10-Q

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, 2014.

[  ] 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 o Accelerated Filer o Non accelerated filer o Smaller reporting company o

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 o No o

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

Yes o No o

85,848,237 shares of common stock, $.001 par value, were outstanding as of November 7, 2014.

Cicero Inc.

Index

PART I.     Financial Information	Page Number
Item 1.     Condensed  Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)	5
Condensed Consolidated Statement of Stockholders’ Deficit as of September 30, 2014 (unaudited)	6
Notes to Condensed Consolidated Financial Statements(unaudited)	7
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.     Quantitative and Qualitative Disclosures about Market Risk	17
Item 4.   Controls and Procedures	17
PART II.    Other Information	18
Item 1.    Legal Proceedings	18
Item 1A. Risk Factors	18
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3. Defaults Upon Senior Securities	18
Item 4. Mine Safety Disclosures	18
Item 5. Other Information	18
Item 6. Exhibits	18
SIGNATURE	19

Part I. Financial Information

Item 1.  Condensed Consolidated Financial Statements

CICERO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30, 2014			December 31, 2013
	(unaudited)
Current assets:
Cash and cash equivalents	$	51			$	5
Trade accounts receivable, net		110				1,125
Prepaid expenses and other current assets		194				208
Total current assets		355				1,338
Property and equipment, net		20				29
Goodwill (Note 2)		2,832				2,832
Total assets	$	3,207			$	4,199
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term debt (Note 3)	$	7,732			$	456
Accounts payable		3,659				3,178
Accrued expenses:
Salaries, wages, and related items		1,385				1,235
Other		509				417
Deferred revenue		722				1,382
Total current liabilities		14,007				6,668
Long-term debt		--				6,134
Total liabilities		14,007				12,802
Commitments and Contingencies (Note 6 and 7) Stockholders' deficit:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized Series A-1 – 1,541.6 shares issued and outstanding at September 30, 2014 and December 31, 2013 Series B -  10,400 shares issued and outstanding at September 30, 2014 and at December 31, 2013		-- --				-- --
Common stock, $0.001 par value, 215,000,000 shares authorized, 85,806,247 issued and outstanding at September 30, 2014 and at December 31, 2013		86				86
Additional paid-in capital		237,200				237,135
Accumulated deficit		(248,086	)			(245,824	)
Total stockholders' deficit		(10,800	)			(8,603	)
Total liabilities and stockholders' deficit	$	3,207			$	4,199

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CICERO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine months Ended September 30,
	2014			2013			2014			2013
Revenue:
Software	$	12		$	24		$	308		$	67
Maintenance		367			372			1,095			1,077
Services		4			146			72			496
Total operating revenue		383			542			1,475			1,640
Cost of revenue
Software		--			--			--			28
Maintenance		24			25			78			84
Services		141			258			526			724
Total cost of revenue		165			283			604			836
Gross margin		218			259			871			804
Operating expenses:
Sales and marketing		231			304			790			1,139
Research and product development		325			247			902			1,017
General and administrative		258			227			796			817
Total operating expenses		814			778			2,488			2,973
Loss from operations		(596	)		(519	)		(1,617	)		(2,169	)
Other income/(expense):
Interest expense		(197	)		(144	)		(551	)		(372	)
Other income/(expense)		--			--			--			(1	)
Total other income/(expense)		(197	)		(144	)		(551	)		(373	)
Net loss		(793	)		(663	)		(2,168	)		(2,542	)
8% preferred stock Series B dividend		32			32			94			94
Net loss applicable to common stockholders	$	(825	)	$	(695	)	$	(2,262	)	$	(2,636	)
Loss per share applicable to common stockholders:
Basic and Diluted	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.03	)
Weighted average shares outstanding:
Basic and Diluted		85,806			85,806			85,806			84,993

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CICERO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net loss	$	(2,168	)	$	(2,542	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		16			49
Stock compensation expense		65			69
Stock issuance for external consulting fees		--			35
Changes in assets and liabilities:
Trade accounts receivable		1,015			1,153
Prepaid expenses and other assets		14			174
Accounts payable and accrued expenses		629			191
Deferred revenue		(660	)		(666	)
Net cash used by operating activities		(1,089	)		(1,537	)
Cash flows from investing activities:
Purchases of equipment		(7	)		(7	)
Net cash used by investing activities		(7	)		(7	)
Cash flows from financing activities:
Issuance of common stock		--			65
Borrowings under short and long-term debt		1,536			1,860
Repayments of short and long-term debt		(394	)		(416	)
Net cash generated by financing activities		1,142			1,509
Net increase/(decrease) in cash		46			(35	)
Cash:
Beginning of period		5			69
End of period	$	51		$	34

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

CICERO INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

(in thousands, except share amounts)

	Common Stock			Preferred Stock
	Shares			Shares	Amount		Additional Paid-in Capital		Accumulated (Deficit)			Total
Balance at December 31, 2013	85,806,247	$	86	11,941	--	$	237,135	$	(245,824	)	$	(8,603	)
Dividend for preferred B stock									(94	)		(94	)
Options issued as compensation							2					2
Restricted shares issued as compensation							63					63
Net loss									(2,168	)		(2,168	)
Balance at September 30, 2014 (unaudited)	85,806,247	$	86	11,941	--	$	237,200	$	(248,086	)	$	(10,800	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CICERO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (unaudited)

NOTE 1.   INTERIM FINANCIAL STATEMENTS

The accompanying financial statements for the three and nine months ended September 30, 2014 and 2013 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 financial statements and notes thereto contained in Cicero Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014.  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 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 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 $3,206,000 for the year ended December 31, 2013, and has a history of operating losses. For the nine months ended September 30, 2014, the Company incurred losses of $2,168,000 and had a working capital deficiency of $13,652,000 as of September 30, 2014.  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 $1,536,000 and $2,671,000 in 2014 and 2013, respectively.  The Company has also retired approximately $394,000 and $416,000 of debt in 2014 and 2013, respectively. 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 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.

