UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013

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

Commission File Number:  000-26392

CICERO INC.
(Exact name of registrant as specified in its charter)

Delaware
 
11-2920559
(State of incorporation)
 
(I.R.S. Employer Identification No.)

8000 Regency Parkway, Suite 542, Cary, NC 27518
(Address of principal executive offices, including Zip Code)
 
(919) 380-5000
( Registrant’s telephone number, including area code)
_____________

Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
_____________

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the above Act. Yes o No þ

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

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

Indicate by check mark whether the registrant is a shell company.  Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer,” “large 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 þ

Aggregate market value of the outstanding shares of common stock held by non-affiliates of the Registrant as of June 30, 2013 was approximately $4,384,699 based upon the closing price quoted on the Over The Counter Bulletin Board.

There were 85,806,247 shares of Common Stock outstanding as of March 24, 2014.

Documents Incorporated by Reference: None
 


 
 
 
 
 
CICERO INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2013

Item Number
 
Page
Number
     
 
PART I
 
     
1.
Business
1
1A.
Risk factors
7
1B
Unresolved Staff Comments
11
2.
Properties
11
3.
Legal Proceedings
11
4.
Mine Safety Disclosures
11
 
PART II
 
     
5.
Market For Registrant's Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities.
12
6.
Selected Financial Data
12
7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
13
7A.
Quantitative and Qualitative Disclosures About Market Risk
20
8.
Financial Statements and Supplementary Data
20
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
20
9A.
Controls and Procedures
21
9B.
Other Information
21
     
 
PART III
 
     
10.
Directors, Executive Officers and Corporate Governance
22
11.
Executive Compensation
25
12.
Security Ownership of Certain Beneficial Owners and Management
30
13.
Certain Relationships and Related Transactions, and Director Independence
32
14.
Principal Accountant Fees and Services
32
     
 
PART IV
 
     
15.
Exhibits and Financial Statement Schedules
34
     
SIGNATURES
37
   
INDEX TO FINANCIAL STATEMENTS
F-1

 
 

 

PART I

Item 1.      Business

Overview

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 track 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 ideal for the financial services, insurance, healthcare,  governmental and other industries requiring a cost-effective, proven business performance and user experience management solution for enterprise desktops.
 
 
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Some of the companies that have implemented or are implementing the Company’s software solutions include Merrill Lynch, & Co., Inc., Nationwide Financial Services, First Tennessee Bank, Assurant, JP Morgan Chase, Convergys, and UBS. We have also sold our products to healthcare, banking, and government users.

Cicero Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc. and re-incorporated in Delaware in 1999. Our principal executive offices are located at 8000 Regency Parkway, Suite 542, Cary, NC 27518 and our telephone number is (919) 380-5000. Our web site is www.ciceroinc.com.
 
Products

The Company’s software products deliver desktop activity intelligence and improvement capabilities to improve business performance. All of our products - Cicero Discovery and Cicero XM - leverage existing technologies by securely monitoring activities and presenting relevant information in an intuitive manner, improving business processes and the user experience.

Cicero Discovery
 
Cicero Discovery is a software solution that provides companies operational visibility into how their enterprise desktops are being used and performing to identify areas for process improvement and cost reduction. Cicero Discovery collects activity and application performance data and tracks business objects across time and across multiple users, as well as measures against a defined "expected" business process flow, either for analysis or to feed a third party application. Cicero Discovery is invisible to the end user – it gathers data about what they do, what applications they run, how those applications are used, the health of their computer and the type of data they are working on that the company is interested in.  These data are collected and stored centrally and can be tracked in real-time or via deferred processing.

Companies are using Cicero Discovery to:
 
  
Monitor for potential business rule, compliance, fraud, and company policy issues.
 
  
Identify inconsistent workflow or missing steps in given processes.
 
  
Publish configured events to stop and start call recording software (or any other purpose).
 
  
Identify the step(s) in any or all processes an object (an account, claim, product, etc.) has been through and also what the latest step was and the current step in process.
 
  
Define an “anticipated” sequence for a process and report the events as they happen regardless of order.
 
  
Distinguish the differences between top and bottom performers.
 
  
Pinpoint repetitive and manual tasks that could be automated.
 
  
Capture where and when data are cut or copied from applications.
 
  
Identify if employees are navigating several screens (clicking, alt + tab) to complete tasks.
 
  
Capture, analyze, and focus on key performance indicators and metrics.
 
  
Supply desktop activity data to third-party enterprise analysis and reporting applications (e.g., BI, BAM, BPM, WFM/WFO, Speech Analytics, Call Recording, etc.).
 
  
Improve application usage and better focus/leverage IT investments.
 
Cicero XM ®
 
Cicero XM enables businesses to transform human interaction across the enterprise. Cicero XM enables the flow of data between different applications, regardless of the type and source of the application, eliminating redundant entry and costly mistakes. Cicero XM automates up and down-stream process flows, enforcing compliance and optimizing handle time and provides a task-oriented desktop, reducing training time and enabling delivery of best in class service. Cicero XM captures real-time information about each interaction, guiding the business user through an activity and capturing usage data to spot trends and forecast problems before they occur.

Cicero XM software offers a proven, innovative departure from traditional, costly and labor-intensive enterprise application integration solutions. The Company provides non-invasive application integration, reduces enterprise integration implementation cost and time, and extends companies' Service-Oriented Architecture (“SOA”) to the desktop. Cicero XM also enables customers to transform applications, business processes and human expertise into a seamless, cost effective business solution that provides a cohesive, task-oriented and role-centric interface that works the way people think.
 
 
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By using Cicero XM technology, companies can decrease their customer management costs, improve their customer service, maximize the lifetime value of existing customers, and more efficiently cross-sell the full range of their products and services resulting in an overall increase in return on their information technology investments. In addition, the Company’s software enables organizations to reduce the business risks inherent in replacement or re-engineering of mission-critical applications and extend the productive life and functional reach of their application portfolio.

Services
 
We provide a full spectrum of technical support, training and consulting services across all of our products as part of our commitment to providing our customers industry-leading business integration solutions.  Our services organization is staffed with experts in the field of systems integration having backgrounds in development, consulting, and business process reengineering.  In addition, our services professionals have substantial industry specific backgrounds with extraordinary depth in our focus marketplaces of financial services, contact centers, and the back office.

Maintenance and Support
 
We offer customers varying levels of technical support tailored to their needs, including periodic software upgrades, and telephone support.  The Company’s products are frequently used in mission-critical business situations, and our maintenance and support services are accustomed to the critical demands that must be met to deliver world-class service to our clients.  Many of the members of our staff have expertise in mission critical environments and are ready to deliver service commensurate with those unique client needs.
 
Training Services

Our training organization offers a full curriculum of courses and labs designed to help customers become proficient in the use of our products and related technology as well as enabling customers to take full advantage of our field-tested best practices and methodologies.  Our training organization seeks to enable client organizations to gain the proficiency needed in our products for full client self-sufficiency but retains the flexibility to tailor their curriculum to meet specific needs of our clients.

Consulting Services
 
We offer consulting services around our product offerings in project management, applications and platform integration, application design and development and application renewal, along with expertise in a wide variety of development environments and programming languages. We also have an active partner program in which we recruit leading IT consulting and system integration firms to provide services for the design, implementation and deployment of our solutions. Our consulting organization supports third party consultants by providing architectural and enabling services.
 
Customers

Our customers include both end-users to whom we sell our products and services directly and distributors and other intermediaries who either resell our products to end-users or incorporate our products into their own product offerings. Typical end-users of our products and services are large businesses with sophisticated technology requirements for contact centers, in the financial services, insurance and telecommunications industries, and intelligence, security, law enforcement and other governmental organizations.

Our customers are using our solutions to rapidly deploy applications. Some examples of customers' uses of our products include:

  
A Regional Bank - A large U.S. regional bank selected Cicero XM software to provide intelligent unified desktop solutions for their customer service operations and throughout their enterprise. Leveraging existing applications, the new solution captures desktop activities, automates processes, provides user guidance, and displays composite views of information to improve user productivity and the customer experience.

 
3

 
 
  
Business Process Outsourcers - use our software solution in contact centers to provide real time integration among existing back-office systems, eliminate redundant data entry, shorten call times, provide real-time data access and enhance customer service and service levels.

  
A financial institution - uses our software solution to provide real-time integration among market data, customer account information, existing back-office systems and other legacy applications, eliminate redundant data entry, provide real-time data access and processing, and enhance customer service and service levels.

  
An insurance company – Information technology and Cicero professionals created a Cicero desktop solution which integrated computer telephony integration, key business systems and numerous secondary applications in use in the contact centers and elsewhere within the organization.  Using Cicero, the contact center agents now use a central, integrated dashboard to navigate between applications, with key information (like customer and policy numbers) passed automatically between applications.

Other customers are systems integrators, which use our software to develop integration solutions for their customers.

Merrill Lynch/Bank of America, JP Morgan Chase, and UBS, Inc. each accounted for more than ten percent (10%) of our operating revenues in 2013.  Convergys, Inc., Merrill Lynch/Bank of America and UBS, Inc. each accounted for more than ten percent (10%) of our operating revenues in 2012.
 
Sales and Marketing
 
Sales
 
An important element of our sales strategy is to supplement our direct sales force by expanding our relationships with third parties to increase market awareness and acceptance of our business integration software solutions. As part of these relationships, we continue to jointly sell and implement our software solutions with strategic partners such as systems integrators and embed our software along with other products through reseller relationships.  We provide training and other support necessary to systems integrators and resellers to aid in the promotion of our products.  To date we have entered into technology partnerships for integrated business solutions with  KnoahSoft, Monet Software, Co-nexus, Pipkins, and Voice Print International.    In addition, we have entered into strategic partnerships with eg solutions and Convergys.  These organizations have relationships with existing customers or have access to organizations requiring top secret or classified access.  In addition, several of these partners can bundle our software with other software to provide a comprehensive solution to customers.  We are not materially dependent on any of these organizations. Generally, our agreements with such partners provide for price discounts based on their sales volume, with no minimum required volume.

Marketing
 
The target market for our products and services are in the financial services, insurance, and healthcare industries, as well as users in the intelligence, security and law enforcement communities and other governmental organizations. Increasing competitiveness and consolidation is driving companies in such businesses to increase the efficiency, improve the user experience and improve the quality of their customer contact centers. As a result, companies are compelled by both economic necessity and internal mandates to find ways to increase internal efficiency, increase customer satisfaction, increase effective cross-selling, decrease staff turnover cost and leverage their investment in current information technology.
 
Our marketing staff has an in-depth understanding of business performance and user experience software marketplaces and the needs of these customers, as well as experience in all of the key marketing disciplines.  They also have knowledge across industries in financial services, insurance, healthcare, and government organizations that have focused on application integration and business process automation solutions to address needs in mergers and acquisitions and homeland security.
 
Core marketing functions include product marketing, marketing communications and strategic alliances.  We utilize focused marketing programs that are intended to attract potential customers in our target vertical industries and to promote our Company and our brands. Our marketing programs are specifically directed at our target markets, and include speaking engagements, public relations campaigns, focused trade shows and web site marketing, while devoting substantial resources to supporting the field sales team with high quality sales tools and ancillary material.  As product acceptance grows and our target markets increase, we will shift to broader marketing programs.
 
 
4

 
 
The marketing department also produces ancillary material for presentation or distribution to prospects, including demonstrations, presentation materials, white papers, case studies, articles, brochures, and data sheets.

Research and Product Development
 
We incurred research and development expense of approximately $1,272,000 and $1,476,000 in 2013 and 2012, respectively.

Since Cicero Discovery and Cicero XM are relatively new products in a relatively untapped market, it is imperative to constantly enhance the features and functionality of these products.  Our budget for research and development is based on planned product introductions and enhancements. Actual expenditures, however, may significantly differ from budgeted expenditures. Inherent in the product development process are a number of risks. The development of new, technologically advanced software products is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends.

Competition

The markets in which we compete are highly competitive and subject to rapid change. These markets are highly fragmented and served by numerous firms. We believe that the competitive factors affecting the markets for our products and services include:

  
Product functionality and features;

  
Availability and quality of support services;

  
Ease of product implementation;

  
Price;

  
Product reputation; and

  
Our financial stability.

The relative importance of each of these factors depends upon the specific customer environment. Although we believe that our products and services can compete favorably, we may not be able to increase our competitive position against current and potential competitors. In addition, many companies choose to deploy their own information technology personnel or utilize system developers to write new code or rewrite existing applications in an effort to deploy solutions to desktops. As a result, prospective customers may decide against purchasing and implementing externally developed and produced solutions such as ours.

We compete with companies that utilize varying approaches to modernize, web-enable and integrate existing software applications:
 
  
Middleware software provides integration of applications through messages and data exchange implemented typically in the middle tier of the application architecture.  This approach requires modification of the application source code and substantial infrastructure investments and operational expense.  Reuters, TIBCO and IBM MQSeries are competitors in the middleware market.

  
CRM software offers application tools that allow developers to build product specific interfaces and custom applications.  This approach is not designed to be product neutral and is often dependent on deep integration with our technology.  Siebel and Salesforce.com are representative products in the CRM software category.
 
  
Recently, there have been several companies that offer capabilities similar to our software in that these companies advertise that they integrate applications without modifying the underlying code for those applications. OpenSpan is one company who advertises that they can non-invasively integrate at the point of contact or on the desktop.
 
 
5

 
 
Our product competes directly with other contact center solutions offered by OpenSpan, Jacada, Verint, and NICE.  We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with each other, or other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. Many of our current competitors have greater name recognition, a larger installed customer base and greater financial, technical, marketing and other resources than we have.

Intellectual Property
 
Our success is dependent upon developing, protecting and maintaining our intellectual property assets. We rely upon combinations of copyright, trademark and trade secrecy protections, along with contractual provisions, to protect our intellectual property rights in software, documentation, data models, methodologies, data processing systems and related written materials in the international marketplace. We have filed applications for patents on our United Data Model.  Copyright protection is generally available under United States laws and international treaties for our software and printed materials. The effectiveness of these various types of protection can be limited, however, by variations in laws and enforcement procedures from country to country.  We use the registered trademarks “Cicero®”, “Cicero XM®”, “United Data Model®”, and “United Desktop®”.

All other product and company names mentioned herein are for identification purposes only and are the property of, and may be trademarks of, their respective owners.
 
Employees
 
As of December 31, 2013, we employed 25 full time employees.  Our employees are not represented by a union or a collective bargaining agreement.
 
Available Information

Our web address is www.ciceroinc.com.  We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.  Also, the public may read and copy such material at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.  The Securities and Exchange Commission also maintains an internet site that contains reports, proxy and information statements, and other information at www.sec.gov.

Forward Looking and Cautionary Statements

Certain statements contained in this Annual Report may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). We may also make forward looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to shareholders, in press releases and in other public statements. In addition, our representatives may from time to time make oral forward looking statements. Forward looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward looking statements. In accordance with the Reform Act, set forth below are cautionary statements that accompany those forward looking statements. Readers should carefully review these cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward looking statements and from historical trends. The following cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in our filings with the Securities and Exchange Commission and in materials incorporated therein by reference: our future success depends on the market acceptance of our products and successful execution of the strategic direction; general economic or business conditions may be less favorable than expected, resulting in, among other things, lower than expected revenues; an unexpected revenue shortfall may adversely affect our business because our expenses are largely fixed; our quarterly operating results may vary significantly because we are not able to accurately predict the amount and timing of individual sales and this may adversely impact our stock price; trends in sales of our products and general economic conditions may affect investors' expectations regarding our financial performance and may adversely affect our stock price; our future results may depend upon the continued growth and business use of the Internet; we may lose market share and be required to reduce prices as a result of competition from our existing competitors, other vendors and information systems departments of customers; we may not have the ability to recruit, train and retain qualified personnel; rapid technological change could render the Company's products obsolete; loss of any one of our major customers could adversely affect our business; our products may contain undetected software errors, which could adversely affect our business; because our technology is complex, we may be exposed to liability claims; we may be unable to enforce or defend our ownership and use of proprietary technology; because we are a technology company, our common stock may be subject to erratic price fluctuations; and we may not have sufficient liquidity and capital resources to meet changing business conditions.

 
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Item 1A. Risk Factors

We have a history of losses and there are no assurances that such losses may not continue.

We experienced operating losses and net losses for each of the years from 2000 through 2013. We incurred a net loss of $0.2 million for 2012 and $3.2 million for 2013.  As of December 31, 2013, we had a working capital deficit of $5.3 million. Our ability to generate positive cash flow is dependent upon sustaining certain cost reductions and generating sufficient revenues.   If we are unable to generate positive cash flow, our results of operations and financial condition may be adversely affected.
 
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

The report of our independent auditors dated March 31, 2014 on our consolidated financial statements for the period ended December 31, 2013 included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern.  Our auditors’ doubts are based on our recurring losses from operations and working capital deficit. Our ability to continue as a going concern will be determined by our ability to secure customer contracts that will drive sufficient cash flow to sustain our operations and/or raise additional capital in the form of debt or equity financing. Our 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 we be unable to continue as a going concern.

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

Historically, we have relied on equity and debt offerings, borrowings and operating cash flows to finance our working capital requirements. Reliance on internally generated cash to finance our operations could substantially limit our operational and financial flexibility. We have experienced negative cash flows from operations for the past three years. To the extent that we have insufficient operating cash flows, our ability to finance our operations may be limited by the extent to which we are able to raise capital through debt or equity financings. The extent to which we will be able to use shares of capital stock will depend on the market value of our capital stock from time to time and the willingness of potential investors to invest in our company. Using shares of capital stock for this purpose also may result in significant dilution to our then existing stockholders. Raising external capital in the form of debt could require periodic interest payments that could hinder our financial flexibility in the future. Besides, our ability to obtain external financing is subject to a number of uncertainties, including:
 
            our future financial condition, results of operations and cash flows;
            the state of global credit markets; and
            general market conditions for financing activities by companies in our industry.
 
Our failure to obtain a sufficient amount of capital on acceptable terms to finance our operations may materially and adversely affect the growth of our business.

We depend on an acceptance of our products for ongoing revenue.

The Company’s future revenues are entirely dependent on acceptance of Cicero’s products. The Company has experienced negative cash flows from operations for the past three years. At December 31, 2013, the Company had a working capital deficiency of $5.3 million. In order to generate sufficient revenues to sustain its operations, the Company will need to attract more accounts in the near future.

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

Our ability to generate revenue depends on the overall demand for customer experience management software and services and a recently introduced product within the enterprise mobility market. Our business depends on overall economic conditions, the economic and business conditions in our target markets and the spending environment for information technology projects, and specifically for customer experience management in those markets. A weakening of the economy in one or more of our geographic regions, unanticipated major events and economic uncertainties may make more challenging the spending environment for our software and services, reduce capital spending on information technology projects by our customers and prospective customers, result in longer sales cycles for our software and services or cause customers or prospective customers to be more cautious in undertaking larger transactions. Those situations may cause a decrease in our revenue. A decrease in demand for our software and services caused, in part, by a weakening of the economy, may result in a decrease in our revenue rates.
 
 
7

 
 
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 .
 
Our quarterly operating results have varied significantly in the past, and we expect they will continue to do so in the future. We have derived, and expect to continue to derive in the near term, a significant portion of our revenue from relatively large customer contracts or arrangements. The timing of revenue recognition from those contracts and arrangements has caused and may continue to cause fluctuations in our operating results, particularly on a quarterly basis. Our quarterly revenues and operating results typically depend upon the volume and timing of customer contracts received during a given quarter and the percentage of each contract, which we are able to recognize as revenue during the quarter. Each of these factors is difficult to forecast. As is common in the software industry, the largest portion of software license revenues are typically recognized in the last month of each fiscal quarter and the third and fourth quarters of each fiscal year. We believe these patterns are partly attributable to budgeting and purchasing cycles of our customers and our sales commission policies, which compensate sales personnel for meeting or exceeding periodic quotas.

Furthermore, licensing fees for Cicero XM are significant and each sale can or will account for a large percentage of our revenue and a single sale may have a significant impact on the results of a quarter. In addition, the substantial commitment of executive time and financial resources that have historically been required in connection with a customer’s decision to purchase our software increases the risk of quarter-to-quarter fluctuations. Our software sales require a significant commitment of time and financial resources because it is an enterprise product. Typically, the purchase of our products involves a significant technical evaluation by the customer and the delays frequently associated with customers’ internal procedures to approve large capital expenditures and to test, implement and accept new technologies that affect key operations. This evaluation process frequently results in a lengthy sales process of several months. It also subjects the sales cycle for our products to a number of significant risks, including our customers’ budgetary constraints and internal acceptance reviews. The length of our sales cycle may vary substantially from customer to customer.

Our product revenue may fluctuate from quarter to quarter due to the completion or commencement of significant assignments, the number of working days in a quarter and the utilization rate of services personnel. As a result of these factors, we believe that a period-to-period comparison of our historical results of operations is not necessarily meaningful and should not be relied upon as indications of future performance. In particular, our revenues in the third and fourth quarters of our fiscal years may not be indicative of the revenues for the first and second quarters. Moreover, if our quarterly results do not meet the expectations of our securities analysts and investors, the trading price of our common stock would likely decline.
 
Loss of key personnel associated with Cicero ® development could adversely affect our business .
 
Loss of key executive personnel or the software engineers we have hired with specialized knowledge of our technology could have a significant impact on our execution of our new strategy given that they have specialized knowledge developed over a long period of time with respect to our technology.
 
Different competitive approaches or internally developed solutions to the same business problem could delay or prevent adoption of Cicero Discovery and Cicero XM .
 
Cicero Discovery is designed to provide a unique way for an enterprise to understand what is truly happening on their users’ desktops. To effectively penetrate the market for solutions to this problem, Cicero Discovery will compete with traditional quality assurance and desktop analytic solutions that attempt to solve this business problem. Quality assurance and desktop analytic solutions are currently sold and marketed by companies such as OpenSpan and Verint. There can be no assurance that our potential customers will determine that Cicero Discovery’s methodology is superior to solutions provided by the competitors described above in addressing this business problem. Moreover, the information systems departments of our target customers, large financial institutions, are large and may elect to attempt to internally develop an internal solution to this business problem rather than to purchase the Cicero Discovery product.

Cicero XM is designed to address in a novel way the problems that large companies face integrating the functionality of different software applications by integrating these applications at the desktop. To effectively penetrate the market for solutions to this disparate application problem, Cicero XM will compete with traditional Enterprise Application Integration, or EAI, solutions that attempt to solve this business problem at the server or back-office level. Server level EAI solutions are currently sold and marketed by companies such as NEON, Mercator, Vitria, and BEA. There can be no assurance that our potential customers will determine that Cicero XM’s desktop integration methodology is superior to traditional middleware EAI solutions provided by the competitors described above in addressing this business problem. Moreover, the information systems departments of our target customers, large financial institutions, are large and may elect to attempt to internally develop an internal solution to this business problem rather than to purchase the Cicero XM product.

 
8

 
 
Accordingly, we may not be able to provide products and services that compare favorably with the products and services of our competitors or the internally developed solutions of our customers. These competitive pressures could delay or prevent adoption of Cicero Discovery or Cicero XM or require us to reduce the price of our products, either of which could have a material adverse effect on our business, operating results and financial condition.
 
Our ability to compete may be subject to factors outside our control.

We believe that our ability to compete depends in part on a number of competitive factors outside our control, including the ability of our competitors to hire, retain and motivate senior project managers, the ownership by competitors of software used by potential clients, the development by others of software that is competitive with our products and services, the price at which others offer comparable services and the extent of our competitors’ responsiveness to customer needs.
 
 
The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles.

  Our future success will depend to a substantial degree upon our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and emerging and evolving industry standards.

The introduction of new or enhanced products also requires us to manage the transition from older products in order to minimize disruption in customer ordering patterns, as well as ensure that adequate supplies of new products can be delivered to meet customer demand. There can be no assurance that we will successfully develop, introduce or manage the transition to new products.
 
 
We have in the past, and may in the future, experience delays in the introduction of our products, due to factors internal and external to our business. Any future delays in the introduction or shipment of new or enhanced products, the inability of such products to gain market acceptance or problems associated with new product transitions could adversely affect our results of operations, particularly on a quarterly basis.

We believe that to fully implement our business plan we will be required to enhance our ability to work with the Windows 7, Microsoft Vista, Windows XP, and Windows 2000 operating systems as well as the Linux operating system by adding additional development personnel as well as additional direct sales personnel to complement our sales plan.

The reputation of our software may be damaged and we may face a loss of revenue if our software products fail to perform as intended or contain significant defects.

Our software products are complex, and significant defects may be found following introduction of new software or enhancements to existing software or in product implementations in varied information technology environments. Internal quality assurance testing and customer testing may reveal product performance issues or desirable feature enhancements that could lead us to reallocate product development resources or postpone the release of new versions of our software. The reallocation of resources or any postponement could cause delays in the development and release of future enhancements to our currently available software, require significant additional professional services work to address operational issues, damage the reputation of our software in the marketplace and result in potential loss of revenue. Although we attempt to resolve all errors that we believe would be considered serious by our partners and customers, our software is not error-free. Undetected errors or performance problems may be discovered in the future, and known errors that we consider minor may be considered serious by our partners and customers. This could result in lost revenue, delays in customer deployment or legal claims and would be detrimental to our reputation. If our software experiences performance problems or ceases to demonstrate technology leadership, we may have to increase our product development costs and divert our product development resources to address the problems.

 
9

 
 
We may be unable to enforce or defend our ownership and use of proprietary and licensed technology .
 
Our success depends to a significant degree upon our proprietary and licensed technology. We rely on a combination of patent, trademark, trade secret and copyright law, contractual restrictions and passwords to protect our proprietary technology. However, these measures provide only limited protection, and there is no guarantee that our protection of our proprietary rights will be adequate. Furthermore, the laws of some jurisdictions outside the United States do not protect proprietary rights as fully as in the United States. In addition, our competitors may independently develop similar technology; duplicate our products or design around our patents or our other intellectual property rights. We may not be able to detect or police the unauthorized use of our products or technology, and litigation may be required in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of our proprietary rights. Any litigation to enforce our intellectual property rights would be expensive and time-consuming, would divert management resources and may not be adequate to protect our business.
 
We do not believe any of our products infringe the proprietary rights of third parties. However, companies in the software industry have experienced substantial litigation regarding intellectual property and third parties could assert claims that we have infringed their intellectual property rights. In addition, we may be required to indemnify our distribution partners and end-users for similar claims made against them. Any claims against us would divert management resources, and could require us to spend significant time and money in litigation, pay damages, develop new intellectual property or acquire licenses to intellectual property that is the subject of the infringement claims. These licenses, if required, may not be available on acceptable terms. As a result, intellectual property claims against us could have a material adverse effect on our business, operating results and financial condition.
 
As the number of software products in the industry increases and the functionality of these products further overlaps, we believe that software developers and licensors may become increasingly subject to infringement claims. Any such claims, with or without merit, could be time consuming and expensive to defend and could adversely affect our business, operating results and financial condition.

Our business may be adversely impacted if we do not provide professional services to implement our solutions.

Customers that license our software typically engage our professional services staff or third-party consultants to assist with product implementation, training and other professional consulting services. We believe that many of our software sales depend, in part, on our ability to provide our customers with these services and to attract and educate third-party consultants to provide similar services. New professional services personnel and service providers require training and education and take time and significant resources to reach full productivity. Competition for qualified personnel and service providers is intense within our industry. Our business may be harmed if we are unable to provide professional services to our customers to effectively implement our solutions or if we are unable to establish and maintain relationships with third-party implementation providers.

Our business may be adversely impacted by cyber security breach.

Third parties may attempt to fraudulently induce employees or customers to disclose sensitive information such as user names, passwords, or other information in order to gain access to our data, which could result in significant legal and financial exposure and a loss of confidence in the security of our service that would harm our future business prospects. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.
 
Because our software could interfere with the operations of customers, we may be subject to potential product liability and warranty claims by these customers.

Our software enables customers’ software applications to integrate and is often used for mission critical functions or applications. Errors, defects or other performance problems in our software or failure to provide technical support could result in financial or other damages to our customers. Customers could seek damages for losses from us. In addition, the failure of our software and solutions to perform to customers’ expectations could give rise to warranty claims.  The integration of our software with our customer’s applications, increase the risk that a customer may bring a lawsuit against us. Even if our software is not at fault, a product liability claim brought against us, even if not successful, could be time consuming and costly to defend and could harm our reputation.

 
10

 
 
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.

The Company’s common stock is quoted on the Over-the-Counter Bulletin Board.  Trading of our common stock on the OTCBB may be subject to certain provisions of the Securities Exchange Act of 1934, as amended, commonly referred to as the "penny stock" rule. A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Our stock is currently a penny stock and therefore is subject to additional sales practice requirements on broker-dealers. These may require a broker-dealer to:

 
make a special suitability determination for purchasers of our shares;

 
receive the purchaser's written consent to the transaction prior to the purchase; and

 
deliver to a prospective purchaser of our stock, prior to the first transaction, a risk disclosure document relating to the penny stock market.

Consequently, penny stock rules may restrict the ability of broker-dealers to trade and/or maintain a market in our common stock. Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares.

We have not paid any dividends on our common stock and it is likely that no dividends will be paid in the future.
 
We have never declared or paid cash dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 
Provisions of our charter and Bylaws could deter takeover attempts.
 
Our certificate of incorporation authorizes the issuance, without stockholder approval, of preferred stock, with such designations, rights and preferences as the board of directors may determine from time to time. Such designations, rights and preferences established by the board may adversely affect our stockholders. In the event of issuance, the preferred stock could be used, under certain circumstances, as a means of discouraging, delaying or preventing a change of control of the Company. Although we have no present intention to issue any shares of preferred stock in addition to the currently outstanding preferred stock, we may issue preferred stock in the future.

