Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2016
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition
period from_____to______
Commission
File Number: 000-26392
CICERO INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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11-2920559
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(State
of incorporation)
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(I.R.S. Employer Identification No.)
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8000 Regency Parkway, Suite 542, Cary, NC 27518
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(Address of principal executive offices, including Zip
Code)
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(919) 380-5000
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(Registrant’s
telephone number, including area code)
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_____________
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Securities
registered pursuant to Section 12(b) of the Act:
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NONE
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Securities
registered pursuant to Section 12(g) of the Act:
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Common Stock, $.001 par value
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_____________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the above
Act. Yes [ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[X] No
[_]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). Yes [X] No [_]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of 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. [X]
Indicate
by check mark whether the registrant is a shell company. Yes [ ] No
[X]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “accelerated
filer,” “large accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer [_]
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Accelerated filer
[_]
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Non - accelerated
filer [_]
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Smaller reporting
company [X]
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Aggregate
market value of the outstanding shares of common stock held by
non-affiliates of the Registrant as of June 30, 2016 was
approximately $4,806,325 based upon the closing price quoted on the
Over The Counter Bulletin Board.
There
were 192,253,005 shares of common stock outstanding as of March 22,
2017.
Documents
Incorporated by Reference: None
CICERO INC.
Annual
Report on Form 10-K
For the
Fiscal Year Ended December 31, 2016
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Item
Number
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Page
Number
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PART
I
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1.
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Business
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1
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1A.
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Risk
Factors
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7
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1B
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Unresolved
Staff Comments
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11
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2.
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Properties
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11
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3.
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Legal
Proceedings
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11
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4.
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Mine
Safety Disclosures
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11
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PART
II
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5.
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Market
For Registrant's Common Stock, Related Shareholder Matters and
Issuer Purchases of Equity Securities.
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12
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6.
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Selected
Financial Data
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12
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7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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13
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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20
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8.
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Consolidated
Financial Statements and Supplementary Data
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20
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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20
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9A.
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Controls
and Procedures
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20
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9B.
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Other
Information
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21
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PART
III
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10.
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Directors,
Executive Officers and Corporate Governance
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22
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11.
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Executive
Compensation
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25
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12.
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Security
Ownership of Certain Beneficial Owners and Management
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30
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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32
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14.
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Principal
Accountant Fees and Services
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32
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PART
IV
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15.
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Exhibits
and Financial Statement Schedules
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34
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SIGNATURES
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37
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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PART I
Item
1.
Business
Overview
Cicero,
Inc. (the “Company”) provides desktop activity
intelligence and automation software that helps organizations
isolate issues and automates employee tasks in the contact center
and back office. The Company provides an innovative and unique
combination of application and process integration, automation, and
desktop analytics capabilities, all without changing the underlying
applications or requiring costly application development. The
Company’s software collects desktop activity and application
performance data and tracks business objects across time and
multiple users, as well as measures against defined expected
business process flows, for either analysis or to feed a
third-party application. In addition to software solutions, the
Company also provides technical support, training and consulting
services as part of its commitment to providing customers with
industry-leading solutions. The Company’s consulting team has
in-depth experience in developing successful enterprise-class
solutions as well as valuable insight into the business information
needs of customers in the largest Fortune 500 corporations
worldwide.
The
Company focuses on the activity intelligence and customer
experience management market with emphasis on desktop analytics and
automation with its Cicero Discovery™, Cicero Insight™
and Cicero Automation™ products.
Cicero
Discovery collects desktop activity leveraging a suite of sensors.
Cicero Discovery is a lightweight and configurable tool to collect
activity and application performance data and track business
objects across time and across multiple users as well as measure
against a defined "expected" business process flow, either for
analysis or to feed a third-party application.
Cicero
Insight is a measurement and analytics solution that collects and
presents high value information about quality, productivity,
compliance, and revenue from frontline activity to target areas for
improvement. Powered by Cicero Discovery sensors, Cicero Insight
collects activity data about the applications, when and how they
are used and makes it readily available for analysis and action to
the business community.
Cicero
Automation delivers all the features of the Cicero Discovery
product as well as desktop automation for enterprise contact center
and back office employees. Leveraging existing IT investments
Cicero Automation integrates applications, automates workflow, and
provides control and adaptability at the end user
desktop.