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 issued 15,000 options at an exercise price of $0.025 in the first nine months of 2014.  The Company recognized stock-based compensation expense of $21,000 and $65,000 for the three and nine months ended September 30, 2014, respectively.  This is comprised of the following amounts for the three and nine months, respectively, as of September 30, 2014; $0 and $2,000 in connection with outstanding options, $9,000 and $27,000 for the 549,360 shares of restricted stock reserved for Mr. John Broderick, the Company’s CEO, in accordance with his 2007 employment agreement, and $12,000 and $36,000 for the 1,500,000 shares of restricted stock reserved for Mr. Broderick, in accordance with his 2012 employment agreement.

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At September 30, 2014, there was unrecognized compensation cost of approximately $300 related to stock options which is expected to be recognized over a weighted-average amortization period of 1.5 years.  In addition, at September 30, 2014, there was approximately $6,000 of unrecognized expense compensation cost related to Mr. Broderick’s 1,500,000 shares of unvested restricted stock that is expected to be recognized over a weighted-average period of less than 1 year.

The following table sets forth certain information as of September 30, 2014 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, 2013		3,396,210
Granted		15,000
Exercised		--
Forfeited		(168,600	)
Outstanding on September 30, 2014		3,242,610
Weighted average exercise price of outstanding options	$	0.24
Aggregate Intrinsic Value	$	0.00
Shares available for future grants on September 30, 2014		1,258,590
Weighted average of remaining contractual life		4.89

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 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 all current U.S. GAAP guidance on this topic and eliminate all 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, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. The Company has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the 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. Through September 30, 2014, no indicator of impairment of goodwill has been identified.

The Company’s intangible asset, consisting of software acquired from SOAdesk, LLC, in the amount of $2,103,000 was being amortized over its estimated useful life of 3 years ended March 31, 2013. Amortization expense for the three months ended March 31, 2013 was $28,000, resulting in the intangible asset being fully amortized.

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NOTE 3.   SHORT-TERM DEBT

Short-term debt and notes payable to related party consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Note payable - asset purchase agreement (a)	$	700	$	--
Note payable – related party (b)		5,946		21
Notes payable (c)		1,086		435
	$	7,732	$	456

(a)   In June 2014, the Company reclassified to short-term debt its 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.  At September 30, 2014, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $165,000 in interest. At December 31, 2013, this debt was classified as long-term debt but subsequently has been reclassified to short term debt.

The note is convertible into 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 Company is obligated to repay any principal of the loan with fifty percent of any gross proceeds of any Series B Preferred capital raised through maturity of the note.  The note is convertible at the holder’s option at any time or at maturity.

(b) From 2012 through 2014, the Company entered into various short-term notespayable with John Broderick, the Chief Executive Officer and Chief Financial Officer, for various working capital needs. The notes bear interest at 12% and were unsecured. At December 31, 2013, the Company was indebted to Mr. Broderick in the approximate amount of $6,000. In February 2014, the debt of $6,000 and approximate interest of $500 was paid in full.

During 2013, the Company entered into a short-term notepayable with Antony Castagno, the Chief Technology Officer, for various working capital needs. The note was non-interest bearing and unsecured. At December 31, 2013, the Company was indebted to Mr. Castagno in the approximate amount of $15,000. No interest was paid in fiscal 2013.  In March 2014, Mr. Castagno amended the note extending the term date till December 31, 2014 and the note bears interest at 10%.  At September 30, 2014, the Company was indebted to Mr. Castagno in the amount of $15,000 in principal and approximately $800 in interest.

From time to time during 2012 through 2014, 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. In June 2014, the Company reclassified its outstanding debt with Mr. Steffens to short term debt.  At September 30, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $5,931,000 of principal and $949,000 in interest.  At December 31, 2013, the Company was indebted to Mr. Steffens in the approximate amount of $4,398,000 of principal and $505,000 in interest. In March 2014, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until June 30, 2015. As such this amount was classified as long term debt at December 31, 2013.

(c) The Company has issued a series of short-term promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured.  The notes in the aggregate principal amount of $50,000 and $435,000, respectively, as of September 30, 2014 and December 31, 2013, bear interest between 10% and 36% per annum.  The Company repaid approximately $385,000 of the outstanding notes and $52,000 of interest in fiscal 2014.

In January 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.  At September 30, 2014, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $198,000 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.  The note is convertible at the option of the holder with one-third convertible in January 2011, two-thirds convertible in January 2012, and the entire note convertible in January 2013 or at maturity.  In March 2012, SOAdesk elected to convert $300,000 of the outstanding note balance into 2,000,000 shares of Company’s Common Stock.  At December 31, 2013, the Company was indebted to SOAdesk in the amount of $700,000 of principal and $172,000 in interest and was classified as long term debt but subsequently had been reclassified to short-term debt.

In June 2014, the Company reclassified to short-term debt its unsecured promissory note with certain private lenders 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 2014, the maturity date of the note was extended to June 30, 2015 and reclassified to long term debt at December 31, 2013.  At September 30, 2014, the Company was indebted to these private lenders in the amount of $336,000 in principal and $103,000 in interest.

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NOTE 4.   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 2014 or 2013.  Because of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance.

