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

FORM 10-Q
 
(Mark one)
þ[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended JuneSeptember 30, 2015.

o[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                                                to                      

Commission File Number 0-26392
 
CICERO INC.
(Exact name of registrant as specified in its charter)
 
Delaware11-2920559
(State or other jurisdiction of incorporation or organization)(I.R.S Employer Identification Number)


8000 Regency Parkway, Suite 542, Cary, North Carolina27518
(Address of principal executive offices)(Zip Code)

(919) 380-5000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES þ xNO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer oAccelerated Filer oNon accelerated filer oSmaller reporting company xþ

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 þx No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).
Yes o Yes o No þx
 
180,353,377192,253,005 shares of common stock, $.001 par value, were outstanding as of August 10,November 11, 2015.
 
 
 
 
 
 
Cicero Inc.
Index
 
PART I.     Financial Information
Page
Number
PART I. Financial Information3
  
Item 1.     Condensed  Consolidated Financial Statements
3
 
  
Condensed Consolidated Balance Sheets as of JuneSeptember 30, 2015 (unaudited) and December 31, 2014
3
  
Condensed Consolidated Statements of Operations for the three and sixnine months ended JuneSeptember 30, 2015 and 2014 (unaudited)
4
  
Condensed Consolidated Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2015 and 2014 (unaudited)
5
  
Condensed Consolidated Statement of Stockholders’ Deficit as of JuneSeptember 30, 2015 (unaudited)
6
  
Notes to Condensed Consolidated Financial Statements (unaudited)
7
  
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
1413
  
Item 3.     Quantitative and Qualitative Disclosures about Market Risk
2119
  
Item 4.   Controls and Procedures
2119
  
PART II.    Other Information
2220
  
Item 1.    Legal Proceedings
2220
  
Item 1A. Risk Factors
2220
  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
2220
  
Item 3. Defaults Upon Senior Securities
2220
  
Item 4. Mine Safety Disclosures
2220
  
Item 5. Other Information
2220
  
Item 6. Exhibits
2220
  
SIGNATURE2321
 
 
2
 
 
Part I.  Financial Information
Item 1.  Condensed Consolidated Financial Statements

CICERO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

 
June 30,
2015
  
December 31,
2014
  
September 30,
2015
  
December 31,
2014
 
ASSETS (unaudited)     (unaudited)    
Current assets:            
Cash and cash equivalents $57  $20  $1,047  $20 
Trade accounts receivable, net  106   1,035   132   1,035 
Prepaid expenses and other current assets  231   237   230   237 
Total current assets
  394   1,292   1,409   1,292 
Property and equipment, net  15   14   12   14 
Goodwill (Note 2)  1,658   1,658   1,658   1,658 
Total assets
 $2,067  $2,964  $3,079  $2,964 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
Liabilities:                
Short-term debt (Note 3) $787  $8,492  $1,452  $8,492 
Accounts payable  1,154   2,012   1,441   2,012 
Accrued expenses:                
Salaries, wages, and related items
  1,545   1,400   1,584   1,400 
Accrued interest
  1,953   1,674   1,993   1,674 
Other
  662   573   639   573 
Deferred revenue  1,041   1,399   750   1,399 
Total current liabilities  7,142   15,550   7,859   15,550 
Long-term debt (Note 3)  2,157   --   2,132   -- 
Total liabilities
  9,299   15,550   9,991   15,550 
        
Commitments and Contingencies (Note 7 and 8)        
Commitments and Contingencies (Note 8 and 9)
        
                
Stockholders' deficit:                
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized                
Series A-1 – 1,499.6 shares issued and outstanding at June 30, 2015 and December 31, 2014  --   -- 
Series B - 10,400 shares issued and outstanding at June 30, 2015 and at December 31, 2014  --   -- 
Common stock, $0.001 par value, 215,000,000 shares authorized, 155,353,377 issued and outstanding at June 30, 2015 and 85,848,237 issued and outstanding at December 31, 2014
  155   86 
Series A-1 – No shares issued and outstanding at September 30, 2015 and 1,499.6 shares issued and outstanding at December 31, 2014  --   -- 
Series B - No shares issued and outstanding at September 30, 2015 and 10,400 shares issued and outstanding at December 31, 2014
   --    -- 
Common stock, $0.001 par value, 600,000,000 shares authorized, 192,253,005 issued and outstanding at September 30, 2015 and 85,848,237 issued and outstanding at December 31, 2014 (Note 5)
  192   86 
Additional paid-in capital
  244,088   237,206   244,178   237,206 
Accumulated deficit
  (251,475)  (249,878)  (251,282)  (249,878)
Total stockholders' deficit
  (7,232)  (12,586)  (6,912)  (12,586)
Total liabilities and stockholders' deficit
 $2,067  $2,964  $3,079  $2,964 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
Page 3
 
 
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
  
Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 2015  2014  2015  2014  2015  2014  2015  2014 
Revenue:                        
Software
 $119  $180  $205  $296  $140  $12  $345  $308 
Maintenance
  368   367   735   728   372   367   1,106   1,095 
Services
  22   6   28   68   30   4   59   72 
Total operating revenue
  509   553   968   1,092   542   383   1,510   1,475 
                                
Cost of revenue                                
Software
  --   --   --   --   --   --   --   -- 
Maintenance
  27   27   56   54   26   24   82   78 
Services
  141   163   289   386   145   141   434   526 
Total cost of revenue
  168   190   345   440   171   165   516   604 
                                
Gross margin  341   363   623   652   371   218   994   871 
                                
Operating expenses:                                
Sales and marketing
  338   300   619   559   215   231   833   790 
Research and product development
  408   305   749   577   359   325   1,108   902 
General and administrative
  216   234   507   536   419   258   928   796 
Total operating expenses
  962   839   1,875   1,672   993   814   2,869   2,488 
Loss from operations  (621)  (476)  (1,252)  (1,020)  (622)  (596)  (1,875)  (1,617)
                                
Other income/(expense):                                
Interest expense
  (49)  (176)  (283)  (355)  (43)  (197)  (325)  (551)
Total other income/(expense)  (49)  (176)  (283)  (355)  (43)  (197)  (325)  (551)
                                
                                
Net loss  (670)  (652)  (1,535)  (1,375)  (665)  (793)  (2,200)  (2,168)
8% preferred stock Series B dividend  31   31   62   62   24   32   86   94 
Deemed dividend applicable to warrant purchase  882   --   882   -- 
Net loss applicable to common stockholders $(701) $(683) $(1,597) $(1,437) $(1,571) $(825) $(3,168) $(2,262)
Loss per share applicable to common stockholders:                                
Basic and Diluted $(0.00) $(0.01) $(0.01) $(0.02) $(0.01) $(0.01) $(0.02) $(0.03)
Weighted average shares outstanding:                                
Basic and Diluted  150,007   85,806   118,105   85,806   178,735   85,806   138,537   85,806 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
Page 4
 

CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Six Months Ended
June 30,
  
Nine Months Ended
September 30,
 
 2015  2014  2015  2014 
Cash flows from operating activities:            
Net loss $(1,535) $(1,375) $(2,200) $(2,168)
Adjustments to reconcile net loss to net cash used by operating activities:                
Depreciation and amortization  7   11   10   16 
Stock compensation expense  --   44   9   65 
Changes in assets and liabilities:                
Trade accounts receivable  929   1,047   903   1,015 
Prepaid expenses and other current assets  6   36   7   14 
Accounts payable and accrued expenses  436   295   755   629 
Deferred revenue  (358)  (365)  (649)  (660)
Net cash used by operating activities  (515)  (307)  (1,165)  (1,089)
                