Cicero
Automation also provide Single Sign-On (SSO) and stay signed on
capability. The software maintains a secure credential store that
facilitates single sign-on. Passwords can be reset but are
non-retrievable. Stored interactions can be selectively encrypted
based on the needs of the enterprise. All network communications
are compressed and encrypted for transmission.
The
Company provides an intuitive configuration toolkit for each
product, which simplifies the process of deploying and managing the
solutions in the enterprise. The Company provides a unique way of
capturing untapped desktop activity data using sensors, combining
it with other data sources, and making it readily available for
analysis and action to the business community. The Company also
provides a unique approach that allows companies to organize
functionality of their existing applications to better align them
with tasks and operational processes. In addition, the
Company’s software solutions can streamline end-user tasks
and enable automatic information sharing among line-of-business
siloed applications and tools. It is ideal for deployment in
organizations that need to provide access to enterprise
applications on desktops to iteratively improve business
performance, the user experience, and customer satisfaction. By
leveraging desktop activity data, integrating disparate
applications, automating business processes and delivering a better
user experience, the Company’s products are ideal for the
financial services, insurance, healthcare, governmental and other
industries requiring a cost-effective, proven business performance
and user experience management solution for enterprise
desktops.
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.
1
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, Cicero
Insight, and Cicero Automation - leverage existing technologies by
securely collecting desktop activity data and automating redundant,
manual processes, improving business processes and the user
experience.
Cicero Discovery™
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.
Cicero Insight™
Cicero
Insight is a measurement and analytics solution that collects and
presents high value information about quality, productivity,
compliance, and revenue from frontline activity to target areas for
improvement. Using a set of configurable sensors at the
employees’ desktop Cicero Insight collects activity data
about the applications, when and how they are used and makes it
readily available for analysis and action to the business
community. Cicero Insight:
●
Provides a source
of rich data from the desktop, which is not readily obtainable or
commonly utilized in business level analysis.
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Is a solution to
analyze data and identify areas of improvement with actionable
intelligence (data-driven decisions).
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Helps companies
establish a desktop knowledge baseline.
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Delivers role-based
dashboards, reporting and analytics in a web and mobile
context.
●
Supports data
harmonization with the integration and correlation of data from
other data platforms.
Companies
are using Cicero Insight to:
●
See how the events
at the desktop impact business goals, the employee and customer
experience.
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Measure and
assessing activity (what activity, by whom, where, how much and
when).
●
Identify compliance
issues (installed software and versions, approved/unapproved apps,
web usage and domain access, copying files, external drive access,
etc.).
●
Identify top
performers, best practices, etc.
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Have current
hardware configuration and state of utilization data.
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Establish a
knowledge baseline for the employee desktop.
●
Measure and assess
performance (hardware and user).
●
Measure and assess
process/task efficiency (look at the frequency of use of an
application vs total time spent in an application).
●
Identify
improvement opportunities through automation, training, process
changes, and fraud/regulatory and compliance changes.
Cicero Automation™
Cicero
Automation enables businesses to transform human interaction across
the enterprise. It enables the flow of data between different
applications, regardless of the type and source of the application,
eliminating redundant entry and costly mistakes. Cicero Automation
automates up and down-stream process flows, enforcing compliance
and optimizing handle and transaction time, reducing training time
and enabling delivery of best in class service. Cicero Automation
also captures real-time information about each process at the
desktop, allowing organizations to spot trends and forecast
problems before they occur.
Cicero
Automation software offers a proven, innovative departure from
traditional, costly and labor-intensive enterprise application
integration and automation solutions. The Company provides
non-invasive application integration, reducing enterprise
integration implementation cost and time. Cicero Automation also
enables customers to transform applications, business processes and
human expertise into a cost effective business solution that
improves operational efficiency.
2
By
using Cicero Automation technology, companies can decrease their
customer management costs, improve the customer experience,
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 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.
●
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.
3
●
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.
Merrill
Lynch/Bank of America and UBS, Inc. each accounted for more than
ten percent (10%) of our operating revenues in fiscal 2016 and
fiscal 2015.
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
Teleopti, Avaya/KnoahSoft, Nexidia, and Co-nexus. In addition, we
have entered into strategic partnerships with Aspect, 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 and security 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, digital marketing
and public relations. 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.
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.
4
Research and Product Development
We
incurred research and development expense of approximately
$1,163,000 and $1,445,000 in 2016 and 2015,
respectively.
