CICERO INC - FORM 10-Q - November 14, 2016

Attached files

file	filename
EX-32 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CICERO INC	cicn_ex32.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF THE SARBANES-OXLY ACT OF 2002 - CICERO INC	cicn_ex311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X]

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

For the quarterly period ended September 30, 2016.

[ ]

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)

Delaware	11-2920559
(State or other jurisdiction of incorporation or organization)	(I.R.S Employer Identification Number)

8000 Regency Parkway, Suite 542, Cary, North Carolina	27518
(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 X NO _

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 ☐ Accelerated Filer ☐ Non accelerated filer ☐ Smaller reporting company ☒

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 ☒No ☐

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

Yes ☐ No ☒

192,253,005 shares of common stock, $.001 par value, were outstanding as of November 10, 2016.

Cicero Inc.

Index

PART I. Financial Information	Page Number

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (unaudited)	4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited)	5

Condensed Consolidated Statement of Stockholders’ Deficit as of September 30, 2016 (unaudited)	6

Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3. Quantitative and Qualitative Disclosures about Market Risk	22

Item 4. Controls and Procedures	22

PART II. Other Information	23

Item 1. Legal Proceedings	23

Item 1A. Risk Factors	23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3. Defaults Upon Senior Securities	23

Item 4. Mine Safety Disclosures	23

Item 5. Other Information	23

Item 6. Exhibits	23

SIGNATURE	24

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

CICERO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

	September 30,	December 31,
	2016	2015
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$393	$1,009
Trade accounts receivable	43	256
Prepaid expenses and other current assets	68	235
Total current assets	504	1,500
Property and equipment, net	9	11
Goodwill (Note 2)	1,658	1,658
Total assets	$2,171	$3,169
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Short-term debt less unamortized debt discount of $68 at September 30, 2016 and	$5,210	$2,098
$219 at December 31, 2015 (Note 3)
Accounts payable	957	1,336
Accrued expenses:
Salaries, wages, and related items	1,565	1,601
Accrued interest	2,113	2,021
Other	648	653
Deferred revenue	663	605
Total current liabilities	11,156	8,314
Long-term debt (Note 3)	--	2,132
Total liabilities	11,156	10,446

Commitments and Contingencies (Note 7 and 8)

Stockholders' deficit:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized
No shares issued and outstanding at September 30, 2016 and December 31, 2015	--	--
Common stock, $0.001 par value, 600,000,000 shares authorized,	192	192
192,253,005 issued and outstanding at September 30, 2016 and December 31, 2015 (Note 4)
Additional paid-in capital	246,271	246,220
Accumulated deficit	(255,448)	(253,689)
Total stockholders' deficit	(8,985)	(7,277)
Total liabilities and stockholders' deficit	$2,171	$3,169

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 September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Revenue:
Software	$11	$140	$34	$345
Maintenance	124	372	769	1,106
Services	82	30	167	59
Total operating revenue	217	542	970	1,510

Cost of revenue:
Software	--	--	--	--
Maintenance	46	26	144	82
Services	96	145	337	434
Total cost of revenue	142	171	481	516

Gross margin	75	371	489	994

Operating expenses:
Sales and marketing	84	215	415	833
Research and product development	269	359	862	1,108
General and administrative	197	419	642	928
Total operating expenses	550	993	1,919	2,869
Loss from operations	(475)	(622)	(1,430)	(1,875)

Other income/(expense):
Interest expense	(114)	(43)	(329)	(325)
Total other income/(expense)	(114)	(43)	(329)	(325)


Net loss:	(589)	(665)	(1,759)	(2,200)
8% preferred stock Series B dividend	--	24	--	86
Deemed dividend applicable to warrant purchase	--	882	--	882
Net loss applicable to common stockholders	$(589)	$(1,571)	$(1,759)	$(3,168)
Loss per share applicable to common stockholders:
Basic and Diluted	$(0.00)	$(0.01)	$(0.01)	$(0.02)
Weighted average shares outstanding:
Basic and Diluted	192,253	178,735	192,253	138,537

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)