Cash flows from investing activities:                
Purchases of equipment  (8)  (5)  (8)  (7)
Net cash used by investing activities  (8)  (5)  (8)  (7)
                
Cash flows from financing activities:                
Issuance of common stock  1,000   -- 
Borrowings under debt  575   748   1,410   1,536 
Repayments of debt  (15)  (391)  (210)  (394)
Net cash generated by financing activities  560   357   2,200   1,142 
Net increase in cash  37   45   1,027   46 
Cash:                
Beginning of period  20   5   20   5 
End of period $57  $50  $1,047  $51 
 
Non-Cash Investing and Financing Activities:

During April 2015, the Company converted $6,951 of debt to related party lender by issuing 69,505,140 shares of its common stock.
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
Page 5
 
 
CICERO INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(in thousands, except share amounts)
 
 Common Stock  Preferred Stock  
Additional
Paid-in
  Accumulated     Common Stock  Preferred Stock  
Additional
Paid-in
Capital
  
Accumulated
(Deficit)
  
Total
 
 Shares   Amount  Shares   Amount  
Capital
  
(Deficit)
  Total  Shares  Amount  Shares  Amount       
Balance at December 31, 2014  85,848,237  $86   11,899   --  $237,206  $(249,878) $(12,586)  85,848,237  $86   11,899   --  $237,206  $(249,878) $(12,586)
Dividend for preferred B stock                      (62)  (62)                      (86)  (86)
Options issued as compensation                  9       9 
Conversion of preferred stock to common stock  11,899,628   12   (11,899)      (12)      -- 
Common stock and warrant issuance  25,000,000   25           93   882   1,000 
Issuance of stock for payment of debt  69,505,140   69           6,882       6,951   69,505,140   69           6,882       6,951 
Net loss                      (1,535)  (1,535)                      (2,200)  (2,200)
Balance at June 30, 2015 (unaudited)  155,353,377  $155   11,899   --  $244,088  $(251,475) $(7,232)
Balance at September 30, 2015 (unaudited)
  192,253,005  $192   --   --  $244,178  $(251,282) $(6,912)
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
Page 6
 

CICERO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)

NOTE 1.   INTERIM FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements for the three and sixnine months ended JuneSeptember 30, 2015 and 2014 are unaudited, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").  Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations.  Accordingly, these interim financial statements should be read in conjunction with the audited condensed financial statements and notes thereto contained in Cicero Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 31, 2015.  The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for other interim periods or for the full fiscal year.  In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of the interim results of operations.  All such adjustments are of a normal, recurring nature.

The year-end condensed balance sheet data was derived from audited consolidated financial statements in accordance with the rules and regulations of the SEC, but does not include all disclosures required for financial statements prepared in accordance with accounting principles generally accepted in the United States of America.

The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All of the Company's subsidiaries are wholly owned for the periods presented.

Liquidity

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has incurred an operating loss of approximately $3,927,000 for the year ended December 31, 2014, and has a history of operating losses. For the sixnine months ended JuneSeptember 30, 2015, the Company incurred losses of $1,535,000$2,200,000 and had a working capital deficiency of $6,748,000$6,450,000 as of JuneSeptember 30, 2015.  Management believes that its repositioned strategy of leading with its Discovery product to use analytics to measure and then manage how work happens will shorten the sales cycle and allow for value based selling to our customers and prospects.  The Company anticipates success in this regard based upon current discussions with active customers and prospects.  The Company has borrowed $575,000$1,410,000 and $2,296,000 in 2015 and 2014, respectively.  The Company has also repaid approximately $15,000$210,000 and $391,000$394,000 of debt in 2015 and 2014, respectively. Additionally, in April 2015, the Company’s Chairman, Mr. Launny Steffens, converted $6,950,514 of debt into 69,505,140 shares of common stock of the Company.  In July 2015, the Company completed a sale of 25 million shares of its common stock and warrants to purchase up to 205,277,778 shares of its common stock to a group of nine investors, led by the Company’s Chairman of the Board, John (Launny) Steffens and the Privet group,Group, LLC, for $1,000,000.  Additionally,Should the investors can exercise the warrants, forwhich have exercise prices ranging from $0.04 to $0.05 per share, the Company would receive an additional 205,277,778 of the Company’s common shares for an additional $9,000,000.$9,000,000 in proceeds. The warrants expire in three years.  Should the Company be unable to secure customer contracts that will drive sufficient cash flow to sustain operations, the Company will be forced to seek additional capital in the form of debt or equity financing; however, there can be no assurance that such debt or equity financing will be available on terms acceptable to the Company or at all. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Use of Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual amounts could differ from these estimates.  Significant estimates include the recoverability of long-lived assets, valuation and recoverability of goodwill, stock based compensation, deferred taxes and related valuation allowances and valuation of equity instruments.
 
7
Financial Instruments:
 
The carrying amount of the Company’s financial instruments, representing accounts receivable, accounts payable and short-term debt approximate their fair value due to their short term nature.

The fair value and carrying amount of long-term debt were as follows:

June 30,
2015
December 31,
2014
Fair Value2,061,495--
Carrying Value2,157,000--
  
September 30,
2015
  
December 31,
2014
 
Fair Value $2,048,710   -- 
Carrying Value $2,132,457   -- 

Valuations for long-term debt are determined based on borrowing rates currently available to the Company for loans with similar terms and maturities. These loans have been determined to be Level 3 within the fair value hierarchy and use a discounted cash flow model to determine their valuation. There have been no changes to the valuation technique.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 718 “Compensation – Stock Compensation” which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards under ASC 718.  The Company issued 25,000525,000 options at an exercise price of $0.05 in the first sixnine months of 2015.  The Company recognized stock-based compensation expense of $38$9,801 and $513$10,352 for the three and sixnine months ended JuneSeptember 30, 2015 in connection with outstanding options.  The Company has $15,255 in unrecognized stock-based compensation expense as of September 30, 2015.

The following table sets forth certain information as of JuneSeptember 30, 2015 about shares of the Company’s common stock, par value $.001 (the “Common Stock”), outstanding and available for issuance under the Company’s existing equity compensation plans: the Cicero Inc. 2007 Employee Stock Option Plan and the Outside Director Stock Option Plan.  The Company’s stockholders approved all of the Company’s stock-based compensation plans.

 Shares  Shares 
Outstanding on December 31, 2014  3,150,110   3,150,110 
Granted  25,000   525,000 
Exercised  --   -- 
Forfeited  (18,000)  (18,000)
Outstanding on June 30, 2015  3,157,110 
Outstanding on September 30, 2015  3,657,110 
        
Weighted average exercise price of outstanding options $0.24  $0.21 
Aggregate Intrinsic Value $385  $299 
Shares available for future grants on June 30, 2015  1,344,090 
Shares available for future grants on September 30, 2015  844,090 
        
Weighted average of remaining contractual life  4.23   4.78 

 
Page 8
 
 
Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.  The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.  The Company is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.

In May 2014, the FASB issued a new accounting standard update on revenue recognition from contracts with customers. The new guidance will replace most current U.S. GAAP guidance on this topic and eliminate most industry-specific guidance.  According to the new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the consolidated financial statements and related disclosures.
 