Some of the rights granted to the holders of our Series A-1 Preferred Stock and Series B Preferred Stock could prevent a potential acquirer from buying our Company.

Holders of our Series A-1 and Series B Preferred Stock have the right to block the Company from consummating a merger, sale of all or substantially all of its assets or recapitalization.  Accordingly, the holder of our Series A-1 Preferred Stock and Series B Preferred Stock could prevent the consummation of a transaction in which our stockholders could receive a substantial premium over the current market price for their shares.

Item 1B. Unresolved Staff Comments

Not Applicable

Item 2. Properties

Our corporate headquarters and administrative functions are based in offices of approximately 5,038 square feet in our Cary, North Carolina office pursuant to a lease which expires in 2014.  The Company is currently in negotiations to renew the lease.  We also believe that our present facilities are suitable for continuing our existing and planned operations.

Item 3. Legal Proceedings

None

Item 4. Mine Safety Disclosures

Not applicable.
 
 
11

 
 
PART II

Item 5.      Market For Registrant's Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Our common stock is currently quoted on the Over-The-Counter Bulletin Board. In January 2007, we formally changed our name to Cicero Inc. and now trade under the ticker CICN.  The chart below sets forth the high and low stock prices for the quarters of the fiscal years ended December 31, 2013 and 2012.

   
2013
   
2012
 
Quarter
 
High
   
Low
   
High
   
Low
 
First
  $ 0.10     $ 0.05     $ 0.19     $ 0.05  
Second
  $ 0.06     $ 0.05     $ 0.19     $ 0.14  
Third
  $ 0.06     $ 0.03     $ 0.15     $ 0.08  
Fourth
  $ 0.04     $ 0.01     $ 0.09     $ 0.04  
 
The closing price of the common stock on March 24, 2014 was $0.04 per share.
 
Dividends and Record Stockholders

We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future.   As of March 24, 2014, we had 209 registered stockholders of record.
 
Equity Compensation Plan Information

The following table sets forth certain information as of December 31, 2013, about shares of Common Stock outstanding and available for issuance under the Company’s existing equity compensation plans: the 2007 Cicero Stock Option Plan, the Level 8 Systems, Inc. 1997 Stock Option Incentive Plan, the 1995 Non-Qualified Option Plan and the Outside Director Stock Option Plan.
 
 
 
 
 
Plan Category
 
 
Number of Securities to
be issued upon exercise of
outstanding options
   
 
 
Weighted-average
exercise price of
outstanding options
   
Number of securities
remaining available under
equity compensation plans
(excluding securities reflected
in the first column)
 
Equity compensation plans approved by stockholders
    3,396,210     $ 0.31       1,111,090  
Equity compensation plans not approved by stockholders
    -0-       --       -0-  

Item 6.      Selected Financial Data.

Not Applicable

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

General Information

Cicero Inc. provides businesses the ability to maximize every interaction from intra-company back office applications to those that take place between employees, customers and vendors while extending the value of the best of breed applications in which businesses have already invested. The Company provides an innovative and unique combination of application and process integration, automation, presentation and real-time analysis, all without changes to the underlying applications or requiring costly development expenditures. Business integration software addresses the emerging need for a company's information systems to deliver enterprise-wide views of the Company's business information processes.

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.  Cicero offers services around our integration and customer experience management software products.

This discussion 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.  See ''Item 1. Business—Forward Looking and Cautionary Statements.''
 
Business Strategy

Management makes operating decisions and assesses performance of the Company’s operations based on one reportable segment, the Software product segment.

The Software product segment is comprised of the Cicero Discovery and Cicero XM products.  Cicero Discovery delivers desktop analytics and reporting for the enterprise.  Cicero Discovery collects activity and application performance data and tracks business objects across time and across multiple users as well as measures against a defined "expected" business process flow, either for analysis or to feed a third party application.  Cicero XM enables businesses to transform human interaction across the enterprise. Cicero XM enables the flow of data between different applications, regardless of the type and source of the application, eliminating redundant entry and costly mistakes. Cicero XM automates up and down-stream process flows, enforcing compliance and optimizing handle time and provides a task-oriented desktop, reducing training time and enabling delivery of best in class service. Cicero XM captures real-time information about each interaction, guiding the business user through an activity and capturing usage data to spot trends and forecast problems before they occur.

 
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Results of Operations

The following table sets forth, for the years indicated, the Company's results of operations expressed as a percentage of revenue and presents information for the three categories of revenue.
 
   
Years Ended December 31,
 
   
2013
   
2012
 
Revenue:
           
Software
    5.7 %     67.7 %
Maintenance
    65.7 %     22.2 %
Services
    28.6 %     10.1 %
Total
    100.0 %     100.0 %
                 
Cost of revenue:
               
Software
    1.3 %     11.7 %
Maintenance
    5.0 %     2.4 %
Services
    44.0 %     16.3 %
Total
    50.3 %     30.4 %
                 
Gross margin
    49.7 %     69.6 %
                 
Operating expenses:
               
Sales and marketing
    64.9 %     31.6 %
Research and product development
    58.0 %     24.6 %
General and administrative
    48.1 %     15.8 %
Total
    171.1 %     72.1 %
                 
Loss from operations
    (121.4 )%     (2.5 )%
Other income/(expense), net
    (24.9 )%     (0.6 )%
Net loss
    (146.3 )%     (3.1 )%

The following table sets forth data for total revenue for operations by geographic origin as a percentage of total revenue for the periods indicated:

   
2013
   
2012
 
United States
    100 %     100 %

  Years Ended December 31, 2013 and 2012

Revenue and Gross Margin.    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 does not have any material backlog of unfilled software orders and product revenue in any period and is substantially dependent upon orders received in that quarter. Because the Company's operating expenses are based on anticipated revenue levels and are relatively fixed over the short term, variations in the timing of the recognition of revenue can cause significant variations in operating results from period to period. Fluctuations in operating results may result in volatility of the price of the Company's common stock.

Total revenues for the year ended December 31, 2013 decreased 63.4% or $3,805,000 from $5,997,000 in 2012 to $2,192,000 in 2013. The decrease in revenues in 2013 is due primarily to the decrease in revenue in software sales due to two significant enterprise license sales in fiscal 2012 partially offset by an increase in maintenance and consulting revenue.  
 
 
14

 
 
Software Products . Software products revenue for the year ended December 31, 2013 decreased 96.9% or $3,937,000 from $4,061,000 in 2012 to $124,000 in 2013.  The decrease in software revenue in 2013 is primarily due to two significant enterprise license sales in fiscal 2012 and no significant software sales in 2013.  
 
The gross margin on software products was 77.4% and 82.7% for the year ended December 31, 2013 and 2012, respectively.  Cost of software is composed primarily of amortization expense related to intangible assets acquired as part of the SOAdesk LLC transaction in January 2010. The decrease in gross margin is primarily due to the decrease in software revenue partially offset by the lower expenses due to the amortization costs of the acquired SOAdesk software being fully amortized as of the first quarter of 2013.
 
The Company expects to see an increase in software sales coupled with improving margins on software products as Cicero Discovery and Cicero XM gain acceptance in the marketplace. The Company’s expectations are based on its modification of the sales approach with customers and prospects. The Company believes that the entry level product for an enterprise is Discovery which allows companies to measure and then manage. Using data and analytics to drive change in an organization begins with capturing that data. This approach is being embraced by the company’s prospects. In addition, the Company and its products continue to be recognized in the marketplace with technology and partnership awards.

Maintenance.   Maintenance revenues for the year ended December 31, 2013 increased 8.0% or $107,000 from $1,333,000 in 2012 to $1,440,000 in 2013. The increase in maintenance revenue in 2013 is primarily due to a new annual maintenance contract with a major financial services company partially offset by the cancellation of two other maintenance contracts. 
 
Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company’s software products. The Company experienced a gross margin on maintenance products of 92.4% and 89.1% for 2013 and 2012, respectively.

Maintenance revenues are expected to increase as a result of our expected increase in sales of the Cicero Discovery and Cicero XM products. The cost of maintenance should increase slightly.

Services.   Services revenue for the year ended December 31, 2013 increased 4.1% or $25,000 from $603,000 in 2012 to $628,000 in 2013.   The increase in services revenues in 2013 is primarily attributable to an increase in paid consulting engagements.  
 
Cost of services primarily includes personnel and travel costs related to the delivery of services. Services gross margin loss was (53.5%) and (62.4%) for fiscal 2013 and 2012, respectively.  The decrease in gross margin loss in 2013 was primarily attributable to the increase in consulting revenue and a decrease in consulting expenses from a decrease in headcount and reduced travel expense.
 
Services revenues are expected to increase as the Cicero Discovery and Cicero XM products gain acceptance.

Sales and Marketing.   Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as industry conference participation and promotional expenses. Sales and marketing expenses decreased 25.0% or $474,000 to $1,423,000 in 2013.  The decrease is primarily attributable to lower headcount, a decrease in commissions from lower sales and lower trade shows expense .
 
 
15

 
 
Sales and marketing expenses are expected to increase as the Company adds variable compensation based on sales.

Research and Development.   Research and development expenses primarily include personnel costs for product authors, product developers and product documentation and related overhead.  Research and development expense decreased 13.8% or $204,000 to $1,272,000 in 2013. The decrease in costs is primarily due to lower headcount and a decrease in travel expenses partially offset by an increase in outside professional services.  
 
The Company intends to continue to make a significant investment in research and development while enhancing efficiencies in this area.

General and Administrative. General and administrative expenses consist of personnel costs for the executive, legal, financial, human resources, investor relations and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses increased 11.2% or $106,000 to $1,055,000 in 2013.  The increase is primarily attributable to an adjustment of accrued legal fees in 2012 partially offset by a decrease in professional service expenses.  
 
General and administrative expenses are expected to remain fairly static going forward.

Provision for Taxes. The Company’s effective income tax rate for continuing operations differs from the statutory rate primarily because an income tax benefit was not recorded for the net loss incurred in 2013 and 2012. Because of the Company’s inconsistent earnings history, the deferred tax assets have been fully offset by a valuation allowance.

Other Income/(Charges). Other income (net) decreased $510,000 from other income of $509,000 in 2012 to other loss of $1,000 in 2013.  The decrease is primarily due to income from net debt forgiveness in 2012 of approximately $507,000.  
 
Interest expense decreased $2,000 from $547,000 in 2012 to $545,000 in 2013 due to the decrease in debt obligations incurred by the Company due to the conversion of debt to equity in the first quarter of fiscal 2012 partially offset by the additional debt incurred in fiscal year 2013.  
 
Net Loss. Net loss increased $3,018,000 from a net loss of $188,000 in 2012 to a net loss of $3,206,000 in fiscal 2013.  The increase in loss is primarily due to the decrease in software revenue and a decrease in other income, partially offset by the decrease in operating expenses in fiscal 2013.
 
Impact of Inflation.   Inflation has not had a significant effect on the Company’s operating results during the periods presented.
 
Liquidity and Capital Resources

Operating and Investing Activities

The Company’s cash was $5,000 on December 31, 2013 compared with $69,000 on December 31, 2012, a decrease of $64,000.  The Company incurred a net loss of $3,206,000 for the year ended December 31, 2013 compared to net loss of $188,000 for the previous fiscal year. The Company has experienced negative cash flows from operations for each of the past three years. At December 31, 2013, the Company had a working capital deficiency of $5,330,000.

Operating activities utilized $2,375,000 in cash, which was primarily comprised of the loss from operations of $3,206,000 and a decrease of $7,000 in deferred revenue.  This was offset by non-cash charges for depreciation of $27,000 and amortization of $28,000, stock compensation expense of $92,000, stock issuance for outside consulting services of $35,000, a decrease in trade receivable of $122,000, a decrease in prepaid expenses of $81,000, and an increase of trade payables and other accruals of $453,000.
 
 
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The Company utilized approximately $9,000 in cash in the purchase of updating the Company’s network and computer equipment.
 
Financing Activities

The Company funded its cash needs during the year ended December 31, 2013 with cash on hand from December 31, 2012, the revenue generated in fiscal 2013 as well as through the use of proceeds from other short term borrowings in the amount of $2,255,000, net of repayments.
 
In December 2012, the Company had stock subscription of 10,200,000 shares of its common stock at a price of $0.05 per share.  This was part of an offering in a private investment in the Company’s common stock. The stock subscription was made up of $186,132 of cash from private investors, the extinguishment of $23,868 of interest on a note with one of the private investors, and the exchange of $300,000 of short term debt with Mr. John Steffens, the Company’s Chairman. Additionally, the investors were issued warrants to purchase common stock of the Company at a strike price of $0.20 per share.  The warrants expire in five years.  2,040,000 warrants were issued to these investors.  In 2013, an additional investment in the offering was made up of $60,000 of cash from private investors and the exchange of $15,000 of short term debt and the extinguishment of $2,012 of interest on a note with one of the private investors for 1,640,241 shares of the Company’s common stock and 328,048 warrants.  In March 2013, the offering was officially closed and the Company issued 11,840,241 common shares in exchange for $592,012.

From time to time during 2012 through 2013, 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 December 2012, Mr. Steffens converted $300,000 of his debt into a subscription of 6,000,000 shares of the Company’s common stock at a price of $0.05 per share as part of a private investment in the Company’s stock.  At December 31, 2012, the Company was indebted to Mr. Steffens in the approximate amount of $1,773,000 of principal and $148,000 in interest.  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.
 
The Company maintained several Note agreements with an individual investor. The borrowings from time to time were both secured and unsecured.  Several notes in the aggregate of $250,000 were due and outstanding under the Note agreements. The loans bear interest at 36% per annum. In July 2012, the Company entered into a restructuring settlement with the lender whereby the lender agreed to accept $495,000 in full satisfaction of all principal and interest due under the Note agreements, as of June 1, 2012, plus interest in the amount of approximately $21,000 for the period from June 1, 2012 to July 31, 2012.  In addition, the Company agreed to pay interest for the period after July 31, 2012 in the aggregate amount of approximately $67,000.  The note and all outstanding interest were paid in full in February 2013.

During March 2012, the Company converted $3,576,515 in principal and interest on debt held by certain lenders of short and long term notes, including certain directors and significant shareholders of the Company, into 23,843,429 shares of the Company’s common stock at a price of $0.15 per share.

During March 2012, the Company converted $264,800 of accrued Series B dividends owed to certain holders of the Company’s Series B Preferred Stock, including certain directors and significant shareholders of the Company, into 1,765,333 shares of the Company’s common stock at a price of $0.15 per share.

Although 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, management believes that its repositioned strategy of leading with its Discovery product to measure how work happens and then follow with its integration capabilities through its XM product will shorten the sales cycle and allow for value based selling to our customers and prospects.  The Company anticipates a continued success in this regard based upon current discussions with active customers and prospects.  The Company has also retired approximately $1,900,000 and $416,000 of debt in 2012 and 2013, respectively. Additionally, the Company converted $3,800,000 of debt into common stock and has received notification of additional forgiveness of liabilities of $404,000 during 2012.  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 in existence.
 
 
17

 
 
SOAdesk Transaction

On January 15, 2010, the Company entered into an Asset Purchase Agreement with SOAdesk, LLC (“SOAdesk”) and Vertical Thought, Inc. (“VTI” and, together with SOAdesk, the “Sellers”), pursuant to which the Company acquired the Sellers’ “United Desktop” and “United Data Model” software technology, as well as substantially all of the other assets owned by the Sellers directly or indirectly used (or intended to be used) in or related to Sellers’ business of providing customer interaction consulting and technology services for organizations and contact centers throughout the world (the “Business”). The Company also assumed certain liabilities of the Sellers related to the Business, as described in the Asset Purchase Agreement.

The aggregate consideration payable by the Company to the Sellers consisted of the following:

  $300,000 paid in cash to the Sellers on the closing date;

an unsecured convertible note in the aggregate principal amount of $700,000, payable to SOAdesk, with an annual interest rate of 5% and an original maturity date of March 31, 2010.  On March 31, 2010, the maturity date of the unsecured Convertible Note was extended from March 31, 2010 to September 30, 2010 and was secured by shares of the Company’s Series B Preferred Stock (the “Convertible Note”).  At September 30, 2010, the maturity date was extended from September 30, 2010 to March 31, 2011.  Through a series of amendments, the maturity date was extended to April 1, 2013. In March 2014, the maturity date was further extended to June 30, 2015;

  $525,000, payable in cash to SOAdesk on March 31, 2010 (subsequently converted into a convertible promissory note as stated below);

an unsecured convertible note in the aggregate principal amount of $1,000,000, due in January 2015, payable to SOAdesk and convertible into shares of the Company’s Common Stock.  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 under this note in the amount of $700,000 in principal and $172,000 in interest; and

certain earn-out contingencies of $2,410,000 based on product and enterprise revenue performance targets being met.

The terms of the Asset Purchase Agreement were amended on March 31, 2010, and the Company issued a $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment. This note, carried an annual interest rate of 5%, was convertible into shares of the Company’s Series B Preferred Stock at the holder’s option and originally matured on June 30, 2010.  The Company paid principal in the amount of $100,000 in April 2010.  On June 30, 2010, the convertible note was amended to extend the maturity date from June 30, 2010 to September 30, 2010.  As of September 30, 2010, the convertible note was further amended to extend the maturity date from September 30, 2010 to March 31, 2011.  The Company paid principal in the amount of $4,000 in May 2011.  In March 2011, the Company and SOAdesk LLC agreed to extend the maturity date until March 31, 2012 and the Company issued a five-year warrant to SOAdesk to purchase up to 100,000 shares of its common stock at an exercise price of $0.08 per share.  In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company determined the embedded conversion option is beneficial and has intrinsic value to the holder.  The total debt discount to be recognized was $175,000 and the Company had reduced the note by that amount and increased Additional Paid in Capital by the same amount. As of December 31, 2010, the Company had fully amortized the debt discount of $175,000 in the statement of operations.  In April 2012, the Company paid this note in full.
 
The Company was obligated to make additional payments of up to $2,410,000 over an 18 month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets. Such payments are payable quarterly during the eighteen month period over which the performance targets are being measured. The earn-out award is to be calculated, subject to adjustment, based upon the cumulative effect of achieved revenue performance targets during the applicable earn-out period.  The obligation was determined by management after consultation with an independent appraiser using the income approach methodology analyzing the Company’s discounted cash flow and management’s input on probability of attaining the different revenue performance targets.  As of March 31, 2011, the Company had determined that the earn-out targets originally recorded as part of the acquisition will not be completely met.  The Company has therefore recorded a gain of $517,000 in the first quarter of 2011, in addition to the $1,050,000 gain recorded in the fourth quarter of 2010, in the statement of operations from the reversal of part of the earn-out accrual.  The earn-out earned through July 31, 2011 of $843,000 is included in the accounts payable balance at December 31, 2013 and 2012, respectively.
 
 
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Off Balance Sheet Arrangements

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

Critical Accounting Policies

The policies discussed below are considered by us to be critical to an understanding of our financial statements because they require us to apply the most judgment and make estimates regarding matters that are inherently uncertain.  Specific risks for these critical accounting policies are described in the following paragraphs.  With respect to the policies discussed below, we note that because of the uncertainties inherent in forecasting, the estimates frequently require adjustment.

Our financial statements and related disclosures, which are prepared to conform to accounting principles generally accepted in the United States of America, require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and accounts receivable and expenses during the period reported.  We are also required to disclose amounts of contingent assets and liabilities at the date of the financial statements.  Our actual results in future periods could differ from those estimates.  Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the Consolidated Financial Statements in the period they are determined to be necessary.

We consider the most significant accounting policies and estimates in our financial statements to be those surrounding: (1) revenue recognition; (2) allowance for doubtful trade accounts receivable; (3) goodwill; (4) capitalization and valuation of software product technology; and (5) valuation of deferred tax assets.  These accounting policies, the basis for any estimates and potential impact to our Consolidated Financial Statements, should any of the estimates change, are further described as follows:

Revenue Recognition.   Our revenues are derived principally from three sources:  (i) license fees for the use of our software products; (ii) fees for consulting services and training; and (iii) fees for maintenance and technical support.  We generally recognize revenue from software license fees when a license agreement has been signed by both parties, the fee is fixed or determinable, collection of the fee is probable, delivery of our products has occurred and no other significant obligations remain.

Revenues from services include fees for consulting services and training.  Revenues from services are recognized on either a time and materials or percentage of completion basis as the services are performed and amounts due from customers are deemed collectible and non-refundable.

We apply the provisions of Accounting Standards Codification, or ASC 985-605, Software Revenue Recognition, to all transactions involving the licensing of software products. In the event of a multiple element arrangement for a license transaction, we evaluate the transaction as if each element represents a separate unit of accounting taking into account all factors following the accounting standards. When such estimates are not available, the completed contract method is utilized. Under the completed contract method, revenue is recognized only when a contract is completed or substantially complete.

Allowance for Doubtful Trade Accounts Receivable .  In addition to assessing the probability of collection in conjunction with revenue arrangements, we continually assess the collectability of outstanding invoices.  Assumptions are made regarding the customer’s ability and intent to pay and are based on historical trends, general economic conditions, and current customer data.  Should our actual experience with respect to collections differ from our initial assessment, there could be adjustments to bad debt expense.

Goodwill.   The Company accounts for goodwill in accordance ASC Topic 350 “Intangibles – Goodwill and Other” 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.
 
 
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Capitalization and Valuation of Software Product Technology.   Our policy on capitalized software costs determines the timing of our recognition of certain development costs.  In addition, this policy determines whether the cost is classified as development expense or cost of software revenue.  Management is required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization.  Additionally, we review software product technology assets for net realizable value at each balance sheet date.  Should we experience reductions in revenues because our business or market conditions vary from our current expectations, we may not be able to realize the carrying value of these assets and will record a write down at that time.
 
Valuation of Deferred Tax Assets.   Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.  Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is established to the extent that it is more likely than not, that we will be unable to utilize deferred income tax assets in the future.  At December 31, 2013, we had a valuation allowance of $63,448,000 against $63,448,000 of gross deferred tax assets.  We considered all of the available evidence to arrive at our position on the net deferred tax asset; however, should circumstances change and alter our judgment in this regard, it may have an impact on future operating results.

At December 31, 2013, the Company has net operating loss carryforwards of approximately $154,858,000 which may be applied against future taxable income. These carryforwards will expire at various times between 2014 and 2033.

Recent Accounting Pronouncements:

None applicable.
 
Item 7A.      Quantitative and Qualitative Disclosures about Market Risk

Not applicable
 
Item 8.      Financial Statements and Supplementary Data

The information required by this item appears beginning on page F-1 of this report.
 
Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

In May 2012, the Company dismissed its principal independent accountant, Marcum LLP (“Marcum”).  The dismissal was approved by the Audit Committee of the Company’s Board of Directors.

Marcum was the Company’s principal independent accountant and reported on the Company’s financial statements for the fiscal year ended December 31, 2011. During 2011, and subsequently up to the date of dismissal, there were no disagreements between the Company and Marcum on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements that, if not resolved to Marcum’s satisfaction, would have caused Marcum to make reference to the subject matter of the disagreement in connection with its report issued in connection with the audit of the Company’s financial statements.

None of the reportable events described under Item 304(a)(1)(v)(A)-(D) of Regulation S-K occurred within the Company’s 2011 fiscal year nor subsequently up to the date of dismissal, except as set forth in the following sentence.  In connection with the audit of the Company’s December 31, 2011 financial statements, Marcum advised the Company of a material weakness in its internal control over financial reporting, in that the Company did not independently account for a significant, complex, and non-routine transaction as of December 31, 2011.  However, the transaction has been properly disclosed in the consolidated financial statements filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
 
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Marcum’s audit report on financial statements for the fiscal year ended December 31, 2011 of the Company contained no adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.
 
Item 9A.      Controls and Procedures

(a) Evaluation of Disclosure Controls

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files and submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with our independent registered public accounting firm, Cherry Bekaert LLP, and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors have free access to the Audit Committee.

(b) Management’s Responsibility for Financial Statements

Our management is responsible for the integrity and objectivity of all information presented in this report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s consolidated financial position and results of operations for the periods and as of the dates stated therein.

(c) Management’s Assessment of Internal Control over Financial Reporting

The management of Cicero Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rules 13a–15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934.  This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements.  Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
 
Under the direction of our Chief Executive Officer and Chief Financial Officer, management completed an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control-Integrated Framework , published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and has determined that the Company’s system of internal control over financial reporting was effective as of December 31, 2013.
 
(d) Changes in Internal Control over Financial Reporting

During our fourth fiscal quarter, there has been no change in our internal control over our financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.      Other Information

None

 
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PART III

Item 10.  Directors, Executive Officers and Corporate Governance

The following table sets forth certain information about our directors and executive officers:
 
Name
 
Age
 
Position(s)
John L Steffens
 
72
 
Director and Chairman
John Broderick
 
64
 
Director and Chief Executive Officer/Chief Financial Officer
Antony Castagno
 
46
 
Director and Chief Technology Officer
Mark Landis
 
72
 
Director
Bruce W. Hasenyager
 
72
 
Director
Jay R. Kingley
 
53
 
Director
Charles B. Porciello
 
78
 
Director
Bruce D. Miller
 
63
 
Director
John W. Atherton
 
71
 
Director
Don Peppers
 
63
 
Director

John L. Steffens
Director since May, 2007.

Mr. Steffens was appointed to our Board of Directors on May 16, 2007 and is the Founder and Managing Director of Spring Mountain Capital, L. P.  Prior to establishing Spring Mountain Capital, Mr. Steffens spent 38 years at Merrill Lynch & Co., where he held numerous senior management positions, including President of Merrill Lynch Consumer Markets, which was later named the Private Client Group, from July 1985 until April 1997, and both Vice Chairman of Merrill Lynch & Co., Inc. (the parent company) and Chairman of its U.S. Private Client Group from April 1997 until July 2001. Mr. Steffens was elected a member of the Board of Directors of Merrill Lynch & Co., Inc. in April 1986 and served on the board until July 2001. Mr. Steffens was Chairman of the Securities Industry Association during 1994 and 1995, and is currently a Trustee of the Committee for Economic Development. He is the National Chairman Emeritus of the Alliance for Aging Research and serves on the Board of Aozora Bank in Japan.  Mr. Steffens graduated from Dartmouth University in 1963 with a B.A. degree in Economics.  He also attended the Advanced Management Program of the Harvard Business School in 1979.  We believe Mr. Steffen’s qualifications to serve on our Board of Directors include his experience in leading complex enterprises and his experience as a senior executive.

John P. Broderick
Director since July 2005.

Mr. Broderick is currently the Chief Executive Officer and Chief Financial Officer of the Company and is also a director. Mr. Broderick has served as the Chief Executive Officer of the Company since June 2005, as the Chief Financial Officer of the Company since April 2001, and as Corporate Secretary since August 2001. Prior to joining our Company, Mr. Broderick was Executive Vice President of Swell Inc., a sports media e-commerce company where he oversaw the development of all commerce operations and served as the organization's interim Chief Financial Officer. Previously, Mr. Broderick served as Chief Financial Officer and Senior Vice President of North American Operations for Programmer's Paradise, a publicly held international software marketer.  Mr. Broderick received his B.S. in accounting from Villanova University.  We believe Mr. Broderick’s qualifications to serve on our Board of Directors include his intimate knowledge of our operations as a result of day to day leadership as our Chief Executive Officer.

Antony Castagno
Director since March 2010.

Mr. Castagno has been the Chief Technology Officer of the Company since January 2010 and a director since March 2010.  Mr. Castagno brings over 20 years of leadership and technology experience to Cicero and is responsible for the technology vision and execution for Cicero’s customer experience software. Prior to joining Cicero in January 2010, Mr. Castagno was the Chief Executive Officer of SOAdesk LLC, which pioneered the Intelligent Agent Desktop and Customer Interaction Management space. From 2005 to 2007, Mr. Castagno was the co-founder and Chief Technology Officer for OpenSpan, where he led the development of client side integration. Mr. Castagno graduated from the United States Military Academy at West Point in 1989 with a BS in Computer Science. Over the course of Mr. Castagno’s career, he has held leadership and technology positions with Deloitte, Verifone, ADP, Personic and was the founder of Vertical Thought an Atlanta-based technology incubator.  We believe Mr. Castagno’s qualifications to serve on our Board of Directors include his experience as Chief Executive Officer of SOAdesk, LLC.
 
 
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Mark Landis
Director since July 2005.

Mr. Landis has been a director of the Company since July 2005.  Mr. Landis is the Managing Member of Catalyst Partners, a family investment vehicle created in 1995. From 2003 to 2005 he was Executive in Residence of The Jordan Company, a private equity firm based in New York City.  In 2003 Mr. Landis retired from being President of the North American Security Division of Siemens Building Technologies, Inc., (SBT) having been Chief Executive Officer of Security Technologies Group, Inc. (STG) which was acquired by Siemens in 2001.  Mr. Landis earned his B.A. from Cornell University and his Jurist Doctorate from the University of Pennsylvania.  Mr. Landis received his CPCU - Chartered Property and Casualty Underwriter from the American Institute for Property and Liability Underwriters.  We believe Mr. Landis’ qualifications to serve on our Board of Directors include his experience in leading enterprises and his experience as a senior executive.

Bruce W. Hasenyager
Director since October 2002.