NOTE 5.   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, restricted stock, preferred stock and convertible debt.

Options 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 were included for the three and nine months ended September 30, 2014 and 2013.  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.

NOTE 6.   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 September 30, 2014 consisted of only one lease as follows (in thousands):

	Lease Commitments
2014	$	17
2015		102
2016		103
2017		106
2018		89
	$	417

NOTE 7.   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.

The Company is currently in discussions with the State of Delaware regarding the possible underpayment of its annual franchise tax dating back to 2002.  The Company filed with the IRS amended federal tax returns, upon which the Delaware franchise tax is partially based, for years 1999 through 2011 and has submitted those amended federal tax returns to the State of Delaware.  The Company believes the value of its assets reflected in such amended tax returns should ameliorate the possible underpayment, and that if the State of Delaware re-calculates the Company’s franchise taxes based upon its amended returns, the Company would have no or a small outstanding balance for its Delaware franchise tax.  Upon resolution thereof, the Company’s Certificate of Incorporation would be reinstated.  Currently the discussions are focused on an amount due of approximately $42,000 based on correspondence with the State of Delaware, which takes into account certain offered credits, but until there is a settlement, the previously reported amount or some other amount may be sought by the state.  Should the Company not be able to reinstate its Certificate of Incorporation with the State of Delaware, its corporate powers would continue to be inoperative.

In October 2003, we were served with a summons and complaint in Superior Court of North Carolina regarding unpaid invoices for services rendered by one of our subcontractors.  The amount in dispute was approximately $200,000 and is included in accounts payable. Subsequent to March 31, 2004, we settled this litigation.  Under the terms of the settlement agreement, we agreed to pay a total of $189,000 plus interest over a 19-month period ending November 15, 2005. The Company has not made any additional payments and has a remaining liability of approximately $88,000.

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, 2014.

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NOTE 8. SUBSEQUENT EVENTS

In October 2014, the Company entered into various notes payable totaling $260,000 with Mr. Steffens.  The notes bear interest at 12%.  They are unsecured and mature on June 30, 2015.

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 enables companies to monitor people, processes, and technology, to identify areas for improvement, and to implement change using existing technologies. The Company provides an innovative and unique combination of application and process integration, automation, presentation 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.  The Company’s software also addresses the emerging need for companies' information systems by securely presenting relevant information in an intuitive manner on desktops. 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 business process automation with its Cicero Discovery™ and Cicero XM® products, respectively.

Cicero Discovery delivers desktop analytics and reporting for the enterprise.  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 XM delivers a unified smart desktop solution for enterprise contact center and back office employees.  Leveraging existing IT investments Cicero XM integrates applications, automates workflow, guides the employee (presentation, scripts, etc.) and provides control and adaptability in a Smart Desktop.

Cicero XM includes a Studio environment that enables business analysts and other non-IT staff to build and enhance back-end integrations, scripts, smart workflows and composite screens without any impact on underlying applications or business logic.

The Cicero XM suite is highly secure. It has a credentials 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 XM utilizes the United Data Model® (UDM).  The UDM is supported by a database, enabling 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 integrated toolkit for each product that provides an intuitive configuration and development environment, which simplifies the process of deploying solutions to the enterprise. The Company provides a unique approach that allows companies to organize components 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 by providing a single, seamless user interface for simple access to multiple systems or be configured to display one or more composite applications to enhance productivity either on the desktop. Our technology enables automatic information sharing among line-of-business applications and tools. It is ideal for deployment in organizations that need to provide access to enterprise applications on desktops to improve business performance, the user experience, and customer satisfaction. By integrating diverse applications across multiple operating systems, automating business processes and delivering a better user experience, the Company’s products are best suited 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.

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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;

●   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;

●   Loss of key personnel associated with Cicero Discovery and XM 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 XM;

●   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, 2014 and 2013 (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2014			2013				2014			2013
Total revenue	$	383		$	542			$	1,475		$	1,640
Total cost of revenue		165			283				604			836
Gross margin		218			259				871			804
Total operating expenses		814			778				2,488			2,973
Income/(loss) from operations	$	(596	)	$	(519	)		$	(1,617	)	$	(2,169	)

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 terms 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, 2014 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2013.

Total Revenues.  Total revenues decreased $159,000, or 29.3%, from $542,000 to $383,000, for the three months ended September 30, 2014 as compared with the three months ended September 30, 2013. The decrease is due primarily to a decrease in consulting revenue.

Total Cost of Revenue.  Total cost of revenue decreased $118,000, or 41.7%, from $283,000 to $165,000 for the three months ended September 30, 2014, as compared with the three months ended September 30, 2013.  The decrease is primarily due to a decrease in headcount and lower consulting expenses.

Total Gross Margin.  Gross margin was $218,000, or 56.9%, for the three months ended September 30, 2014, as compared to the gross margin of $259,000, or 47.8%, for the three months ended September 30, 2013. The decrease in gross margin is primarily due to the decrease in sales partially offset by the lower expenses from a reduction in headcount and lower outside consulting expenses.

Total Operating Expenses.  Total operating expenses increased $36,000, or 4.6%, from $778,000 to $814,000 for the three months ended September 30, 2014, as compared with the three months ended September 30, 2013.  The increase is primarily attributable to franchise tax accrual recorded in third quarter 2014 partially offset by a decrease in headcount and lower trade show expenses.

Software Products.

Software Product Revenue.  The Company earned $12,000 in software product revenue for the three months ended September 30, 2014 as compared to $24,000 in software revenue for the three months ended September 30, 2013, a decrease of $12,000.  The decrease is primarily due to the traditional long sales cycles within the enterprise software arena.