NOTE 2.   GOODWILL AND OTHER INTANGIBLE ASSETS
 
The Company accounts for goodwill in accordance with ASC Topic 350 “Intangibles – Goodwill and Other Intangible Assets” which requires that goodwill and intangible assets with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
 
Goodwill includes the excess of the purchase price over the fair value of net assets acquired of $2,832,000 in connection with the SOAdesk LLC acquisition in fiscal 2010.  The Codification requires that goodwill be tested for impairment at the reporting unit level. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value.
 
Pursuant to recent authoritative accounting guidance, the Company elects to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless the Company determines that it is more likely than not that its fair value is less than its carrying amount. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test is performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step is measuring the fair value of assets and liabilities of the reporting unit to determine the implied fair value of goodwill, which is compared with the carrying amount of that goodwill. Any excess of the goodwill carrying value over the respective implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value.

 
Page 9
 
 
Upon completion of the fiscal year 2014 test, the goodwill of our SOAdesk LLC acquisition was determined to be impaired. The impairment was the result of slower than projected growth in revenue. This goodwill impairment charge of $1,174,000 also represented our accumulated goodwill impairment as of December 31, 2014.  Through JuneSeptember 30, 2015, no indicator of impairment of goodwill has been identified.

 Goodwill  Goodwill 
Balance at December 31, 2014 $1,658,000  $1,658,000 
Additions  --   -- 
Impairment  --   -- 
Balance at June 30, 2015 $1,658,000 
Balance at September 30, 2015 $1,658,000 
 
NOTE 3.   DEBT

Debt and notes payable to related party consist of the following (in thousands):

 
June 30,
2015
  
December 31,
2014
  September 30, 2015  December 31, 2014 
Notes payable – asset purchase agreement (a) $1,543  $700  $1,518  $700 
Notes payable – related party (b)  315   6,706 
Notes payable – related parties (b)  980   6,706 
Notes payable (c)  1,086   1,086   1,086   1,086 
Total Debt  2,944   8,492   3,584   8,492 
Less current portion  (787)  (8,492)  (1,452)  (8,492)
Total long term debt $2,157  $--  $2,132  $-- 

(a)  In January 2010, the Company entered into an unsecured convertible promissory note with SOAdesk for $700,000 with an annual interest rate of 5% as per the Asset Purchase Agreement.  The note was originally scheduled to mature on March 31, 2010 but was subsequently amended and through a series of amendments, the maturity date was extended to June 30, 2015.  In June 2015, the note was amended and the maturity date was extended to June 30, 2017.  In July 2015, the Company paid $25,000 toward the principal amount of the note.  At December 31, 2014, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $175,000 in interest. At JuneSeptember 30, 2015, the Company was indebted to SOAdesk in the amount of $700,000$675,000 in principal and $192,000$200,000 in interest.

In June 2015, the note was amended so that the note is convertible into shares of the Company’s common stock at the rate of one share for every $0.15 of principal and interest due under the note from the original conversion to shares of Series B Convertible Preferred Stock at the rate of one share per every $150 of principal and interest due under the note.  The note was further amended that should the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) exceed $1,000,000 in either 12 month period beginning June 30, 2015 and June 30, 2016, respectively, then the Company shall repay, in cash, a portion of the outstanding principal of the note at the rate of $0.50 for each $1.00 that exceeds the EBITDA threshold.  The note is convertible at the holder’s option at any time or at maturity.

As part of the Asset Purchase Agreement, the Company was obligated to make additional payments of up to $2,410,000 over an 18 month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets. Per the Asset Purchase Agreement, the earn-out was payable fifty percent in cash and fifty percent in common stock of the Company at the rate of one share for every $0.15 earn-out payable.  The Company had recorded $842,606 in its accounts payable as of December 31, 2014.  In June 2015, the Company entered into a promissory note with SOAdesk for fifty percent of the earn-out payable ($421,303) to SOAdesk.  The maturity date of the note is December 31, 2015 with an annual interest rate of 10%.  At September 30, 2015, the Company was indebted to SOAdesk for $421,303 in principal and approximately $11,000 in interest.  The Company also entered into a convertible promissory note with SOAdesk for fifty percent of the earn-out payable ($421,303) with a maturity date of June 30, 2017 that was non-interest bearing.  The note is only convertible into
Page 10
shares of the Company’s common stock at the rate of one share for every $0.15 of principal due under the note. The note is convertible at the holder’s option at any time or at maturity.
  At September 30, 2015 the Company was indebted to SOAdesk for $421,303 in principal.
 
10
(b)
During 2013, the Company entered into a short-term note payable with Antony Castagno, the Chief Technology Officer, for various working capital needs. The note was non-interest bearing and unsecured. In March 2014, Mr. Castagno amended the note extending the termmaturity date until December 31, 2014 and the note bore interest at 10%. At December 31, 2014, the Company was indebted to Mr. Castagno in the approximate amount of $15,000 and approximately $1,400 in interest. No interest was paid in fiscal 2014.  In March 2015, the debt of $15,000 and approximate interest of $1,700 was paid in full.

From time to time during 2012 through 2015, the Company entered into several short-term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year, are unsecured and mature on June 30, 2015. On April 8, 2015, the Company entered into an Exchange Agreement with Mr. Steffens to convert an aggregate of $6,950,514 of principal amount of debt into 69,505,140 shares of the Company’s common stock at a conversion rate of $0.10 per share.  Subsequent to the exchange agreement, the Company entered into several short term notes payable with Mr. Steffens for various working capital needs.  The notes arevary from non-interest bearing to interest rate of 12% with a maturity date of December 31, 2015.  The Company is obligated to repay the notes with the collection of any accounts receivables.  The Company had repaid $170,000 in principal as of September 30, 2015.  At December 31, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $6,691,000 of principal and $1,139,000 in interest.  At JuneSeptember 30, 2015, the Company was indebted to Mr. Steffens in the approximate amount of $315,000$980,000 of principal and $1,361,000$1,362,000 of interest.

(c)The Company has issued a series of short-term unsecured promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured.borrowings.  The notes in the aggregate principal amount of $50,000 of principal and $41,000 of interest and $50,000 of principal and $47,000$50,000 of interest, respectively, as of December 31, 2014 and JuneSeptember 30, 2015, bear interest between 10% and 36% per annum.

In March 2014, the Company reclassified to short-term debt its unsecured convertible promissory note with SOAdesk that was entered into as part of the Asset Purchase Agreement with SOAdesk for $1,000,000 with an annual interest rate of 5% and a maturity date of January 14, 2015.  In March 2012, SOAdesk elected to convert $300,000 of the outstanding note balance into 2,000,000 shares of the Company’s Common Stock.  Through a series of amendments, the note was amended to extend the maturity date until June 30, 2015.  In June 2015, the note was amended to extend the maturity date until June 30, 2017.  The note was further amended that should the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) exceed $1,000,000 in either 12 month period beginning June 30, 2015 and June 30, 2016, respectively, then the Company shall repay, in cash, a portion of the outstanding principal of the note at the rate of $0.50 for each $1.00 that exceeds the EBITDA threshold.  At December 31, 2014, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $207,000 in interest. At JuneSeptember 30, 2015, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $224,000$233,000 in interest.  The note is only convertible into shares of the Company’s common stock at the rate of one share for every $0.15 of principal and interest due under the note.

In June 2014, the Company reclassified to short-term debt its unsecured promissory note with a private lender that was originally entered into in March 2012 for $336,000 at an interest rate of 12% and a maturity date of March 31, 2013.  In March 2013, the maturity date of the note was extended to June 30, 2015.  In June 2015, the maturity date of the note was extended to June 30, 2017, a repayment schedule of quarterly principal and interest payments of $12,000 beginning on September 30, 2015 and two milestone payments of $125,000 on February 28, 2016 and 2017, respectively were added.  At December 31, 2014, the Company was indebted to this private lender in the amount of $336,000 in principal and $112,000 in interest. At JuneSeptember 30, 2015, the Company was indebted to this private lender in the amount of $336,000 in principal and $129,000$138,000 in interest.