Mr. Hasenyager has been a director of the Company since October 2002.  Since November 2004, Mr. Hasenyager has served as Principal of Bergen & Webster Executive Communications.  Prior to that, he served as Director of Business and Technology Development at the Hart eCenter at Southern Methodist University (SMU) and Chief Operating Officer of the Guildhall at SMU. From April 1996 to April 2002, Mr. Hasenyager was a founder and served as Senior Vice President of Technology and Operations and Chief Technology Officer at MobilStar Network Corporation. Prior to April 1996, Mr. Hasenyager held executive and senior management positions in information technology at Chemical Bank, Merrill Lynch, Kidder Peabody, and Citibank.  We believe Mr. Hasenyager’s qualifications to serve on our Board of Directors include his many years of industry experience.

Jay R. Kingley
Director since November 2002.

Mr. Kingley has been a director of the Company since November 2002.  Mr. Kingley is currently the Chief Executive Officer of Innocution Partners, LLC, a consultancy that focuses on helping companies monetize creativity through innovation and disciplined execution and Chairman of Kingley Institute LLC, a medical wellness company. Prior to that, Mr. Kingley has served as CEO of Warren Partners, LLC, a software development and consultancy company. Mr. Kingley was Managing Director of a business development function of Zurich Financial Services Group from 1999-2001.  Prior to joining Zurich Financial Services Group, Mr. Kingley was Vice President of Diamond Technology Partners, Inc., a management-consulting firm.  We believe Mr. Kingley’s qualifications to serve on our Board of Directors include his experience as Chief Executive Officer of  a software development and consultancy company.

Charles B. Porciello
Director since June 2005.

Mr. Porciello has been a director since June 6, 2005.  From 2003 until 2011, Mr. Porciello had been the Chief Executive Officer of Pilar Services, Inc. From 2001 until 2003, he served as Chief Operating Officer of Enterprise Integration Corporation, a minority-owned IT services company.  Prior to that Mr. Porciello worked for various IT companies, developing and facilitating in their growth.   Mr. Porciello retired from the U.S. Air Force in 1982 after serving his country for twenty five years. Mr. Porciello graduated from the U.S. Military Academy with a B.S. in Engineering and received his Master’s Degree in Management from the University of Nebraska.  We believe Mr. Porciello’s qualifications to serve on our Board of Directors include his experience as Chief Operating Officer of an IT service company and his many years of experience in the industry.

Bruce D. Miller
Director since July 2005.

Mr. Miller has been a director of the Company since July 2005.  Mr. Miller has been a General Partner of Delphi Partners, Ltd. a privately-owned investment partnership since 1989.  He is the treasurer and a director of American Season Corporation.  Mr. Miller is a board member of Cape Air/Nantucket Airlines, Inc.  Mr. Miller is a trustee of the Egan Maritime Foundation and is involved in other non-profit activities.  Mr. Miller received his B.S. in Finance from Lehigh University and subsequently earned an M.B.A. from Lehigh.  We believe Mr. Miller’s qualifications to serve on our Board of Directors include his experience as General Partner of a privately owned investment partnership.
 
 
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John W. Atherton
Director since May 2006.

Mr. Atherton has been a director since May 12, 2006. Since 2005, Mr. Atherton has been the Vice President and Chief Financial Officer of CityFed Financial, a financial holding company, based in Nantucket, Massachusetts. He served as Chairman of CityFed Financial from 1991 until 2005. Mr. Atherton received his B.A. degree from Wesleyan University (Middletown, Connecticut) and an M.B.A. with Distinction from Babson College (Wellesley, Massachusetts).  We believe Mr. Atherton’s qualifications to serve on our Board of Directors include his experience as Chief Financial Officer and Chairman of a financial holding company.

Don Peppers
Director since June 2007.

Mr. Peppers has been a director since June 20, 2007.  Mr. Peppers formed Marketing 1:1, Inc. in January 1992 which became Peppers & Rogers Group, a customer-centered management consulting firm with offices located in the United States, Europe, the Middle East, Latin America and South Africa.   He has written or co-authored ten books on marketing, sales, and customer relationships issues.  Peppers & Rogers Group is now a unit of TeleTech Holdings (TTEC), a business process outsourcer based in Denver, Colorado. From October 1990 to January 1992, Mr. Peppers was the Chief Executive Officer of Perkins/Butler Direct Marketing, a top-20 U.S.-direct-marketing agency.  Prior to marketing and advertising, he worked as an economist in the oil business and as the director of accounting for a regional airline. Mr. Peppers holds a Bachelor's Degree in astronautical engineering from the U.S. Air Force Academy, and a Master's Degree in public affairs from Princeton University's Woodrow Wilson School.  We believe Mr. Pepper’s qualifications to serve on our Board of Directors include his years of experience providing strategic advisory services to organizations.

There are no family relationships between or among the above directors or executive officers.

Audit Committee

The Audit Committee is composed of Mr. Bruce Miller, Mr. Bruce Hasenyager and Mr. John W. Atherton. The responsibilities of the Audit Committee include the appointment of, retention, replacement, compensation and overseeing the work of the Company’s independent accountants and tax professionals. The Audit Committee reviews with the independent accountants the results of the audit engagement, approves professional services provided by the accountants including the scope of non-audit services, if any, and reviews the adequacy of our internal accounting controls. The Audit Committee met formally four times during our fiscal year ended December 31, 2013. Each member attended every meeting while they were appointed to the Audit Committee. The Board of Directors has determined that the members of the Audit Committee are independent as defined in Rule 5605(a)(2) of The NASDAQ Stock Market’s listing standards. Mr. John W. Atherton was designated the “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K due to his experience as a Chief Financial Officer of a public company.

Code of Ethics and Conduct
 
Our Board of Directors has adopted a code of ethics and a code of conduct that applies to all of our directors, Chief Executive Officer, Chief Financial Officer, and employees.  We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of the code of ethics or code of conduct, please send your written request to Cicero Inc., Suite 542, 8000 Regency Pkwy, Cary, North Carolina 27518, Attn: Corporate Secretary.  The code of ethics is also available on the Company’s website at www.ciceroinc.com.
 
Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers, directors and persons who own more than ten percent of the Company’s Common Stock (collectively, “Reporting Persons”) to file reports of ownership and changes in ownership with the SEC.  Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely on its review of the copies of such reports received by it and written representations all Section 16(a) reports were filed in a timely manner.

 
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Item 11. Executive Compensation.
 
Compensation Committee Membership and Organization

The Compensation Committee of the Board of Directors has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy. Its duties include:

  
Setting the total compensation of our Chief Executive Officer and evaluating his performance based on corporate goals and objectives;
 
  
Reviewing and approving the Chief Executive Officer’s decisions relevant to the total compensation of the Company’s other executive officer;
 
  
Making recommendations to the Board of Directors with respect to equity-based plans in order to allow us to attract and retain qualified personnel; and
 
  
Reviewing director compensation levels and practices, and recommending, from time to time, changes in such compensation levels and practices of the Board of Directors.
 
The members of the Compensation Committee are Messrs. Kingley and Porciello. None of the current members of the Compensation Committee has served as an executive officer of the Company, and no executive officer of the Company has served as a member of the Compensation Committee of any other entity of which Messrs. Kingley and Porciello have served as executive officers. Mr. Porciello is the former Chief Executive Officer of Pilar Services Inc., a reseller partner.  We recognized no revenue with Pilar Services Inc. during 2013 and 2012.  There were no interlocking relationships between us and other entities that might affect the determination of the compensation of the directors and executive officers of the Company. The Compensation Committee meets on an as necessary basis during the year.

General Compensation Philosophy

As a technology company, we operate in an extremely competitive and rapidly changing industry. We believe that the skill, talent, judgment and dedication of our executive officers are critical factors affecting the long term value of our company. The Compensation Committee’s philosophy and objectives in setting compensation policies for executive officers are to align pay with performance, while at the same time providing fair, reasonable and competitive compensation that will allow us to retain and attract superior executive talent. The Compensation Committee strongly believes that executive compensation should align executives’ interests with those of shareholders by rewarding achievement of specific annual, long-term and strategic goals by the Company, with an ultimate objective of providing long-term stockholder value. The specific goals that our current executive compensation program rewards are focused primarily on revenue growth and profitability. To that end, the Compensation Committee believes executive compensation packages provided by the Company to its executive officers should include a mix of both cash and equity based compensation that reward performance as measured against established goals. As a result, the principal elements of our executive compensation are base salary, non-equity incentive plan compensation, long-term equity incentives generally in the form of stock options and/or restricted stock and post-termination severance and acceleration of stock option vesting upon termination and/or a change in control.

Our goal is to maintain an executive compensation program that will fairly compensate our executives, attract and retain qualified executives who are able to contribute to our long-term success, induce performance consistent with clearly defined corporate goals and align our executives’ long-term interests with those of our shareholders. The decision on the total compensation for our executive officers is based primarily on an assessment of each individual’s performance and the potential to enhance long-term stockholder value. Often, judgment is utilized in lieu of total reliance upon rigid guidelines or formulas in determining the amount and mix of compensation for each executive officer. Factors affecting such judgment include performance compared to strategic goals established for the individual and the Company at the beginning of the year, the nature and scope of the executive’s responsibilities and effectiveness in leading initiatives to achieve corporate goals.

Role of Chief Executive Officer in Compensation Decisions
 
The Compensation Committee of our Board of Directors determines the base salary (and any bonus and equity-based compensation) for each executive officer annually. John Broderick, our Chief Executive Officer, confers with members of the Compensation Committee, and makes recommendations, regarding the compensation of all executive officers other than himself. He does not participate in the Compensation Committee's deliberations regarding his own compensation. In determining the compensation of our executive officers, the Compensation Committee does not engage in any benchmarking of total compensation or any material element of compensation.
 
 
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Components of Executive Compensation

The compensation program for our Named Executive Officers consists of:

  
Base salary;
  
Non-equity incentive plan compensation;
  
Long-term incentive compensation; and
  
Other benefits

Base Salary

The Company provides our executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. The Compensation Committee considered the scope and accountability associated with each executive officer’s position and such factors as the performance and experience of each executive officer, individual leadership and level of responsibility when approving the base salary levels for fiscal year 2013.

Non-Equity Incentive Plan Compensation

Non-equity incentive plan compensation for our executive officers is designed to reward performance against key corporate goals and for certain of our executives for performance against individual business development goals. Our executive officers’ incentive targets are designed to motivate management to exceed specific goals related to profitability objectives. We believe that these metrics closely correlate to stockholder value. We believe that these metrics also correlate to stockholder value and individual performance. Our Chief Executive Officer achieved a non-equity bonus of $25,000 in fiscal 2013 and 2012 and our Chief Technology Officer achieved a non-equity bonus of $45,372 in 2013.

Our Chief Executive Officer, Mr. Broderick, is eligible for non-equity incentive plan compensation with a target bonus of $75,000 for achieving targeted pretax income for fiscal 2014.

Long-Term Equity Incentive Awards

The Company presently has one equity-based compensation plan under which grants may be made, entitled Cicero Inc. 2007 Employee Stock Option Plan. The Plan provides for the grant of incentive and non-qualified stock options to employees, and the grant of non-qualified options to consultants and to directors and advisory board members. In addition, various other types of stock-based awards, such a stock appreciation rights, may be granted under the Plan. The Plan is administered by the Compensation Committee of our Board of Directors, which determines the individuals eligible to receive options or other awards under the Plan, the terms and conditions of those awards, the applicable vesting schedule, the option price and term for any granted options, and all other terms and conditions governing the option grants and other awards made under the Plan. Under the 2007 Plan, 4,500,000 shares of our common stock were reserved for issuance pursuant to options or restricted stock awards; at December 31, 2013, 1,111,090 shares were available for future option grants and awards. The Company’s previous equity-based compensation plan, entitled Level 8 Systems 1997 Employee Stock Option Plan, expired during fiscal 2007. There are 6,100 options outstanding under that plan.

To date, awards have been mainly in the form of non-qualified stock options granted under the Plans. The Compensation Committee grants these stock-based incentive awards from time to time for the purpose of attracting and retaining key executives, motivating them to attain the Company's long-range financial objectives, and closely aligning their financial interests with long-term stockholder interests and share value.
 
Grants to other employees are typically made upon initial employment and then periodically as the Compensation Committee so determines. The Compensation Committee has empowered our Chief Executive Officer to issue grants of up to 75,000 options to new employees at the fair market value of the stock on the date of employment. Any proposed option grants in excess of that amount require Compensation Committee approval. Our stock options typically vest over two years with one third being immediately vested upon the date of grant and one third vesting on each of the next two anniversaries of the date of grant.  During fiscal 2013, the Company granted options to purchase 25,000 shares to employees.
 
 
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We account for equity compensation paid to all of our employees under the rules of Financial Accounting Standards Board guidance now codified as ASC 718 “Compensation – Stock Compensation”, which requires us to estimate and record compensation expense over the service period of the award. All equity awards to our employees, including executive officers, and to our directors have been granted and reflected in our consolidated financial statements, based upon the applicable accounting guidance, at fair market value on the date of grant. Generally, the granting of a non-qualified stock option to our executive officers is not a taxable event to those employees, provided, however, that the exercise of such stock would result in taxable income to the optionee equal to the difference between the fair market value of the stock on the exercise date and the exercise price paid for such stock. Similarly, a restricted stock award subject to a vesting requirement is also not taxable to our executive officers unless such individual makes an election under section 83(b) of the Internal Revenue Code of 1986, as amended. In the absence of a section 83(b) election, the value of the restricted stock award becomes taxable to the recipient as the restriction lapses.

Other Benefits

Our executive officers participate in benefit programs that are substantially the same as all other eligible employees of the Company.

The following summary compensation table sets forth the compensation earned by all persons serving as the Company’s executive officers during fiscal year 2013 and 2012.

Summary Compensation Table
 
Name and
Principal
Position
 
Fiscal
Year
 
Salary
   
Stock Awards
(1)
   
Non- Equity
Incentive
Plan Compensation
(2)
   
 
All Other
Compensation
(3)
   
 
 
Total
 
John P. Broderick
 
2013
  $ 175,000       --     $ 25,000     $ 5,627     $ 205,627  
Chief Executive Officer,
 
2012
  $ 175,000       75,000     $ 25,000     $ 6,462     $ 281,462  
Chief Financial Officer,                                            
Corporate Secretary                                            
                                             
Antony Castagno
 
2013
  $ 150,000       --     $ 45,372     $ 6,289     $ 201,661  
Chief Technology Officer  
2012
  $ 150,000       --       --     $ 5,792     $ 155,792  
                                             
 
(1)
 
In November 2012, the Company issued Mr. Broderick a restricted stock award in the amount of 1,500,000 shares which will vest to him upon termination or a change of control. The Company valued the restricted stock award at the fair market value on the date of the award and is amortizing the total expense of $75,000 over the assumed life of two years.
     
(2)
 
Non-equity incentive plan compensation for Mr. Broderick includes a bonus for certain revenue transactions earned during fiscal year ended December 31, 2013 and 2012.  The revenue transaction was the acceptance of the first contract greater than $300,000 for each fiscal year. Non-equity incentive plan compensation for Mr. Castagno includes a bonus for any revenues in excess of his base salary when engaged in consulting services on behalf of the Company.
     
(3)
 
Other compensation includes the Company’s portion of major medical insurance premiums and long term disability premiums for named executives during fiscal year ended December 31, 2013 and 2012, respectively.
 
 
27

 

Grants of Plan Based Awards

The Company did not award any stock options to the named executives during fiscal 2013 and 2012.  The Company did not award any stock appreciation rights (“SARs”) during fiscal 2013 and 2012.

The following table presents the number and values of exercisable options as of December 31, 2013 by the named executive.

Outstanding Equity Awards at December 31, 2013
 
   
Option Awards
 
Stock Awards
 
 Name                 
 
Number of Securities Underlying Unexercised Options # Exercisable (Vested)
   
Number of Securities Underlying Unexercised Unearned Options# Unexercisable (Unvested)
   
Option Exercise price ($)
 
Option Expiration date
 
Number of Shares of Stock That Have Not Vested
   
Market Value of Shares of Stock That Have Not Vested
 
John P. Broderick
    5,000 (1)     --     $ 31.00  
02/18/2014
           
      549,360 (2)     --     $ 0.51  
08/17/2017
           
      75,000 (3)     --     $ 0.09  
08/20/2020
           
                                549,630 (4)   $ 10,993  
                                1,500,000 (5)   $ 30,000  
Antony Castagno
    75,000 (3)     --     $ 0.09  
08/20/2020
               
                                           

(1)   
These options were granted on February 18, 2004. This stock option vested and became exercisable in three equal annual installments with the first installment vesting on February 18, 2004.
 
(2)  
These options were granted on August 17, 2007. This stock option vests in three equal installments with the first installment vesting on August 17, 2007.
 
(3)  
These options were granted on August 20, 2010. This stock option vests in three equal installments with the first installment vesting on August 20, 2010.
 
(4)  
These are restricted stock granted on August 17, 2007.  The shares will vest to him upon his resignation or termination or a change of control.
 
(5)  
These are restricted stock granted on November 9, 2012.  The shares will vest to him in the event of the termination, with or without cause, of his employment by the Company or his resignation from the Company with or without cause or in the event of a change of control.
 
Options Exercised and Stock Vested

The named executives did not exercise any options during the year ended December 31, 2013. Mr. Broderick and Mr. Castagno have 629,360 and 75,000 outstanding options respectively at December 31, 2013.
 
Employment Agreements, Termination of Employment and Change-In-Control Arrangements

Under the employment agreement between the Company and Mr. Broderick effective January 1, 2014, we agreed to pay Mr. Broderick an annual base salary of $175,000 and performance bonuses in cash of up to $250,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion.  Upon termination of Mr. Broderick’s employment by the Company without cause, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within 30 days of termination and any unpaid deferred salaries and bonuses. In the event there occurs a substantial change in Mr. Broderick’s job duties, there is a decrease in or failure to provide the compensation or vested benefits under the employment agreement or there is a change in control of the Company, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within thirty (30) days of termination. Additionally, as part of his employment agreement for fiscal 2012, Mr. Broderick will be entitled to receive 1,500,000 shares of the Company’s common stock in the event of the termination, with or without cause, of his employment by the Company or his resignation from the Company with or without cause or in the event of a change of control (as that term is defined in the Employment Agreement) of the Company.   Mr. Broderick will have thirty (30) days from the date written notice is given about either a change in his duties or the announcement and closing of a transaction resulting in a change in control of the Company to resign and execute his rights under this agreement. If Mr. Broderick’s employment is terminated for any reason, Mr. Broderick has agreed that, for two (2) year after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so.
 
 
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Under the employment agreement between the Company and Mr. Castagno effective January 1, 2013, we agreed to pay Mr. Castagno an annual base salary of $150,000 and a performance cash bonus of up to $215,000 per annum based upon exceeding certain pre-tax operating net income metrics, as determined by and at the discretion of the Compensation Committee.  If the Company terminates Mr. Castagno’s employment without cause, we agreed to pay Mr. Castagno an amount equivalent to six (6) months of Mr. Castagno’s then current base salary in equal semi-monthly installments over that six (6) month period following termination. If Mr. Castagno’s employment is terminated for any reason, Mr. Castagno has agreed that, for two (2) year after such termination, he will not directly or indirectly solicit or divert business from us,  assist any business in attempting to solicit or divert business from us, solicit or hire any person who was our employee during the employment agreement term, or assist any business in attempting to solicit or hire any person who was our employee during the employment agreement term. During 2013 the Company amended Mr. Castagno’s employment agreement to provide that Mr. Castagno could engage in consulting services on behalf of the Company and would be compensated for any revenues in excess of his base salary as a bonus.
 
Estimated Payments and Benefits Upon Termination

The amount of compensation and benefits payable to the named executive officers has been estimated in the table below and assume a termination date of December 31, 2013.  Since all options held by the executives are out-of-the-money, we have not estimated any value for option acceleration. Deferred compensation reflects amounts voluntarily deferred from salaries during fiscal 2013 and 2012 and accrued salaries for fiscal 2013 that had not been paid in fiscal 2013.
 
   
Base Salary
   
Restricted Shares Award
   
Deferred Compensation
   
Total Compensation and Benefits
 
John P. Broderick
                       
  Death
  $ --     $ 40,993     $ 44,792     $ 85,785  
  Disability
    --       40,993       44,792       85,785  
  Involuntary termination     without cause
    175,000       40,993       44,792       260,785  
  Change in Control
    175,000       40,993       44,792       260,785  
Antony Castagno
                               
  Death
  $ --     $ --     $ 36,987     $ 36,987  
  Disability
    --       --       36,987       36,987  
  Involuntary termination     without cause
    75,000       --       36,987       111,987  
  Change in Control
    --       --       36,987       111,987  
 
The amounts shown in the table above do not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried employees generally upon termination, such as unreimbursed business expenses payable.

Stock Option Plan

In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock that may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. During fiscal 2013, the Company granted options to purchase 25,000 shares to its employees; however no grants were awarded to our named executive officers during fiscal 2013 and 2012.

Director Compensation

No cash or non-cash compensation was paid during fiscal 2013 by us to our non-employee directors who served during fiscal 2013.

 
29

 
 
Item 12.      Security Ownership of Certain Beneficial Owners and Management.
 
The following table sets forth information as of February 28, 2014 with respect to beneficial ownership of shares by (i) each person known to the Company to be the beneficial owner of more than 5% of the outstanding common stock, (ii) each of the Company’s directors, (iii) the executive officers of the Company named in the Summary Compensation Table (the “Named Executives”) and (iv) all current directors and executive officers of the Company as a group. Unless otherwise indicated, the address for each person listed is c/o Cicero Inc., 8000 Regency Parkway, Suite 542, Cary, North Carolina 27518.
 
The chart is based on 85,806,247 common shares, 1,541.618 Series A1 preferred shares and 10,400 Series B preferred shares outstanding as of February 28, 2014.   Beneficial ownership is determined in accordance with Rule 13-3(d) promulgated by the SEC under the Securities Exchange Act of 1934.  Except as otherwise stated in the footnotes below, the named persons have sole voting and investment power with regard to the shares shown as beneficially owned by such persons.

Name of Beneficial Owner
 
No. of Common Shares
   
% of Class
   
No. of Series A1 Shares
   
% of Class
   
No. of Series B Shares
   
% of Class
   
% of Combined Classes
 
John L. Steffens (1)
    35,518,814       39.9 %     14.832       1.0 %     6,400.00       61.5 %     43.9 % (2)
Jonathan Gallen (3)
    9,699,840       11.2 %     --       *       1,667.00       16.0 %     12.9 % (4)
Mark and Carolyn P. Landis (5)
    3,783,717       4.4 %     1,326.136       86.0 %     --       *       5.9 % (6)
SOAdesk LLC
    5,357,713       6.2 %     --       *       5,811.32       35.8 %     12.2 % (7)
Bruce Miller
    2,892,655       3.4 %     --       *       --       *       3.4 % (8)
Don Peppers
    2,127,512       2.5 %     --       *       1,333.33       12.8 %     3.9 % (9)
John P. Broderick
    2,681,968       3.0 %     --       *       --       *       3.0 % (10)
John W.  Atherton
    166,784       *       --       *       --       *       * (11)
Bruce W. Hasenyager
    50,652       *       --       *       --       *       * (12)
Charles Porciello
    98,286       *       --       *       --       *       * (13)
Antony Castagno
    75,000       *       --       *       --       *       * (14)
Jay R. Kingley
    19,000       *       --       *       --       *       * (15)
Scott Lustgarten
    1,643,934       1.9 %     --       *       1,000.00       9.6 %     3.0 (16)
All current directors and executive officers as a group (10 persons)
    47,414,388       51.2 %     1,340.968       87.0 %     7,733.33       74.4 %     55.6 %(17)

*
Represents less than one percent of the outstanding shares.
 
1.   
The address of John L. Steffens is 65 East 55 th Street, New York, N.Y. 10022.
 
2.  
Includes 32,262,529 shares of common stock, 14,832 common shares issuable upon conversion of the Series A-1 Convertible Preferred Stock, 6,400,000 common shares issuable upon conversion of the Series B Convertible Preferred Stock, and 3,238,285 shares issuable upon the exercise of warrants and 18,000 shares subject to stock options.
 
3.   
The address of Mr. Gallen is 299 Park Avenue New York, New York 10171.
 
4.   
Ahab Partner, L.P. (“Partners”), Ahab International, Ltd. (“International”), Queequeg Partners, L.P. (“Queequeg”) and Queequeg, Ltd. (“Limited,” and collectively with Partners, International and Queequeg, the “Funds”) held in aggregate 9,283,173 shares of common stock, 1,667,000 common shares issuable upon conversion of the Series B Convertible Preferred Stock and warrants to acquire 416,667 shares of common stock. Jonathan Gallen possesses the sole power to vote and the sole power to direct the disposition of all securities of the Company held by the Funds.  In addition, Jonathan Gallen held the power to direct the disposition of 100,000 shares of common stock held in private investment account.  Accordingly, for the purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, Mr. Gallen may be deemed to beneficially own 11,366,840 shares of common stock of the Company.
 
5.   
The address of Mark and Carolyn P. Landis is 503 Lake Drive, Princeton, New Jersey 08540.
 
6.   
Includes 3,771,717 shares of common stock, 1,326,136 common shares issuable upon conversion of the Series A-1 Convertible Preferred Stock and 12,000 shares subject to stock options.
 
 
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7.  
Includes 2,000,000 shares of common stock, 3,257,713 shares of common stock issuable upon conversion of one-half of the principal and accumulated interest of a $700,000 convertible promissory note and 5,811,320 common shares issuable upon the conversion of the Series B Convertible Preferred Stock issuable upon conversion of a convertible promissory note in the principal amount of $700,000 and accumulated interest of $172,000.
 
8.  
Consists of 2,774,655 shares of common stock, 18,000 shares subject to stock options and warrants to acquire 100,000 shares of common stock. Mr. Miller has sole or shared voting or dispositive power with respect to the securities held by Delphi Partners, Ltd., which holds 509,267 shares of common.
 
9.  
Includes 1,582,179 shares of common stock and 1,333,333 common shares issuable upon conversion of the Series B Convertible Preferred Stock, warrants to acquire 533,333 shares of common stock and 12,000 shares subject to stock options.
 
10.  
Includes 3,248 shares of common stock.  629,360 shares subject to stock options exercisable within sixty (60) days and 2,049,360 shares of restricted stock that is awarded upon termination or change of control.
 
11.  
Includes 148,784 shares of common stock, and 100 shares of common stock held in a self-directed IRA and 18,000 shares subject to stock options.
 
12.  
Consists of 32,652 shares of common stock and 18,000 shares subject to stock options.
 
13.  
Consists of 80,286 shares of common stock and 18,000 shares subject to stock options.
 
14.   
Consists of 75,000 shares subject to stock options.
 
15.  
Consists of 1,000 shares of common stock and 18,000 shares subject to stock options.
 
16.   
Includes 1,634,934 shares of common stock and 1,000,000 common shares issuable upon conversion of the Series B Convertible Preferred Stock, warrants to acquire 450,000 shares of common stock.
 
17.  
Includes shares issuable upon conversion of shares of preferred stock and exercise of options and warrants as described in above Notes for each director and officer.

 
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Item 13.     Certain Relationships and Related Transactions, and Director Independence
 
Loans from Related Parties

From time to time during 2012 through 2013, 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 December 2012, Mr. Steffens converted $300,000 of his debt into a subscription of 6,000,000 shares of the Company’s common stock at a price of $0.05 per share as part of a private investment in the Company’s stock.  At December 31, 2012, the Company was indebted to Mr. Steffens in the approximate amount of $1,773,000 of principal and $148,000 in interest.  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 April 1, 2015.

During 2012 and 2013, the Company entered into several short term notes   payable with John Broderick, the Chief Executive Office 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 principal and $428 in interest. No interest was paid in fiscal 2013.

Antony Castagno, the Company’s Chief Technology Officer, is part-owner of SOAdesk LLC. For a description of the transactions between the Company and SOAdesk, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – SOAdesk Transaction.  During 2013, the Company entered into a short term note payable with Mr. Castagno for various working capital needs.  The note was non-interest bearing and was unsecured.  At December 31, 2013, the Company was indebted to Mr. Castagno in the approximate amount of $15,000.
 
Director Independence

Our board of directors currently consists of ten members.  They are John L. Steffens, John P. Broderick, Antony Castagno, Mark Landis, Bruce Hasenyager, Jay Kingley, Bruce D. Miller, Charles Porciello, John W. Atherton, and Don Peppers.  Mr. Steffens is the Company’s Chairman of the Board, Mr. Broderick is the Company’s Chief Executive Officer and Chief Financial Officer and Mr. Castagno is the Company’s Chief Technology Officer.  The Company’s stock is quoted on the Over The Counter Bulletin Board, which does not have director independence requirements. Under Item 407(a) of Regulation S-K, the Company has chosen to measure the independence of its directors under the definition of independence used by the American Stock Exchange, which can be found in the NYSE Amex Company Guide, §803(A)(2).  Under such definition, Messrs. Steffens, Landis, Hasenyager, Kingley, Miller, Porciello, Atherton and Peppers are independent directors.

Item 14.      Principal Accountant Fees and Services

Independent Registered Public Accounting Firm

Cherry Bekaert LLP audited our financial statements for the year ended December 31, 2013 and 2012.

Audit Fees

Audit fees include fees for the audit of the Company’s annual financial statements, fees for the review of the Company’s interim financial statements, and fees for services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. The aggregate fees billed by Cherry Bekaert LLP for professional services rendered to our company for the audit of the Company's annual financial statements for fiscal year 2013 and 2012 (and reviews of quarterly financial statements on Form 10-Q) were $78,750 and $79,000, respectively.