Software Product Gross Margin.  The gross margin on software products for the three months ended September 30, 2014 and September 30, 2013 was 100.0% due to the intangible assets from the SOAdesk acquisition being fully amortized as of the first quarter 2013.

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Maintenance.

Maintenance Revenue.  Maintenance revenue for the three months ended September 30, 2014 decreased by approximately $5,000, or 1.3%, from $372,000 to $367,000 as compared to the three months ended September 30, 2013.  The decrease in maintenance revenue is primarily due to the non-renewal of one maintenance contract.

Maintenance Gross Margin.  Gross margin on maintenance products for the three months ended September 30, 2014 was 93.5% compared with 93.3% for the three months ended September 30, 2013.  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 the decrease in the timing of outside consulting expense in 2013.

Services.

Services Revenue.  Services revenue decreased $142,000, or 97.3%, from $146,000 to $4,000 for the three months ended September 30, 2014 as compared with the three months ended September 30, 2013. The decrease in services revenues is primarily attributable to a decrease in paid consulting engagements in the third quarter of 2014.

Services Gross Margin Loss.  Services gross margin loss was 3,425.0% for the three months ended September 30, 2014 compared with gross margin loss of 76.7% for the three months ended September 30, 2013.  The increase in gross margin loss was primarily attributable to a decrease in consulting revenue partially offset by a decrease in headcount and lower travel expenses.

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, 2014 decreased by approximately $73,000, or 24.0%, from $304,000 to $231,000 as compared with the three months ended September 30, 2013.  The decrease is primarily attributable to a decrease in headcount, decrease in outside professional services expense and lower trade show expenses which was partially due to a timing difference due to a change in estimate.  Previously the Company estimated the use of its prepaid trade show expenses ratably but now estimates its use when the trade show occurs.

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 $78,000, or 31.6%, from $247,000 to $325,000 for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.  The increase in costs for the quarter is primarily due to an increase in headcount and outside consulting expense for research development.

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, 2014 increased by approximately $31,000, or 13.7%, from $227,000 to $258,000 as compared to the three months ended September 30, 2013.  The increase is primarily due to a franchise tax accrual partially offset by a decrease in headcount.

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 2014 and 2013. Because 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 $793,000 for the three months ended September 30, 2014 as compared to a net loss of $663,000 for the three months ended September 30, 2013. The increase in net loss is primarily due to the decreases in total revenue partially offset by the decrease of cost of revenue.

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NINE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2013.

Total Revenues.  Total revenues decreased $165,000, or 10.1%, from $1,640,000 to $1,475,000, for the nine months ended September 30, 2014 as compared with the nine months ended September 30, 2013. The decrease is due primarily due to a decrease in consulting revenue partially offset by an increase in software and maintenance revenue.

Total Cost of Revenue.  Total cost of revenue decreased $232,000, or 27.8%, from $836,000 to $604,000 for the nine months ended September 30, 2014, as compared with the nine months ended September 30, 2013.  The decrease is primarily due to a decrease in headcount, lower travel expenses due to a decrease in services revenue and the intangible assets from the SOAdesk acquisition being fully amortized as of the first quarter 2013.

Total Gross Margin. Gross margin was $871,000, or 59.1%, for the nine months ended September 30, 2014, as compared to the gross margin of $804,000, or 49.0%, for the nine months ended September 30, 2013. The increase in gross margin is primarily due to the increase in software and maintenance revenue and its higher gross margin partially offset by the lower consulting revenue and its lower gross margin.  The impact of the lower consulting revenue was offset by the decrease in expenses from a decrease in headcount, a decrease in travel expenses and lower outside consulting expenses.

Total Operating Expenses.  Total operating expenses decreased $485,000, or 16.3%, from $2,973,000 to $2,488,000 for the nine months ended September 30, 2014, as compared with the nine months ended September 30, 2013.  The decrease is primarily attributable to a decrease in headcount and lower trade show expenses.

Software Products.

Software Product Revenue.  The Company earned $308,000 in software product revenue for the nine months ended September 30, 2014 as compared to $67,000 in software revenue for the nine months ended September 30, 2013, an increase of $241,000.  The increase is primarily due to the sale of one enterprise license during the first nine months of 2014.

Software Product Gross Margin.  The gross margin on software products for the nine months ended September 30, 2014 was 100.0% compared with a gross margin of 58.2% for the nine months ended September 30, 2013.  The increase in gross margin is primarily due to the increase in revenue and the amortization costs of the acquired SOAdesk software being fully amortized as of the first quarter of 2013.

Maintenance.

Maintenance Revenue.  Maintenance revenue for the nine months ended September 30, 2014 increased by approximately $18,000, or 1.7%, from $1,077,000 to $1,095,000 as compared to the nine months ended September 30, 2013.  The increase in maintenance revenue is primarily due to new software sales in the second half of fiscal 2013.

Maintenance Gross Margin.  Gross margin on maintenance products for the nine months ended September 30, 2014 was 92.9% compared with 92.2% for the nine months ended September 30, 2013.  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 the increase in maintenance revenue and lower outside consulting expense.

Services.

Services Revenue.  Services revenue decreased $424,000, or 85.5%, from $496,000 to $72,000 for the nine months ended September 30, 2014 as compared with the nine months ended September 30, 2013. The decrease in services revenues is primarily attributable to a decrease in paid consulting engagements in the first nine months of 2014.