 
Page 11
 

NOTE 4.   CONVERSION OF DEBT TO EQUITY

On April 8, 2015, the Company entered into agreement with John L. Steffens, the Chairman of the Board of Directors, to convert $6,950,514 of principal amount of debt into 69,505,140 common share of the Company’s common stock. (See Note 3)  The Company accounted for the transaction pursuant to Topic ASC 470-50, Modification and Extinguishment of Debt. Due to the fact that the transaction was with Mr. Steffens, the Company’s Chairman of the Board, the Company determined that this was not an arm’s length agreement and as such has recorded the entire transaction through additional paid in capital.

NOTE 5.   STOCKHOLDER’S EQUITY
 
At the Company’s Annual Meeting held on September 11, 2015, the shareholders approved the following proposals:
1.  An amendment to the Company’s Amended and Restated Certificate of Incorporation (“Charter”) to increase the number of authorized shares of common stock, par value $0.001 per share, from 215,000,000 to 600,000,000;
2.  An amendment to the Company’s Charter to allow stockholders to be able to act by written consent only while Privet Fund LP and its affiliates (a “Privet Stockholder”) own an aggregate of at least 30% of the Company’s outstanding voting stock;
3.  An amendment to the Company’s Charter to provide that only the Board of Directors may call a special meeting of stockholders of the Company;
4.  An amendment to the Company’s Charter to renounce the Company’s expectancy regarding certain corporate opportunities presented to a Privet Stockholder;
5.  An amendment to  the Company’s Charter to not be governed by the provisions of Section 203 of the Delaware General Corporation Law;
6.  An amendment to the Company’s Charter establishing the courts located within the State of Delaware as the exclusive forum for the adjudication of certain legal actions by the stockholders; and
7.  An amendment to the Company’s Charter to authorize 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share.
Also at the Annual Meeting, the holders of the Company’s Series A-1 Convertible Preferred Stock approved an amendment to Article IV (Conversion) of the Series A-1 Convertible Preferred Stock Certificate of Designations to the effect that the Series A-1 Preferred Stock will automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,000; and the holders of the Company’s Series B Convertible Preferred Stock approved an amendment to Section 6 (Automatic Conversion) of the Series B Convertible Preferred Stock Certificate of Designations to the effect that the Series B Preferred Stock will automatically convert into common stock upon the Company consummating an equity financing for at least $1,000,000.
On July 15, 2015, the Company entered into a Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with investors named therein, including Privet Fund LP (“Privet”), five directors of the Company, including John L. Steffens, Donald Peppers, Bruce D. Miller, Mark Landis, and Thomas Avery, and three other persons (collectively the nine investors are referred to as the “Purchasers”), pursuant to which the Purchasers severally purchased, in the aggregate, 25,000,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 205,277,778 shares of the Company’s common stock (“Warrants”) for an aggregate consideration of $1,000,000.
The Warrants are exercisable for a period of three years beginning at any time after 60 days of issuance. The exercise prices of the Warrants are as follows: (i) Warrants to purchase up to 87,500,000 shares of the Company’s common stock are exercisable at a price of $0.04 per share (“Tranche I”); (ii) Warrants to
Page 12
purchase up to 77,777,778 shares of the Company’s common stock are exercisable at a price of $0.045 per share (“Tranche II”); and (iii) Warrants to purchase up to 40,000,000 shares of the Company’s common stock are exercisable at a price of $0.05 per share (“Tranche III”). The Warrants are exercisable only for cash, as the exercise price paid is intended to increase the funding of the Company. All the exercise prices and numbers of shares are subject to customary anti-dilution provisions. The Warrants contain an exercise limitation provision that prohibits exercise of the Warrants to the extent that the exercise would result in the issuance of shares of the Company’s common stock that would cause either (a) the Company to be deemed an investment company under the Investment Company Act of 1940, as amended, or (b) an ownership change within the meaning of Internal Revenue Code Section 382 (and applicable U.S. Treasury regulations pursuant to such section) limiting the use of the Company’s net operating losses, carryforwards and other tax attributes.  The Company is obligated to reserve a sufficient number of shares of the Company’s common stock to enable the exercise of the Warrants.
The use of proceeds from this transaction are for general corporate purposes, as approved from time to time by the Board of Directors (the “Board”), which approval must include approval by a majority of the directors that have been designated by Privet.
In connection with the execution of the Purchase Agreement, the Company entered into an Investor Rights Agreement with Privet and Mr. Steffens (the “Investors”), granting the Investors the right to require the Company to file with the Securities and Exchange Commission up to four requested registration statements to register for resale the Investors’ shares of common stock purchased under the Purchase Agreement and purchased upon exercise of any of the Warrants (the “Registrable Securities”). The Investors also are granted unlimited “piggy-back” registration rights with respect to the Registrable Securities. The obligation to register the Registrable Securities continues until those securities have been sold or transferred by the holders of the registration rights or may be sold without limitation under Rule 144 or otherwise may be sold without restriction.
As a result of the transaction, (i) Privet became the record holder of approximately 10.1% of the outstanding and issued shares of common stock, and has the right to purchase under the Warrants an additional 149,852,778 shares of common stock which would correspondingly increase its percentage of ownership and it has the right to appoint directors, and (ii) Mr. Steffens decreased his current 65.5% ownership of the common stock of the Company to 59.3%, while retaining his current control position in the common stock.  Together Privet and Mr. Steffens, excluding the exercise of the Warrants, have a majority of the voting control of the Company.

NOTE 5.6.   INCOME TAXES

The Company accounts for income taxes in accordance with Financial Accounting Standards Board (“FASB”) guidance ASC 740 “Income Taxes”. The Company's effective tax rate differs from the statutory rate primarily due to the fact that no income tax benefit or expense was recorded for the first sixnine months of fiscal year 2015 or 2014.  As a result of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance.
 
Page 13
NOTE 6.7.   LOSS PER SHARE

Basic loss per share is computed based upon the weighted average number of common shares outstanding.  Diluted loss per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities.  Potentially dilutive securities outstanding during the periods presented include stock options, warrants, restricted stock, preferred stock and convertible debt.

The weighted average number of common shares is increased by the number of dilutive potential common shares issuable on the exercise of options less the number of common shares assumed to have been purchased with the proceeds from the exercise of the options pursuant to the treasury stock method; those purchases are assumed to have been made at the average price of the common stock during the respective period. Options or warrants to purchase shares of  common  stock  are  excluded  from  the calculation  of diluted  earnings per share when their  inclusion  would have an anti-dilutive effect on the calculation.  No options or warrants were included in the calculation of loss per share for the three and sixnine months ended JuneSeptember 30, 2015 and 2014.

NOTE 7.8.   COMMITMENTS

In June 2014, the Company entered into an amendment with its landlord and renewed its lease through 2018.   Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of JuneSeptember 30, 2015 consisted of only one lease as follows (in thousands):

 
Lease
Commitments
  
Lease
Commitments
 
      
2015 $51  $26 
2016  103   103 
2017  106   106 
2018  89   89 
 $349  $324 

 
12

NOTE 8.9.   CONTINGENCIES

The Company, from time to time, is involved in legal matters arising in the ordinary course of its business including matters involving proprietary technology. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.