Audit-Related Fees

Audit-related fees include fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements. There were no audit-related fees billed by Cherry Bekaert LLP for fiscal year 2013 and audit-related fees billed by Cherry Bekaert LLP for fiscal year 2012 of approximately $4,000.
 
 
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Tax Fees

Tax fees include fees for tax compliance, tax advice and tax planning. There were no fees billed by Cherry Bekaert LLP for these services in 2013 and 2012.

Other Fees

All other fees include fees for all services except those described above. There were no other fees billed by Cherry Bekaert LLP for fiscal year 2013 and 2012.
 
Determination of Auditor Independence

The Audit Committee considered the provision of non-audit services by Cherry Bekaert LLP and determined that the provision of such services was consistent with maintaining the independence of Cherry Bekaert LLP.
 
Audit Committee’s Pre-Approval Policies

The Audit Committee has adopted a policy that all audits, audit-related, tax and any other non-audit service to be performed by the Company’s independent registered public accounting firm must be pre-approved by the Audit Committee. It is the Company’s policy that all such services be pre-approved prior to commencement of the engagement. The Audit Committee is also required to pre-approve the estimated fees for such services, as well as any subsequent changes to the terms of the engagement.

 
33

 
 
PART IV
 
Item 15. Exhibits and Financial Statement Schedules.
 
(A)           Financial Statements
 
The following financial statements of the Company and the related reports of Independent Registered Public Accounting Firms thereon are set forth immediately following the Index of Financial Statements which appears on page F-1 of this report:
 
Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2013 and 2012
 
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
 
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2013 and 2012
 
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
 
Notes to Consolidated Financial Statements
 
(B)     Financial Statement Schedules
 
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
 
(C)     Exhibits

The exhibits listed under the Exhibit Index are filed as part of this Annual Report on Form 10-K.

 
34

 
 
Exhibit Index
Exhibit Number   Description
     
3.1
 
Certificate of Incorporation of Level 8 Systems, Inc., a Delaware corporation, as amended and restated December 29, 2006 (incorporated by reference to exhibit 3.1 to Level 8’s Form 8-K filed January 17, 2007).
 
3.2
 
Certificate of Designation relating to Series A1 Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.2 to Level 8’s Form 8-K filed January 17, 2007).
     
3.3
 
Certificate of Incorporation of Level 8 Systems, Inc., a Delaware corporation, as amended August 4, 2003 (incorporated by reference to exhibit 3.1 to Level 8’s Form 10-K filed March 31, 2004).
     
3.4
 
Bylaws of Level 8 Systems, Inc., a Delaware corporation (incorporated by reference to exhibit 3.2 to Level 8’s Form 10-K filed April 2, 2002).
     
3.5
 
Certificate of Designation relating to Series B Convertible Redeemable Preferred Stock (incorporated by reference to exhibit 3.1 to Level 8’s Form 8-K filed January 20, 2010).
     
4.1
  Form of Long term Promissory Note Stock Purchase Warrant (incorporated by reference to exhibit 4.19 to Cicero Inc.’s Form 10-K filed March 31, 2008).
     
4.2
 
Form of Long term Promissory Note Stock Purchase Warrant (incorporated by reference to exhibit 4.17 to Cicero Inc.’s Form 10-K filed March 31, 2009).
     
4.3
 
Form of Amended Long term Promissory Note Stock Purchase Warrant (incorporated by reference to exhibit 4.3 to Cicero Inc.’s Form 10-K filed March 31, 2011).
     
 
Form of Investor Warrant Agreement (filed herewith)
     
10.2
 
Amended PCA Shell License Agreement, dated as of January 3, 2002, between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to exhibit 10.2 to Level 8's Form 8-K, filed January 11, 2002).
     
10.3A
 
PCA Shell License Agreement between Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to exhibit 10.2 to Level 8’s Report on Form 8-K, filed September 11, 2000).
     
10.3B
 
OEM License Agreement between Cicero Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to exhibit 10.12A to Cicero Inc.’s Form 10-K filed March 31, 2008).
     
10.3C
 
Software Support and Maintenance Schedule between Cicero Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to exhibit 10.12A to Cicero Inc.’s Form 10-K filed March 31, 2008).
     
10.6
 
Level 8 Systems Inc. 1997 Stock Option Plan, as Amended and Restated (incorporated by reference to exhibit 10.2 to Level 8’s Registration Statement on Form S-1/A, filed September 22, 2000, File No. 333-44588).*
     
10.7A
 
Fifth Amendment to Level 8 Systems Inc. 1997 Stock Option Plan (incorporated by reference to exhibit 10.9A to Level 8’s Form 10-K filed April 2, 2002).*
     
10.8B
 
Seventh Amendment to Level 8 Systems Inc. 1997 Stock Option Plan (incorporated by reference to exhibit 10.14 B to Level 8’s Form 10-K, filed March 31, 2004).*
     
10.1
 
Cicero Inc. 2007 Employee Stock Option Plan (incorporated by reference to exhibit 10.22 to Cicero Inc.’s Form 10-K filed March 31, 2008).
     
10.11
 
Agreement and Promissory Note of Cicero Inc., dated October 30, 2007 among Cicero Inc. and BluePhoenix Solutions Ltd. (incorporated by reference to exhibit 10.23 to Cicero Inc.’s Form 10-K filed March 31, 2008).
     
10.12
 
Promissory Note of Cicero Inc., dated October 29, 2007 among Cicero Inc. and John L. Steffens (incorporated by reference to exhibit 10.24 to Cicero Inc.’s Form 10-K filed March 31, 2008).
     
10.15
 
Revolving Loan Agreement dated November 3, 2008 among Cicero Inc. and Barbara Sivan (incorporated by reference to exhibit 10.15 to Cicero Inc., Form 10-K filed March 31, 2009).
     
10.16
 
Employment Agreement between John P. Broderick and the Company effective January 1, 2012 (incorporated by reference to exhibit 10.16 to Cicero Inc., Form 10-K filed April 16, 2012).
 
 
35

 
     
10.17
 
Form of Long Term Promissory Note dated March 31, 2009 (incorporated by reference to exhibit 10.17 to Cicero Inc., Form 10-K filed March 31, 2009).
     
10.18
 
Employment Agreement between Antony Castagno and the Company effective January 1, 2012 (incorporated by reference to exhibit 10.16 to Cicero Inc., Form 10-K filed April 16, 2012).*
     
10.19
 
Asset Purchase Agreement dated January 15, 2010 between Cicero Inc., Vertical Thought Inc., and SOAdesk LLC (incorporated by reference to exhibit 2.1 to Cicero’s Form 8-K filed January 20, 2010).
     
10.2
 
Amendment No. 1 to the Purchase Agreement dated January 15, 2010 between Cicero Inc., Vertical Thought Inc., and SOADesk LLC (incorporated by reference to exhibit 2.1 to Cicero’s Form 8-K/A filed April 2, 2010).
     
10.21
 
Registration Rights Agreement, dated as of January 15, 2010, by and among Cicero Inc. and the Purchasers thereto (incorporated by reference to exhibit 4.4 to Cicero Inc.’s Form 8-K filed January 20, 2010)
     
 
Form of Short Term Secured Promissory Note of Cicero Inc. among Cicero Inc. and John Broderick (filed herewith).
     
10.23
 
Source Code License Agreement between Cicero Inc. and Convergys Customer Management Group Inc. (incorporated by reference to exhibit 10.16 to Cicero Inc., Form 10-K filed April 16, 2012).
     
10.9
 
Lease Agreement for Cary, N.C. offices, dated July 21,   2010, between Cicero Inc. and Regency Park Corporation (incorporated by reference to exhibit 10.9 to Cicero Inc.’s Form 10-K filed March 31, 2011).
     
10.24
 
Form of Short Term Promissory Note of Cicero Inc. among Cicero Inc. and John L. Steffens (incorporated by reference to exhibit 10.16 to Cicero Inc., Form 10-K filed April 16, 2012).
     
 
Form of Short Term Promissory Note of Cicero Inc. among Cicero Inc. and Antony Castagno (filed herewith).
     
10.26
 
Amended Employment Agreement between John P. Broderick and the Company effective January 1, 2012 (incorporated by reference to exhibit 10.26 to Cicero Inc., Form 10-K filed April 15, 2013)
     
 
Registration Rights Agreement, dated as of March 20, 2013, by and among Cicero Inc. and the Purchasers thereto (filed herewith)
     
 
Form of Securities Purchase Agreement by and among Cicero, Inc. and the Purchasers thereto (filed herewith)
     
 
Amended Employment Agreement between Antony Castagno and the Company effective July 3, 2013 (filed herewith)
     
14.1
 
Code of Ethics (incorporated by reference to exhibit 14.1 to Level 8’s Form 10-K/A, filed March 31, 2004).
     
21.1
 
List of subsidiaries of the Company (filed herewith).
     
 
Consent of Cherry Bekaert LLP (filed herewith).
     
 
Certification of Chief Executive pursuant to Rule 13a-14(a) (filed herewith).
     
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
     
 
Certification of John P. Broderick pursuant to 18 USC § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

*        Management contract or compensatory agreement.
 
 
36

 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
CICERO INC.
 
       
 
By:
/s/  John P. Broderick  
   
John P. Broderick
 
   
Chief Executive Officer and Chief Financial Officer
 
   
Date: March 31, 2014
 
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, the following persons on behalf of the Registrant and in the capacities and on the dates indicated have signed the report below.
 
Signature
 
Title
 
Date
         
/ s/John L. Steffens
 
Chairman of the Board
 
March 31, 2014
John L. Steffens        
         
/s/ John P. Broderick
 
Chief Executive Officer/Chief Financial Officer
 
March 31, 2014
John P. Broderick   (Principal Executive and Financial and Accounting Officer)    
         
/s/ Antony Castagno
 
Chief Technology Officer
 
March 31, 2014
Antony Castagno        
         
/s/ Mark Landis
 
Director
 
March 31, 2014
Mark Landis        
         
/s/ Bruce Hasenyager
 
Director
 
March 31, 2014
Bruce Hasenyager        
         
/s/ Jay Kingley
 
Director
 
March 31, 2014
Jay Kingley        
         
/s/ Bruce D. Miller
 
Director
 
March 31, 2014
Bruce D. Miller        
         
/s/ Charles Porciello
 
Director
 
March 31, 2014
Charles Porciello        
         
/s/ John W. Atherton
 
Director
 
March 31, 2014
John W. Atherton        
         
/s/ Don Peppers
 
Director
 
March 31, 2014
Don Peppers        
 
 
37

 
 
INDEX TO FINANCIAL STATEMENTS
 
Report of Independent Registered Public Accounting Firm
F-2
   
Financial Statements:
 
   
Consolidated Balance Sheets
F-3
   
Consolidated Statements of Operations
F-4
   
Consolidated Statements of Stockholders' Deficit
F-5
   
Consolidated Statements of Cash Flows
F-7
   
Notes to Consolidated Financial Statements
F-8
 
 
 
F-1

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Cicero, Inc.
Cary, North Carolina
 
We have audited the accompanying consolidated balance sheets of Cicero Inc. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2013.  The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a working capital deficiency as of December 31, 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ Cherry Bekaert LLP
Raleigh, North Carolina
March 31, 2014
 
 
F-2

 
 
CICERO INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
   
December 31,
2013
   
December 31,
2012
 
ASSETS
           
Current assets:
           
Cash
  $ 5     $ 69  
Trade accounts receivable, net
    1,125       1,247  
Prepaid expenses and other current assets
    208       289  
Total current assets
    1,338       1,605  
Property and equipment, net
    29       47  
Intangible asset, net (Note 4)
    --       28  
Goodwill (Note 4)
    2,832       2,832  
Total assets
  $ 4,199     $ 4,512  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
Current liabilities:
               
Short-term debt (Note 5)
  $ 456     $ 826  
Accounts payable
    3,178       2,887  
Accrued expenses:
               
Salaries, wages, and related items
    1,235       1,119  
Other
    417       271  
Deferred revenue
    1,382       1,389  
Total current liabilities
    6,668       6,492  
Long-term debt (Note 6)
    6,134       3,509  
Total liabilities
    12,802       10,001  
                 
Commitments and contingencies (Notes 13 and 14)
               
                 
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 December 31, 2013 and 2012, $500 per share liquidation preference (aggregate liquidation value of $771)
      --         --  
Series B – 10,400 shares issued and outstanding at December 31, 2013 and 2012, $500 per share liquidation preference (aggregate liquidation value of $5,200)
    --       --  
Common stock, $0.001 par value, 215,000,000 shares authorized at December 31, 2013 and 2012; 85,806,247 issued and outstanding at December 31, 2013 and  73,094,286 issued and outstanding at December 31, 2012 (Note 9)
    86       73  
Common stock - subscribed
    --       10  
Additional paid-in-capital
    237,135       236,919  
                 
Accumulated deficit
    (245,824 )     (242,491 )
Total stockholders' deficit
    (8,603 )     (5,489 )
Total liabilities and stockholders' deficit
  $ 4,199     $ 4,512  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-3

 
 
CICERO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
   
Years Ended December 31,
 
   
2013
   
2012
 
Revenue:
           
Software
  $ 124     $ 4,061  
Maintenance
    1,440       1,333  
Services
    628       603  
Total operating revenue
    2,192       5,997  
Cost of revenue:
               
Software
    28       701  
Maintenance
    110       145  
Services
    964       979  
Total cost of revenue
    1,102       1,825  
Gross margin
    1,090       4,172  
Operating expenses:
               
Sales and marketing
    1,423       1,897  
Research and product development
    1,272       1,476  
General and administrative
    1,055       949  
Total operating expenses
    3,750       4,322  
Loss from operations before other income (charges)
    (2,660 )     (150 )
Other income (charges):
               
Interest expense
    (545 )     (547 )
Other (Note 1)
    (1 )     509  
      (546 )     (38 )
                 
Net loss
    (3,206 )     (188 )
8% preferred stock Series B dividend
    127       127  
Net loss applicable to common stockholders
  $ (3,333 )   $ (315 )
                 
Loss per share – basic and diluted
  $ (0.04 )   $ (0.00 )
                 
Average shares outstanding – basic and diluted
    85,198       67,038  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-4

 
 
CICERO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands, except share amounts)
 
    Common Stock     Preferred Stock     Additional
Paid-in
    Accumulated        
 
  Shares    
Amount
    Shares    
Amount
   
Capital
   
(Deficit)
   
Total
 
Balance at December 31, 2011
    47,444,524     $ 47       11,941       --     $ 232,506     $ (242,176 )   $ (9,623 )
Dividend for preferred B stock
                                            (127 )     (127 )
Beneficial conversion of preferred A stock
    1,000                                               --  
Issuance of stock for payment of debt/interest
    23,884,429       24                       3,560               3,584  
Issuance of stock for payment of accrued dividends
    1,765,333       2                       263               265  
Common Stock – Subscription
    10,200,000       10                       500               510  
Options issued as compensation
                                    48               48  
Restricted shares issued as compensation
                                    42               42  
Net loss
                                            (188 )     (188 )
Balance at December 31, 2012
    83,294,286     $ 83       11,941       --     $ 236,919     $ (242,491 )   $ (5,489 )
Dividend for preferred B stock
                                            (127 )     (127 )
Issuance of stock for payment of debt/interest
    198,000                               10               10  
Issuance of stock for external consulting fees
    673,720       1                       34               35  
Issuance of common stock
    1,640,241       2                       80               82  
Options issued as compensation
                                    8               8  
Restricted shares issued as compensation
                                    84               84  
Net loss
                                            (3,206 )     (3,206 )
Balance at December 31, 2013
    85,806,247     $ 86       11,941       --     $ 237,135     $ (245,824 )   $ (8,603 )
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
F-5

 

CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
   
Years Ended December 31,
 
   
2013
   
2012
 
Cash flows from operating activities:
           
Net loss
  $ (3,206 )   $ (188 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    55       725  
Stock compensation expense
    92       90  
Stock issuance for external consulting fees
    35       --  
Bad debt expense
    --       18  
Gain on forgiveness of debt
    --       (598 )
Gain on write down of accrued liability
    --       (390 )
Changes in assets and liabilities:
               
Trade accounts receivable
    122       (404 )
Prepaid expenses and other assets
    81       123  
Accounts payable and accrued expenses
    453       354  
Deferred revenue
    (7 )     (222 )
Net cash used in operating activities
    (2,375 )     (492 )
Cash flows from investing activities:
               
Purchases of property and equipment
    (9 )     (39 )
Net cash used in investing activities
    (9 )     (39 )
Cash flows from financing activities:
               
Issuance of common stock
    65       --  
Common stock subscription
    --       187  
Borrowings under short and long-term debt
    2,671       1,998  
Repayments of short and long-term debt
    (416 )     (1,769 )
Net cash provided by financing activities
    2,320       416  
Net decrease in cash
    (64 )     (115 )
Cash at beginning of year
    69       184  
Cash at end of year
  $ 5     $ 69  
   
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid during the year for:
               
Income taxes
  $ 12     $ 15  
Interest
  $ 19     $ 263  
 
The accompanying notes are an integral part of the consolidated financial statements.

 
F-6

 
 
CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

Non-Cash Investing and Financing Activities

2013

During February 2013, the Company converted $10,000 of interest payable to a private lender by issuing 198,000 shares of its common stock.

2012

During April 2012, the Company converted $6,000 of account payable to a vendor by issuing 40,000 shares of its common stock.

During March 2012, the Company converted $265,000 of accrued Series B Preferred Stock dividends by issuing 1,765,333 shares of its common stock.

During March 2012, the Company converted $3,544,000 of debt and $33,000 of interest payable to private and related party lenders by issuing 23,843,429 shares of its common stock.

 
F-7

 
 
CICERO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.
SUMMARY OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Cicero Inc., (''Cicero'' or the ''Company''), is a provider of business integration software which enables organizations to integrate new and existing information and processes at the desktop.  Business integration software addresses the emerging need for a company's information systems to deliver enterprise-wide views of the company's business information processes. Cicero Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc. and re-incorporated in Delaware in 1999.

Going Concern and Management Plans:

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. Management believes that its repositioned strategy of leading with its Discovery product to measure how work happens and then follow with its integration capabilities through its XM product will shorten the sales cycle and allow for value based selling to our customers and prospects.  The Company anticipates a continued success in this regard based upon current discussions with active customers and prospects.  The Company has borrowed $1988,000 and $2,671,000 and also retired approximately $1,796,000 and $416,000 of debt in 2012 and 2013, respectively. Additionally, the Company converted $3,800,000 of debt into common stock and has received notification of additional forgiveness of liabilities of $404,000 during 2012.  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. 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 in existence.
 
Principles of Consolidation:

The accompanying 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.

All significant inter-company accounts and transactions are eliminated in consolidation.

Use of 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.
 
 
F-8

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

   
December 31,
 
   
2013
   
2012
 
Fair Value
  $ 6,110,141     $ 3,420,397  
Carrying Value
  $ 6,134,000     $ 3,509,000  

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

The Company places substantially all cash with various financial institutions. The Federal Deposit Insurance Corporation (FDIC) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. As of December 31, 2013, the Company did not exceed these insured amounts.

Trade Accounts Receivable:

Trade accounts receivable are stated in the amount management expects to collect from outstanding balances.  Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance of doubtful accounts based on its assessment of the current status of individual accounts.  Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance of doubtful accounts and a credit to trade accounts receivable.  Changes in the allowance for doubtful accounts have not been material to the financial statements.

Property and Equipment:

Property and equipment purchased in the normal course of business is stated at cost, and property and equipment acquired in business combinations is stated at its fair market value at the acquisition date.  All property and equipment is depreciated using the straight-line method over estimated useful lives.

Expenditures for repairs and maintenance are charged to expense as incurred.

The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in the Consolidated Statements of Operations.

Software Development Costs:

The Company capitalizes certain software costs after technological feasibility of the product has been established. Generally, an original estimated economic life of three years is assigned to capitalized software costs, once the product is available for general release to customers. Costs incurred prior to the establishment of technological feasibility are charged to research and product development expense.

Capitalized software costs are amortized over related sales on a product-by-product basis using the straight-line method over the remaining estimated economic life of the product.

The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies.

Long-Lived Assets:

The Company reviews the recoverability of long-lived intangible assets when circumstances indicate that the carrying amount of assets may not be recoverable. This evaluation is based on various analyses including undiscounted cash flow projections. In the event undiscounted cash flow projections indicate impairment, the Company would record an impairment based on the fair value of the assets at the date of the impairment. The Company accounts for impairments under the Financial Accounting Standards Board ("FASB") guidance now codified as Accounting Standards Codification (“ASC”) 360 “Property, Plant and Equipment”.
 
 
F-9

 
 
Accrued Other:

Accrued other is primarily comprised of accrued dividends of $233,000 and $106,000 at December 31, 2013 and 2012, respectively, and the remaining balance is comprised of accrued auditing, royalty, consulting and other.
 
Revenue Recognition:

We derive revenue from three sources: license fees, recurring revenue and professional services. Recurring revenue includes software maintenance and support. Maintenance and support consists of technical support. Professional services primarily consists of consulting, implementation services and training. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in changes to the amount and timing of our revenue for any period if different conditions were to prevail. We present revenue, net of taxes collected from customers and remitted to governmental authorities.

We apply the provisions of ASC 985-605, Software Revenue Recognition, to all transactions involving the licensing of software products. In the event of a multiple element arrangement for a license transaction, we evaluate the transaction as if each element represents a separate unit of accounting taking into account all factors following the accounting standards. When such estimates are not available, the completed contract method is utilized. Under the completed contract method, revenue is recognized only when a contract is completed or substantially complete.

When licenses are sold together with system implementation and consulting services, license fees are recognized upon delivery, provided that (i) payment of the license fees is not dependent upon the performance of the consulting and implementation services, (ii) the services are available from other vendors, (iii) the services qualify for separate accounting as we have sufficient experience in providing such services, have the ability to estimate cost of providing such services, and have vendor-specific objective evidence of fair value, and (iv) the services are not essential to the functionality of the software.

We use signed software license and services agreements and order forms as evidence of an arrangement for sales of software, maintenance and support. We use signed engagement letters to evidence an arrangement for professional services.

License Revenue
We recognize license revenue when persuasive evidence of an arrangement exists, the product has been delivered, no significant obligations remain, the fee is fixed or determinable, and collection of the resulting receivable is probable. In software arrangements that include rights to multiple software products and/or services, we use the residual method under which revenue is allocated to the undelivered elements based on vendor-specific objective evidence of the fair value of such undelivered elements. The residual amount of revenue is allocated to the delivered elements and recognized as revenue, assuming all other criteria for revenue recognition have been met. Such undelivered elements in these arrangements typically consist of software maintenance and support, implementation and consulting services.
 
Software is delivered to customers electronically. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. We have standard payment terms included in our contracts. We assess collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If we determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.
 
We consider a software element to exist when we determine that the customer has the contractual right to take possession of our software. Professional services are recognized as described below under “Professional Services Revenue.” If vendor-specific evidence of fair value cannot be established for the undelivered elements of an agreement, the entire amount of revenue from the arrangement is recognized ratably over the period that these elements are delivered.

Maintenance Revenue
Included in recurring revenue is revenue derived from maintenance and support services. We use vendor-specific objective evidence of fair value for maintenance and support to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. Maintenance and support is renewable by the customer on an annual basis. Maintenance and support rates, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.
 
 
F-10

 
 
Professional Services Revenue
Included in professional services revenue is revenue derived from system implementation, consulting and training. For software transactions, the majority of our consulting and implementation services and accompanying agreements qualify for separate accounting. We use vendor-specific objective evidence of fair value for the services to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our consulting and implementation service contracts are bid on a fixed-fee basis. For fixed fee contracts, where the services are not essential to the functionality, we recognize revenue as services are performed. If the services are essential to functionality, then both the product license revenue and the service revenue are deferred until the services are performed.

Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.

Cost of Revenue:

The primary component of the Company's cost of revenue for its software products is the amortization of software for the assets acquired from SOAdesk in January 2010. (See Note 4)

The primary component of the Company's cost of revenue for maintenance and services is compensation expense.

Advertising Expenses:

The Company expenses advertising costs as incurred.  Advertising expenses were approximately $388,000 and $506,000, for the years ended December 31, 2013 and 2012, respectively.

Research and Product Development:

Research and product development costs are expensed as incurred.  Research and development expenses were approximately $1,272,000 and $1,476,000, for the years ended December 31, 2013 and 2012, respectively.

Other Income/(Charges):

Other income (net) in fiscal 2012 consists primarily of a write off of certain debt forgiveness of $414,000.

Income Taxes:

The Company uses FASB guidance now codified as ASC 740 “Income Taxes” to account for income taxes. This statement requires an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events, other than enactments of changes in the tax law or rates, are generally considered. A valuation allowance is recorded when it is ''more likely than not'' that recorded deferred tax assets will not be realized.  (See Note 8.)

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. During 2013 and 2012, potentially dilutive securities included stock options, warrants to purchase common stock, and preferred stock.

 
F-11

 
 
The following table sets forth the potential shares that are not included in the diluted net loss per share calculation because to do so would be anti-dilutive for the periods presented:

   
2013
   
2012
 
Stock options
    3,396,210       3,921,493  
Warrants
    6,281,333       5,928,285  
Preferred stock
    11,941,618       11,941,618  
      21,619,161       21,791,396  

$127,000 was accrued for dividends on the Series B Preferred Stock in fiscal 2013 and 2012, respectively.  During March 2012, the Company converted $265,000 of accrued dividends into 1,765,333 common shares of the Company.

Stock-Based Compensation:

The Company adopted 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 granted 25,000 options in fiscal 2013 at an exercise price of $0.05 per share and recognized approximately $8,000 of stock-based compensation.  The Company granted 70,000 options in fiscal 2012 at exercise prices between $0.05 and $0.19 per share and recognized approximately $48,000 of stock-based compensation.  The Company recognized as stock-based compensation approximately $36,000 in fiscal 2013 and 2012 for the restricted shares issued in 2007 to John Broderick, the Chief Executive Officer.  Additionally, the Company recognized as stock based compensation approximately $48,000 and $6,000 in fiscal 2013 and 2012 for the 1,500,000 restricted shares issued in 2012 to John Broderick.

The fair value of the Company's stock-based awards to employees was estimated as of the date of the grant using the Black-Scholes option-pricing model, using the following weighted-average assumptions:

   
2013
   
2012
 
Fair value of common stock
  $ 0.05     $ 0.14  
Expected life (in years)
 
9.99 years
   
9.85 years
 
Expected volatility
    169 %     186 %
Risk free interest rate
    0.40 %     0.19 %
Expected dividend yield
    0 %     0 %
 
Recent Accounting Pronouncements:

None applicable.
 
 
 
F-12

 
 
NOTE 2.      ACCOUNTS RECEIVABLE

Trade accounts receivable was composed of the following at December 31 (in thousands):

   
2013
   
2012
 
Current trade accounts receivable
  $ 1,125     $ 1,247  
 
NOTE 3.      PROPERTY AND EQUIPMENT

Property and equipment was composed of the following at December 31 (in thousands):

   
2013
   
2012
 
Computer equipment
  $ 143     $ 134  
Furniture and fixtures
    24       24  
Office equipment
    35       35  
      202       193  
Less: accumulated depreciation and amortization
    (173 )     (146 )
                 
    $ 29     $ 47  

Depreciation and amortization expense of property and equipment was $27,000 and $24,000 for the years ended December 31, 2013 and 2012, respectively.
 
NOTE 4.      INTANGIBLE ASSET, NET AND GOODWILL
 
The Company accounts for goodwill in accordance ASC Topic 350 “Intangibles – Goodwill and Other” 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 2010. ASC Topic 350 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 may elect 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, measuring the impairment loss, compares the implied fair value of the goodwill 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 December 31, 2013, no impairment of goodwill has been identified.
 
 
F-13

 
 
The Company’s intangible asset with a finite life in the amount of $2,103,000 is being amortized over its estimated useful life of 3 years for software acquired from SOAdesk LLC. Amortization expense is $28,000 and $701,000 for fiscal 2013 and 2012, respectively. At December 31, 2013, the intangible asset has been fully amortized.

Based upon our annual evaluation testing, we have determined that the implied fair value of goodwill exceeds the carrying value of the goodwill as of December 31, 2013.
 
NOTE 5.      SHORT-TERM DEBT

Term loan, notes payable, and notes payable to related party consist of the following at December 31 (in thousands):

   
2013
   
2012
 
Note payable related parties (a)
  $ 21     $ 3  
Notes payable (b)
    435       823  
    $ 456     $ 826  

(a)
During 2012 and 2013, 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, 2012, the Company was indebted to Mr. Broderick in the approximate amount of $3,000. No interest was paid in fiscal 2012. At December 31, 2013, the Company was indebted to Mr. Broderick in the approximate amount of $6,000. No interest was paid in fiscal 2013.

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.
 
(b)
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 amount of $435,000 and $407,000, respectively, as of December 31, 2013, and 2012 bear interest between 10% and 36% per annum.  In March 2012, the Company converted $235,000 of these previously held notes into 1,566,667 shares of Company’s common stock.

In July 2012, the Company entered into a restructuring settlement with a private lender whereby the lender agreed to accept $495,000 in full satisfaction of all principal and interest due under the Note agreements, as of June 1, 2012, plus interest in the amount of approximately $21,000 for the period from June 1, 2012 to July 31, 2012.  In addition, the Company agreed to pay interest for the period after July 31, 2012 in the aggregate amount of approximately $67,000.  This interest was paid in seven monthly installments of approximately $9,750 each from August 2012 through February 2013. The final payment of the remaining principal of approximately $416,000 was paid in February 2013.
 