Services Gross Margin Loss.  Services gross margin loss was 630.6% for the nine months ended September 30, 2014 compared with gross margin loss of 46.0% for the nine months ended September 30, 2013.  The increase in gross margin loss was primarily attributable to a decrease in consulting revenue partially offset by a decrease in headcount and lower travel expenses.

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, 2014 decreased by approximately $349,000, or 30.6%, from $1,139,000 to $790,000 as compared with the nine months ended September 30, 2013.  The decrease is primarily attributable to a decrease in headcount and lower trade show expenses.

15

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 $115,000, or 11.3%, from $1,017,000 to $902,000 for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.  The decrease in costs is primarily due to a decrease in headcount and lower travel 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 nine months ended September 30, 2014 decreased by approximately $21,000, or 2.6%, from $817,000 to $796,000 as compared to the nine months ended September 30, 2013.  The decrease is primarily attributable to a decrease in headcount.

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 2014 and 2013. Because 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 $2,168,000 for the nine months ended September 30, 2014 as compared to a net loss of $2,542,000 for the nine months ended September 30, 2013. The decrease in net loss is primarily due to the decreases in operating expenses and software being fully amortized in 2013 partially offset by the increase in revenue.

LIQUIDITY AND CAPITAL RESOURCES

Cash

Cash and cash equivalents increased to $51,000 at September 30, 2014 from $5,000 at December 31, 2013, an increase of $46,000.

Net cash used by Operating Activities. Cash used by operations for the nine months ended September 30, 2014 was $1,089,000 compared to cash used by operations of $1,537,000 for the nine months ended September 30, 2013.  Cash used by operations for the nine months ended September 30, 2014 was primarily due to the loss from operations of $2,168,000 and a decrease in deferred revenue of $660,000 partially offset  by the increase in depreciation and amortization of $16,000, stock compensation of $65,000, a decrease in accounts receivable of $1,015,000, a decrease in prepaid expenses of $14,000, and an increase in accounts payable and accrued expenses of $629,000.

Net cash used in Investing Activities. The Company had purchases of equipment totaling $7,000 and $7,000 for the nine months ended September 30, 2014 and 2013, respectively.

Net cash generated by Financing Activities.  Net cash generated in financing activities for the nine months ended September 30, 2014 was approximately $1,142,000 as compared with net cash generated by financing activities of approximately $1,509,000 for the nine months ended September 30, 2013.  Cash generated by financing activities for the nine months ended September 30, 2014 was comprised primarily from the cash received from short term borrowings of $1,536,000 offset by the repayment of $394,000 of short term debt.

Liquidity

The Company funded its cash needs during the nine months ended September 30, 2014 with cash on hand from December 31, 2013, the revenue generated in the first nine months of 2014, and short term borrowings.

From time to time during 2012 through 2014, 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.  At December 31, 2013, the Company was indebted to Mr. Steffens in the approximate amount of $4,398,000 of principal and $505,000 in interest. In March 2014, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until June 30, 2015. At September 30, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $5,931,000 of principal and $949,000 in interest.

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Subsequent to September 30, 2014, the Company entered into various notes payable totaling $260,000 with Mr. Steffens.  The notes bear interest at 12%.  They are unsecured and mature on June 30, 2015.

The Company has incurred an operating loss of approximately $3,206,000 for the year ended December 31, 2013, and has a history of operating losses.  For the nine months ended September 30, 2014, the Company incurred losses of $2,168,000 and had a working capital deficiency of $13,652,000 as of September 30, 2014.  However, 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 $1,536,000 and $2,671,000 in 2014 and 2013, respectively.  The Company has also retired approximately $394,000 and $416,000 of debt in 2014 and 2013, respectively.  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 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.

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, 2014.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of September 30, 2014, 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, 2014 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.
	By:	/s/ John P. Broderick
		John P. Broderick
		Chief Executive Officer and Chief Financial Officer
Date: November 14, 2014

19

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, John P. Broderick, certify that:

1.      I have reviewed this Quarterly Report on Form 10-Q of Cicero Inc.,

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 14, 2014	By:	/s/ John P. Broderick
		John P. Broderick
		Chief Executive and Financial Officer
		(Principal Executive, Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER/CHIEF FINANCIAL OFFICER

OF CICERO INC.

This certification is provide pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended September 30, 2014 of Cicero Inc. (the “Company”).

I, John P. Broderick, the Chief Executive Officer/Chief Financial Officer of the Company certify that:

(i) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/   John P. Broderick

John P. Broderick

Chief Executive and Financial Officer

(Principal Executive, Financial and Accounting Officer)

September 14, 2014

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

3. SHORT TERM DEBT

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

3. SHORT TERM DEBT

Short-term debt and notes payable to related party consist of the following (in thousands):

	September 30, 2014		December 31, 2013
Note payable - asset purchase agreement (a)	$	700	$	--
Note payable – related party (b)		5,946		21
Notes payable (c)		1,086		435
	$	7,732	$	456

(a)   In June 2014, the Company reclassified to short-term debt its 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.  At September 30, 2014, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $165,000 in interest. At December 31, 2013, this debt was classified as long-term debt but subsequently has been reclassified to short term debt.

The note is convertible into 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 Company is obligated to repay any principal of the loan with fifty percent of any gross proceeds of any Series B Preferred capital raised through maturity of the note.  The note is convertible at the holder’s option at any time or at maturity.

(b) From 2012 through 2014, the Company entered into various short-term notes payable with John Broderick, the Chief Executive Officer and Chief Financial Officer, for various working capital needs. The notes bear interest at 12% and were unsecured. At December 31, 2013, the Company was indebted to Mr. Broderick in the approximate amount of $6,000. In February 2014, the debt of $6,000 and approximate interest of $500 was paid in full.