Under the indemnification clause of the Company’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee. There were no claims against the Company as of JuneSeptember 30, 2015.
 
NOTE 9.10. SUBSEQUENT EVENTS
On July 15, 2015, the Company entered into a Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with investors named therein, including Privet Fund LP (“Privet”), five directors of the Company, including John L. Steffens, Donald Peppers, Bruce D. Miller, Mark Landis, and Thomas Avery, and three other persons (collectively the nine investors are referred to as the “Purchasers”), pursuant to which the Purchasers severally purchased, in the aggregate, 25,000,000 shares of the Company’s common stock and warrants to purchase up to an aggregate of 205,277,778 shares of the Company’s common stock (“Warrants”) for an aggregate consideration of $1,000,000.
The Warrants are exercisable for a period of three years beginning at any time after 60 days of issuance. The exercise prices of the Warrants are as follows: (i) Warrants to purchase up to 87,500,000 shares of the Company’s common stock are exercisable at a price of $0.04 per share (“Tranche I”); (ii) Warrants to purchase up to 77,777,778 shares of the Company’s common stock are exercisable at a price of $0.045 per share (“Tranche II”); and (iii) Warrants to purchase up to 40,000,000 shares of the Company’s common stock are exercisable at a price of $0.05 per share (“Tranche III”). The Warrants are exercisable only for cash, as the exercise price paid is intended to increase the funding of the Company. All the exercise prices and numbers of shares are subject to customary anti-dilution provisions. The Warrants contain an exercise limitation provision that prohibits exercise of the Warrants to the extent that the exercise would result in the issuance of shares of the Company’s common stock that would cause either (a) the Company to be deemed an investment company under the Investment Company Act of 1940, as amended, or (b) an ownership change within the meaning of Internal Revenue Code Section 382 (and applicable U.S. Treasury regulations pursuant to such section) limiting the use of the Company’s net operating losses, carryforwards and other tax attributes.  Because the Company does not have a sufficient number of authorized shares at this time to permit it to issue the shares upon exercise of the Warrants, the exercise of the Warrants is also subject to the Company obtaining authorization of the stockholders and filing an amendment to the certificate of incorporation to increase the number of authorized shares of the Company’s common stock within 60 days after the closing of the transaction. Once that increase in the capitalization has been completed, the Company is obligated to reserve a sufficient number of shares of the Company’s common stock to enable the exercise of the Warrants.
The use of proceeds from this transaction are for general corporate purposes, as approved from time to time by the Board of Directors (the “Board”), which approval must include approval by a majority of the directors that have been designated by Privet.
As a condition to closing, Mr. Steffens gave an option to the Company for it to require the conversion of outstanding interest due on previously converted notes in favor of Mr. Steffens at a conversion rate of $0.10 per share, which as of July 8, 2015, would have resulted in the issuance of 13,608,700 shares of the Company’s common stock if the Company option were exercised.
In connection with the execution of the Purchase Agreement, the Company entered into an Investor Rights Agreement with Privet and Mr. Steffens (the “Investors”), granting the Investors the right to require the Company to file with the Securities and Exchange Commission up to four requested registration statements to register for resale the Investors’ shares of common stock purchased under the Purchase Agreement and purchased upon exercise of any of the Warrants (the “Registrable Securities”). The Investors also are granted unlimited “piggy-back” registration rights with respect to the Registrable Securities. The obligation to register the Registrable Securities continues until those securities have been sold or transferred by the holders of the registration rights or may be sold without limitation under Rule 144 or otherwise may be sold without restriction.
As a result of the transaction, (i) Privet became the record holder of approximately 10.1% of the outstanding and issued shares of common stock, and has the right to purchase under the Warrants an additional 149,852,778 shares of common stock which would correspondingly increase its percentage of ownership and it has the right to appoint directors, and (ii) Mr. Steffens will decreased his current 65.5% ownership of the common stock of the Company to 59.3%, while retaining his current control position in the common stock.  Together Privet and Mr. Steffens, excluding the exercise of the Warrants, have a majority of the voting control of the Company.

In JulyOctober 2015, the Company entered into various notes payable totaling $290,000$315,000 with Mr. Steffens.  The notes bear interest between 0% and 12%.are non-interest bearing.  They are unsecured and mature on December 31, 2015. The Company is obligated to repay the notes with the collection of any accounts receivables.
 
 
13Page 14
 
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cicero, Inc. (the “Company”) provides desktop activity intelligence and improvement software that helps organizations isolate issues and automates employee tasks in the contact center and back office.  The Company provides an innovative and unique combination of application and process integration, automation, and desktop analytics capabilities, all without changes to the underlying applications or requiring costly development expenditures. The Company’s software collects activity and application performance data and tracks business objects across time and multiple users, as well as measures against defined expected business process flow, for either analysis or to feed a third-party application.  In addition to software solutions, the Company also provides technical support, training and consulting services as part of its commitment to providing customers with industry-leading solutions.

The Company focuses on the activity intelligence and customer experience management market with emphasis on desktop analytics and automation with its Cicero Discovery™ and Cicero Discovery Automation™ products, respectively.

Cicero Discovery delivers desktop analytics for the enterprise. Leveraging a suite of sensors, Cicero Discovery provides endpoint analytics by collecting activity data and mapping employee effort to highlight areas for improvement in business processes, compliance, training and application utilization. Cicero Discovery is a lightweight and configurable tool to collect activity and application performance data and track business objects across time and across multiple users as well as measure against a defined "expected" business process flow, either for analysis or to feed a third-party application. Cicero Discovery helps customers identify what is actually happening to an object through its life cycle and identify optimal business process and/or critical steps that are missing or holding up the process.

Cicero Discovery includes a Studio environment that enables business analysts and other non-IT staff to configure which applications, processes, and business objects to monitor and how the data should be stored for reporting or shared with another application.

Cicero Discovery Automation delivers all the features of the Cicero Discovery product as well as desktop automation for enterprise contact center and back office employees.  Leveraging existing IT investments Cicero Discovery Automation integrates applications, automates workflow, and provides control and adaptability at the end user desktop.

Cicero Discovery Solution includes a Studio environment that enables business analysts and other non-IT staff to configure and enhance desktop integrations, scripts, and workflows without any impact on underlying applications or business logic.

The Cicero Discovery and Cicero Discovery Automation provide Single Sign-On (SSO) and stay signed on capability.   The software maintains a secure credential store that facilitates single sign-on. Passwords can be reset but are non-retrievable. Stored interactions can be selectively encrypted based on the needs of the enterprise. All network communications are compressed and encrypted for transmission.

Cicero Discovery Automation enables the abstraction and separation of the department’s existing technical environment from its business logic. This physical separation empowers IT and the operations managers to build and change the business logic at their discretion. The abstraction capability converts the contact center and other departments into a flexible and agile operating environment that can rapidly and cost effectively respond to the dynamic needs of the enterprise.

The Company provides an intuitive configuration toolkit for each product, which simplifies the process of deploying solutions to the enterprise. The Company provides a unique approach that allows companies to organize functionality of their existing applications to better align them with tasks and operational processes. In addition, the Company’s software solutions can streamline end-user tasks and enable automatic information sharing among line-of-business, siloed applications and tools. It is ideal for deployment in organizations that need to provide access to enterprise applications on desktops to iteratively improve business performance, the user experience, and customer satisfaction. By integrating disparate applications,
automating business processes and delivering a better user experience, the Company’s products are ideal for the financial services, insurance, healthcare,  governmental and other industries requiring a cost-effective, proven business performance and user experience management solution for enterprise desktops.