Since
Cicero Discovery, Cicero Insight, and Cicero Automation are 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 can capture
desktop activity and integrate applications without modifying the
underlying code for those applications. OpenSpan is one company who
advertises that they can capture desktop activity and provide
integration at the point of contact or on the desktop.
Our
product competes directly with other back office and 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.
5
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 completed 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®”, “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, 2016, we employed 16 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; 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.
6
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 2002 through 2016. We incurred a net loss of $2.8 million for
2015 and $3.9 million for 2016. As of December 31, 2016, we
had a working capital deficit of $11.1 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, 2017 on our
consolidated financial statements for the period ended December 31,
2016 included an emphasis of matter 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 consolidated financial statements
do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should 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 a number
of years, including 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 a number of years,
including the past three years. At December 31, 2016, the Company
had a working capital deficiency of $11.1 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. 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 the spending environment
more challenging 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 and/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 Automation 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, Cicero Insight, and Cicero
Automation.
Cicero
products are 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 products will compete with traditional quality assurance and
desktop analytic solutions that attempt to solve this business
problem. Quality assurance and desktop analytics 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 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 a Cicero
product.
Cicero
Automation 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 Automation 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 Automation’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 Automation
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, Cicero Insight
or Cicero Automation 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 of 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.
In
order to fully implement our business plan, we will be required to
stay current with common technology enhancements and the needs of
the modern contact center, back and branch office. To that end we
will be required to extend our support for browser-based
applications to support Microsoft Edge on Windows 10 and for
Windows-based application support to include UAP (formerly Metro).
Further, operational changes in the contact center industry, such
as chat and social-media agents, require that we extend support for
concurrent use of applications, enabling agents to work
simultaneously with more than one customer.
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.
10
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.
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.
Item 1B. Unresolved Staff Comments
Not
applicable.
Item
2.
Properties
Our
corporate headquarters and administrative functions are based in
offices of approximately 3,080 square feet in our Cary, North
Carolina office pursuant to a lease which expires in 2018. We
believe that our present facilities are suitable for continuing our
existing and planned operations.
Item
3.
Legal
Proceedings
Not
applicable.
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, 2016 and 2015.
|
|
2016
|
2015
|
||
|
Quarter
|
High
|
Low
|
High
|
Low
|
|
First
|
$0.04
|
$0.02
|
$0.05
|
$0.02
|
|
Second
|
$0.03
|
$0.03
|
$0.06
|
$0.04
|
|
Third
|
$0.03
|
$0.01
|
$0.06
|
$0.03
|
|
Fourth
|
$0.01
|
$0.01
|
$0.04
|
$0.02
|
The
closing price of the common stock on March 23, 2017 was $0.01 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 23, 2017, we had 221 registered
stockholders of record.
Equity Compensation Plan Information
The
following table sets forth certain information as of December 31,
2016, about shares of Common Stock outstanding and available for
issuance under the Company’s existing equity compensation
plans: the 2007 Cicero Stock Option Plan and the Outside Director
Stock Option Plan.
|
Plan
Category
|
Number of
Securities tobe issued upon exercise of outstanding
options
|
Weighted-average
exercise price of
outstanding
options
|
Number of
securities remaining available underequity compensation plans
(excluding securities reflected
in the first
column)
|
|
Equity compensation
plans approved by stockholders
|
2,832,212
|
$0.24
|
1,667,788
|
|
Equity compensation
plans not approved by stockholders
|
-0-
|
--
|
-0-
|
Item
6.
Selected
Financial Data.
Not
applicable
12
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,
Cicero Insight and Cicero Automation 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 Insight is a measurement and analytics solution that
collects and presents high value information about quality,
productivity, compliance, and revenue from frontline activity to
target areas for improvement. Using a set of configurable sensors
at the employees’ desktop Cicero Insight collects activity
data about the applications, when and how they are used and makes
it readily available for analysis and action to the business
community. Cicero Automation enables businesses to transform human
interaction across the enterprise. Cicero Automation enables the
flow of data between different applications, regardless of the type
and source of the application, eliminating redundant entry and
costly mistakes. Cicero Automation automates up and down-stream
process flows, enforcing compliance and optimizing handle time,
reducing training time and enabling delivery of best in class
service. Cicero Automation captures real-time information about
business processes at the desktop, allowing organizations to spot
trends and forecast problems before they occur.