	Nine Months Ended September 30,
	2016	2015
Cash flows from operating activities:
Net loss	$(1,759)	$(2,200)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	5	10
Stock compensation expense	2	9
Amortization of debt discount	200	--
Changes in assets and liabilities:
Trade accounts receivable	213	903
Prepaid expenses and other current assets	167	7
Accounts payable and accrued expenses	(328)	755
Deferred revenue	58	(649)
Net cash used by operating activities	(1,442)	(1,165)

Cash flows from investing activities:
Purchases of equipment	(3)	(8)
Net cash used by investing activities	(3)	(8)

Cash flows from financing activities:
Issuance of common stock	--	1,000
Borrowings under debt	833	1,410
Repayments of debt	(4)	(210)
Net cash generated by financing activities	829	2,200
Net increase/(decrease) in cash	(616)	1,027
Cash:
Beginning of period	1,009	20
End of period	$393	$1,047

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
	Shares	Amount	Shares	Amount	Capital	(Deficit)	Total
Balance at December 31, 2015	192,253,005	$192	--	--	$246,220	$(253,689)	$(7,277)
Imputed interest on debt discount					49		49
Options issued as compensation					2		2
Net loss						(1,759)	(1,759)
Balance at September 30, 2016 (unaudited)	192,253,005	$192	--	--	$246,271	$(255,448)	$(8,985)

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 nine months ended September 30, 2016 and 2015 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, 2015, filed with the SEC on March 30, 2016. 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 $2,843,000 for the year ended December 31, 2015, and has a history of operating losses. For the nine months ended September 30, 2016, the Company incurred losses of $1,759,000 and had a working capital deficiency of $10,652,000 as of September 30, 2016. Management believes that its repositioned dual strategy of leading with its Discovery product to use analytics to measure and then manage how work happens as well as concentrating on expanding the indirect channel with more resale and OEM partners, 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 partners, customers and prospects. The Company has borrowed $833,000 and $2,275,000 in 2016 and 2015, respectively. The Company has also repaid approximately $4,000 and $210,000 of debt in 2016 and 2015, 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, LLC, for $1,000,000. Should the investors exercise the warrants, which have exercise prices ranging from $0.04 to $0.05 per share, the Company would receive an additional $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.

Page 7

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.

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.

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 did not issue any stock options in the first nine months of 2016. The Company recognized stock-based compensation expense of $800 and $2,000 for the three and nine months ended September 30, 2016 in connection with outstanding options. The Company has $4,075 in unrecognized stock-based compensation expense as of September 30, 2016.

The following table sets forth certain information as of September 30, 2016 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
Outstanding on December 31, 2015	3,657,110
Granted	--
Exercised	--
Forfeited	(824,898)
Outstanding on September 30, 2016	2,832,212

Weighted average exercise price of outstanding options	$0.24
Aggregate Intrinsic Value	$0
Shares available for future grants on September 30, 2016	1,667,788

Weighted average of remaining contractual life	3.48

Page 8

Recent Accounting Pronouncements

In March 2016, the FASB issued a new accounting standard intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance includes provisions to reduce the complexity related to income taxes, statement of cash flows, and forfeitures when accounting for share-based payment transactions. The new standard is effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact that this new standard will have on its condensed consolidated financial statements and related disclosures.

The FASB's new leases standard ASU 2016-02 Leases (Topic 842) was issued on February 25, 2016. ASU 2016-02 is intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet the new ASU will require both types of leases (i.e. operating and capital) to be recognized on the balance sheet. The FASB lessee accounting model will continue to account for both types of leases. The capital lease will be accounted for in substantially the same manner as capital leases are accounted for under existing GAAP. The operating lease will be accounted for in a manner similar to operating leases under existing GAAP, except that lessees will recognize a lease liability and a lease asset for all of those leases. The leasing standard will be effective for calendar year-end public companies beginning after December 15, 2018. Public companies will be required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption will be permitted for all companies and organizations upon issuance of the standard. For calendar year-end public companies, this means an adoption date of January 1, 2019 and retrospective application to previously issued annual and interim financial statements for 2018. See Note 7 for the Company’s current lease commitments. The Company is currently in the process of evaluating the impact that this new leasing ASU will have on its financial statements.

