$281, in 20082011 and 2007,2010, respectively. (See Note 1, Material Commitments).

7.
12.  Income taxes:

As of December 31, 2008,2011, the Company had federal net operating loss carryforwardscarry-forwards available to reduce taxable income of approximately $67,485.$64,491.  The net operating loss carryforwardscarry-forwards expire between 20092011 and 2027.2030. The Company also had federal research and investment tax credit carryforwardscarry-forwards of approximately $315$128 that expire at various dates through 2012. The Company also hadhas state net operating loss carryforwardscarry-forwards available to reduce taxable income of approximately $22,818.$31,200. The net operating loss carryforwardscarry-forwards expire between 20102013 through 2020.
F-22
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands)
7. Income taxes (continued):2030.

Deferred tax assets and liabilities at December 31, consist of the following:
 2008  2007  2011  2010 
Deferred tax assets:            
Net operating loss carryforwards $24,959  $25,572 
Credit carryforwards 315  315 
Net operating loss carry-forwards $25,796  $25,373 
Credit carry-forwards  128   165 
Deferred income 117  172   514   456 
Intangibles  839   1,175 
Other, net  170   317   120   210 
                
Total deferred tax assets  25,561   26,376   27,397   27,379 
                
Valuation allowance  (25,561)  (26,376)  (27,397)  (27,379)
                
Net deferred tax assets $-  $-  $-  $- 


F- 26
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)


12.Income taxes (continued):

Income tax (benefit)benefit differs from the expected statutory rate as follows:

  2008  2007 
Expected federal income tax benefit $(1,267) $(1,157)
State income tax benefit  (330)  (204)
Expired net operating loss  1,911   1,512 
Change in valuation allowance and other  (314)  (151)
     Income tax expense (benefit) $–  $– 
  2011  2010 
Expected federal income tax benefit $(1,150) $(1,414)
State income tax benefit  (299)  (250)
Other  (248)  (548)
Change in valuation allowance  1,697   2,212 
     Income tax benefit $–  $– 

A full valuation allowance has been established for the Company's net deferred tax assets since the realization of such assets through the generation of future taxable income is uncertain.

Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net operating losses and tax credit carryforwardscarry-forwards may be impaired or limited in certain circumstances. These circumstances include, but are not limited to, a cumulative stock ownership change of greater than 50%, as defined, over a three-year period. During 1997, the Company experienced stock ownership changes which could limit the utilization of its net operating loss and research and investment tax credit carryforwardscarry-forwards in future periods. In addition, a study of recent transactions has not been performedpreformed to determine whether any further limitations might apply.

8. 13.Employee benefit plans:

The Company sponsors a 401(k) defined contribution plan covering all employees meeting certain eligibility requirements. Contributions made by the Company are determined annually by the Board of Directors. To date, the Company has made no contributions to this plan.

9. 14.Subsequent event:event

OnIn December 2010, the Company received a demand letter from counsel from a Company stockholder alleging that Phoenix Venture Fund, LLC (“PVF”) and its affiliates may be liable to the Company for short swing profits in connection with the cashless exercise of certain warrants issued to PVF by the Company in connection with the Credit Agreement (the “Warrants”), pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended (the “1934 Act).

In January 27, 20092011 the Company received a preferred shareholder converted 20 preferred shares into 143letter from PVF concluding that the issuance (and/or modification) and cashless exercise of the Warrants were exempt transactions from Section 16(b) pursuant to Rules 16b-3(d) and (e) on the basis that PVF was a director by deputation since its co-managing members were Company board observers and thus functional directors.

The Company’s Board of Directors convened a Special Committee of Independent Directors (the “Special Committee”) to investigate the allegations and the Special Committee retained special independent counsel. After analyzing the transactions identified in the demand letter, and receiving advice from the special independent counsel, the Special Committee concluded that PVF and its affiliates were deemed to be directors for purposes of Rule 16(b) under the 1934 Act as a result of their activities with the Company during the time period 2007 to 2009. The full Board ratified the Special Committee’s conclusion that the transactions were exempt from Section 16(b), and the Company informed the stockholder that CIC would not commence litigation to recover the profit referred to in the demand letter.

In April 2011, despite the Special Committee’s finding, the stockholder commenced a civil action against PVF, an affiliate of PVF and the two co-manager of the managing member of PVF for alleged violations of Section 16(b) and included the Company as a nominal defendant. In December 2011, in order to avoid further significant costs and

F- 27
Communication Intelligence Corporation
Notes to Consolidated Financial Statements
(In thousands except per share amounts)


14.Subsequent event (continued)

expenses, and without admitting any liability or wrongdoing or the lack of merit in any defense, PVF and its affiliates and the Company settled the action, and, in January 2012, PVF paid the Company $500 in the aggregate, consisting of $175 in cash and 6.5 million shares of the Company’s Common Stock.Stock valued at $325.

In January 2012, PVF requested indemnification from the Company for all costs and expenses incurred and amounts paid in settlement, net of any insurance payments received pursuant to the Company’s 1986 By-laws, as amended (the ”By-laws”), and the June 5, 2008, Credit Agreement, as amended on May 28, 2009 (the Credit Agreement”).

In January 2012, the Board requested that the Special Committee review PVF's request for indemnification and make a recommendation to the Board. The Special Committee retained special independent counsel and, after receiving advice from such counsel, negotiated with PVF and settled the claim to avoid further costs and expenses, subject to the approval of the Board.

In February 2012, the Board approved the settlement. Pursuant to the terms of the settlement, the Company issued 277,957 shares of its Series C Preferred Stock to PVF and the Company and PVF exchanged mutual releases relating to the indemnification claim and the litigation. The shares of Series C Preferred Stock issued in connection with the settlement had an approximate of $417.

The Company has combined the PVF settlement with the cost of indemnification, and has recorded a net charge to expense of $71 at December 31, 2011.


 
 
 
 
 
 
 
 
 
 
 
 
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