NOTE 6.      LONG-TERM DEBT

Long-term loan and notes payable consist of the following at December 31 (in thousands):

   
2013
   
2012
 
Note payable asset purchase agreement (a)
  $ 700     $ 700  
Note payable – related party (b)
    4,398       1,773  
Other long-term debt (c)
    1,036       1,036  
    $ 6,134     $ 3,509  

 
F-14

 
 
(a)  
In January 2010, per the Asset Purchase Agreement, the Company entered into an unsecured convertible promissory note with SOAdesk for $700,000 with an annual interest rate of 5%.  The note was originally scheduled to mature on March 31, 2010 but was subsequently amended through a series of amendments, the maturity date was extended to June 30, 2015.  At December 31, 2013, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $139,000 in interest.

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 time to time during 2012 through 2013, 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 December 2012, Mr. Steffens converted $300,000 of his debt into a subscription of 6,000,000 shares of the Company’s common stock at a price of $0.05 per share as part of a private investment in the Company’s stock.  At December 31, 2012, the Company was indebted to Mr. Steffens in the approximate amount of $1,773,000 of principal and $148,000 in interest.  In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until April 1, 2014.  As such this amount has been classified as long term debt as of December 31, 2012.  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 has been classified as long term debt.

(c)  
In January 2010, as part of the Asset Purchase Agreement, the Company entered into an unsecured Convertible Promissory Note with SOAdesk in the amount of $1,000,000.  The note bears interest at 5% and is due January 14, 2015.  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, 2012 the Company was indebted to SOAdesk in the amount of $700,000 of principal and $137,000 in interest.  At December 31, 2013, the Company was indebted to SOAdesk in the amount of $700,000 of principal and $172,000 in interest.

In March 2012, certain private lenders agreed to refinance $83,000 of debt and $301,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013.  In March 2013, the maturity date of the note was extended to April 4, 2014. As such this amount has been reclassified to long term debt at December 31, 2012. In March 2014, the maturity date of the note was extended to June 30, 2015.  As such this amount has been reclassified to long term debt at December 31, 2013.
 
Scheduled maturities of the above long-term debt are as follows:

Year
     
2015
  $ 6,134,000  
         
    $ 6,134,000  
 
 
F-15

 
 
NOTE 7.   CONVERSION OF DEBT TO EQUITY

On March 30, 2012, the Company entered into agreements with private lenders and investors, and officers, directors and significant shareholders of the Company; including John L. Steffens, the Chairman of the Board of Directors, to convert $3,243,502 of debt and $33,013 of interest into 21,843,429 common shares of the Company’s stock.  The Company accounted for the transaction pursuant to Topic ASC 470-50, Modification and Extinguishment of Debt. Pursuant to ASC 470-50, when debt is extinguished by delivering noncash assets owned by the debtor, the gain or loss on the extinguishment should be measured by the difference between the net carrying amount of the debt and the fair value of the noncash assets. Any difference between the fair value and the carrying amount of the noncash assets should be recognized as a gain or loss on transfer. As part of management’s analysis in determining the fair market value, the Company engaged an independent expert to help management determine the fair market value of the Company stock and whether a discount to the price of the stock needed to be applied.  In analysis of historical studies of discounts attributable to trading restrictions as well as analysis from an option pricing model of protective puts of the Company’s stock, the Company determined that a 25% discount to the closing stock price on the day of the transaction would be required to establish fair market value.  The Company calculated an approximately $246,000 gain on the extinguishment of the debt, however, due to the fact that 20,000,000 shares of the transaction were being issued to Mr. Steffens, the Company determined that this was not an arm’s length agreement and as such has recorded the gain through additional paid in capital.
 
NOTE 8. INCOME TAXES

The Company follows the provisions of ASC Topic 740, “Income Taxes”, and recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.  For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority.  The Company applies ASC Topic 740 to all tax positions for which the statute of limitations remains open.

The Company has identified its federal tax return and its state tax return in North Carolina as “major” tax jurisdictions.  Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.  The evaluation was performed for the tax years 2010 through 2012, and may be subject to audits for amounts related to net operating loss carryforwards generated in periods prior to December 31, 2009.  The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. The tax returns for the prior three years are generally subject to review by federal and state taxing authorities.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.  There were no amounts accrued for penalties and interest as of or during the period for the tax years 2012 and 2013.  The Company does not expect its uncertain tax position to change during the next twelve months.  Management is currently unaware of any issues under review that could result in significant payment, accruals or material deviations from its position.
 
A reconciliation of expected income tax at the statutory federal rate with the actual income tax provision is as follows for the years ended December 31 (in thousands):

   
2013
   
2012
 
Expected income tax benefit at statutory rate (34%)
  $ (1,090 )   $ (64 )
State taxes, net of federal tax benefit
    (192 )     (10 )
Effect of change in valuation allowance
    (9,876 )     (9,848 )
Non-deductible expenses
    4       6  
Expiration of net operating loss deductions
    11,154       9,916  
Total
  $ --     $ --  

 
F-16

 

Significant components of the net deferred tax asset (liability) at December 31 were as follows:

   
2013
   
2012
 
Current assets:
           
Accrued expenses, non-tax deductible
  $ 99     $ 5  
Deferred revenue
    553       556  
Contingent payments
    (831 )     (831 )
Noncurrent assets:
               
Stock compensation expense
    580       543  
Loss carryforwards
    61,942       71,122  
Depreciation and amortization
    1,105       1,929  
      63,448       73,324  
                 
Less: valuation allowance
    (63,448 )     (73,324 )
                 
    $ --     $ --  

At December 31, 2013, the Company had net operating loss carryforwards of approximately $154,858,000, which may be applied against future taxable income. These carryforwards will expire at various times between 2014 and 2033. Net operating loss carryforwards include tax deductions for the disqualifying dispositions of incentive stock options. When the Company utilizes the net operating losses related to these deductions, the tax benefit will be reflected in additional paid-in capital and not as a reduction of tax expense. The total amount of these deductions included in the net operating loss carryforwards is $21,177,000.

The Company provided a full valuation allowance on the total amount of its deferred tax assets at December 31, 2013 and 2012 since management does not believe that it is more likely than not that these assets will be realized.
 
NOTE 9. STOCKHOLDERS’ EQUITY

Preferred Stock :

In April 2010, the Company issued to a certain accredited investor 1,333 shares of Series B Convertible Preferred Stock at $150 per share for a total of $200,000.  The Series B Convertible Preferred Stock bears an annual dividend of 8%.  The Series B stock may convert into common stock at a conversion rate of $0.15 per share.  Additionally, the Series B stock provides warrants to purchase common stock of the Company at a strike price of $0.25 per share.  The warrants expire in five years.  333,333 warrants were issued to the investor.  
 
In January 2010, the Company issued to certain accredited investors 9,067 shares of Series B Convertible Preferred Stock at $150 per share for a total of $1,360,000, including $500,000 in cash, the cancellation of $710,000 of existing indebtedness.  The Series B Convertible Preferred Stock bears an annual dividend of 8%.  The Series B stock may convert into common stock at a conversion rate of $0.15 per share.  Additionally, the Series B stock investors were issued warrants to purchase common stock of the Company at a strike price of $0.25 per share.  The warrants expire in five years.  2,266,667 warrants were issued to these investors.

Common Stock :

During February 2013, the Company converted approximately $10,000 of interest payable to a private lender by issuing 198,000 shares of its common stock.
 
 
F-17

 

In December 2012, the Company had stock subscription of 10,200,000 shares of their common stock at a price of $0.05 per share.  This was part of an offering in a private investment in the Company’s common stock. The stock subscription was made up of $186,132 of cash from private investors, the extinguishment of $23,868 of interest on a note with one of the private investors, and the exchange of $300,000 of short term debt with Mr. John Steffens, the Company’s Chairman. Additionally, the investors were issued warrants to purchase common stock of the Company at a strike price of $0.20 per share.  The warrants expire in five years.  2,040,000 warrants were issued to these investors. In 2013, an additional investment in the offering was made up of $60,000 of cash from private investors and the exchange of $15,000 of short term debt and the extinguishment of $2,012 of interest on a note with one of the private investors for 1,640,241 shares of the Company’s common stock and 328,048 warrants.   In March 2013, the offering was officially closed and the Company issued 11,840,241 common shares in exchange for $592,012.

In April 2012, the Company converted approximately $6,000 of accounts payable to a vendor by issuing 40,000 shares of its common stock.

In March 2012, the Company converted approximately $265,000 of accrued Series B Preferred Stock dividends by issuing 1,765,333 shares of its common stock.

In March 2012, the Company converted approximately $3,544,000 of debt and $33,000 of interest payable to certain directors and significant shareholders of the Company and other private lenders by issuing 23,843,429 shares of its common stock.
 
Stock Grants :

In November 2012, the Company issued Mr. John P. Broderick, our Chief Executive Officer, a restricted stock award in the amount of 1,500,000 shares which will vest to him upon his termination, or change in control.  The Company valued the award at the fair market value of the date of the award and is amortizing the total expense of $75,000 over the implicit service period of 2 years.  The Company recorded expense of approximately $48,000 and $6,000 in fiscal 2013 and 2012, respectively. The Company has unrecognized compensation expense of approximately $28,000 associated with this grant.

In August 2007, the Company issued Mr. John P. Broderick, our Chief Executive Officer, a restricted stock award in the amount of 549,360 shares which will vest to him upon his resignation or termination.  The Company used the Black-Scholes method to value these shares and assumed a life of 7 years.  The Company recorded compensation expense of approximately $36,000 for fiscal 2013 and 2012. The Company has unrecognized compensation expense of approximately $43,000 associated with this grant.

Stock Options :

In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock which may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors.  The Company also has a stock incentive plan for outside directors and the Company has set aside 1,200 shares of common stock for issuance under this plan.

Under the terms of the Plans, the exercise price of the incentive stock options may not be less than the fair market value of the stock on the date of the award and the options are exercisable for a period not to exceed ten years from date of grant. Stock appreciation rights entitle the recipients to receive the excess of the fair market value of the Company's stock on the exercise date, as determined by the Board of Directors, over the fair market value on the date of grant. Performance shares entitle recipients to acquire Company stock upon the attainment of specific performance goals set by the Board of Directors. Restricted stock entitles recipients to acquire Company stock subject to the right of the Company to repurchase the shares in the event conditions specified by the Board are not satisfied prior to the end of the restriction period. The Board may also grant unrestricted stock to participants at a cost not less than 85% of fair market value on the date of sale. Options granted vest at varying periods up to five years and expire in ten years.

 
F-18

 

Activity for stock options issued under these plans for the years ending December 31, 2013 and 2012 was as follows:
 
 
 
Number of Options
   
Option Price
Per Share
   
Weighted Average
Exercise Price
   
Aggregate Intrinsic Value
 
Balance at December 31, 2011
    4,296,193       0.06-39.00     $ 0.39          
     Granted
    70,000       0.05-0.19     $ 0.14          
     Forfeited
    (440,000 )     0.06-31.00     $ 0.35          
     Expired
    (4,700 )     34.00-39.00     $ 36.39          
Balance at December 31, 2012
    3,921,493       0.06-46.00     $ 0.36          
     Granted
    25,000       0.05     $ 0.05          
     Forfeited
    (544,733 )     0.06-46.00     $ 0.44          
     Expired
    (5,550 )     22.00-26.00     $ 25.57          
Balance at December 31, 2013
    3,396,210       0.05-46.00     $ 0.31     $ 0.00  

Activity for non-vested stock options under these plans for the fiscal year ending December 31, 2013 and 2012 was as follows:
 
 
 
Number of Options
   
Option Price
Per Share
   
Weighted Average
Exercise Price
 
Balance at December 31, 2011
    952,414       0.06-0.10     $ 0.08  
     Granted
    70,000       0.05-0.19     $ 0.14  
     Vested
    (805,747 )     0.05-0.09     $ 0.08  
     Forfeited
    (75,000 )     0.08-0.09     $ 0.08  
Balance at December 31, 2012
    141,667       0.05-0.19     $ 0.10  
     Granted
    25,000       0.05     $ 0.05  
     Vested
    (33,334 )     0.05-0.19     $ 0.12  
     Forfeited
    (8,333 )     0.16     $ 0.16  
Balance at December 31, 2013
    125,000       0.05-0.19     $ 0.08  

There were 25,000 options granted during 2013 and 70,000 options granted during 2012. The weighted average grant date fair value of options issued during the years ended December 31, 2013 and 2012 was equal to $0.05 and $0.14 per share, respectively. There were no option grants issued below fair market value during 2013 and 2012.

At December 31, 2013, there was unrecognized compensation cost of $2,000 related to stock options which is expected to be recognized over a weighted-average amortization period of one year.


At December 31, 2013 and 2012, options to purchase 3,271,210 and 3,779,826 and shares of common stock were exercisable, respectively, pursuant to the plans at prices ranging from $0.05 to $46.00. The following table summarizes information about stock options outstanding at December 31, 2013:
 
Exercise Price
   
Number
Outstanding
   
Remaining Contractual Life for Options Outstanding
   
Number Exercisable
   
Weighted Average Exercise Price
 
                           
$ 0.05-0.08       725,000       7.7       608,333     $ 0.07  
  0.09       997,750       6.6       997,750       0.09  
  0.10-0.37       370,000       5.4       361,667       0.15  
  0.38-31.00       1,303,460       3.6       1,303,460       0.65  
                                     
          3,396,210       5.6       3,271,210     $ 0.32  
 
 
F-19

 
 
Preferred Stock :

Series A-1

The holders of the Series A-1 preferred stock shall have the rights and preferences set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware upon the approval of the Recapitalization.  The rights and interests of the Series A-1 preferred stock of the Company will be substantially similar to the rights and interests of each of the series of  the former Level 8 preferred stock other than for (i) anti-dilution protections that have been permanently waived and (ii) certain voting, redemption and other rights that holders of Series A-1 preferred stock will not be entitled to.  All shares of Series A-1 preferred stock will have a liquidation preference pari passu with all other Series A-1 preferred stock.

The Series A-1 preferred stock is convertible at any time at the option of the holder into an initial conversion ratio of 1,000 shares of common stock for each share of Series A-1 preferred stock.  The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations.  The Series A-1 preferred stock is also convertible on an automatic basis in the event that (i) the Company closes on an additional $5,000,000 equity financing from strategic or institutional investors, or (ii) the Company has four consecutive quarters of positive cash flow as reflected on the Company’s financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) and filed with the Commission.  The holders of Series A-1 preferred stock are entitled to receive equivalent dividends on an as-converted basis whenever the Company declares a dividend on its common stock, other than dividends payable in shares of common stock.  The holders of the Series A-1 preferred stock are entitled to a liquidation preference of $500 per share of Series A-1 preferred stock upon the liquidation of the Company.  The Series A-1 preferred stock is not redeemable.

The holders of Series A-1 preferred stock also possess the following voting rights.  Each share of Series A-1 preferred stock shall represent that number of votes equal to the number of shares of common stock issuable upon conversion of a share of Series A-1 preferred stock.  The holders of Series A-1 preferred stock and the holders of common stock shall vote together as a class on all matters except: (i) regarding the election of the Board of Directors of the Company (as set forth below); (ii) as required by law; or (iii) regarding certain corporate actions to be taken by the Company (as set forth below).

The approval of at least two-thirds of the holders of Series A-1 preferred stock voting together as a class, shall be required in order for the Company to: (i) merge or sell all or substantially all of its assets or to recapitalize or reorganize; (ii) authorize the issuance of any equity security having any right, preference or priority superior to or on parity with the Series A-1 preferred stock; (iii) redeem, repurchase or acquire indirectly or directly any of its equity securities, or to pay any dividends on the Company’s equity securities; (iv) amend or repeal any provisions of its certificate of incorporation or bylaws that would adversely affect the rights, preferences or privileges of the Series A-1 preferred stock; (v) effectuate a significant change in the principal business of the Company as conducted at the effective time of the Recapitalization; (vi) make any loan or advance to any entity other than in the ordinary course of business unless such entity is wholly owned by the Company; (vii) make any loan or advance to any person, including any employees or directors of the Company or any subsidiary, except in the ordinary course of business or pursuant to an approved employee stock or option plan; and (viii) guarantee, directly or indirectly any indebtedness or obligations, except for trade accounts of any subsidiary arising in the ordinary course of business.  In addition, the unanimous vote of the Board of Directors is required for any liquidation, dissolution, recapitalization or reorganization of the Company.  The voting rights of the holders of Series A-1 preferred stock set forth in this paragraph shall be terminated immediately upon the closing by the Company of at least an additional $5,000,000 equity financing from strategic or institutional investors.

In addition to the voting rights described above, the holders of a majority of the shares of Series A-1 preferred stock are entitled to appoint two observers to the Company’s Board of Directors who shall be entitled to receive all information received by members of the Board of Directors, and shall attend and participate without a vote at all meetings of the Company’s Board of Directors and any committees thereof.  At the option of a majority of the holders of Series A-1 preferred stock, such holders may elect to temporarily or permanently exchange their board observer rights for two seats on the Company’s Board of Directors, each having all voting and other rights attendant to any member of the Company’s Board of Directors.  There are two current members of the Board of Directors that are holders of the Series A-1 preferred stock.  As part of the Recapitalization, the right of the holders of Series A-1 preferred stock to elect a majority of the voting members of the Company’s Board of Directors shall be terminated.
 
 
F-20

 
 
Series B
 
The Series B Preferred Stock ranks senior to the Common Stock and on parity with the Company’s outstanding Series A-1 Preferred Stock. As required by the Certificate of Designations applicable to the Series A-1 Preferred Stock, the Company obtained the consent of a holder representing in excess of two thirds of the outstanding shares of Series A-1 Preferred Stock to authorize and issue the shares of Series B Preferred Stock.
 
Dividends will accrue on each share of Series B Preferred Stock at the rate per annum of eight percent (8%). Dividends will accrue from the date on which a share of Series B Preferred Stock was issued by the Company until paid, whether or not declared, and shall be cumulative; provided , however , that except as set forth in the Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (the “ Series B Certificate ”), such dividends will be payable only when, as, and if declared by the Board of Directors, and the Company will be under no obligation to pay such dividends.
 
Each share of Series B Preferred Stock is convertible, at the option of the holder, into that number of shares of common stock equal to $150.00 (the “ Series B Original Issue Price ”) divided by the conversion price of the Series B Preferred Stock then in effect, which is initially $0.15, subject to adjustment under certain circumstances as set forth in the Series B Certificate.
 
In the event of certain specified liquidation events, the holders of Series B Preferred Stock will be entitled to receive an amount per share equal to the Series B Original Issue Price plus any dividends accrued or declared but unpaid thereon before the payment of any amount to the holders of Common Stock and other junior securities.
 
The holders of Series B Preferred Stock will be entitled to vote, on an as-converted basis, on all matters submitted to a vote of the stockholders of the Company, and the holders of Series B Preferred Stock, Series A-1 Preferred Stock and common stock will vote together as a single class. In addition, until such time as the Company consummates at least an additional $5,000,000 equity financing from institutional or strategic investors, the approval of the holders of at least 2/3 of the outstanding shares of the Series B Preferred Stock voting together separately as a class will be required for the Company to take certain specified actions set forth in the Series B Certificate.
 
Stock Warrants:

The Company values warrants based on the Black-Scholes pricing model.  In accordance with ASC 815, these warrants are classified as equity. The warrants were issued in conjunction with certain promissory notes, the Series B preferred Stock offering, and the private investment in the Company’s shares.  At December 31, 2013, there were 6,281,333 exercisable warrants at an exercise price between $0.08 and $0.25 per share.
 
    Number of Warrants    
Warrant Price
Per Share
      Weighted Average Exercise Price  
Balance at December 31, 2012
    5,928,285     $ 0.08-$0.25     $ 0.22  
     Issued
    353,048     $ 0.10-$0.20     $ 0.19  
     Exercised
    --       --       --  
     Forfeited
    --       --       --  
Balance at December 31, 2013
    6,281,333     $ 0.10-$0.25     $ 0.22  
 
NOTE 10. EMPLOYEE BENEFIT PLANS

The Company sponsors one defined contribution plan for its employees - the Cicero Inc. 401(K) Plan.  Under the terms of the Plan, the Company, at its discretion, provides a 50% matching contribution up to 6% of an employee’s salary.  Participants must be eligible and employed at December 31 of each calendar year to be eligible for employer matching contributions.  The Company opted not to make any matching contributions for 2013 and 2012.
 
NOTE 11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

In 2013, three customers accounted for 46%, 13% and 12% of operating revenues and one customer accounted for 89% of accounts receivable at December 31, 2013.  In 2012, three customers accounted for 43%, 21% and 19% of operating revenues and two customers accounted for 80% and 10% of accounts receivable at December 31, 2012.
 
NOTE 12. RELATED PARTY INFORMATION

From time to time during 2012 through 2013, 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 December 2012, Mr. Steffens converted $300,000 of his debt into a subscription of 6,000,000 shares of the Company’s common stock at a price of $0.05 per share as part of a private investment in the Company’s stock.  At December 31, 2012, the Company was indebted to Mr. Steffens in the approximate amount of $1,773,000 of principal and $148,000 in interest.  In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until April 1, 2014.  As such this amount has been classified as long term debt as of December 31, 2012.  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 has been classified as long term debt as of December 31, 2013. (See Note 6)
 
 
F-21

 
 
During 2012 and 2013, the Company entered into several 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, 2012, the Company was indebted to Mr. Broderick in the approximate amount of $3,000. No interest was paid in fiscal 2012.  At December 31, 2013, the Company was indebted to Mr. Broderick in the approximate amount of $6,000. No interest was paid in fiscal 2013.

Antony Castagno, the Company’s Chief Technology Officer, is part-owner of SOAdesk LLC. During 2013, the Company entered into a short term note payable with Mr. Castagno for various working capital needs.  The note was non-interest bearing and was unsecured.  At December 31, 2013, the Company was indebted to Mr. Castagno in the approximate amount of $15,000.
 
NOTE 13.  COMMITMENTS AND EMPLOYMENT AGREEMENTS

The Company leases certain facilities and equipment under various operating leases.  Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2013 consisted of only one lease as follows (in thousands):

   
Lease
Commitments
 
       
2014
  $ 59  
         
    $ 59  

Rent expense was $98,000 and $96,000 for each year ended December 31, 2013 and 2012, respectively.  As of December 31, 2013 and 2012, the Company had no sublease arrangements.
 
Per the Asset Purchase Agreement with SOAdesk LLC in 2010, the Company was obligated to make additional payments of up to $2,410,000 over an 18 month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets.  At December 31, 2013 and 2012 the Company has recorded $843,000 in accounts payable for the earn-out earned through July 31, 2011.
 
Under the emp loyment agreement between the Company and Mr. Broderick effective January 1, 2014, we agreed to pay Mr. Broderick an annual base salary of $175,000 and performance bonuses in cash of up to $275,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion.  Upon termination of Mr. Broderick’s employment by the Company without cause, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within 30 days of termination and any unpaid deferred salaries and bonuses. In the event there occurs a substantial change in Mr. Broderick’s job duties, there is a decrease in or failure to provide the compensation or vested benefits under the employment agreement or there is a change in control of the Company, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within thirty (30) days of termination. Additionally, as part of his employment agreement for fiscal 2012, Mr. Broderick will be entitled to receive 1,500,000 shares of the Company’s common stock in the event of the termination, with or without cause, of his employment by the Company or his resignation from the Company with or without cause or in the event of a change of control (as that term is defined in the Employment Agreement) of the Company.  Mr. Broderick will have thirty (30) days from the date written notice is given about either a change in his duties or the announcement and closing of a transaction resulting in a change in control of the Company to resign and execute his rights under this agreement. If Mr. Broderick’s employment is terminated for any reason, Mr. Broderick has agreed that, for two (2) years after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so.

 
F-22

 
 
Under the employment agreement between the Company and Mr. Castagno effective January 1, 2013, we agreed to pay Mr. Castagno an annual base salary of $150,000.  Upon termination of Mr. Castagno’s employment by the Company without cause, we agreed to pay Mr. Castagno an amount of $75,000 which is equivalent to six (6) months of Mr. Castagno’s then current base salary in equal semi-monthly installments over the six (6) month period following the termination. If Mr. Castagno’s employment is terminated for any reason, Mr. Castagno has agreed that, for two (2) years after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so. During 2013 the Company amended Mr. Castagno’s employment agreement to provide that Mr. Castagno could engage in consulting services on behalf of the Company and would be compensated for any revenues in excess of his base salary as a bonus.
 
NOTE 14. 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.

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.

During 2011, the Company was served with a writ of summons by a creditor who holds several short-term notes.  Several notes in the aggregate of $250,000 were due and outstanding under the Note agreements. The loans bore interest at 36% per annum. In July 2012, the Company entered into a restructuring settlement with the lender whereby the lender agreed to accept $495,000 in full satisfaction of all principal and interest due under the Note agreements, as of June 1, 2012, plus interest in the amount of approximately $21,000 for the period from June 1, 2012 to July 31, 2012.  In addition, the Company agreed to pay interest for the period after July 31, 2012 in the aggregate amount of approximately $67,000.  This interest was paid in seven monthly installments of approximately $9,750 each from August 2012 through February 2013. The final payment of the remaining principal of approximately $416,000 was paid in February 2013.

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 December 31, 2013 and 2012.

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 has recently 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 outstanding balance for its Delaware franchise tax.  Upon resolution thereof, the Company’s Certificate of Incorporation would be reinstated.  However, should the State of Delaware not accept the amended tax returns, or accept the amended tax returns but not re-calculate franchise tax based thereon, the Company believes, based on certain conversations with an employee of the Delaware Franchise Tax Bureau, it would be exposed to a franchise tax liability of approximately $1.6 million, and possibly more depending on interest and penalties which could be assessed.  Should the Company not be able to re-instate its Certificate of Incorporation with the State of Delaware, its corporate powers would continue to be inoperative.
 
NOTE 15. SUBSEQUENT EVENTS

In March 2014, the Company amended various promissory notes of approximately $4,398,000 with John L. (Launny) Steffens, the Chairman of the Board of Directors, its promissory note of $700,000 with SOAdesk LLC, and its promissory note of approximately $336,000 with a private lender.  The notes were all amended to extend the maturity date on each note until June 30, 2015.

In January 2014, the Company entered into various note payables totaling $135,000 with Mr. Steffens.  The notes bear interest at 12%.  They are unsecured and mature on June 30, 2015.

F-23

Exhibit 4.4
 
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”) AND APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.  THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
 
INVESTOR WARRANT AGREEMENT
 
Investor Warrant Agreement (the “ Warrant ”), dated as of ___________, 2013 between Cicero Inc. (the “ Company ”) and _______________________________(the “ Holder ”).
 
 
WITNESSETH:
 
WHEREAS, the Company and the Holder have entered into a Securities Purchase Agreement (the “ Purchase Agreement ”) of even date, and the Purchase Agreement provides for, among other things, the issuance of this Warrant for the purchase of an aggregate of ____________ shares of common stock, $.001 par value per share, of the Company (“ Common Stock ”), as provided herein; and
 
WHEREAS, this Warrant is being issued on a private placement basis, and the Holder understands the limitations and responsibilities of acquiring the restricted securities comprising the Warrant and the underlying shares of Common Stock (the “ Warrant Shares ”).
 
NOW, THEREFORE, in consideration of the premises contained herein, the agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
 
1.   Grant and Period.
 
1.1   Grant .  The Holder is hereby granted the right to purchase from the Company, at any time during the exercise period, up to an aggregate of  ______ Warrant Shares of the Company at an initial exercise price (subject to adjustment as provided in Section 5 hereof) of $0.20 per Warrant Share (the “ Exercise Price ”), such exercise to be subject to the terms and conditions of this Warrant.
 
1.2   Period .  This Warrant will be exercisable commencing on ____________, 2013, and expire at 5:00 PM on ___________________, 2017 (the “ Expiration Time ”).  If the Expiration Time is not a Business Day in the City of New York, then the expiration date will be extended to 5:00 PM on the next Business Day in the City of New York.  “Business Day” means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York generally are authorized or required by law or other government actions to close.
 
2.   Exercise of Warrant .
 
2.1   Full Exercise .  Except as provided in Section 2.3 below, the Holder shall effect an exercise of the Warrant by surrendering to the Company this Warrant, together with a Subscription in the form of Exhibit A attached thereto, duly executed by such Holder, at any time prior to the Expiration Time, at the Company’s principal office, accompanied by payment in cash or by certified or official bank check payable to the order of the Company in the amount of the aggregate purchase price (the “ Aggregate Price ”), subject to any adjustments provided for in the Warrant. The Aggregate Price shall be the amount that is the result of the Exercise Price multiplied by the number of Warrant Shares that are the subject of the Warrant (as adjusted as hereinafter provided) being purchased by the Holder.
 
2.2   Partial Exercise .  The Warrant may also be exercised from time to time in part by surrendering the Warrant in the manner specified in Sections 2.1 or 2.3 hereof, except that the Purchase Price payable shall be the amount that is the result of the number of Warrant Shares being purchased hereunder multiplied by the Exercise Price, subject to any adjustments provided for in the Warrant. Upon any such partial exercise, the Company, at its expense, will forthwith issue to the Holder a new Warrant of like tenor for the aggregate number of securities (as constituted as of the date hereof) for which the Warrant shall not have been exercised, issued in the name of the Holder or as the Holder (upon payment by such Holder of any applicable transfer taxes) may direct.
 