In January 2016, the FASB issued a new accounting standard that will enhance the Company’s reporting through the updating of the recognition, measurement, presentation, and disclosure of financial instruments. The new standard is effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Earlier adoption is permitted for interim and annual reporting periods as of the beginning of the fiscal year of adoption. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

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.

Page 9

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. Through September 30, 2016, there was a negative indicator but no impairment of goodwill has been identified.

	Goodwill
Balance at December 31, 2015	$1,658,000
Additions	--
Impairment	--
Balance at September 30, 2016	$1,658,000

NOTE 3. DEBT

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

	September 30, 2016	December 31, 2015
Note payable – asset purchase agreement (a)	$1,518	$1,518
Note payable – related parties (b)	2,674	1,845
Notes payable (c)	1,086	1,086
Unamortized debt discount (b)	(68)	(219)
Total debt	5,210	4,230
Less current portion	(5,210)	(2,098)
Total long-term debt	$--	$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%. 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, 2015, the Company was indebted to SOAdesk in the amount of $675,000 in principal and $208,000 in interest. At September 30, 2016, the Company was indebted to SOAdesk in the amount of $675,000 in principal and $233,000 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.

Page 10

As part of a prior acquisition, the Company was obligated to certain earn-out obligation 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. 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 due to a portion of earn-out obligations being met. 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 was December 31, 2015 with an annual interest rate of 10%. In December 2015, the maturity date was extended to December 31, 2016. At December 31, 2015, the Company was indebted to SOAdesk for $421,303 in principal and approximately $21,000 in interest. At September 30, 2016, the Company was indebted to SOAdesk for $421,303 in principal and approximately $53,000 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 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 December 31, 2015 and September 30, 2016, the Company was indebted to SOAdesk for $421,303 in principal.

(b)

In January 2016, the Company entered into a $3,500 short-term note payable with Antony Castagno, the Chief Technology Officer, for various working capital needs. The note bore interest at 10%. In February 2016, the debt of $3,500 and interest 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 bore interest at 12% per year, were unsecured and had maturity dates on June 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. 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 vary 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 December 31, 2015. In December 2015, the maturity dates were extended to December 31, 2016. At December 31, 2015, the Company was indebted to Mr. Steffens in the approximate amount of $1,845,000 of principal and $1,362,000 of interest. At September 30, 2016, the Company was indebted to Mr. Steffens in the approximate amount of $2,674,000 of principal and $1,368,000 of interest. At December 31, 2015, the Company recorded $275,000 of unamortized discount on debt on the non-interest bearing notes with Mr. Steffens. Imputed interest was calculated based on a 12% interest rate based on historical notes with Mr. Steffens and comparative non-related party loans with the Company. The Company has recorded $56,000 of amortization of the debt discount in interest expense through December 31, 2015. At March 31, 2016, the Company recorded an additional $49,000 of unamortized discount on debt for the debt issued in fiscal 2016. The Company has recorded $200,000 of amortization of the debt discount in interest expense through September 30, 2016.

(c)

The Company has issued a series of short-term unsecured promissory notes with private lenders, which provide for short term borrowings. The notes in the aggregate amount of $50,000 of principal and $53,000 of interest and $50,000 of principal and $61,000 of interest, respectively, as of December 31, 2015 and September 30, 2016, 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, 2015, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $242,000 in interest. At September 30, 2016, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $268,000 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.

Page 11

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. In February 2016, the note was amended that the first milestone payment due on February 29, 2016, was now payable quarterly beginning February 29, 2016 through November 29, 2016. At December 31, 2015, the Company was indebted to this private lender in the amount of $336,000 in principal and $134,000 in interest. At September 30, 2016, the Company was indebted to this private lender in the amount of $336,000 in principal and $128,000 in interest.

NOTE 4. STOCKHOLDER’S EQUITY

At the Company’s Annual Meeting held on September 11, 2015, the shareholders approved the following proposals:

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;

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;

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;

An amendment to the Company’s Charter to renounce the Company’s expectancy regarding certain corporate opportunities presented to a Privet Stockholder;

An amendment to the Company’s Charter to not be governed by the provisions of Section 203 of the Delaware General Corporation Law;

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

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.

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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. 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 at that time, 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 then 65.5% ownership of the common stock of the Company to 59.3% at that time, 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.