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. At December 31, 2013, the Company was indebted to Mr. Castagno in the approximate amount of $15,000. No interest was paid in fiscal 2013.  In March 2014, Mr. Castagno amended the note extending the term date till December 31, 2014 and the note bears interest at 10%.  At September 30, 2014, the Company was indebted to Mr. Castagno in the amount of $15,000 in principal and approximately $800 in interest.

From time to time during 2012 through 2014, 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. In June 2014, the Company reclassified its outstanding debt with Mr. Steffens to short term debt.  At September 30, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $5,931,000 of principal and $949,000 in interest.  At December 31, 2013, the Company was indebted to Mr. Steffens in the approximate amount of $4,398,000 of principal and $505,000 in interest. In March 2014, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until June 30, 2015. As such this amount was classified as long term debt at December 31, 2013.

(c) The Company has issued a series of short-term promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured.  The notes in the aggregate principal amount of $50,000 and $435,000, respectively, as of September 30, 2014 and December 31, 2013, bear interest between 10% and 36% per annum.  The Company repaid approximately $385,000 of the outstanding notes and $52,000 of interest in fiscal 2014.

In January 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.  At September 30, 2014, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $198,000 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.  The note is convertible at the option of the holder with one-third convertible in January 2011, two-thirds convertible in January 2012, and the entire note convertible in January 2013 or at maturity.  In March 2012, SOAdesk elected to convert $300,000 of the outstanding note balance into 2,000,000 shares of Company’s Common Stock.  At December 31, 2013, the Company was indebted to SOAdesk in the amount of $700,000 of principal and $172,000 in interest and was classified as long term debt but subsequently had been reclassified to short-term debt.

In June 2014, the Company reclassified to short-term debt its unsecured promissory note with certain private lenders 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 2014, the maturity date of the note was extended to June 30, 2015 and reclassified to long term debt at December 31, 2013.  At September 30, 2014, the Company was indebted to these private lenders in the amount of $336,000 in principal and $103,000 in interest.

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2. GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

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. Through September 30, 2014, no indicator of impairment of goodwill has been identified.

The Company’s intangible asset, consisting of software acquired from SOAdesk, LLC, in the amount of $2,103,000 was being amortized over its estimated useful life of 3 years ended March 31, 2013. Amortization expense for the three months ended March 31, 2013 was $28,000, resulting in the intangible asset being fully amortized.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
ASSETS
Cash and cash equivalents	$ 51	$ 5
Trade accounts receivable, net	110	1,125
Prepaid expenses and other current assets	194	208
Total current assets	355	1,338
Property and equipment, net	20	29
Goodwill (Note 2)	2,832	2,832
Total assets	3,207	4,199
Current liabilities:
Short-term debt (Note 3)	7,732	456
Accounts payable	3,659	3,178
Accrued expenses:
Salaries, wages, and related items	1,385	1,235
Other	509	417
Deferred revenue	722	1,382
Total current liabilities	14,007	6,668
Long-term debt	0	6,134
Total liabilities	14,007	12,802
Stockholders' deficit:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized Series A-1 - 1,541.6 shares issued and outstanding at September 30, 2014 and December 31, 2013	0	0
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized Series B - 10,400 shares issued and outstanding at September 30, 2014 and at December 31, 2013	0	0
Common stock, $0.001 par value, 215,000,000 shares authorized 85,806,247 issued and outstanding at September 30, 2014 and at December 31, 2013	86	86
Additional paid-in capital	237,200	237,135
Accumulated deficit	(248,086)	(245,824)
Total stockholders' deficit	(10,800)	(8,603)
Total liabilities and stockholders' deficit	$ 3,207	$ 4,199

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (Unaudited) (USD $) In Thousands, except Share data	Common Stock	Preferred Stock	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning Balance, Amount at Dec. 31, 2013	$ 86	$ 0	$ 237,135	$ (245,824)	$ (8,603)
Beginning Balance, Shares at Dec. 31, 2013	85,806,247	11,941
Dividend for preferred B stock				(94)	(94)
Options issued as compensation			2		2
Restricted shares issued as compensation			63		63
Net income				(2,168)	(2,168)
Ending Balance, Amount (unaudited) at Sep. 30, 2014	$ 86	$ 0	$ 237,200	$ (248,086)	$ (10,800)
Ending Balance, Shares (unaudited) at Sep. 30, 2014	85,806,247	11,941

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6. COMMITMENTS (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014
Commitments Tables
2014	$ 17
2015	102
2016	103
2017	106
2018	89
Total	$ 417

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1. INTERIM FINANCIAL STATEMENTS

9 Months Ended

Sep. 30, 2014

Notes to Financial Statements

1. INTERIM FINANCIAL STATEMENTS

The accompanying financial statements for the three and nine months ended September 30, 2014 and 2013 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 financial statements and notes thereto contained in Cicero Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014.  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 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 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 $3,206,000 for the year ended December 31, 2013, and has a history of operating losses. For the nine months ended September 30, 2014, the Company incurred losses of $2,168,000 and had a working capital deficiency of $13,652,000 as of September 30, 2014.  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 $1,536,000 and $2,671,000 in 2014 and 2013, respectively.  The Company has also retired approximately $394,000 and $416,000 of debt in 2014 and 2013, respectively. 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 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.