14
In addition to software products, the Company also provides technical support, training and consulting services as part of its commitment to providing its customers industry-leading integration solutions.  The Company’s consulting team has in-depth experience in developing successful enterprise-class solutions as well as valuable insight into the business information needs of customers in the Global 5000.  We offer services around our integration software products.

This Quarterly Report on Form 10-Q contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, liquidity and capital resources and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause its actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.  These risk and uncertainties include, among others, the following:

●We develop new and unproven technology and products;

●We depend on an unproven strategy for ongoing revenue;

●OurAn inability to obtain sufficient capital either through internally generated cash or through the use of equity or debt offerings could impair the growth of our business.

●Economic conditions could adversely affect our revenue growth and cause us not to achieve desired revenue;

●The so-called “penny stock rule” could make it cumbersome for brokers and dealers to trade in our common stock, making the market for our common stock less liquid which could cause the price of our stock to decline;

●Because we cannot accurately predict the amount and timing of individual sales, our quarterly operating results may vary significantly, which could adversely impact our stock price;

●LossA loss of key personnel associated with Cicero Discovery and Cicero Discovery Automation development could adversely affect our business;

●Different competitive approaches or internally developed solutions to the same business problem could delay or prevent adoption of Cicero Discovery and Cicero Discovery Automation;

●Our ability to compete may be subject to factors outside our control;

●The markets for our products are characterized by rapidly changing technologies, evolving industry standards, and frequent new product introductions;

●We may face damage to the reputation of our software and a loss of revenue if our software products fail to perform as intended or contain significant defects;

●We may be unable to enforce or defend our ownership and use of proprietary and licensed technology; and

●Our business may be adversely impacted if we do not provide professional services to implement our solutions.
 
 
15Page 16
 
 
Reference should be made to such factors and all forward-looking statements are qualified in their entirety by the above cautionary statements.  Although we believe that these forward-looking statements are based upon reasonable assumptions, we can give no assurance that our goals will be achieved.  Given these uncertainties, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on these forward-looking statements.  These forward-looking statements are made as of the date of this quarterly report.  We assume no obligation to update or revise them or provide reasons why actual results may differ.
 
RESULTS OF OPERATIONS

The table below presents information for the three and sixnine months ended JuneSeptember 30, 2015 and 2014 (in thousands):
 
 Three months ended June 30,  Six months ended June 30,  Three months ended September 30,Nine months ended September 30, 
 2015  2014  2015  2014  2015  2014  2015  2014 
Total revenue $509  $553  $968  $1,092  $542  $383  $1,510  $1,475 
Total cost of revenue  168   190   345   440   171   165   516   604 
Gross margin  341   363   623   652   371   218   994   871 
Total operating expenses  962   839   1,875   1,672   993   814   2,869   2,488 
Income/(loss) from operations $(621) $(476) $(1,252) $(1,020)
Loss from operations $(622) $(596) $(1,875) $(1,617)

Revenue.  The Company has three categories of revenue: software products, maintenance, and services. Software products revenue is comprised primarily of fees from licensing the Company's proprietary software products. Maintenance revenue is comprised of fees for maintaining, supporting, and providing periodic upgrades to the Company's software products. Services revenue is comprised of fees for consulting and training services related to the Company's software products.

The Company's revenues vary from quarter to quarter, due to market conditions, the budgeting and purchasing cycles of customers and the effectiveness of the Company’s sales force.  The Company typically does not have any material backlog of unfilled software orders and product revenue in any quarter is substantially dependent upon orders received in that quarter. Because the Company's operating expenses are relatively fixed over the short term, variations in the timing of the recognition of revenue can cause significant variations in operating results from quarter to quarter.

We generally recognize revenue from software license fees when our obligations to the customer are fulfilled, which is typically upon delivery or installation.  Revenue related to software maintenance contracts is recognized ratably over the termsterm of the contracts.  Revenues from services are recognized on a time and materials basis as the services are performed and amounts due from customers are deemed collectible and non-refundable.  Within the revenue recognition rules pertaining to software arrangements, certain assumptions are made in determining whether the fee is fixed and determinable and whether collectability is probable.  Should our actual experience with respect to collections differ from our initial assessment, there could be adjustments to future results.

THREE MONTHS ENDED JUNESEPTEMBER 30, 2015 COMPARED WITH THE THREE MONTHS ENDED JUNESEPTEMBER 30, 2014.

Total Revenues.  Total revenues decreased $44,000,increased $159,000, or 8.0%41.5%, from $553,000$383,000 to $509,000,$542,000, for the three months ended JuneSeptember 30, 2015 as compared with the three months ended JuneSeptember 30, 2014. The decreaseincrease is due primarily to a decreasean increase in license and services revenue.

Total Cost of Revenue.  Total cost of revenue decreased $22,000,increased $6,000, or 11.6%3.6%, from $190,000$165,000 to $168,000$171,000 for the three months ended JuneSeptember 30, 2015, as compared with the three months ended JuneSeptember 30, 2014.  The decreaseincrease is primarily due to a decrease in headcount due to a reallocationthe timing of certain personnel and lower travel expenses.costs.

 
16Page 17
 

Total Gross Margin.  Gross margin was $341,000,$371,000, or 67.0%68.5%, for the three months ended JuneSeptember 30, 2015, as compared to the gross margin of $363,000,$218,000, or 65.6%56.9%, for the three months ended JuneSeptember 30, 2014. The decreaseincrease in gross margin is primarily due to the decreaseincrease in sales partially offset by the lower expenses from a reallocation of personnel.sales.

Total Operating Expenses.  Total operating expenses increased $123,000,$179,000, or 14.7%22.0%, from $839,000$814,000 to $962,000$993,000 for the three months ended JuneSeptember 30, 2015, as compared with the three months ended JuneSeptember 30, 2014.  The increase is primarily attributable to an increase in headcount and higher outsides consultinglegal and professional services partially offset by a decrease in travel expenses and a decreaseconjunction with the $1,000,000 equity financing in stock option expenses.the third quarter of 2015.

Software Products.
Software Product Revenue.  The Company earned $119,000$140,000 in software product revenue for the three months ended JuneSeptember 30, 2015 as compared to $180,000$12,000 in software revenue for the three months ended JuneSeptember 30, 2014, a decreasean increase of $61,000.$128,000.  The decreaseincrease is primarily due to the traditional long sales cycles within the enterprise software arena.additional licenses ordered from an existing customer and subscription revenue that began in late fiscal 2014.

Software Product Gross Margin.  The gross margin on software products for the three months ended JuneSeptember 30, 2015 and JuneSeptember 30, 2014 was 100.0%.

Maintenance.
Maintenance Revenue.  Maintenance revenue for the three months ended JuneSeptember 30, 2015 increased by approximately $1,000,$5,000, or 0.3%1.4%, from $367,000 to $368,000$372,000 as compared to the three months ended JuneSeptember 30, 2014.  The increase in maintenance revenue is primarily due to the new software product sales in the second half of fiscal 2014 and new sales in fiscal 2015.

Maintenance Gross Margin.  Gross margin on maintenance products for the three months ended JuneSeptember 30, 2015 was $341,000$346,000 or 92.7%93.0% compared with $340,000$343,000 or 92.6%93.5% for the three months ended JuneSeptember 30, 2014.  Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company’s software products.  The increase in gross margin is due to greater maintenance revenue.