 
1

 
2.3   Conversion Right .  The Holder may effect an exercise of the Warrants and pay the Exercise Price through a conversion of the Warrant (“ Conversion Right ”); provided, that such right shall exist only at such time that the Company has the obligation to the Holder to provide a resale registration statement for the underlying securities of the Warrant and the Company does not have a registration statement effective and currently available for the resale by the Holder of the underlying securities of the Warrant. The Holder may effect a Conversion Right of the Warrant by surrendering to the Company this Warrant, together with a Subscription in the form of Exhibit B attached hereto, duly executed by such Holder, prior to the Expiration Time, at the Company’s principal office, upon which the Company shall issue to the Holder the number of Warrant Shares determined as follows:
 
       
 
X
=
Y x (A-B)/A
       
where
X
=
the number of Warrant Shares to be issued to the Holder;
       
 
Y
=
the number of Warrant Shares with respect to which this Warrant is being exercised;
       
 
A
=
the Market Price of a share of Common Stock as of the Date of Exercise; and
       
 
B
=
the Exercise Price.
       

2.4   Certain Defined Terms .  “ Market Price ” of a share of Common Stock on any date shall mean, (i) if the shares of Common Stock are traded on the Nasdaq Global Market, Nasdaq Global Select Market or the Nasdaq Capital Market, the last bid price reported on that date; (ii) if the shares of Common Stock are not quoted on a Nasdaq market and are listed on any other national securities exchange, the last sale price of the Common Stock reported by such exchange on that date; (iii) if the shares of Common Stock are not quoted on any such market or listed on any such exchange and the shares of Common Stock are traded in the over-the-counter market, the last price reported on such day by the OTC Bulletin Board; (iv) if the shares of Common Stock are not quoted on a any such market, listed on any such exchange or quoted on the OTC Bulletin Board, then the last price quoted on such day in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); or (v) if none of clauses (i)-(iv) are applicable, then as determined, in good faith, by the Board of Directors of the Company. “Date of Exercise” means the date on which the Holder shall have delivered to the Company (i) the Warrant, (ii) the applicable Subscription form attached thereto, appropriately completed and duly signed, and (iii) if applicable, payment of the Exercise Price.
 
3.   Issuance of Certificates .  Upon the exercise of the Warrant, the issuance of certificates for Warrant Shares shall be made promptly (and, in any event within five (5) Business Days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Section 4 and Section 5 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided , however , that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.
 
4.   Restriction on Transfer .  The Warrant and the Warrant Shares may be transferred only pursuant to a registration statement filed under the Securities Act and the applicable state securities laws or an exemption from such registrations.  Subject to such restrictions, the Company shall transfer the Warrant and the Warrant Shares, from time to time, upon the books to be maintained by the Company for that purpose, upon surrender thereof, for transfer properly endorsed or accompanied by appropriate instructions for transfer and such other documents as may be reasonably required by the Company, including, if required by the Company, an opinion of its counsel to the effect that such transfer is exempt from the registration requirements of the Securities Act, and to establish that such transfer is being made in accordance with the terms hereof.  Upon such surrender to the Company of this Warrant for its transfer, the Company shall execute and deliver a new Warrant, representing the new Warrant or Warrants in the name of the transferee or transferees and in the denomination or denominations specified in such instructions, and shall issue to the transferor a new Warrant evidencing the portion of the Warrant not so transferred, and this Warrant shall promptly be cancelled.  A Warrant, if properly transferred, may be exercised by a new holder without having a new Warrant issued.
 
5.   Adjustments to Exercise Price and Number of Securities .
 
5.1   Stock Dividends and Splits .  If the Company, (i) pays a stock dividend on its Common Stock, (ii) subdivides outstanding shares of Common Stock into a greater number of shares, or (iii) combines outstanding shares of Common Stock into a lesser number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination.
 
 
2

 
5.2   Extraordinary Transactions .  If, (i) the Company effects any merger or consolidation of the Company with or into another Person and the Company is not the surviving entity, or (ii) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, (in either such case, an “ Extraordinary Transaction ”), then the Warrant will become the right thereafter to receive, upon exercise, the same amount and kind of securities as the Holder would have been entitled to receive upon the occurrence of such Extraordinary Transaction if it had been, immediately prior to such Extraordinary Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of the Warrant (the “ Alternate Consideration ”) in lieu of the Warrant Shares. The aggregate Exercise Price for each Warrant will not be affected by any such Extraordinary Transaction, but the Company shall apportion such aggregate Exercise Price to the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities to be received in an Extraordinary Transaction, then each Holder, to the extent practicable, shall be given the same choice as to the Alternate Consideration it receives upon any exercise of the Warrant following such Extraordinary Transaction. In addition, at the request of the Holder, upon surrender of the Warrant, any successor to the Company or surviving entity in such Extraordinary Transaction shall issue to the Holder a new Warrant consistent with the foregoing provisions and evidencing the Holder’s right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof. Each Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to an Extraordinary Transaction.
 
5.3   Adjustment in Number of Securities .  Upon each adjustment of the Exercise Price pursuant to the provisions of Sections 5.1 and 5.2, the number of securities issuable upon the exercise of the Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of securities issuable upon exercise of the Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price.
 
5.4   No Adjustment of Exercise Price in Certain Cases .  No adjustment of the Exercise Price shall be made if the amount of said adjustment shall be less than $.01 per Warrant Share; provided , however , that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least $.01 per Warrant Share.
 
5.5   Notice of Adjustment .  In each case of an adjustment or readjustment of the Exercise Price or the number and kind of any securities issuable upon exercise of the Warrant, the Company at its expense will promptly calculate such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number of shares of Common Stock or type of Alternate Consideration issuable upon exercise of the Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. The Company will promptly deliver to each Holder who makes a request in writing, a copy of each such certificate.
 
6.   Elimination of Fractional Interests .  The Company shall not be required to issue certificates representing fractions of securities upon the exercise of the Warrant, nor shall it be required to issue script or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests may be eliminated, at the Company’s option, by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights issuable on exercise, or in lieu thereof paying cash equal to such fractional interest.
 
7.   Reservation, Validity and Listing .  The Company covenants and agrees that during the exercise period, the Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrant, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise under this Warrant. The Company covenants and agrees that, upon exercise of the Warrant, and payment of the Exercise Price therefore, all shares of Common Stock and other securities issuable upon such exercise shall be duly authorized, validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder. As long as the Warrant is outstanding, the Company shall use its reasonable commercial efforts to cause all shares of Common Stock issuable upon the exercise of the Warrant to be listed and quoted (subject to official notice of issuance) on all securities exchanges and systems on which the other outstanding shares of Common Stock are then listed and/or quoted, including Nasdaq, the American Stock Exchange and the OTC Bulletin Board.
 
8.   Registration Rights .  The Warrant Shares issuable upon exercise of the Warrant, as adjusted pursuant to the terms of the Warrant, shall be entitled to the registration rights set forth in the Registration Rights Agreement, dated the date hereof (the “ Registration Rights Agreement ”), by and among the Company, the Holder and the other persons or entities that may become party thereto in accordance with the terms thereof.
 
9.   Notices to Warrant Holder .  Nothing contained in this Warrant shall be construed as conferring upon the Holder of the Warrant the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the Expiration Time of the Warrant and its exercise in full, any of the following events shall occur:
 
(a)           the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or
 
(b)           the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefore; or
 
 
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(c)           a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed;
 
then, in any one or more of said events, the Company to the extent practicable shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date of the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notices shall specify such record date or the date of closing the transfer books, as the case may be. 
 
10.     Notices .  Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or delivery by telex (with correct answer back received) or facsimile at the address or number designated below (if delivered on a Business Day during normal business hours where such notice is to be received), or the first Business Day following such delivery (if delivered other than on a Business Day during normal business hours where such notice is to be received) or (b) on the second Business Day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be:
 
(a)           If to the Company, to the address of below or as such may be changed from time to time.
 
Cicero Inc.
8000 Regency Parkway
Cary, NC  27511
Tel: (919) 380-5000
Fax: (919) 380-5121
Attn:  John P. Broderick
 
(b)           If to the Holder, to the address set forth below or as shown on the books of the Company as such may be changed from time to time.
 
 
 
 
 
Tel:
Fax:

With a copy to (which copy shall not constitute notice):
 
 
 
 
 
Tel:
Fax:
 
11.   Entire Agreement : Modification .  This Warrant, together with the registration rights provisions contained in the Registration Rights Agreement, contains the entire understanding between the parties hereto with respect to the subject matter hereof, and the terms and provisions of this Warrant may only be modified, waived or amended in writing. Any modification, waiver or amendment executed by the Company and the Holder (or the Holders holding a majority of the Warrant Shares or the other securities, property or rights issuable upon exercise of the Warrants, as the case may be) shall be binding on the Holder (or all Holders, as the case may be). Notice of any modification, waiver or amendment shall be promptly provided to any Holder not consenting to such modification, waiver or amendment.
 
 
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12.   Assignment .  The Holder may assign to one or more assignees (each an “ Assignee ”) all, or any part, of the Warrant; provided that the Company may continue to deal solely and directly with the Holder in connection with the interest assigned to the Assignee until (i) written notice of such assignment has been given to the Company by the Holder and the Assignee, and (ii) the Holder and the Assignee have delivered to the Company a document reflecting the assignment and acceptance, as reasonably acceptable to the Company.  The assignment of the Warrant does not transfer the registration rights provided pursuant to the Registration Rights Agreement, which are unique to the initial Holder.
 
13.   Successors .  All the covenants and provisions of the Warrant shall be binding upon and inure to the benefit of the Company, the Holders and their respective permitted successors and assigns hereunder.
 
14.   Governing Law; Submissi on to Jurisdiction .  This Warrant shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Warrant, shall be brought solely in a federal or state court located in the State of Delaware. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City of Wilmington, State of Delaware and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in the City of Wilmington, State of Delaware. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined.
 
15.   Severability .  If any term, provision, covenant or restriction of this Warrant is held to be invalid, illegal, void or unenforceable in any respect, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction.  It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
 
16.   Headings .  The caption headings of the sections of the Warrant are for convenience of reference only and are not intended to be, nor should they be construed as, a part of the Warrant and shall be given no substantive effect.
 
17.   Benefits of This Warrant .  Nothing in the Warrant shall be construed to give to any person, corporation or other entity other than the Company and any registered Holder(s) of the Warrant(s) any legal or equitable right, remedy or claim under the Warrant; and the Warrant shall be for the sole and exclusive benefit of the Company and any Holder(s) of the Warrant.
 
18.   Counterparts .  This Warrant may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
 
 
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IN WITNESS HEREOF, the parties hereto have caused this Warrant to be duly executed by their respective authorized officer as of the date first above written.
 
 
CICERO INC.
 
       
 
By:
   
  Name: John Broderick  
  Title: CEO/CFO  
       
       
 
HOLDER
 
       
 
By:
   
  Name:    
  Title:    
 
 
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EXHIBIT A
 
FORM OF SUBSCRIPTION (CASH EXERCISE)
 
(To be signed only upon exercise of Warrant)

TO:
Cicero Inc.
   
   
   
 
The undersigned holder of Warrant dated ________________ (the “ Warrant ”), of Cicero Inc. (the “ Company ”), which is being delivered herewith, hereby irrevocably elects to purchase ______________ Warrant Shares (as defined in the Warrant), and herewith makes payment of $ _________________ therefore, all in accordance with the Warrant. Certificates for the Warrant Shares shall be issued in the name of ________________ and delivered to the following address:
 
   
   
   
   

By:
 
Name:  
Social Security Number or Tax Identification Number:
 
Date:
 
   
 
(Signature must conform in all respects to name of Holder as specified in the Warrant)
 
 
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EXHIBIT B
 
FORM OF SUBSCRIPTION (CASHLESS EXERCISE)
 
TO:
Cicero Inc.
 
     
     
     
 
The undersigned holder of Warrant dated _________________ (the “ Warrant ”), of Cicero Inc. (the “ Company ”), which Warrant is being delivered herewith, hereby irrevocably elects to exercise (on a conversion right basis, in accordance with the formula set forth in Section 2.3 of the Warrant with respect to __________________ Warrant Shares (as defined in the Warrant), all in accordance with the Warrant. Certificates for the Warrant Shares shall be issued in the name of _____________________ and delivered to the following address:
 
   
   
   
   

By:
 
Name:  
Social Security Number or Tax Identification Number:
 
Date:
 
   
 
(Signature must conform in all respects to name of Holder as specified in the Warrant)

 
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FORM OF ASSIGNMENT
 
(To be used by the registered holder if such Holder desires to transfer the Warrant)
 
FOR VALUE RECEIVED ______________________________________________ hereby sells, assigns and transfers unto:
 
Print Name of Transferee: ____________________________________________________
 
Address: ___________________________________________________________________
 
City State Zip Code:_________________________________________________________
 
Social Security or Federal Tax ID Number: _____________________________________
 
this Warrant, originally dated __________ 2009, and issued by Cicero Inc. (“ Company ”), together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ___________________________ as its Attorney in Fact, to transfer the Warrant on the books of the Company, with full power of substitution.
 
Dated:                                                      
Signature:
   
   
   
 
(Signature must conform in all respects to name of Holder as specified on the face of the Warrant)
   

9

Exhibit 10.22
 
SECURED PROMISSORY NOTE

Amount: _____________                                                                                                Date: ____________

FOR VALUE RECEIVED, CICERO INC., a Delaware corporation, with address of 8000 Regency Parkway, Suite 542, Cary, North Carolina 27518 (hereafter, the “Maker”) promises to pay to the order of John Broderick, (hereafter the “Lender”), (Insert Address), or at such place as the Lender may designate and notify the Maker, without grace except as expressly provided herein, in lawful money of the United States of America, which shall at the time of payment be legal tender in payment of  all debts and dues, public and private, (Enter Amount) ($), together with simple interest accruing daily for the actual number of days elapsed (including the first but not the last) at 1/365 th of the annual rate of interest stated below subject to adjustment as provided below:

INTEREST RATE. Interest shall accrue on the daily, unpaid principal balance from the date hereof until paid in full at twelve percent (12%) per annum rate of interest.

PAYMENTS . All amounts payable hereunder shall be due and payable as follows:

Optional prepayments may be made by the Maker in whole or in part at any time and from time to time without premium or penalty. The principal balance and all accrued interest thereon is due and payable in one (1) payment due on or before (Enter Date).

INTEREST AND CHARGES.   Charges imposed by the Lender for the use of the money in connection with the loan evidenced by this note are and shall be the interest expressed in this note, at the rate set forth in this note, which rate of interest at the date hereof expressed in simple interest terms, is twelve percent (12%) per annum; and transfer fees incurred for deposit into Maker’s account in the amount of Fifteen Dollars and No/100 ($15.00).

SECURITY INTEREST . This note is secured by that certain receivable between (Enter Customer) and Cicero, Inc.,

DEFAULT. The maker will be in default if any one or more of the following occur (each an “Event of Default”):

1.  
the Maker failed to make payment on time or in the amount due, which failure continues uncured ten (10) days after Maker’s receipt of written notice from the Lender specifying such failure; or

2.  
the Maker goes into bankruptcy, whether through the Maker’s own choice or not, or makes an assignment for the benefit of creditors, or admits his inability to pay his debts as they become due.
 
REMEDIES. If an Event of Default occurs, the Lender has the following remedies:

1.  
the Lender may, without further notice, accelerate the due date on this Note and all unpaid principal, interest, and all other charges immediately shall be due and payable;

2.  
the Lender may demand additional security or that new parties become obligated to pay this note;

3.  
the Lender may make use of any remedy the Lender has under state or federal law; and

4.  
the Lender may make use of any remedy given to the Lender in any agreement securing or entered into in connection with this Note.

By selecting any one or more of these remedies the Lender does not give up his right to later use any other remedy. By deciding not to use any remedy should the Maker default, the Lender does not waive his right to later consider the event an Event of Default if it happens again.

 
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WAIVER. The Maker gives up his rights to require the Lender to do certain things. The Maker will not require the Lender to:

(1)  
except as expressly provided in this Note, demand payment of amounts due (presentation);

(2)  
obtain official certification of nonpayment (protest); or

(3)  
except as expressly provided in this Note, give notice to the amounts due have not been paid (notice of dishonor).
 
APPLICABLE LAW. This note shall be governed by and construed under the internal laws of the State of North Carolina.

NOTICE. Time is of the essence of this Note. All notices and other communications hereunder shall be in writing. Notices in writing shall be delivered personally or be sent certified or registered mail, postage pre-paid, or by overnight courier, or facsimile transmission and shall be deemed received when actually received by the addressee or, if sooner, in the case of personal delivery, when delivered, in the case of mailing, when receipted for, in the case of overnight delivery, on the next business day after delivery to the courier, and in the case of facsimile transmission, upon transmittal if during regular business hours at the destination or at the open of the next business day, provided that in the case of notices to the Lender, notice shall be deemed to have been given only when such notice is actually received by the Lender. Notices to either party shall be sent to it at the address set forth below, or any other address of which such party notifies all the other parties in writing.

If to Maker:                           Cicero, Inc.
8000 Regency Parkway
Cary, North Carolina 27518
Attn: John Broderick
Fax: (919) 380-5121

If to Lender:                          John Broderick


IN WITNESS WHEREOF , the undersigned has executed, sealed and delivered this Note as of the date hereof.


CICERO, INC.


____________________________________
John Broderick
Chief Executive Officer


____________________________________
Oscar Laserna
Controller



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Exhibit 10.25
 
PROMISSORY NOTE

Amount: _____________                                                                                                Date: ____________
 
FOR VALUE RECEIVED, CICERO INC., a Delaware corporation, with address of 8000 Regency Parkway, Suite 542, Cary, North Carolina 27518 (hereafter, the “Maker”) promises to pay to the order of Antony Castagno, (hereafter the “Lender”), (Insert Address), or at such place as the Lender may designate and notify the Maker, without grace except as expressly provided herein, in lawful money of the United States of America, which shall at the time of payment be legal tender in payment of  all debts and dues, public and private, (Enter Amount) ($).
 
INTEREST RATE. This Promissory Note is a non-interest bearing transaction between Maker and Lender.
 
PAYMENTS . The principal balance and charges imposed by Lender are due and payable in one (1) payment due on (Enter Date).
 
CHARGES. Charges imposed by Lender for the use of the money in connection with the loan evidenced by this note shall be transfer fees incurred for deposit into Maker’s account in the amount of Forty Dollars and No/100 ($40.00).
 
DEFAULT. The maker will be in default if any one or more of the following occur (each an “Event of Default”):

1.  
the Maker failed to make payment on time or in the amount due, which failure continues uncured ten (10) days after Maker’s receipt of written notice from the Lender specifying such failure; or

2.  
the Maker goes into bankruptcy, whether through the Maker’s own choice or not, or makes an assignment for the benefit of creditors, or admits his inability to pay his debts as they become due.
 
REMEDIES. If an Event of Default occurs, the Lender has the following remedies:

1.  
the Lender may, without further notice, accelerate the due date on this Note and all other charges immediately shall be due and payable;

2.  
the Lender may demand additional security or that new parties become obligated to pay this note; and

3.  
the Lender may make use of any remedy the Lender has under state or federal law.

By selecting any one or more of these remedies the Lender does not give up his right to later use any other remedy. By deciding not to use any remedy should the Maker default, the Lender does not waive his right to later consider the event an Event of Default if it happens again.
 
 
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WAIVER. The Maker gives up his rights to require the Lender to do certain things. The Maker will not require the Lender to:

(1)  
except as expressly provided in this Note, demand payment of amounts due (presentation);

(2)  
obtain official certification of nonpayment (protest); or

(3)  
except as expressly provided in this Note, give notice to the amounts due have not been paid (notice of dishonor).
 
APPLICABLE LAW. This note shall be governed by and construed under the internal laws of the State of North Carolina.
 
NOTICE. Time is of the essence of this Note. All notices and other communications hereunder shall be in writing. Notices in writing shall be delivered personally or be sent certified or registered mail, postage pre-paid, or by overnight courier, or facsimile transmission and shall be deemed received when actually received by the addressee or, if sooner, in the case of personal delivery, when delivered, in the case of mailing, when receipted for, in the case of overnight delivery, on the next business day after delivery to the courier, and in the case of facsimile transmission, upon transmittal if during regular business hours at the destination or at the open of the next business day, provided that in the case of notices to the Lender, notice shall be deemed to have been given only when such notice is actually received by the Lender. Notices to either party shall be sent to it at the address set forth below, or any other address of which such party notifies all the other parties in writing.

If to Maker:                           Cicero, Inc.
8000 Regency Parkway
Cary, North Carolina 27518
Attn: John Broderick
Fax: (919) 380-5121

If to Lender:                          Antony Castagno



IN WITNESS WHEREOF , the undersigned has executed, sealed and delivered this Note as of the date hereof.


CICERO, INC.



____________________________________
John Broderick
Chief Executive Officer



2

Exhibit 10.27
 
REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this “ Agreement ”) is made and entered into as of March 20, 2013  by and among Cicero Inc., a corporation organized and existing under the laws of the State of Delaware (the “ Company ”), the purchaser whose signature appears on the signature pages of this Agreement under the caption “Purchaser” and any additional purchasers of Common Shares and Warrants (each as defined below) that become parties to this Agreement in accordance with Section 8(m) hereof (collectively, the “ Purchasers ”).

This Agreement is being entered into pursuant to the Securities Purchase Agreement, dated as of the date hereof, between the Company and the Purchaser (the “ Purchase Agreement ”), relating to the private offering of not less than $500,000 in the aggregate of Common Shares, par value $.001 per share, of the Company (the “ Common Shares ”), and warrants (the “ Warrants ”) to acquire shares of Common Stock, par value $.001 per share, of the Company.

The Company and the Purchasers hereby agree as follows:

1.   Definitions .
 
As used in this Agreement, the following terms shall have the following meanings:

415 Notice shall have the meaning set forth in Section 2(b ).

Affiliate ” means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person.  For the purposes of this definition, “ control ,” when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms “ affiliated ,” “ controlling ” and “ controlled ” have meanings correlative to the foregoing.

Board ” shall have meaning set forth in Section 3(k) .

Business Day ” means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York generally are authorized or required by law or other government actions to close.

Commission ” means the Securities and Exchange Commission.

Common Stock ” means the Common Stock, par value $.001 per share, of the Company.

 “ Effectiveness Date ” means, subject to Section 2(b) hereof, with respect to the Registration Statement the earlier of (A) the one hundred eightieth (180 th ) day following the Initial Closing Date or (B) the date which is within three (3) Business Days after the date on which the Commission informs the Company (i) that the Commission will not review the Registration Statement or (ii)   that the Company may request the acceleration of the effectiveness of the Registration Statement and the Company makes such request; provided that , if the Effectiveness Date falls on a Saturday, Sunday or any other day which shall be a legal holiday or a day on which the Commission is authorized or required by law or other government actions to close, the Effectiveness Date shall be the following Business Day.

Effectiveness Period ” shall have the meaning set forth in Section 2(a) .

Exchange Act ” means the Securities Exchange Act of 1934, as amended.

Filing Date ” means, subject to Section 2(b) hereof, the one hundred twentieth (120 th ) day following the Initial Closing Date; provided that , if the Filing Date falls on a Saturday, Sunday or any other day which shall be a legal holiday or a day on which the Commission is authorized or required by law or other government actions to close, the Filing Date shall be the following Business Day.

 
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FINRA ” means the Financial Industry Regulatory Authority.

Holder ” or “ Holders ” means the holder or holders, as the case may be, from time to time of Registrable Securities.

Indemnified Party ” shall have the meaning set forth in Section 6(c) .

Indemnifying Party ” shall have the meaning set forth in Section 6(c) .

Initial Closing Date ” means the date of the initial closing of the purchase and sale of the shares of Common Stock and the Warrants pursuant to the Purchase Agreement.

Losses ” shall have the meaning set forth in Section   6(a) .

Person ” means an individual or a corporation, limited or general partnership, trust, incorporated or unincorporated association, firm, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.

Proceeding ” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

Prospectus ” means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus.

Registrable Securities ” means (i) the Common Shares, (ii) the Warrant Shares and (iii) shares of Common Stock issued in respect of the foregoing as a result of stock splits, stock dividends, reclassifications, recapitalizations, or other similar events.  At such time as any Common Shares or Warrant Shares or shares of Common Stock are sold pursuant to the Registration Statement or Rule 144, or may be sold without restriction pursuant to Rule 144, then such shares shall cease to be Registrable Securities.

Registration Statement ” means the registration statement and any additional registration statements contemplated by Section 2 , including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference in such registration statement.

Rule 144 ” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

Rule 158 ” means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

Rule 415 ” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

Rule 424 ” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

Securities Act ” means the Securities Act of 1933, as amended.

Warrant Shares ” means shares of Common Stock issued or issuable upon the exercise of the Warrants.
 
 
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2.   Resale Registration .
 
(a)   On or prior to the Filing Date, the Company shall prepare and file with the Commission a “resale” Registration Statement providing for the resale of all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415.  The Registration Statement shall be on Form S-1 (or another appropriate form in accordance herewith and with the Securities Act and the rules promulgated thereunder).  Such Registration Statement shall cover to the extent allowable under the Securities Act and the rules promulgated thereunder (including Rule 416), such indeterminate number of additional shares of Common Stock resulting from stock splits, stock dividends or similar transactions with respect to the Registrable Securities.  The Company shall use commercially reasonable efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until such date as is the earlier of (x) the date when all Registrable Securities covered by such Registration Statement have been sold or (y) the date on which the Registrable Securities may be sold without any restriction pursuant to Rule 144 as determined by the counsel to the Company pursuant to a written opinion letter, addressed to the Company’s transfer agent to such effect (the “ Effectiveness Period ”).  If at any time and for any reason an additional Registration Statement is required to be filed because at such time the actual number of Conversion Shares and Warrant Shares exceeds the number of shares of Registrable Securities remaining under the Registration Statement, the Company shall have thirty (30) Business Days to file such additional Registration Statement, and the Company shall use commercially reasonable efforts to cause such additional Registration Statement to be declared effective by the Commission as soon as possible, but in no event later than ninety (90) days after.
 
(b)   Notwithstanding anything to the contrary set forth in this Section 2 , in the event the Commission does not permit the Company to register all of the Registrable Securities in the Registration Statement because of the Commission’s application of Rule 415 (a “ 415 Notice ”), the Company shall, within ten (10) days of receipt of the 415 Notice, register in the Registration Statement such number of Registrable Securities as is permitted by the Commission, provided , however , that the Registrable Securities to be included in such Registration Statement or any subsequent registration statement shall be determined in the following order: (i) first, the Warrant Shares shall be registered on a pro rata basis among the Purchasers, (ii) second, the Conversion Shares shall be registered on a pro rata basis among the Purchasers, and (iii) third, any securities of the Company included or to be included in such Registration Statement pursuant to piggyback or demand registration rights shall be registered on a pro rata basis.  In the event the Commission does not permit the Company to register all of the Registrable Securities in the initial Registration Statement, the Company shall file subsequent Registration Statements to register the Registrable Securities that were not registered in the initial Registration Statement as promptly as possible and in a manner permitted by the Commission.  For purposes of this Section 2(b), “ Filing Date means with respect to each subsequent Registration Statement filed pursuant hereto, the later of (i) thirty (30) days following the sale of substantially all of the Registrable Securities included in the initial Registration Statement or any subsequent Registration Statement and (ii) six (6) months following the effective date of the initial Registration Statement or any subsequent Registration Statement, as applicable, or such earlier date as permitted by the Commission.   For purposes of this Section 2(b) , “ Effectiveness Date ” means with respect to each subsequent Registration Statement filed pursuant hereto, the earlier of (A) the ninetieth (90 th ) day following the filing date of such Registration Statement (or in the event the Commission reviews the Registration Statement, the one hundred twentieth (120 th ) day following such filing date) or (B) the date which is within three (3) Business Days after the date on which the Commission informs the Company (i) that the Commission will not review such Registration Statement or (ii)   that the Company may request the acceleration of the effectiveness of such Registration Statement and the Company makes such request; provided that , if the Effectiveness Date falls on a Saturday, Sunday or any other day which shall be a legal holiday or a day on which the Commission is authorized or required by law or other government actions to close, the Effectiveness Date shall be the following Business Day.
 
3.   Registration Procedures .
 
                      In connection with the Company’s registration obligations hereunder, the Company shall:
 
(a)   Prepare and file with the Commission, on or prior to the applicable Filing Date, a Registration Statement on Form S-1 (or another appropriate form in accordance herewith and with the Securities Act and the rules promulgated thereunder) (which, subject to any comments of the Commission, shall contain a plan of distribution substantially as set forth on Exhibit A hereto) and in accordance with applicable law, rules, regulations and Commission policies, and use commercially reasonable efforts to cause the Registration Statement to become effective and remain effective as provided herein; provided , however , that not less than five (5) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto, the Company shall furnish to the Holders copies of all such documents proposed to be filed, which documents will be subject to the review of such Holders.  The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities shall reasonably object in writing within three (3) Business Days of their receipt thereof.
 
(b)   (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and, subject to Section 2(b) , prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as possible, but in no event later than twenty (20) Business Days, to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as possible provide the Holders true and complete copies of all material correspondence from and to the Commission relating to the Registration Statement; provided , however , that the Company shall not provide the Holders with any portion of such correspondence that in the reasonable opinion of counsel to the Company constitutes material non-public information or that is otherwise competitively sensitive; (iv) file the final prospectus pursuant to Rule 424 of the Securities Act no later than 9:00 a.m. Eastern Time on the second Business Day following the date the Registration Statement is declared effective by the Commission; and (v) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the Effectiveness Period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented.
 
 
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(c)   Notify the Holders of Registrable Securities as promptly as possible (and, in the case of (i)(A) below, not less than three (3) days prior to such filing, and in the case of (iii) below, on the same day of receipt by the Company of such notice from the Commission): (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is filed, (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement, and (C) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation or threatening of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (v) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
 
(d)   Use commercially reasonable efforts to avoid the issuance of, or, if issued, obtain the withdrawal of, as promptly as possible, (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable   Securities for sale in any jurisdiction.
 