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 issued 15,000 options at an exercise price of $0.025 in the first nine months of 2014.  The Company recognized stock-based compensation expense of $21,000 and $65,000 for the three and nine months ended September 30, 2014, respectively.  This is comprised of the following amounts for the three and nine months, respectively, as of September 30, 2014; $0 and $2,000 in connection with outstanding options, $9,000 and $27,000 for the 549,360 shares of restricted stock reserved for Mr. John Broderick, the Company’s CEO, in accordance with his 2007 employment agreement, and $12,000 and $36,000 for the 1,500,000 shares of restricted stock reserved for Mr. Broderick, in accordance with his 2012 employment agreement.

At September 30, 2014, there was unrecognized compensation cost of approximately $300 related to stock options which is expected to be recognized over a weighted-average amortization period of 1.5 years.  In addition, at September 30, 2014, there was approximately $6,000 of unrecognized expense compensation cost related to Mr. Broderick’s 1,500,000 shares of unvested restricted stock that is expected to be recognized over a weighted-average period of less than 1 year.

The following table sets forth certain information as of September 30, 2014 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, 2013		3,396,210
Granted		15,000
Exercised		--
Forfeited		(168,600	)
Outstanding on September 30, 2014		3,242,610
Weighted average exercise price of outstanding options	$	0.24
Aggregate Intrinsic Value	$	0.00
Shares available for future grants on September 30, 2014		1,258,590
Weighted average of remaining contractual life		4.89

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 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 all current U.S. GAAP guidance on this topic and eliminate all 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, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. The Company has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the financial statements and related disclosures.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Stockholders deficit:
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock shares authorized	10,000,000	10,000,000
Preferred stock shares series A issued	1,541.6	1,541.6
Preferred stock shares series A outstanding	1,541.6	1,541.6
Preferred stock shares series B issued	10,400	10,400
Preferred stock shares series B outstanding	10,400	10,400
Common stock, par value	$ 0.001	$ 0.001
Common stock shares authorized	215,000,000	215,000,000
Common stock shares issued	85,806,247	85,806,247
Common stock shares outstanding	85,806,247	85,806,247

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3. SHORT TERM DEBT (Tables)

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

Short-term debt, and notes payable to related party

	September 30, 2014		December 31, 2013
Note payable - asset purchase agreement (a)	$	700	$	--
Note payable – related party (b)		5,946		21
Notes payable (c)		1,086		435
	$	7,732	$	456

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Document and Entity Information	9 Months Ended
	Sep. 30, 2014	Nov. 07, 2014
Document And Entity Information
Entity Registrant Name	CICERO INC
Entity Central Index Key	0000945384
Document Type	10-Q
Document Period End Date	Sep. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		85,848,237
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2014

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6. COMMITMENTS (Tables)

9 Months Ended

Sep. 30, 2014

Commitments Tables

Schedule of lease commitments

	Lease Commitments
2014	$	17
2015		102
2016		103
2017		106
2018		89
	$	417

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenue:
Software	$ 12	$ 24	$ 308	$ 67
Maintenance	367	372	1,095	1,077
Services	4	146	72	496
Total operating revenue	383	542	1,475	1,640
Cost of revenue
Software	0	0	0	28
Maintenance	24	25	78	84
Services	141	258	526	724
Total cost of revenue	165	283	604	836
Gross margin	218	259	871	804
Operating expenses:
Sales and marketing	231	304	790	1,139
Research and product development	325	247	902	1,017
General and administrative	258	227	796	817
Total operating expenses	814	778	2,488	2,973
Loss from operations	(596)	(519)	(1,617)	(2,169)
Other income/(expense):
Interest expense	(197)	(144)	(551)	(372)
Other income/(expense)	0	0	0	(1)
Total other income/(expense)	(197)	(144)	(551)	(373)
Net loss	(793)	(663)	(2,168)	(2,542)
8% preferred stock Series B dividend	32	32	94	94
Net loss applicable to common stockholders	$ (825)	$ (695)	$ (2,262)	$ (2,636)
Loss per share applicable to common stockholders:
Basic and Diluted	$ (0.01)	$ (0.01)	$ (0.03)	$ (0.03)
Weighted average shares outstanding:
Basic and Diluted	85,806	85,806	85,806	84,993

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6. COMMITMENTS

9 Months Ended

Sep. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

6. 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 September 30, 2014 consisted of only one lease as follows (in thousands):

	Lease Commitments
2014	$	17
2015		102
2016		103
2017		106
2018		89
	$	417

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5. LOSS PER SHARE

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

5. 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, restricted stock, preferred stock and convertible debt.

Options 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 were included for the three and nine months ended September 30, 2014 and 2013.  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.

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1. INTERIM FINANCIAL STATEMENTS (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended
	Sep. 30, 2014
Interim Financial Statements Details
Outstanding on December 31, 2013	3,396,210
Granted	15,000
Exercised	0
Forfeited	(168,600)
Outstanding onSeptember 30, 2014	3,242,610
Weighted average exercise price of outstanding options	$ 0.24
Aggregate Intrinsic Value	$ 0
Shares available for future grants on September 30, 2014	1,258,590
Weighted average of remaining contractual life	4 years 10 months 20 days

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1. INTERIM FINANCIAL STATEMENTS (Policies)

9 Months Ended

Sep. 30, 2014

Notes to Financial Statements

Liquidity

The accompanying 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 $3,206,000 for the year ended December 31, 2013, and has a history of operating losses. For the nine months ended September 30, 2014, the Company incurred losses of $2,168,000 and had a working capital deficiency of $13,652,000 as of September 30, 2014.  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 $1,536,000 and $2,671,000 in 2014 and 2013, respectively.  The Company has also retired approximately $394,000 and $416,000 of debt in 2014 and 2013, respectively. 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 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.