Services.
Services Revenue.  Services revenue increased $16,000,$26,000, or 266.7%650.0%, from $6,000$4,000 to $22,000$30,000 for the three months ended JuneSeptember 30, 2015 as compared with the three months ended JuneSeptember 30, 2014. The increase in services revenues is primarily attributable to an increase in one significant paid consulting engagementengagements in the secondthird quarter of 2015.

Services Gross Margin Loss.  Services gross margin loss was $119,000$115,000 or 540.9%383.3% for the three months ended JuneSeptember 30, 2015 compared with gross margin loss of $157,000$137,000 or 2,616.7%3,425.0% for the three months ended JuneSeptember 30, 2014.  The decrease in gross margin loss was primarily attributable to a decrease in personnel costs and an increase in services revenue.

Operating Expenses:
Sales and Marketing.  Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses for the three months ended JuneSeptember 30, 2015 increaseddecreased by approximately $38,000,$16,000, or 12.7%6.9%, from $300,000$231,000 to $338,000$215,000 as compared with the three months ended JuneSeptember 30, 2014.  The increasedecrease is primarily attributable to higherlower trade show expenses.

Research and Development.  Research and product development expenses primarily include personnel costs for product developers and product documentation and related overhead. Research and development expense increased by approximately $103,000,$34,000, or 33.8%10.5%, from $305,000$325,000 to $408,000$359,000 for the three months ended JuneSeptember 30, 2015 as compared to the three months ended JuneSeptember 30, 2014.  The increase in costs for the quarter is primarily due to an increase in headcount from a reallocation of personnel and outside consulting expense for research development.stock option expense.

General and Administrative. General and administrative expenses consist of personnel costs for the legal, financial, human resources, and administrative staff, related overhead, and all non-allocable corporate costs
Page 18
of operating the Company. General and administrative expenses for the three months ended JuneSeptember 30, 2015 decreasedincreased by approximately $18,000,$161,000, or 7.7%62.4%, from $234,000$258,000 to $216,000$419,000 as compared to the three months ended JuneSeptember 30, 2014.  The decreaseincrease is primarily due to a decreasean increase in stock option expense.legal and professional service fees associated with the $1,000,000 equity financing in the third quarter of fiscal 2015.

17
Provision for Taxes. The Company’s effective income tax rate differs from the statutory rate primarily because an income tax expense/benefit was not recorded as a result of the losses in the secondthird quarter of 2015 and 2014. As a result of the Company’s recurring losses, the deferred tax assets have been fully offset by a valuation allowance.

Net Loss.  The Company recorded a net loss of $670,000$664,000 for the three months ended JuneSeptember 30, 2015 as compared to a net loss of $652,000$793,000 for the three months ended JuneSeptember 30, 2014. The increasedecrease in net loss is primarily due to the decreasesincrease in total revenue and increase in operating expenses partially offset by the decreaseincrease of cost of revenue.operating costs and interest expenses.

SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2015 COMPARED WITH THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2014.

Total Revenues.  Total revenues decreased $124,000,increased $35,000, or 11.4%2.4%, from $1,092,000$1,475,000 to $968,000,$1,510,000, for the sixnine months ended JuneSeptember 30, 2015 as compared with the sixnine months ended JuneSeptember 30, 2014. The decreaseincrease is due primarily due to a decreasean increase in software and consultingmaintenance revenue partially offset by an increasea decrease in maintenanceservices revenue.

Total Cost of Revenue.  Total cost of revenue decreased $95,000,$88,000, or 21.6%14.6%, from $440,000$604,000 to $345,000$516,000 for the sixnine months ended JuneSeptember 30, 2015, as compared with the sixnine months ended JuneSeptember 30, 2014.  The decrease is primarily due to a decrease in headcount and lower travel expenses.

Total Gross Margin.  Gross margin was $623,000,$994,000, or 64.4%65.8%, for the sixnine months ended JuneSeptember 30, 2015, as compared to the gross margin of $652,000,$871,000, or 59.7%59.1%, for the sixnine months ended JuneSeptember 30, 2014. The decreaseincrease in gross margin is primarily due to the decreaseincrease in software and consultingmaintenance revenue partially offset by the decrease in consulting revenue costs.  The impact of the lower consulting revenue was offset by the decrease in expenses from a decrease in headcount.

Total Operating Expenses.  Total operating expenses increased $203,000,$381,000, or 12.1%15.3%, from $1,672,000$2,488,000 to $1,875,000$2,869,000 for the sixnine months ended JuneSeptember 30, 2015, as compared with the sixnine months ended JuneSeptember 30, 2014.  The increase is primarily attributable to an increase in headcount reclass, and higher outside consulting expenses in research and an increasedevelopment, and higher legal and professional services expenses related to the $1,000,000 equity financing in trade show expense.the third quarter of fiscal 2015.

Software Products.
Software Product Revenue.  The Company earned $205,000$345,000 in software product revenue for the sixnine months ended JuneSeptember 30, 2015 as compared to $296,000$308,000 in software revenue for the sixnine months ended JuneSeptember 30, 2014, a decreasean increase of $91,000.$37,000.  The decreaseincrease is primarily due to the sale of one enterprise license during the first six months ofadditional licenses ordered from an existing customer and subscription revenue that began in late fiscal 2014.

Software Product Gross Margin.  The gross margin on software products for the sixnine months ended JuneSeptember 30, 2015 and JuneSeptember 30, 2014 was 100.0%, respectively.

Maintenance.
Maintenance Revenue.  Maintenance revenue for the sixnine months ended JuneSeptember 30, 2015 increased by approximately $7,000,$11,000, or 1.0%, from $728,000$1,095,000 to $735,000$1,106,000 as compared to the sixnine months ended JuneSeptember 30, 2014.  The increase in maintenance revenue is primarily due to new software sales in the second half of fiscal 2014 and the first sixnine months of 2015.

Maintenance Gross Margin.  Gross margin on maintenance products for the sixnine months ended JuneSeptember 30, 2015 was $679,000$1,024,000 or 92.4%92.6% compared with 674,000$1,017,000 or 92.6%92.9% for the sixnine months ended JuneSeptember 30, 2014.  Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company’s software products.  The decrease in gross margin percentage is due to the increase in personnel costs.
 
 
18Page 19
 
 
support of the Company’s software products.  The increase in gross margin is due to the increase in maintenance revenue.

Services.
Services Revenue.  Services revenue decreased $40,000,$13,000, or 58.8%18.1%, from $68,000$72,000 to $28,000$59,000 for the sixnine months ended JuneSeptember 30, 2015 as compared with the sixnine months ended JuneSeptember 30, 2014. The decrease in services revenues is primarily attributable to a decrease in paid consulting engagements in the first sixnine months of 2015.

Services Gross Margin Loss.  Services gross margin loss was $261,000$375,000 or 932.1%635.6% for the sixnine months ended JuneSeptember 30, 2015 compared with gross margin loss of $318,000$454,000 or 467.6%630.6% for the sixnine months ended JuneSeptember 30, 2014.  The increasedecrease in gross margin percentage loss was primarily attributable to a decrease in consulting revenueheadcount partially offset by a decrease in headcount.consulting revenue.

Operating Expenses:
Sales and Marketing.  Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses for the sixnine months ended JuneSeptember 30, 2015 increased by approximately $60,000,$43,000, or 10.7%5.4%, from $559,000$790,000 to $619,000$833,000 as compared with the sixnine months ended JuneSeptember 30, 2014.  The increase is primarily attributable to an increase in trade show expenses.