(e)   Promptly deliver to each Holder, without charge, one copy of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto; and subject to the provisions of Sections 3(e) and 3(k) , the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.
 
(f)   Prior to any public offering of Registrable Securities, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided , however , that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject.
 
(g)   Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to a Registration Statement, which certificates, to the extent permitted by the Purchase Agreement and applicable federal and state securities laws, shall be free of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any Holder may reasonably request in connection with any sale of Registrable Securities.
 
(h)   Upon the occurrence of any event contemplated by Section 3(c)(vi) , as promptly as possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
 
(i)   Use commercially reasonable efforts to cause all Registrable Securities relating to the Registration Statement to be quoted on the OTC Bulletin Board or any other securities exchange, quotation system or market, if any, on which similar securities issued by the Company are then listed, quoted or traded.
 
(j)   Comply in all material respects with all applicable rules and regulations of the Commission and make generally available to its security holders all documents filed or required to be filed with the Commission.
 
(k)   Notwithstanding anything in this Agreement to the contrary, if (i) there is material non-public information regarding the Company which the Company’s Board of Directors (the “ Board ”) determines not to be in the Company’s best interest to disclose and which the Company is not otherwise required to disclose, (ii) there is a significant business opportunity (including, but not limited to, the acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or other similar transaction) available to the Company which the Board determines not to be in the Company’s best interest to disclose, or (iii) the Company is required to file a post-effective amendment to the Registration Statement to incorporate the Company’s quarterly and annual reports and audited financial statements on Forms 10-Q and 10-K, then the Company may (x) postpone or suspend filing of a registration statement for a period not to exceed sixty (60) consecutive days or (y) postpone or suspend effectiveness of a registration statement for a period not to exceed sixty (60) consecutive days; provided that the Company may not postpone or suspend effectiveness of a registration statement under this Section 3(k) for more than ninety (90) days in the aggregate during any 360 day period; provided , further , that no such postponement or suspension shall be permitted for consecutive sixty (60) day periods arising out of the same set of facts, circumstances or transactions.
 
 
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4.   Obligations of the Holders .
 
(a)   It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement that the selling Holders shall furnish to the Company information regarding such Holder and the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement, Prospectus, or any amendment or supplement thereto, and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information promptly after receiving such request. Additionally, each Holder shall promptly notify the Company of any changes in the information furnished to the Company pursuant hereto.
 
(b)   Each Holder agrees to cooperate with the Company as reasonably requested by the Company in connection with the filing of any Registration Statement hereunder, unless such Holder has notified the Company in writing that such Holder elects to exclude all of its Registrable Securities from such Registration Statement.
 
(c)   Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it or an exemption therefrom in connection with sale of Registrable Securities pursuant to any Registration Statement.
 
(d)   Each Holder who is a member or affiliated or associated with members of FINRA will agree, if requested by FINRA, to sign a lock-up, the form of which shall be satisfactory to FINRA, with respect to any Registrable Securities.
 
(e)   Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c)(ii ), 3(c)(iii) , 3(c)(iv) , 3(c)(v) or 3(k) , such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(h) , or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement.
 
5.   Registration Expenses .
 
All fees and expenses incident to the performance of or compliance with this Agreement by the Company, except as and to the extent specified in this Section 5 , shall be borne by the Company whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement.  The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the OTC Bulletin Board   and/or each other securities exchange or market on which Registrable Securities are required hereunder to be quoted or listed, if any (B) with respect to filing fees required to be paid to FINRA, if any, each as applicable, and (C) in compliance with state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement, including, without limitation, the Company’s independent public accountants (including the expenses of any comfort letters or costs associated with the delivery by independent public accountants of a comfort letter or comfort letters).  In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder.  The Company shall not be responsible for any discounts, commissions, transfer taxes or other similar fees incurred by the Holders in connection with the sales of the Registrable Securities.

6.   Indemnification .
 
(a)   Indemnification by the Company .  The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, managers, partners, members, shareholders, agents, brokers, investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and reasonable attorneys’ fees) and expenses (collectively, “ Losses ”), as incurred, arising out of or relating to any violation of securities laws by the Company or untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information about the plan of distribution or regarding such Holder or such other Indemnified Party furnished or approved in writing to the Company by such Holder expressly for use therein.  The Company shall notify the Holders promptly of the institution, written threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.
 
 
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(b)   Indemnification by Holders .  Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents and employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising out of or based upon (i) any breach of this Agreement by such Holder and (ii) any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising out of or based upon any omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information (including the plan of distribution) so furnished or approved in writing by such Holder or other Indemnifying Party to the Company specifically for inclusion in the Registration Statement or such Prospectus.  Notwithstanding anything to the contrary contained herein, each Holder shall be liable under this Section 6(b) for only that amount as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement.
 
(c)   Conduct of Indemnification Proceedings .  If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “ Indemnified Party ”), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the “ Indemnifying Party ) in writing, and the Indemnifying Party shall be entitled to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof (including reasonable attorneys’ fees and expenses); provided , that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party.
 
An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such parties shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed.  No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened Proceeding in respect of which any Indemnified Party is a party and indemnity has been sought hereunder, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

     All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten (10) Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder;   provided , that the Indemnified Party shall reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).

(d)   Contribution .  If a claim for indemnification under Section 6(a) or 6(b) is due but unavailable to an Indemnified Party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations.  The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying, Party or Indemnified Party, and the   parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission.  The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 6(c) , any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.  In no event shall any selling Holder be required to contribute an amount under this Section 6(d) in excess of the net proceeds received by such Holder upon sale of such Holder’s Registrable Securities pursuant to the Registration Statement giving rise to such contribution obligation.
 
The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph.  No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

 
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7.   Rule 144 .  Until such time as all of the Registrable Securities may be sold without restriction pursuant to Rule 144, as long as any Holder owns shares of Common Stock, Warrants or Registrable Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act.  Until such time as all of the Registrable Securities may be sold without restriction pursuant to Rule 144, as long as any Holder owns shares of  Common Stock, Warrants or Registrable Securities, if the Company is not required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will use its commercially reasonable efforts to prepare and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as any other information required thereby, in the time period that such filings would have been required to have been made under the Exchange Act; provided that the provisions of this sentence shall be of no further force and effect in the event of any sale of the Company or substantially all of its assets.
 
8.   Miscellaneous .
 
(a)   No Inconsistent Agreements .  Neither the Company nor any of its subsidiaries has, as of the date hereof entered into and currently in effect, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof.
 
(b)   Amendments and Waivers .  The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of a majority of the Registrable Securities outstanding (the “ Required Holders ”).
 
(c)   Notices .   Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or delivery by telex (with correct answer back received) or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be:
 
If to the Company:
Cicero Inc.
8000 Regency Parkway
Cary, NC  27518
Attention: John Broderick
Tel. No.: (919) 380-5000
Fax No.:  (919) 380-5121
   
If to any Purchaser:
To the address set forth on the signature page hereto
 
Any party hereto may from time to time change its address for notices by giving at least ten (10) days’ written notice of such changed address to the other party hereto.
 
(d)   Assignment .  The Company may not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the Required Holders.  Subject to Section 8(f) below, the Holders may not assign this Agreement or any of their rights or obligations hereunder without the prior written consent of the Company.
 
(e)   Assignment of Registration Rights for Conversion Shares .   The rights of each Holder hereunder to have the Company register for resale the Conversion Shares in accordance with the terms of this Agreement shall be assignable by such Holder to any Person to whom shares of Preferred Stock or Conversion Shares are transferred if: (i) the Holder agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, as promptly as possible after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignees is restricted under the Securities Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this Section, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions of this Agreement, and (v) such transfer shall have been made in accordance with the applicable requirements of the Purchase Agreement and applicable law.  The rights to assignment shall apply to the Holders (and to subsequent) successors and assigns.  For the avoidance of doubt, the assignment of any Warrant or Warrant Shares shall not transfer the registration rights applicable to Warrant Shares provided herein, which registration rights are unique to the initial Holders of the Warrants.
 
 
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(f)   Counterparts .  This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
 
(g)   Cumulative Remedies .  The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
 
(h)   Severability . If any term, provision, covenant or restriction of this Agreement is held to be invalid, illegal, void or unenforceable in any respect, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction.  It is hereby stipulated and declared   to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
 
(i)   Headings .  The caption headings of the sections of this Agreement are for convenience of reference only and are not intended to be, nor should they be construed as, a part of this Agreement and shall be given no substantive effect.
 
(j)   Shares Held by the Company and its Affiliates . Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than any Holder or transferees or successors or assigns thereof if such Holder is deemed to be an Affiliate solely by reason of its holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage.
 
(k)   Aggregation of Stock .  All securities held or acquired by Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement and such Affiliated persons may apportion such rights as among themselves in any manner they deem appropriate.
 
(l)   Additional Investors .  Notwithstanding anything to the contrary contained herein, if the Company issues additional shares of the Company’s CommonStock, any purchaser of such shares of Common Stock and Warrants may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement, and thereafter shall be deemed a “Purchaser” for all purposes hereunder.  No action or consent by the Purchasers shall be required for such joinder to this Agreement by such additional Purchaser, so long as such additional Purchaser has agreed in writing to be bound by all of the obligations as a “Purchaser” hereunder.
 
(m)   Governing Law; Submission to Jurisdiction .  This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the State of Delaware.  By its execution hereof, the parties hereby consent and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City of Wilmington, State of Delaware and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in the City of Wilmington, State of Delaware. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto.  THE PARTIES HERETO AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY.  THE PARTY PREVAILING THEREIN SHALL BE ENTITLED TO PAYMENT FROM THE OTHER PARTY HERETO OF ALL OF ITS REASONABLE COUNSEL FEES AND DISBURSEMENTS.
 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officer as of the date first above written.
 
 
COMPANY:
 
     
 
CICERO INC.
 
       
 
By:
   
  Name: John Broderick  
  Title: CEO/CFO  
       


 
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PURCHASER:
 
     
 
[PURCHASER]
 
       
 
By:
   
  Name: John Broderick  
  Title: CEO/CFO  
       
    Address:  
       
       
       
       
       
   
Email:
 
       
       
       

 
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EXHIBIT A

Plan of Distribution
 
The selling security holders and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our common stock are traded or in private transactions.  These sales may be at fixed or negotiated prices.  The selling security holders may use any one or more of the following methods when disposing of shares:
 
  
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
 
  
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
  
purchases by a broker-dealer as principal and resales by the broker-dealer for its account;
 
  
an exchange distribution in accordance with the rules of the applicable exchange;
 
  
privately negotiated transactions;
 
  
broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share;
 
  
a combination of any of these methods of sale; and
 
  
any other method permitted pursuant to applicable law.
 
The shares may also be sold under Rule 144 under the Securities Act of 1933, as amended (“Securities Act”), if available, rather than under this prospectus.  The selling security holders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.
 
The selling security holders may pledge their shares to their brokers under the margin provisions of customer agreements.  If a selling security holder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.
 
Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.
 
The selling security holders and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales.  Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.  Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part.
 
We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus.  However, each selling security holder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur.
 
We and the selling security holders have agreed to indemnify one another against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.

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Exhibit 10.28
 
SECURITIES PURCHASE AGREEMENT
 
THIS SECURITIES PURCHASE AGREEMENT (this “ Agreement ”), dated as of _______________, 2012, by and among Cicero Inc., a Delaware corporation with headquarters located at 8000 Regency Parkway, Cary, NC 27518 (the “ Company ”), and the investor whose name appears on the signature page hereto (the “ Purchaser ”).
 
RECITALS:
 
WHEREAS, the Company desires to raise cash funds from investors, including Purchaser (collectively, the “ Investors ”), pursuant to a private offering of not less than $500,000 in the aggregate of the Company’s Common Stock, par value $.001 per share (the “ Common Stock ”), and warrants to acquire shares of Common Stock, par value $.001, of the Company, (each, a “ Warrant ” and collectively, the “ Warrants ”), on terms and conditions substantially similar to the terms and conditions set forth in this Agreement.
 
WHEREAS, the Company and the Purchaser are executing and delivering this Agreement in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “ Securities Act ”), and Rule 506 of Regulation D (“ Regulation D ”) as promulgated by the United States Securities and Exchange Commission (the “ SEC ”) under the Securities Act.
 
WHEREAS, the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from  the Company, upon the terms and subject to the conditions set forth herein, (i) the aggregate number of shares of Common Stock set forth under such Purchaser’s name on the signature page hereto (the “ Common Stock ”) and (ii) a Warrant to acquire up to that aggregate number of shares of Common Stock set forth under such Purchaser’s name on the signature page hereto (the “ Warrant Shares ”).
 
WHEREAS, in connection with the issuance and sale of the Common Stock and Warrants hereunder, the Company and the Purchaser shall enter into a Registration Rights Agreement, (the “ Registration Rights Agreement ”), which Registration Rights Agreement will be substantially similar to the Registration Rights Agreement that the Company will enter into with each other Investor;
 
NOW, THEREFORE, IN CONSIDERATION of the foregoing and the respective representations, warranties, covenants, agreements and conditions contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the Company and the Purchaser agree as follows:
 
ARTICLE I
 
DEFINITIONS
 
1.1   Definitions .  Defined terms used in this Agreement shall have the meanings ascribed to them by definition in this Agreement or in Appendix A.
 
ARTICLE II
 
PURCHASE AND SALE
 
2.1   Sale and Issuance of Securities .  Subject to the terms and conditions set forth in this Agreement, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, such number of Common Shares and Warrants for the purchase prices set forth under such Purchaser’s name on the signature page hereto.
 
2.2   Delivery of Purchase Price; Closing .
 
(a)   Subject to Section 2.2(c) below, upon execution of this Agreement, the Purchaser shall deliver or cause to be delivered to Cicero, Inc. (the Company), the following:
 
(i)   the purchase price set forth under such Purchaser’s name on the signature page hereto under the heading “ Aggregate Purchase Price ” in United States dollars and in immediately available funds, by wire transfer to the account of the Company included on the “Instruction Sheet for Investor” set forth as Exhibit A hereto;
 
 
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(ii)   a duly executed copy of this Agreement, including the information requested by the Stock Certificate Questionnaire and Investor Questionnaire included on the “Instruction Sheet for Investor” set forth as Exhibit A hereto;
 
(iii)   a duly executed copy of the Warrant to acquire the Warrant Shares; and
 
(iv)   a duly executed copy of the Registration Rights Agreement.
 
(b)           The Company expects to hold an initial closing (the “ Initial Closing ”) after the conditions to closing (including, for the avoidance of doubt, the Minimum Capital Raise Condition) set forth in Article V shall have been satisfied or waived. Thereafter, the Company may have closings from time to time for up to one hundred twenty (120) days thereafter at the discretion of the Company for the sale of additional shares of Common Stock and Warrants up to a maximum capital raise of $650,000 in the aggregate. In the event there is more than one closing, the term “ Closing ” shall apply to each such closing unless otherwise specified herein. The Initial Closing and any subsequent Closing shall take place at the offices of Cicero, Inc., 8000 Regency Parkway, Suite 542, Cary, NC 27518, or at such other place as the Company and the Purchaser mutually agree upon, orally or in writing.  The “ Closing Date ” shall mean the date on which the Closing occurs in accordance with this Article II.
 
(c)           Notwithstanding the foregoing, in the event that the Initial Closing shall have occurred and all conditions to closing set forth in Article V are satisfied or waived at the time of the parties’ execution of this Agreement, the Purchaser shall deliver directly to the Company its duly executed Agreement, together with a duly executed Warrant and Registration Rights Agreement, and pay the applicable purchase price directly to the Company, by wire transfer to an account designated in writing to such Purchaser by the Company.
 
2.3   Closing Deliveries .
 
(a)   At the Closing, the Company shall deliver or cause to be delivered to the Purchaser the following:
 
(i)   a copy of this Agreement executed by the Company;
 
(ii)   one or more stock certificates, free and clear of all restrictive and other legends (except as expressly provided in Section 4.1(b) hereof), evidencing such number of Common Shares set forth under such Purchaser’s name on the signature pages hereto under the heading “ Number of Common Shares, ” registered in the name of such Purchaser;
 
(iii)   a Warrant executed by the Company, issued in the name of such Purchaser, pursuant to which such Purchaser shall have the right to acquire such number of Warrant Shares set forth under such Purchaser’s name on the signature pages hereto under the heading “ Number of Warrant Shares ”; and
 
(iv)   a copy of the Registration Rights Agreement executed by the Company.
 
2.4   Acknowledgment of Irrevocable Subscription .  The Purchaser agrees that the Purchaser’s subscription to purchase the Common Shares and Warrants pursuant to this Agreement is irrevocable by the Purchaser, subject to the satisfaction or waiver of the conditions to Closing set forth in Article V; provided that the Purchaser shall be entitled to terminate this Agreement pursuant to Section 6.1 if the Initial Closing has not been consummated by December 31, 2012.  The Purchaser acknowledges and agrees that the Company has the right to accept or reject the Purchaser’s subscription to purchase Common Shares and Warrants hereunder, in whole or in part, for any reason, and that the Company may unilaterally terminate this Agreement for any reason at any time prior to the Closing pursuant to Section 6.1 .
 
ARTICLE III
 
REPRESENTATIONS AND WARRANTIES
 
3.1   Representations and Warranties of the Company .  Subject to the exceptions and qualifications set forth in the Disclosure Schedules hereto, the Company hereby represents and warrants to the Purchaser as follows, as of the date of the Closing:
 
 
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(a)   Organization and Qualification .  Each of the Company and its direct or indirect subsidiaries (each, a “ Subsidiary ”) is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite legal authority to own and use its properties and assets and to carry on its business as currently conducted.  Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation or bylaws.   Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not, individually or in the aggregate, have or reasonably be expected to result in: (i) a material adverse effect on the results of operations, assets, prospects, business condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, (ii) a material and adverse impairment of the Company’s ability to perform its obligations under any of the Transaction Documents, or (iii) a material and adverse effect on the legality, validity or enforceability of any of the Transaction Documents (clauses (i) through (iii) collectively, a “ Material Adverse Effect ”).
 
(b)   Authorization; Enforcement .  The Company has the requisite corporate authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents to which it is a party and otherwise to carry out its obligations hereunder and thereunder.  The execution and delivery by the Company of each of the Transaction Documents to which it is a party and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company and no further consent or action is required by the Company, its Board of Directors or its stockholders.  Each of the Transaction Documents to which it is a party has been or will be duly executed by the Company and is, or when delivered in accordance with the terms hereof, will constitute, the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors rights generally, and (ii) the effect of rules of law governing the availability of specific performance and other equitable remedies.
 
(c)   No Conflicts .  The execution, delivery and performance of the Transaction Documents to which it is a party by the Company and the consummation by the Company of the transactions contemplated hereby and thereby do not (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate of incorporation or bylaws, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound, except to the extent that such conflict, default, termination, amendment, acceleration or cancellation right would not reasonably be expected to have a Material Adverse Effect, (iii) result in any lien on assets or on property of the Company, or (iv) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including, assuming the accuracy of the representations and warranties of the Purchaser set forth in Section 3.2 hereof, federal and state securities laws and regulations and the rules and regulations of any self-regulatory organization to which the Company or its securities are subject, including all applicable Trading Markets), or by which any property or asset of the Company or a Subsidiary is bound, except to the extent that such violation would not reasonably be expected to have a Material Adverse Effect.
 
(d)   Capitalization .  The authorized capital stock of the Company consists of 215,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. As of September 30, 2012, (i) 73,049,286 shares of Common Stock were issued and outstanding, (ii) 1,541.6 shares of Series A-1 Convertible Preferred Stock and 10,400 shares of Series B Convertible Preferred Stock were issued and outstanding, (iii) 20,774,308 shares of Common Stock were reserved for issuance pursuant to outstanding rights, warrants or options to subscribe for or purchase Common Stock, and (iv) 1,541,618 and 10,400,000 shares of Common Stock were reserved for issuance upon conversion of Series A-1 and Series B Convertible Preferred Stock.  All outstanding shares of capital stock are duly authorized, validly issued, fully paid and nonassessable and have been issued in compliance in all material respects with all applicable securities laws.  The issuance and sale of the Common Shares and Warrants will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than Series A-1 and Series B Investors) and will not result in a right of any holder of securities to adjust the exercise, conversion, exchange or reset price under such securities.
 
(e)   The Securities . The Common Shares are duly authorized and, when issued and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all liens, charges, claims, security interests, encumbrances, rights of first refusal or other restrictions.  There have been duly and validly reserved for issuance the shares of Common Stock and the Warrant Shares issuable upon exercise of the Warrant, in each case as of the Closing Date.   Upon issuance in accordance with the Warrant Agreement (as applicable), the Common Shares and Warrant Shares will be duly and validly issued, fully paid and nonassessable.
 
(f)   SEC Reports; Financial Statements .  The Company has filed all reports required to be filed by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act ”), including pursuant to Section 13(a) or 15(d) thereof, for the twenty-four (24) months preceding the date hereof on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  Such reports required to be filed by the Company under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, together with any materials filed or furnished by the Company under the Exchange Act, whether or not any such reports were required being collectively referred to herein as the “SEC Reports ” and, together with this Agreement and the schedules to this Agreement (if any), the “Disclosure Materials ”.  As of their respective dates, the SEC Reports filed by the Company complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the SEC promulgated thereunder, and none of the SEC Reports, when filed by the Company, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved ( “GAAP ”), except as may be otherwise specified in such financial statements, the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP or may be condensed or summary statements, and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, year-end audit adjustments.  All material agreements to which the Company or any Subsidiary is a party or to which the property or assets of the Company or any Subsidiary are subject are included as part of or identified in the SEC Reports, to the extent such agreements are required to be included or identified pursuant to the rules and regulations of the SEC.
 
 
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(g)   Since the date of the latest audited financial statements included within the SEC Reports, (i) there has been no event, occurrence or development that, individually or in the aggregate, has had or that would result in a Material Adverse Effect, (ii) the Company has not incurred any material liabilities other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC, (iii) the Company has not altered its method of accounting or the changed its auditors, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders, in their capacities as such, or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock (except for repurchases by the Company of shares of capital stock held by employees, officers, directors, or consultants pursuant to an option of the Company to repurchase such shares upon the termination of employment or services), and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock-based plans.  The Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge that its creditors intend to initiate involuntary bankruptcy proceedings.
 
(h)   Compliance .  Neither the Company nor any Subsidiary, except in each case as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect, (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received written notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any applicable order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any applicable statute, rule or regulation of any governmental authority.
 
(i)   No General Solicitation; Placement Agent’s Fees .  Neither the Company nor any of its Affiliates has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities.  The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or brokers’ commission (other than for persons engaged by any Purchaser or its investment advisor) relating to or arising out of the issuance of the Securities pursuant to this Agreement.
 
(j)   Private Placement .  Neither the Company nor any of its Affiliates has, directly or indirectly, made any offer or sale of any security or solicitation of any offer to buy any security under circumstances that would (i) eliminate the availability of the exemption from registration under Regulation D under the Securities Act in connection with the offer and sale by the Company of the Securities as contemplated hereby, or (ii) cause the offering of the Securities pursuant to the Transaction Documents to be integrated with prior offerings by the Company for purposes of any applicable law, regulation or stockholder approval provisions, including, without limitation, under the rules and regulations of any Trading Market.  The sale and issuance of the Securities hereunder does not contravene the rules and regulations of any Trading Market on which the Common Stock is listed or quoted in any material respect.
 
(k)   Listing and Maintenance Requirements .  The Company has not, in the twelve (12) months preceding the date hereof, received written notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market.  The Company is in compliance with all such listing and maintenance requirements in all material respects.
 
(l)   Disclosure .  Except as described in Schedule 3.1(l) , the Company confirms that neither it nor any officers, directors or Affiliates, has provided the Purchaser or its agents or counsel with any information that constitutes material, nonpublic information (other than the existence and terms of the issuance of Securities, as contemplated by this Agreement).  The Company understands and confirms that the Purchaser will rely on the foregoing representations in effecting transactions in securities of the Company.  Except for the transactions contemplated by this Agreement, no event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.
 
(m)   Internal Accounting Controls .  The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
 
(n)   No Other Representations or Warranties .  Except for the representations and warranties contained in this Section 3.1, neither the Company nor any other Person on behalf of the Company makes any express or implied representation or warranty with respect to the Company or any of its Subsidiaries or with respect to any other information provided to the Purchaser in connection with the transactions contemplated hereby.
 
3.2   Representations and Warranties of the Purchaser .  Subject to the exceptions and qualifications set forth in the Disclosure Schedules hereto, the Purchaser hereby represents and warrants to the Company as follows, as of the date hereof and as of the Closing:
 
(a)   Organization; Authority .  The Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate, partnership or other power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.  The purchase by such Purchaser of the Common Shares and Warrants hereunder has been duly authorized by all necessary corporate, partnership or other action on the part of such Purchaser.  This Agreement has been duly executed and delivered by such Purchaser and constitutes the valid and binding obligation of such Purchaser, enforceable against it in accordance with its terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors rights generally, and (ii) the effect of rules of law governing the availability of specific performance and other equitable remedies.
 
 
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(b)   No Public Sale or Distribution .  Such Purchaser (i) is acquiring the Common Shares and the Warrants, (ii) upon exercise of the Warrants, will acquire the Warrant Shares issuable upon exercise thereof, in the ordinary course of business for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities laws, and such Purchaser does not have a present arrangement to effect any distribution of the Securities to or through any person or entity; provided , however , that by making the representations herein, such Purchaser does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.
 
(c)   Investor Status .  At the time such Purchaser was offered the Securities, it was, and at the date hereof it is, an “ accredited investor ” as defined in Rule 501(a) under the Securities Act or a “ qualified institutional buyer ” as defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not a registered broker dealer registered under Section 15(a) of the Exchange Act, or a member of the NASD, Inc. or an entity engaged in the business of being a broker dealer.  Except as otherwise disclosed in writing to the Company on Exhibit A-2 hereto on or prior to the date of this Agreement, such Purchaser is not affiliated with any broker dealer registered under Section 15(a) of the Exchange Act, or a member of the NASD, Inc. or an entity engaged in the business of being a broker dealer.
 
(d)   Experience of Such Purchaser .  Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment.  Such Purchaser understands that it must bear the economic risk of this investment in the Securities indefinitely, and is able to bear such risk and is able to afford a complete loss of such investment.
 
(e)   Access to Information .  Such Purchaser acknowledges that it has had the opportunity to review the Disclosure Materials and has been afforded: (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information (other than material non-public information) about the Company and the Subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment.
 
(f)   No Governmental Review .  Such Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.
 
(g)   No Conflicts .  The execution, delivery and performance by such Purchaser of this Agreement and the consummation by such Purchaser of the transactions contemplated hereby do not (i) result in a violation of the organizational documents of such Purchaser, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Purchaser is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Purchaser, except in the case of clauses (ii) and (iii) above, that do not otherwise affect the ability of such Purchaser to consummate the transactions contemplated hereby.
 
(h)   Prohibited Transactions .  The Purchaser has not, directly or indirectly, and no Person acting on behalf of or pursuant to any understanding with the Purchaser has, engaged in any transactions in the securities, including derivatives, of the Company (including, without limitation, any Short Sales (a “ Transaction ”) involving any of the Company’s securities) since the time that such Purchaser was first contacted by the Company or any other Person regarding an investment in the Company.  Such Purchaser covenants that neither it nor any Person acting on its behalf or pursuant to any understanding with such Purchaser will engage, directly or indirectly, in any Transactions in the securities of the Company (including Short Sales) prior to the time the transactions contemplated by this Agreement are publicly disclosed.  “ Short Sales ” include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the Exchange Act and all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, short sales, swaps, derivatives and similar arrangements (including on a total return basis), and sales and other transactions through non-U.S. broker-dealers or foreign regulated brokers.
 
(i)   Restricted Securities .  Such Purchaser understands that the Securities are characterized as “restricted securities” under the U.S. federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act only in certain limited circumstances.
 
(j)   Legends .  It is understood that, except as provided in Section 4.1(b) of this Agreement, certificates evidencing such Securities may bear the legend set forth in Section 4.1(b).
 
(k)   No Legal, Tax or Investment Advice .  Such Purchaser understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to the Purchaser in connection with the purchase of the Securities constitutes legal, tax or investment advice.  Such Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Securities.
 
 
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(l)            Acknowledgment of Disclaimer of Other Representations and Warranties .  Such Purchaser acknowledges and agrees that, except for the representations and warranties expressly set forth in Section 3.1 of this Agreement, (i) neither the Company nor any of its Subsidiaries makes, or has made, any representations or warranties relating to itself or its business or otherwise in connection with the transactions contemplated hereby, and such Purchaser is not relying on any representation or warranty except for those expressly set forth in Section 3.1, (ii) no Person has been authorized by the Company or any of its Subsidiaries to make any representation or warranty relating to itself or its business or otherwise in connection with the transactions contemplated hereby, and if made, such representation or warranty must not be relied upon by such Purchaser, and (iii) any estimates, projections, predictions, data, financial information, memoranda, presentations or any other materials or information provided to such Purchaser or any of its representatives are, and shall not be, deemed to be or include representations or warranties unless any such materials or information is the subject of an express representation or warranty set forth in Section 3.1 of this Agreement.
 