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 issued 15,000 options at an exercise price of $0.025 in the first nine months of 2014.  The Company recognized stock-based compensation expense of $21,000 and $65,000 for the three and nine months ended September 30, 2014, respectively.  This is comprised of the following amounts for the three and nine months, respectively, as of September 30, 2014; $0 and $2,000 in connection with outstanding options, $9,000 and $27,000 for the 549,360 shares of restricted stock reserved for Mr. John Broderick, the Company’s CEO, in accordance with his 2007 employment agreement, and $12,000 and $36,000 for the 1,500,000 shares of restricted stock reserved for Mr. Broderick, in accordance with his 2012 employment agreement.

At September 30, 2014, there was unrecognized compensation cost of approximately $300 related to stock options which is expected to be recognized over a weighted-average amortization period of 1.5 years.  In addition, at September 30, 2014, there was approximately $6,000 of unrecognized expense compensation cost related to Mr. Broderick’s 1,500,000 shares of unvested restricted stock that is expected to be recognized over a weighted-average period of less than 1 year.

The following table sets forth certain information as of September 30, 2014 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, 2013		3,396,210
Granted		15,000
Exercised		--
Forfeited		(168,600	)
Outstanding on September 30, 2014		3,242,610
Weighted average exercise price of outstanding options	$	0.24
Aggregate Intrinsic Value	$	0.00
Shares available for future grants on September 30, 2014		1,258,590
Weighted average of remaining contractual life		4.89

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 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 all current U.S. GAAP guidance on this topic and eliminate all 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, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. The Company has not yet selected a transition method and is evaluating the impact of adopting this new accounting standard update on the financial statements and related disclosures.

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8. SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2014

Subsequent Events [Abstract]

8. SUBSEQUENT EVENTS

In October 2014, the Company entered into various notes payable totaling $260,000 with Mr. Steffens.  The notes bear interest at 12%.  They are unsecured and mature on June 30, 2015.

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7. CONTINGENCIES

9 Months Ended

Sep. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

7. 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.

The Company is currently in discussions with the State of Delaware regarding the possible underpayment of its annual franchise tax dating back to 2002.  The Company filed with the IRS amended federal tax returns, upon which the Delaware franchise tax is partially based, for years 1999 through 2011 and has submitted those amended federal tax returns to the State of Delaware.  The Company believes the value of its assets reflected in such amended tax returns should ameliorate the possible underpayment, and that if the State of Delaware re-calculates the Company’s franchise taxes based upon its amended returns, the Company would have no or a small outstanding balance for its Delaware franchise tax.  Upon resolution thereof, the Company’s Certificate of Incorporation would be reinstated.  Currently the discussions are focused on an amount due of approximately $42,000 based on correspondence with the State of Delaware, which takes into account certain offered credits, but until there is a settlement, the previously reported amount or some other amount may be sought by the state.  Should the Company not be able to reinstate its Certificate of Incorporation with the State of Delaware, its corporate powers would continue to be inoperative.

In October 2003, we were served with a summons and complaint in Superior Court of North Carolina regarding unpaid invoices for services rendered by one of our subcontractors.  The amount in dispute was approximately $200,000 and is included in accounts payable. Subsequent to March 31, 2004, we settled this litigation.  Under the terms of the settlement agreement, we agreed to pay a total of $189,000 plus interest over a 19-month period ending November 15, 2005. The Company has not made any additional payments and has a remaining liability of approximately $88,000.

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, 2014.

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1. INTERIM FINANCIAL STATEMENTS (Tables)

9 Months Ended

Sep. 30, 2014

Interim Financial Statements Tables

Stock-Based Compensation

	Shares
Outstanding on December 31, 2013		3,396,210
Granted		15,000
Exercised		--
Forfeited		(168,600	)
Outstanding on September 30, 2014		3,242,610
Weighted average exercise price of outstanding options	$	0.24
Aggregate Intrinsic Value	$	0.00
Shares available for future grants on September 30, 2014		1,258,590
Weighted average of remaining contractual life		4.89

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3. SHORT TERM DEBT (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Short Term Debt Details
Note payable asset purchase agreement (a)	$ 700	$ 0
Note payable - related party (b)	5,946	21
Note payable (c)	1,086	435
Short term debt	$ 7,732	$ 456

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash flows from operating activities:
Net loss	$ (2,168)	$ (2,542)
Adjustments to reconcile net loss to net cash generated by operating activities:
Depreciation and amortization	16	49
Stock compensation expense	65	69
Stock issuance for external consulting fees	0	35
Changes in assets and liabilities:
Trade accounts receivable	1,015	1,153
Prepaid expenses and other assets	14	174
Accounts payable and accrued expenses	629	191
Deferred revenue	(660)	(666)
Net cash used by operating activities	(1,089)	(1,537)
Cash flows from investing activities:
Purchases of equipment	(7)	(7)
Net cash used by investing activities	(7)	(7)
Cash flows from financing activities:
Issuance of common stock	0	65
Borrowings under short and long-term debt	1,536	1,860
Repayments of short and long-term debt	(394)	(416)
Net cash used in financing activities	1,142	1,509
Net increase/(decrease) in cash	46	(35)
Cash:
Beginning of period	5	69
End of period	$ 51	$ 34

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4. INCOME TAXES

9 Months Ended

Sep. 30, 2014

Income Tax Disclosure [Abstract]

4. 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 2014 or 2013.  Because of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance.

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1. INTERIM FINANCIAL STATEMENTS (Details Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Interim Financial Statements Details Narrative
Net loss	$ 793	$ 663	$ 2,168	$ 2,542
Working capital deficiency	$ 13,652,000		$ 13,652,000