Research and Development.  Research and product development expenses primarily include personnel costs for product developers and product documentation and related overhead. Research and development expense increased by approximately $172,000,$206,000, or 29.8%22.8%, from $577,000$902,000 to $749,000$1,108,000 for the sixnine months ended JuneSeptember 30, 2015 as compared to the sixnine months ended JuneSeptember 30, 2014.  The increase in costs is primarily due to an increase in headcount and higher outside consulting expense.

General and Administrative. General and administrative expenses consist of personnel costs for the legal, financial, human resources, and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses for the sixnine months ended JuneSeptember 30, 2015 decreasedincreased by approximately $29,000,$132,000, or 5.4%16.6%, from $536,000$796,000 to $507,000$928,000 as compared to the sixnine months ended JuneSeptember 30, 2014.  The decreaseincrease is primarily attributable to an increase in legal and professional services expenses related to the $1,000,000 equity financing in the third quarter of fiscal 2015 partially offset by a decrease in stock option expense.

Provision for Taxes. The Company’s effective income tax rate differs from the statutory rate primarily because an income tax expense/benefit was not recorded as a result of the losses in the first sixnine months of 2015 and 2014. As a result of the Company’s recurring losses, the deferred tax assets have been fully offset by a valuation allowance.

Net Loss.  The Company recorded a net loss of $1,535,000$2,200,000 for the sixnine months ended JuneSeptember 30, 2015 as compared to a net loss of $1,375,000$2,168,000 for the sixnine months ended JuneSeptember 30, 2014. The increase in net loss is primarily due to the decreaseshigher operating expenses partially offset by an increase in revenue and higher operating expenses.lower cost of revenue.

LIQUIDITY AND CAPITAL RESOURCES

Cash

Cash and cash equivalents increased to $57,000$1,047,000 at JuneSeptember 30, 2015 from $20,000 at December 31, 2014, an increase of $37,000.$1,027,000.  The increase is primarily attributable to the equity issuance related to the $1,000,000 equity financing in July 2015, collections of accounts receivable from year end, revenue generated in the first sixnine months of 2015 and short term borrowings.

Net cash used by Operating Activities.  Cash used by operations for the sixnine months ended JuneSeptember 30, 2015 was $515,000$1,165,000 compared to cash used by operations of $307,000$1,089,000 for the sixnine months ended June
Page 20
September 30, 2014.  Cash used by operations for the sixnine months ended JuneSeptember 30, 2015 was primarily due to the loss from operations of $1,535,000$2,200,000 and a decrease in deferred revenue of $358,000$649,000 partially offset by an increase in depreciation of $7,000,$10,000, stock option expense of $9,000, a decrease in accounts receivable of $929,000 and$903,000, an increase in accounts payable and accrued expenses of $436,000$755,000 and a decrease in prepaid expenses of $6,000.
$7,000.

19
Net cash used in Investing Activities. The Company had purchases of equipment totaling $8,000 for the sixnine months ended JuneSeptember 30, 2015 as compared to $5,000$7,000 for the sixnine months ended JuneSeptember 30, 2014.

Net cash generated by Financing Activities.  Net cash generated by financing activities for the sixnine months ended JuneSeptember 30, 2015 was approximately $560,000,$2,200,000, and $357,000$1,142,000 for the sixnine months ended JuneSeptember 30, 2014.  Cash generated by financing activities for the sixnine months ended JuneSeptember 30, 2015 was comprised primarily from the cash received from the equity financing of $1,000,000 and short term borrowings of $575,000$1,410,000 offset by the repayment of $15,000$210,000 of short term debt.
 
Liquidity

The Company funded its cash needs during the sixnine months ended JuneSeptember 30, 2015 with cash on hand from December 31, 2014, the revenue generated in the first sixnine months of 2015, and short term borrowings.borrowings and an equity financing of $1,000,000 from the sale of common stock and warrants.
 
From time to time during 2012 through 2015, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until April 1, 2014.  In March 2014, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until June 30, 2015. On April 8, 2015, the Company entered into an Exchange Agreement with Mr. Steffens to convert an aggregate of $6,950,514 of principal amount of debt into 69,505,140 shares of the Company’s common stock at a conversion rate of $0.10 per share.  Subsequent to the exchange agreement, the Company entered into several short term notes payable with Mr. Steffens for various working capital needs.  The notes are non-interest bearing with a maturity date of December 31, 2015.  The Company is obligated to repay the notes with the collection of any accounts receivables.  At December 31, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $6,690,000$6,691,000 of principal and $1,139,000 in interest. At JuneSeptember 30, 2015, the Company was indebted to Mr. Steffens in the approximate amount of $315,000$980,000 of principal and $1,361,000$1,362,000 in interest.

The Company has incurred an operating loss of approximately $3,927,000 for the year ended December 31, 2014, and has a history of operating losses. For the sixnine months ended JuneSeptember 30, 2015, the Company incurred losses of $1,535,000$2,200,000 and had a working capital deficiency of $6,748,000$6,450,000 as of JuneSeptember 30, 2015.  Management believes that its repositioned strategy of leading with its Discovery product to use analytics to measure and then manage how work happens will shorten the sales cycle and allow for value based selling to our customers and prospects.  The Company anticipates success in this regard based upon current discussions with active customers and prospects.  The Company has borrowed $575,000$1,410,000 and $2,296,000 in 2015 and 2014, respectively.  The Company has also repaid approximately $15,000$210,000 and $391,000$394,000 of debt in 2015 and 2014, respectively. Additionally, in April 2015, the Company’s Chairman, Mr. Launny Steffens, converted $6,950,514 of debt into 69,505,140 shares of common stock of the Company.  In July 2015, the Company completed a sale of 25 million shares of its common stock and warrants to purchase up to 205,277,778 shares of its common stock to a group of nine investors, led by the Company’s Chairman of the Board, John (Launny) Steffens and the Privet group,Group, LLC, for $1,000,000.  Additionally,Should the investors can exercise the warrants, forwhich have exercise prices ranging from $0.04 to $0.05 per share, the Company would receive an additional 205,277,778 of the Company’s common shares for an additional $9,000,000.$9,000,000 in proceeds.  The warrants expire in three years.  Should the Company be unable to secure customer contracts that will drive sufficient cash flow to sustain operations, the Company will be forced to seek additional capital in the form of debt or equity financing; however, there can be no assurance that such debt or equity financing will be available on terms acceptable to the Company or at all. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and
Page 21
classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements. We have no unconsolidated subsidiaries or other unconsolidated limited purpose entities, and we have not guaranteed or otherwise supported the obligations of any other entity.

 
20Page 22
 
 
Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.   Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of JuneSeptember 30, 2015.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of JuneSeptember 30, 2015, our disclosure controls and procedures were effective.

(b) Changes in Internal Controls.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended JuneSeptember 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
 

Part II.   Other Information

Item 1.  Legal Proceedings

Not Applicable.

Item 1A.   Risk Factors

Not Applicable.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.      Defaults Upon Senior Securities

None.

Item 4.      Mine Safety Disclosures

None.
 
Item 5.      Other Information

None
 
Item 6.  Exhibits

Exhibit No.
Description
31.1
Certification of Chief Executive Officer/Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
32.1
Certification of Chief Executive Officer/Chief Financial Officer pursuant to 18 USC § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 
 

SIGNATURE
 
SIGNATURE

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

 CICERO INC. 
    
Date: August 13, 2015By:/s/ John P. Broderick 
  John P. Broderick 
  
Chief Executive Officer and Chief Financial Officer
Date: November 13, 2015
 
    
 
 
 
23
 
 Page 25