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NOTE 5. 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 nine months of fiscal year 2016 or 2015. As a result of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance.

NOTE 6. 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 nine months ended September 30, 2016 and 2015.

NOTE 7. COMMITMENTS

In June 2014, the Company entered into an amendment with its landlord and renewed its lease through 2018. In October 2016, the Company entered into an amendment reducing the square footage being leased for the remaining term of the lease. Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2016 consisted of only one lease as follows (in thousands):

	Lease Commitments

2016	$19
2017	64
2018	55
	$138

NOTE 8. 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 September 30, 2016.

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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 changing the underlying applications or requiring costly application development. The Company’s software collects desktop activity and application performance data and tracks business objects across time and multiple users, as well as measures against defined expected business process flows, 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’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 largest Fortune 500 corporations worldwide.

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

Cicero Discovery collects desktop activity leveraging a suite of sensors. 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 Insight is a measurement and analytics solution that collects and presents high value information about quality, productivity, compliance, and revenue from frontline activity to target areas for improvement. Powered by Cicero Discovery sensors, Cicero Insight collects activity data about the applications, when and how they are used and makes it readily available for analysis and action to the business community.

Cicero 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 Automation integrates applications, automates workflow, and provides control and adaptability at the end user desktop.

Cicero Automation also 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.

The Company provides an intuitive configuration toolkit for each product, which simplifies the process of deploying and managing the solutions in the enterprise. The Company provides a unique way of capturing untapped desktop activity data using sensors, combining it with other data sources, and making it readily available for analysis and action to the business community. The Company also 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 leveraging desktop activity data, 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.

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.

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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:

●

An 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;

●

A 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.

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.

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RESULTS OF OPERATIONS

The table below presents information for the three and nine months ended September 30, 2016 and 2015 (in thousands):

	Three months ended September 30,		Nine months ended September 30,
	2016	2015	2016	2015
Total revenue	$217	$542	$970	$1,510
Total cost of revenue	142	171	481	516
Gross margin	75	371	489	994
Total operating expenses	550	993	1,919	2,869
Income/(loss) from operations	$(475)	$(622)	$(1,430)	$(1,875)

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 term 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 SEPTEMBER 30, 2016 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2015.

Total Revenues. Total revenues decreased $325,000, or 60.0%, from $542,000 to $217,000, for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015. The decrease is due primarily to a decrease in license and maintenance revenue.

Total Cost of Revenue. Total cost of revenue decreased $29,000, or 17.0%, from $171,000 to $142,000 for the three months ended September 30, 2016, as compared with the three months ended September 30, 2015. The decrease is primarily due to a decrease in headcount and travel expenses.

Total Gross Margin. Gross margin was $75,000, or 34.6%, for the three months ended September 30, 2016, as compared to the gross margin of $371,000, or 68.5%, for the three months ended September 30, 2015. The decrease in gross margin is primarily due to the decrease in sales offset by the decrease in cost of revenue.

Total Operating Expenses. Total operating expenses decreased $443,000, or 44.6%, from $993,000 to $550,000 for the three months ended September 30, 2016, as compared with the three months ended September 30, 2015. The decrease is primarily attributable to a decrease in headcount and lower legal and regulatory filing fees associated with the equity financing in fiscal 2015.

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Software Products:

Software Product Revenue. The Company earned $11,000 in software product revenue for the three months ended September 30, 2016 as compared to $140,000 in software revenue for the three months ended September 30, 2015, a decrease of $129,000. The decrease is primarily due to a reduction in monthly subscription software revenue from an existing customer.

Software Product Gross Margin. The gross margin on software products for the three months ended September 30, 2016 and September 30, 2015 was 100.0%.

Maintenance:

Maintenance Revenue. Maintenance revenue for the three months ended September 30, 2016 decreased by approximately $248,000, or 66.7%, from $372,000 to $124,000 as compared to the three months ended September 30, 2015. The decrease in maintenance revenue is primarily due to the cancellation of a maintenance contract in second quarter 2016.

Maintenance Gross Margin. Gross margin on maintenance products for the three months ended September 30, 2016 was $78,000 or 62.9% compared with $346,000 or 93.0% for the three months ended September 30, 2015. 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 is due to the decrease in maintenance revenue.