ARTICLE IV
 
OTHER AGREEMENTS OF THE PARTIES
 
4.1   Transfer Restrictions.
 
(a)   Securities will only be disposed of pursuant to an effective registration statement under, and in compliance with the requirements of, the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act, and in compliance with any applicable state securities laws.  In connection with any transfer of Securities, other than (i) pursuant to an effective registration statement, (ii) to the Company, or (iii) pursuant to Rule 144, the Company may require the transferor to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the Securities Act.  Notwithstanding the foregoing, the Company hereby consents to and agrees to register on the books of the Company and with its transfer agent, without any such legal opinion, except to the extent that the transfer agent requests such legal opinion, any transfer of Securities by the Purchaser to an Affiliate of such Purchaser, provided that the transferee certifies to the Company that it is an “accredited investor” as defined in Rule 501(a) under the Securities Act and provided that such Affiliate does not request any removal of any existing legends on any certificate evidencing the Securities.
 
(b)   The Purchaser agrees to the imprinting, so long as is required by this Section 4.1(b) , of the following legend on any certificate evidencing any of the Securities:
 
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.
 
Certificates evidencing Securities shall not be required to contain such legend or any other legend (i) while a registration statement covering the resale of the Securities is effective under the Securities Act, (ii) following any sale of the Securities pursuant to Rule 144 if the Purchaser provides the Company with a legal opinion (and the documents upon which the legal opinion is based) reasonably acceptable to the Company to the effect that the Securities can be sold under Rule 144, (iii) if the Securities have been held by the Purchaser (including application of the “tacking” rules set forth in Rule 144) for the period and pursuant to the requirements of Rule 144, or (iv) if the Purchaser provides the Company with a legal opinion (and the documents upon which the legal opinion is based) reasonably acceptable to the Company to the effect that the legend is not required under applicable requirements of the Securities Act (including controlling judicial interpretations and pronouncements issued by the Staff of the SEC).  At such time as any of the Securities are able to be issued without legend under Rule 144, the Company shall cause its counsel to issue a legal opinion to the transfer agent (with a copy to the Purchaser) permitting the removal of the legend set forth above (or any similar legend) upon issuance or presentation of the certificates representing the Securities, and based upon customary back-up materials.  At such time as a legend is no longer required for the Securities as provided above, the Company will as soon as reasonably practicable following the delivery by the Purchaser to the Company or its transfer agent of (i) a legended certificate or certificates representing such Securities, and (ii) an opinion of counsel to the extent required by Section 4.1(a) , deliver or cause to be delivered to such Purchaser a certificate or certificates representing the Securities free from all restrictive and other legends.  The Company may not make any notation on its records or give instructions to the transfer agent that enlarge the restrictions on transfer set forth in this Section 4.1(b) .
 
(c)   The Company will not object to and shall permit (except as prohibited by law) the Purchaser to pledge or grant a security interest in some or all of the Securities in connection with a bona fide margin agreement or other loan or financing arrangement secured by the Securities, and if required under the terms of such agreement, loan or arrangement, the Company will not object to and shall permit (except as prohibited by law) such Purchaser to transfer pledged or secured Securities to the pledgees or secured parties.  Except as required by law, such a pledge or transfer shall not be subject to approval of the Company, no legal opinion of the pledgee, secured party or pledgor shall be required in connection therewith, and no notice shall be required of such pledge.  The Purchaser acknowledges that the Company shall not be responsible for any pledges relating to, or the grant of any security interest in, any of the Securities or for any agreement, understanding or arrangement between the Purchaser and its pledgee or secured party.  At the Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.
 
 
6

 
4.2   Integration .  The Company shall not, and shall use commercially reasonable efforts to ensure that no Affiliate thereof shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale or issuance of the Securities to the Purchaser or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.
 
4.3   Reservation of Securities .  The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations to issue Warrant Shares and Conversion Shares under the Transaction Documents as of the Closing.  In the event that at any time the then authorized shares of Common Stock are insufficient for the Company to satisfy its obligations to issue such Warrant Shares or Conversion Shares under the Transaction Documents, the Company shall promptly take such actions as may be required to increase the number of authorized shares.
 
ARTICLE V
 
CONDITIONS
 
5.1   Conditions Precedent to the Obligations of the Purchaser .  The obligation of the Purchaser to acquire Securities at the Closing is subject to the satisfaction or waiver by such Purchaser, at or before the Closing, of each of the following conditions:
 
(a)   Representations and Warranties .  The representations and warranties of the Company contained herein shall be true and correct in all material respects (except for representations and warranties that are already qualified by materiality) as of the date when made and as of the Closing as though made on and as of such date;
 
(b)   Performance .  The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing.
 
(c)   Deliveries .  The Company shall have delivered to the Purchaser the documents required by Section 2.3(a) of this Agreement.
 
(d)   Certificate of Designations .  The Company shall have filed the Certificate of Designations with the Secretary of the State of Delaware on or prior to the date of the Closing, which shall continue to be in full force and effect as of such date.
 
 (e)            Minimum Capital Raise Condition .  The Company shall have secured subscriptions from Investors to purchase at least $650,000 of Common Shares and Warrants, in the aggregate, and that such aggregate subscription amount shall have been transferred to, and shall currently be on deposit with, the Company (the “ Minimum Capital Raise Condition ”).
 
5.2   Conditions Precedent to the Obligations of the Company .  The obligation of the Company to sell the Securities at the Closing is subject to the satisfaction or waiver by the Company, at or before the Closing, of each of the following conditions:
 
(a)   Representations and Warranties .  The representations and warranties of the Purchaser contained herein shall be true and correct in all material respects (except for representations and warranties that are already qualified by materiality) as of the date when made and as of the Closing Date as though made on and as of such date; and
 
(b)   Performance .  The Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Purchaser at or prior to the Closing.
 
(c)   Deliveries .  The Purchaser shall have delivered to the Company the documents and payments required by Section 2.2(a) of this Agreement.
 
(d)   Minimum Capital Raise Condition .  The Minimum Capital Raise Condition shall have been satisfied.
 
 
7

 
ARTICLE VI
 
MISCELLANEOUS
 
6.1   Termination .  This Agreement may be terminated (i) by the Company for any reason, by written notice to the Purchaser, at any time prior to the Closing or (ii) by the Company or the Purchaser, by written notice to the other, if the Initial Closing has not been consummated by December 31, 2012.
 
6.2   Fees and Expenses .  Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.
 
6.3   Entire Agreement .  The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.  At or after the Closing, and without further consideration, the parties will execute and deliver to each other such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.
 
6.4   Notices .  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or email at the facsimile number or email address specified in this Section 7.4 prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or email at the facsimile number or email address specified in this Section 7.4 on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day following the date of deposit with a nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.  The addresses, facsimile numbers and email addresses for such notices and communications are those set forth on the signature pages hereof, or such other address or facsimile number as may be designated in writing hereafter, in the same manner, by any such Person.
 
6.5   Amendments; Waivers .  No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each of the Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought.  No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
 
6.6   Construction .  The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
 
6.7   Successors and Assigns .  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns.  The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchaser.  The Purchaser may assign its rights under this Agreement to any Person to whom such Purchaser assigns or transfers (including by way of distribution to its members, partners or stockholders) any Securities, provided (i) such transferor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company as soon as practicable after such assignment, (ii) the Company is furnished with written notice of the name and address of such transferee or assignee, (iii) following such transfer or assignment, the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, (iv) such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the Purchaser and (v) such transfer shall have been made in accordance with the applicable requirements of this Agreement and with all laws applicable thereto.
 
6.8   No Third-Party Beneficiaries .  This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.
 
6.9   Governing Law; Venue; Waiver of Jury Trial .  This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the State of Delaware. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City of Wilmington, State of Delaware and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in the City of Wilmington, State of Delaware. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. THE COMPANY AND INVESTORS HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY.
 
6.10   Survival .  The representations and warranties, agreements and covenants contained herein shall survive the Closing for a period of twelve (12) months.
 
 
8

 
6.11   Execution .  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission or email attachment, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or email-attached signature page were an original thereof.
 
6.12   Severability .  If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.
 
6.13   Replacement of Securities .  If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and the execution by the holder thereof of a customary lost certificate affidavit of that fact and an agreement to indemnify and hold harmless the Company for any losses in connection therewith.  The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities.
 
6.14   Adjustments in Share Numbers and Prices .  In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination or other similar recapitalization or event occurring after the date hereof and prior to the Closing, each reference in any Transaction Document to a number of shares or a price per share shall be amended to appropriately account for such event.
 
6.15   Independent Nature of Purchaser’s Obligations and Rights .  The obligations of the Purchaser and other Investors under any Transaction Document are several and not joint with the obligations of any other Investor, and Purchaser shall not be responsible in any way for the performance of the obligations of any other Investor under any Transaction Documents.  The decision of Purchaser to purchase Securities pursuant to this Agreement has been made by such Purchaser independently of any other Investor and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company which may have been made or given by any other Investor or by any agent or employee of any other Investor, and no Investor or any of its agents or employees shall have any liability to any other Investor (or any other Person) relating to or arising from any such information, materials, statements or opinions.  Nothing contained herein or in any Transaction Document, and no action taken by the Purchaser pursuant thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Document.  Purchaser acknowledges that no other Investor has acted as agent for such Purchaser in connection with making its investment hereunder and that no other Investor will be acting as agent of such Purchaser in connection with monitoring its investment hereunder.
 
7.17            Special Blue Sky Notice .   Special information and disclosures required by applicable state securities laws may appear on the immediately following page.
 
FOR RESIDENTS OF ALL STATES:
 
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.  INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
 
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED.  THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY.
 
FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT OR ANY OTHER SUBSCRIPTION DOCUMENT OR DISCLOSURE DOCUMENT.  ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
FOR FLORIDA RESIDENTS:
 
IF THE UNDERSIGNED IS A RESIDENT OF THE STATE OF FLORIDA OR IS PURCHASING THE SECURITIES WITHIN THE STATE OF FLORIDA, SUCH PURCHASER ACKNOWLEDGES THAT HE HAS BEEN ADVISED AND THAT HE UNDERSTANDS THAT PURSUANT TO SUBSECTION 517.061(12)(A) OF THE FLORIDA SECURITIES ACT, HE HAS THE RIGHT TO CANCEL HIS PURCHASE OF THE SHARES WITHOUT INCURRING ANY LIABILITY TO THE COMPANY, THE COMPANY OR ANY OTHER PERSON, WITHIN THREE DAYS FOLLOWING THE DATE OF THE TENDER OF CONSIDERATION FOR THE SHARES, WHICHEVER COMES LATER, AND TO RECEIVE BACK, WITHOUT PENALTY OR DEDUCTION OF ANY KIND, ANY CONSIDERATION GIVEN FOR THE SECURITIES.  IF THE FLORIDA SUBSCRIBER WISHES TO EXERCISE SUCH RIGHT, HE SHOULD NOTIFY THE COMPANY OF HIS INTENTION TO DO SO.
 
 
9

 
FOR PENNSYLVANIA RESIDENTS
 
IF THE UNDERSIGNED IS A RESIDENT OF THE COMMONWEALTH OF PENNSYLVANIA OR IS PURCHASING THE SECURITIES WITHIN THE COMMONWEALTH OF PENNSYLVANIA, SUCH PURCHASER ACKNOWLEDGES THAT HE HAS BEEN ADVISED AND THAT HE UNDERSTANDS THAT PURSUANT TO SECTION 207(M) OF THE PENNSYLVANIA SECURITIES ACT OF 1972, AS AMENDED (THE “PENNSYLVANIA ACT”), HE HAS THE RIGHT TO CANCEL HIS PURCHASE OF SECURITIES AND TO RECEIVE A FULL REFUND OF ALL MONIES PAID WITHOUT INCURRING ANY LIABILITY TO THE COMPANY OR ANY OTHER PERSON WITHIN TWO BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE COMPANY OF HIS WRITTEN BINDING CONTRACT OF PURCHASE, AS EVIDENCED BY THIS AGREEMENT.  THE UNDERSIGNED ALSO ACKNOWLEDGES AND AGREES THAT THE SHARES MAY NOT BE SOLD FOR A PERIOD OF TWELVE (12) MONTHS AFTER THE DATE OF PURCHASE (EXCEPT IN ACCORDANCE WITH REGULATION 204.011 PROMULGATED UNDER THE PENNSYLVANIA ACT).
 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
 
CICERO INC.
 
By:                                                                          
Name: John Broderick
Title:    CEO/CFO
 
Address for Notice:
 
Cicero Inc.
8000 Regency Parkway
Cary, NC  27518
Tel: (919) 380-5000
Fax: (919) 380-5121
Attn:  John P. Broderick
 

 
COMPANY SIGNATURE PAGE
 
 
10

 

Investor Signature Page
 
By its execution and delivery of this signature page, the undersigned Purchaser hereby joins in and agrees to be bound by the terms and conditions of the Securities Purchase Agreement dated as of __________, 2012 (the “ Purchase Agreement ”) by and among Cicero Inc. and the Purchaser, as to the number of Common Shares and Warrants set forth below, and authorizes this signature page to be attached to the Purchase Agreement or counterparts thereof.
 
Name of Purchaser:
 
[________________________________]
 
By:                                                                          
Name:
Title:
 
Tax Identification Number:                                                                        
Address:                                                                          
                                                                                         
                                                                                         
Telephone No.:                                                                                                                                                  
Facsimile No.:                                                                                                                                             
Email Address:                                                                                                                                       
Number of Common Shares:                                                                          
Number of Warrant Shares:                                                                          
Purchase Price for Common Shares: $0.05 per share
Purchase Price for Warrant Shares:    $0.20 per share
Aggregate Purchase Price:  $                                                                         
 
 
11

 
APPENDIX A
 
Certain Definitions
 
Affiliate ” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act.
 
Business Day ” means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.
 
Person ” means an individual or a corporation, limited or general partnership, trust, incorporated or unincorporated association, firm, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.
 
Securities ” shall collectively refer to the Common Shares, the Warrants, the Conversion Shares and the Warrant Shares.
 
Trading Day ” means (i) a day on which the Common Stock is traded on a Trading Market (other than the OTC Bulletin Board), or (ii) if the Common Stock is not listed on a Trading Market (other than the OTC Bulletin Board), a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on any Trading Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the Pink Sheets LLC (or any similar organization or agency succeeding to its functions of reporting prices); provided , that in the event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.
 
Trading Market ” means whichever of the New York Stock Exchange, the American Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market, OTC Bulletin Board or Pink Sheets LLC on which the Common Stock is listed or quoted for trading on the date in question.
 
Transaction Documents ” means this Agreement, the schedules and exhibits attached hereto, the Registration Rights Agreement, the Certificate of Designations and the Warrant.
 

 
12

 

Exhibit A
 
INSTRUCTION SHEET FOR INVESTORS
 
(to be read in conjunction with the entire
 
Securities Purchase Agreement (the “ Agreement ”))
 
A
Complete the following items relating to the Agreement .
 
 
1.
Review the entire Agreement (including the exhibits thereto) and complete and execute the Investor Signature Page.  The Agreement must be executed by an individual authorized to bind the Purchaser.
 
 
2.
Exhibit A-1 - Stock Certificate Questionnaire:
 
Provide the information requested by the Stock Certificate Questionnaire .
 
 
3.
Exhibit A-2 - Investor Certificate:
 
Provide the information requested by the Investor Certificate .
 
 
4.
Return, via facsimile, (i) the signed Agreement, including the properly completed Exhibits A-1 and A-2, (ii) the signed Warrant, and (iii) the signed Registration Rights Agreement to the Company: Cicero, Inc. at (919) 380-5121, Attn: John Broderick, CEO/CFO
 
 
5.
After completing instruction number four (4) above, deliver (i) the original signed Agreement, including the properly completed Exhibits A-1 and A-2, (ii) the original signed Warrant, and (iii) the original signed Registration Rights Agreement to the Company: Cicero, Inc., 8000 Regency Parkway, Suite 542, Cary, NC 27518 Attn: John Broderick, CEO/CFO
 
B.  
Payment Instructions .  Forward payment for the total amount of your subscription (as indicated under “Aggregate Purchase Price” on the Investor Signature Page) in U.S. dollars by wire transfer to the Company as follows:
 
Bank of America
Charlotte, NC
ABA #026-00-9593
SWIFT BOFAUS3N
Account #000691520436
 
 
13

 
Exhibit A-1
 
CICERO INC.
 
STOCK CERTIFICATE QUESTIONNAIRE
 
Please provide us with the following information:
 
1.
The exact name that the Securities are to be registered in (this is the name that will appear on the stock certificate(s)).  You may use a nominee name if appropriate:
 
   
 
2.
The relationship between the Purchaser of the Securities and the Registered Holder listed in response to item 1 above:
 
   
 
3.
The mailing address, telephone and telecopy number and email address of the Registered Holder listed in response to item 1 above:
 
   
 
   
 
   
 
4.
The Tax Identification Number of the Registered Holder listed in response to item 1 above:
 
   
 
 
 
14

 
 
Exhibit A-2
 
CICERO INC.
 
CERTIFICATE FOR CORPORATE, PARTNERSHIP, LIMITED LIABILITY COMPANY, TRUST, FOUNDATION AND JOINT INVESTORS
 
If the Purchaser is a corporation, partnership, limited liability company, trust, pension plan, foundation, joint Purchaser (other than a married couple) or other entity, an authorized officer, partner, or trustee must complete, date and sign this Certificate.
 
CERTIFICATE
 
The undersigned certifies that the representations and responses below are true and accurate:
 
(a)           The Purchaser has been duly formed and is validly existing and has full power and authority to invest in the Company.  The person signing on behalf of the undersigned has the authority to execute and deliver the Securities Purchase Agreement on behalf of the Investor and to take other actions with respect thereto.
 
(b)           Indicate the form of entity of the undersigned:
 
____           Limited Partnership
 
____           General Partnership
 
____           Limited Liability Company
 
____           Corporation
 
 
____
Revocable Trust (identify each grantor and indicate under what circumstances the trust is revocable by the grantor):
 
   
 
   
(Continue on a separate piece of paper, if necessary.)
 
 
____
Other type of Trust (indicate type of trust and, for trusts other than pension trusts, name the grantors and beneficiaries):
 
   
 
   
(Continue on a separate piece of paper, if necessary.)
 
 
15

 
____           Other form of organization (indicate form of organization)
 
  (
 
  )
 
(c)           Indicate the approximate date the undersigned entity was formed:                                                                                                                     
 
(d)           In order for the Company to offer and sell the Securities in conformance with state and federal securities laws, the following information must be obtained regarding your investor status.  Please initial each category applicable to you as an investor in the Company.
 
 
___
1.
A bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity;
 
 
___
2.
A broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934;
 
 
___
3.
An insurance company as defined in Section 2(13) of the Securities Act;
 
 
___
4.
An investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act;
 
 
___
5.
A Small Business Investment Company licensed by the U.S.  Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958;
 
 
___
6.
A plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000;
 
 
___
7.
An employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
 
 
___
8.
A private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
 
 
___
9.
Any partnership or corporation or any organization described in Section 501(c)(3) of the Internal Revenue Code or similar business trust, not formed for the specific purpose of acquiring the Shares, with total assets in excess of $5,000,000;
 
 
___
10.
A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Shares, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of the Exchange Act;
 
 
___
11.
An entity in which all of the equity owners qualify under any of the above subparagraphs.  If the undersigned belongs to this investor category only, list the equity owners of the undersigned, and the investor category which each such equity owner satisfies:
 
   
 
   
(Continue on a separate piece of paper, if necessary.)
 
 
16

 
Please set forth in the space provided below the (i) states, if any, in the U.S. in which you maintained your principal office during the past two years and the dates during which you maintained your office in each state, (ii) state(s), if any, in which you are incorporated or otherwise organized and (iii) state(s), if any, in which you pay income taxes.
 
   
 
   
 
   

Dated:__________________________, 2012
 
______________________________________________________
Print Name of Purchaser
 
______________________________________________________
Name:
Title:
(Signature and title of authorized officer, partner or trustee)
 
 
17

 
SECURITIES DELIVERY INSTRUCTIONS
 
Please instruct us as to where you would like the Securities delivered to at Closing:
 
Name: ______________________________________________________
 
Company:  ______________________________________________________
 
Address: ______________________________________________________
           ______________________________________________________
 
Telephone: ______________________________________________________
 
Other Special Instructions:__________________________________________
 

 

18

Exhibit 10.29
 
ADDENDUM NO. 1 TO EMPLOYMENT AGREEMENT


This Addendum No. 1 to Employment Agreement (the “Addendum”) is made and entered into this 03 day of July, 2013, by and between CICERO INC, a Delaware corporation (the “Company”), and ANTONY CASTAGNO, a resident of the State of Georgia (the “Employee”).

In consideration of the mutual covenants, promises and conditions set forth in this Addendum, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.
Consulting Services .  The Company hereby agrees to allow Employee to perform consulting services on behalf of Cicero Inc.

2.
Duties of Employee .  Employee will provide consulting services to DTC Systems and be based in Georgia or North Carolina at the discretion of DTC.  Employee will devote a minimum of 40 hours per week to consulting services during its term. Employee will use his best efforts to remain in contact with Cicero’s Development and Sales teams and assist whenever possible and otherwise carryout his duties as Chief Technology Officer.

3.
Term .  The term of this Addendum shall be no longer than six (6) months.

4.            Compensation and Benefits .

 
(a)
Annual Salary .  During the term of this Addendum, Cicero will continue to pay Employee’s semi-monthly salary payments for so long as invoice payments are received from DTC Systems and the Consulting Agreement terms and conditions between the Company and DTC Systems are met in a timely manner. It is agreed that the amount invoiced to DTC Systems shall be paid to Employee, first in the form of employee’s base salary; and second in the form of a bonus for any amount invoiced that exceeds Employee’s base salary. All applicable Employee/Employer taxes shall be withheld at the time such salary and/or bonus payments are made.

5.
Other Benefits .  Employee will be entitled to continue such fringe benefits as may be provided from time-to-time by the Company to its employees, including, but not limited to, group health insurance, life and disability insurance, and any other fringe benefits now or hereafter provided by the Company to its employees. , The Company reserves the right to change or discontinue any employee benefit plans or programs now being offered to its employees; provided, however, that all benefits provided for employees of the same position and status as Employee will be provided to Employee on an equal basis.

6.
Business Expenses .  Employee will be reimbursed for all reasonable expenses incurred in the discharge of Employee's duties under this Addendum pursuant to the Company's standard reimbursement policies.
 
 
1

 
7.
Withholding .  The Company will deduct and withhold from the payments made to Employee under this Addendum, state and federal income taxes, FICA and other amounts normally withheld from compensation due employees.

8.
Non-Disclosure of Proprietary Information .  Employee recognizes and acknowledges that the Trade Secrets (as defined below) and Confidential Information (as defined below) of the Company and its affiliates, and all physical embodiments thereof (as they may exist from time-to-time, collectively, the “Proprietary Information”) are valuable, special and unique assets of the Company's and its affiliates' businesses. Employee further acknowledges that access to such Proprietary Information is essential to the performance of Employee's duties under this Addendum.  Therefore, in order to obtain access to such Proprietary Information, Employee agrees that, except with respect to those duties assigned to him by the Company, Employee will hold in confidence all Proprietary Information and will not reproduce, use, distribute, disclose, publish or otherwise disseminate any Proprietary Information, in whole or in part, and will take no action causing, or fail to take any action necessary to prevent causing, any Proprietary Information to lose its character as Proprietary Information, nor will Employee make use of any such information for Employee's own purposes or for the benefit of any person, firm, corporation, association or other entity (except the Company) under any circumstances.

For purposes of this Addendum, the term “Trade Secrets” means information, including, but not limited to, any technical or nontechnical data, formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers, or other information similar to any of the foregoing, which derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use.  For purposes of this Addendum, the term “Trade Secrets” does not include information that Employee can show by competent proof (i) was known to Employee and reduced to writing prior to disclosure by the Company (but only if Employee promptly notifies the Company of Employee’s prior knowledge; (ii) was generally known to the public at the time the Company disclosed the information to Employee; (iii) became generally known to the public after disclosure by the Company through no act or omission of Employee; or (iv) was disclosed to Employee by a third party having a bona fide right both to possess the information and to disclose the information to Employee; provided, that clauses (i) through The term “Confidential Information” means any data or information of the Company, other than trade secrets, which is valuable to the Company and not generally known to competitors of the Company.  The provisions of this Section 8 will apply to Trade Secrets for so long as such information remains a trade secret and to Confidential Information during Employee’s employment with the Company and for a period of two (2) years following any termination of Employee’s employment with the Company for whatever reason.

 
9. Non-Solicitation Covenants .  Employee agrees that during Employee's consulting engagement  and for a period of two (2) years following the termination of Employee's employment for whatever reason, Employee will not, directly or indirectly, on Employee's own behalf or in the service of or on behalf of any other individual or entity, divert, solicit or attempt to divert or solicit any individual or entity (i) who is a client of the Company  at any time during the six (6)-month period prior to Employee's termination of employment with the Company (“Client”), or was actively sought by the Company  as a prospective client, and (ii) with whom Employee had material contact while employed by or providing services to or for the benefit of the Company, to provide similar services or products as such provided by Employee for the Company, to such Clients or prospects.  Employee further agrees and represents that during Employee's employment by the Company and for a period of  two (2) year following any termination of Employee's employment for whatever reason, Employee will not, directly or indirectly, on Employee's own behalf or in the service of, or on behalf of any other individual or entity, divert, solicit or hire away, or attempt to divert, solicit or hire away, to or for any individual or entity which is engaged in providing similar services or products to that provided by the Company,  any person employed by the Company for whom Employee had supervisory responsibility or with whom Employee had material contact while employed by or providing services to or for the benefit of the Company,  whether or not such employee is a full-time employee or temporary employee of the Company, whether or not such employee is employed pursuant to written agreement and whether or not such employee is employed for a determined period or at-will.  For purposes of this Addendum, “material contact” exists between Employee and a Client or potential Client when (1) Employee established and/or nurtured the Client or potential Client; (2) the Client or potential Client and Employee interacted to further a business relationship or contract with the Company, ; (3) Employee had access to confidential information and/or marketing strategies or programs regarding the Client or potential Client; and/or (4) Employee learned of the Client or potential Client through the efforts of the Company, providing Employee with confidential Client information, including but not limited to the Client’s identify, for purposes of furthering a business relationship.  
 
 
2

 
 
10. Remedies .  Employee agrees and acknowledges that the violation of any of the covenants or agreements contained in Sections 8 and 9 of this Addendum would cause irreparable injury to the Company, that the remedy at law for any such violation or threatened violation thereof would be inadequate, and that the Company will be entitled, in addition to any other remedy, to temporary and permanent injunctive or other equitable relief without the necessity of proving actual damages or posting a bond.

 
11. Severability .  In case one or more of the provisions contained in this Addendum is for any reason held to be invalid, illegal or unenforceable in any respect, the parties agree that it is their intent that the same will not affect any other provision in this Addendum, and this Addendum will be construed as if such invalid or illegal or unenforceable provision had never been contained herein.  It is the intent of the parties that this Addendum be enforced to the maximum extent permitted by law.

 
12. Entire Agreement .  This Addendum embodies the entire agreement of the parties relating to the subject matter of this Addendum and supersedes all prior agreements, oral or written, regarding the subject matter hereof.  No amendment or modification of this Addendum will be valid or binding upon the parties unless made in writing and signed by the parties.

 
13. Governing Law .  This Addendum is entered into and will be interpreted and enforced pursuant to the laws of the State of North Carolina.  The parties hereto hereby agree that the appropriate forum and venue for any disputes between any of the parties hereto arising out of this Addendum shall be any federal court in the state where the Employee has his principal place of residence and each of the parties hereto hereby submits to the personal jurisdiction of any such court.  The foregoing shall not limit the rights of any party to obtain execution of judgment in any other jurisdiction.  The parties further agree, to the extent permitted by law, that a final and unappealable judgment against either of them in any action or proceeding contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified exemplified copy of which shall be conclusive evidence of the fact and amount of such judgment.

IN WITNESS WHEREOF, the parties have executed this Addendum as of the day and year first above written.
 
COMPANY: EMPLOYEE:

CICERO, INC.
 
By:        
Name:   John Broderick   Name:   Antony Castagno  
Title:  CEO/CFO   Title:  CTO  
 



3

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-160581), filed on July 15, 2009, of Cicero Inc. and subsidiaries (the “Company”) of our report dated March 31, 2014, with respect to the consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K, for the years ended December 31, 2013 and 2012, filed on March 31, 2014.


/s/ Cherry Bekaert LLP

Raleigh, North Carolina
March 31, 2014


Exhibit 31.1
CERTIFICATIONS

I, John P. Broderick, certify that:

1.      I have reviewed this Annual Report on Form 10-K 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 financial statements for external purposes in accordance with generally accepted accounting principals;

 
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: March 31, 2014 
  /s/  John P. Broderick  
    John P. Broderick  
   
Chief Executive Officer
 
       



Exhibit 31.2
CERTIFICATIONS

I, John P. Broderick, certify that:

1.      I have reviewed this Annual Report on Form 10-K 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 financial statements for external purposes in accordance with generally accepted accounting principals;

 
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: March 31, 2014 
  /s/  John P. Broderick  
    John P. Broderick  
   
Chief Financial Officer
 
       



Exhibit 32.1
 
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C.SECTION 1350)
 
In connection with the accompanying Annual Report of Cicero Inc., formerly Level 8 Systems, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2013 as filed with the Security Exchange Commission on the date hereof (the “Report”), I, John P. Broderick, Chief Executive and Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented in the Report.

 
       
  By: /s/  John P. Broderick  
    John P. Broderick  
   
Chief Executive and Financial Officer
 
   
(Principal Financial and Accounting Officer)
 
   
March 31, 2014