Services:

Services Revenue. Services revenue for the three months ended September 30, 2016 increased by approximately $52,000, or 173.3%, from $30,000 to $82,000 as compared with the three months ended September 30, 2015. The increase is primarily due to new paid engagements.

Services Gross Margin Loss. Services gross margin loss was $14,000 or 17.1% for the three months ended September 30, 2016 compared with gross margin loss of $115,000 or 383.3% for the three months ended September 30, 2015. The decrease in gross margin loss was primarily attributable to an increase in services revenue and a decrease in cost of services from a reallocation of personnel.

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 September 30, 2016 decreased by approximately $131,000, or 60.9%, from $215,000 to $84,000 as compared with the three months ended September 30, 2015. The decrease is primarily attributable to a decrease in headcount partially offset by an increase in outside consulting 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 decreased by approximately $90,000, or 25.1%, from $359,000 to $269,000 for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015. The decrease in research and development costs for the quarter is primarily due to a decrease in headcount and a decrease in outside consulting.

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 three months ended September 30, 2016 decreased by approximately $222,000, or 53.0%, from $419,000 to $197,000 as compared to the three months ended September 30, 2015. The decrease is primarily due to a decrease in legal and regulatory reporting fees associated with the equity financing in fiscal 2015.

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 third quarter of 2016 and 2015. As a result of the Company’s recurring losses, the deferred tax assets have been fully offset by a valuation allowance.

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Net Loss. The Company recorded a net loss of $589,000 for the three months ended September 30, 2016 as compared to a net loss of $665,000 for the three months ended September 30, 2015. The decrease in net loss is primarily due to the decrease in operating expenses partially offset by the decrease in total revenue.

NINE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2015.

Total Revenues. Total revenues decreased $540,000, or 35.8%, from $1,510,000 to $970,000, for the nine months ended September 30, 2016 as compared with the nine months ended September 30, 2015. The decrease is due primarily to a decrease in license and maintenance revenue.

Total Cost of Revenue. Total cost of revenue decreased $35,000, or 6.8%, from $516,000 to $481,000 for the nine months ended September 30, 2016, as compared with the nine months ended September 30, 2015. The decrease is primarily due to a decrease in headcount.

Total Gross Margin. Gross margin was $489,000, or 50.4%, for the nine months ended September 30, 2016, as compared to the gross margin of $994,000, or 65.8%, for the nine months ended September 30, 2015. The decrease in gross margin is primarily due to the decrease in sales.

Total Operating Expenses. Total operating expenses decreased $950,000, or 33.1%, from $2,869,000 to $1,919,000 for the nine months ended September 30, 2016, as compared with the nine months ended September 30, 2015. The decrease is primarily attributable to a decrease in headcount, lower outside consulting and trade show expenses and a decrease in legal and regulatory reporting fees associated with the equity financing in fiscal 2015.

Software Products:

Software Product Revenue. The Company earned $34,000 in software product revenue for the nine months ended September 30, 2016 as compared to $345,000 in software revenue for the nine months ended September 30, 2015, a decrease of $311,000. The decrease is primarily due to a reduction in monthly subscription software revenue from an existing customer.

Software Product Gross Margin. The gross margin on software products for the nine months ended September 30, 2016 and September 30, 2015 was 100.0%.

Maintenance:

Maintenance Revenue. Maintenance revenue for the nine months ended September 30, 2016 decreased by approximately $337,000, or 30.5%, from $1,106,000 to $769,000 as compared to the nine months ended September 30, 2015. The decrease in maintenance revenue is primarily due to the cancellation of a maintenance contract.

Maintenance Gross Margin. Gross margin on maintenance products for the nine months ended September 30, 2016 was $625,000 or 81.3% compared with $1,024,000 or 92.6% for the nine months ended September 30, 2015. 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 is due to decrease in maintenance revenue offset by the decrease in cost of revenue.

Services:

Services Revenue. Services revenue for the nine months ended September 30, 2016 increased by approximately $108,000, or 183.1%, from $59,000 to $167,000 as compared to the nine months ended September 30, 2015. The increase in services revenue is due to an increase in paid engagements.

Services Gross Margin Loss. Services gross margin loss was $170,000 or 101.8% for the nine months ended September 30, 2016 compared with gross margin loss of $375,000 or 635.6% for the nine months ended September 30, 2015. The decrease in gross margin loss was primarily attributable to an increase in services revenue and a decrease in cost of services from a reallocation of personnel.

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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 nine months ended September 30, 2016 decreased by approximately $418,000, or 50.2%, from $833,000 to $415,000 as compared with the nine months ended September 30, 2015. The decrease is primarily attributable to a decrease in headcount and lower trade show expenses partially offset by higher outside consulting 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 decreased by approximately $246,000, or 22.2%, from $1,108,000 to $862,000 for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The decrease in research and development costs for the quarter is primarily due to a decrease in headcount and a decrease in outside consulting.

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 nine months ended September 30, 2016 decreased by approximately $286,000, or 30.8%, from $928,000 to $642,000 as compared to the nine months ended September 30, 2015. The decrease is primarily due to a decrease in legal and regulatory filing fees from the equity financing in fiscal 2015.

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 nine months of 2016 and 2015. 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 $1,759,000 for the nine months ended September 30, 2016 as compared to a net loss of $2,200,000 for the nine months ended September 30, 2015. The decrease in net loss is primarily due to the decrease in operating expenses partially offset by the decrease in total revenue.

LIQUIDITY AND CAPITAL RESOURCES

Cash

Cash and cash equivalents decreased to $393,000 at September 30, 2016 from $1,009,000 at December 31, 2015, a decrease of $616,000. The decrease is primarily attributable to expenses in the first nine months of 2016 and a reduction of accounts payable partially offset by collections of accounts receivable from year end, revenue generated in the first nine months of 2016 and short term borrowings.

Net cash used by Operating Activities. Cash used by operations for the nine months ended September 30, 2016 was $1,442,000 compared to $1,165,000 for the nine months ended September 30, 2015. Cash used by operations for the nine months ended September 30, 2016 was primarily due to the loss from operations of $1,759,000 and a decrease in accounts payable and accrued expenses of $328,000 partially offset by depreciation expense of $5,000, stock option expense of $2,000 amortization of debt discount of $200,000, a decrease in accounts receivable of $213,000, a decrease in prepaid expenses of $167,000 and an increase of deferred revenue of $58,000.

Net cash used in Investing Activities. The Company had purchases of equipment totaling $3,000 for the nine months ended September 30, 2016 as compared to $8,000 for the nine months ended September 30, 2015.

Net cash generated by Financing Activities. Net cash generated by financing activities for the nine months ended September 30, 2016 was approximately $829,000, compared to $2,200,000 for the nine months ended September 30, 2015. Cash generated by financing activities for the nine months ended September 30, 2016 was comprised primarily from short term borrowings of $833,000 offset by the repayment of $4,000 of short term debt.

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Liquidity

The Company funded its cash needs during the nine months ended September 30, 2016 with cash on hand from December 31, 2015, the revenue generated in the first nine months of 2016 and short term borrowings.

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 bore interest at 12% per year, are unsecured and were to mature on June 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. 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.

The Company has incurred an operating loss of approximately $2,843,000 for the year ended December 31, 2015, and has a history of operating losses. For the nine months ended September 30, 2016, the Company incurred losses of $1,759,000 and had a working capital deficiency of $10,652,000 as of September 30, 2016. Management believes that its repositioned dual strategy of leading with its Discovery product to use analytics to measure and then manage how work happens as well as concentrating on expanding the indirect channel with more resale and OEM partners, 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 partner, customers and prospects. The Company has borrowed $833,000 and $2,275,000 in 2016 and 2015, respectively. The Company has also repaid approximately $4,000 and $210,000 of debt in 2016 and 2015, 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, LLC, for $1,000,000. Should the investors exercise the warrants, which have exercise prices ranging from $0.04 to $0.05 per share, the Company would receive an additional $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.

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.

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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 September 30, 2016.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of September 30, 2016, 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 September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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).

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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: November 14, 2016	By:	/s/ John P. Broderick
		John P. Broderick
		Chief Executive Officer and Chief Financial Officer

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CICERO INC - FORM 10-Q - November 14, 2016

Attached files

CICERO INC Reports