13
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,
|
|
|
|
2016
|
2015
|
|
Revenue:
|
|
|
|
Software
|
6.6%
|
20.1%
|
|
Maintenance
|
70.7%
|
76.1%
|
|
Services
|
22.6%
|
3.8%
|
|
Total
|
100.0%
|
100.0%
|
|
|
|
|
|
Cost of
revenue:
|
|
|
|
Software
|
0.0%
|
0.0%
|
|
Maintenance
|
12.7%
|
5.6%
|
|
Services
|
33.8%
|
29.8%
|
|
Total
|
46.5%
|
35.3%
|
|
|
|
|
|
Gross
margin
|
53.5%
|
64.6%
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Sales and
marketing
|
41.2%
|
55.6%
|
|
Research and
product development
|
93.0%
|
74.4%
|
|
General and
administrative
|
70.2%
|
59.2%
|
|
Goodwill
impairment charge
|
132.5%
|
--%
|
|
Total
|
336.9%
|
189.2%
|
|
|
|
|
|
Loss from
operations
|
(283.4)%
|
(124.5)%
|
|
Other
income/(expense), net
|
(29.0)%
|
(21.7)%
|
|
Net
loss
|
(312.4)%
|
(146.3)%
|
The
following table sets forth data for total revenue for operations by
geographic origin as a percentage of total revenue for the periods
indicated:
|
|
2016
|
2015
|
|
United
States
|
96%
|
92%
|
|
Europe
|
4%
|
8%
|
|
|
100%
|
100%
|
Years
Ended December 31, 2016 and 2015
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, 2016 decreased 35.6% or
$692,000 from $1,943,000 in 2015 to $1,251,000 in 2016. The
decrease in revenues in 2016 is due primarily to the decrease in
software sales and maintenance revenue partially offset by an
increase in consulting revenue.
14
Software Products. Software products
revenue for the year ended December 31, 2016 decreased 78.8% or
$308,000 from $391,000 in 2015 to $83,000 in 2016. The decrease is
primarily due to a slower sales cycle in the acceptance of the
Cicero Discovery in the marketplace as well as delays in getting
the Cicero Insight product to market. Further, the Company has
added OEM partners whose integration of the Cicero products into
their solutions has taken more time than anticipated.
The
gross margin on software products was 100.0% for the years ended
December 31, 2016 and 2015, respectively.
The
Company expects to see an increase in software sales coupled with
improving margins on software products as Cicero Discovery, Cicero
Insight and Cicero Automation gain acceptance in the marketplace.
The Company’s expectations are based on its modification of
the sales approach with customers and prospects as well as a focus
on adding more reseller and OEM partners. 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. We
believe that 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, 2016 decreased 40.2% or $594,000 from
$1,479,000 in 2015 to $885,000 in 2016. The decrease in maintenance
revenue in 2016 is primarily due to the cancellation of a
maintenance contract in fiscal 2016.
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 82.0% and 92.7% for 2016 and 2015,
respectively.
Maintenance
revenues are expected to increase as a result of our expected
increase in sales of the Cicero Discovery, Cicero Insight and
Cicero Automation products. The cost of maintenance as a percentage
should decrease slightly.
Services. Services revenue for the year
ended December 31, 2016 increased 287.7% or $210,000 from $73,000
in 2015 to $283,000 in 2016. The increase in services revenues in
2016 is primarily attributable to an increase in paid consulting
engagements with existing customers.
Cost of
services primarily includes personnel and travel costs related to
the delivery of services. Services gross margin loss was (49.5%)
and (693.2%) for fiscal 2016 and 2015, respectively. The decrease
in gross margin loss in 2016 was primarily attributable to the
increase in consulting revenue partially offset by a decrease in
consulting expenses from a decrease in headcount.
Services revenues
are expected to increase as the Cicero Discovery, Cicero Insight,
and Cicero Automation 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 52.3% or $565,000 to $515,000 in
2016. The decrease is primarily attributable to lower headcount and
lower commissions partially offset by higher outside professional
services.
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 19.5% or
$282,000 to $1,163,000 in 2016. The decrease in costs is primarily
due to lower headcount and a decrease in outside professional
services.
The
Company intends to continue to make a significant investment in
research and development while enhancing efficiencies in this
area.
15
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 decreased 23.7% or $273,000 to $878,000 in
2016. The decrease is primarily attributable to a decrease in legal
and professional services expenses related to the $1,000,000 equity
financing in the third quarter of fiscal 2015.
General
and administrative expenses are not expected to increase in
2017.
Goodwill impairment charge. In 2016, we
recorded a non-cash goodwill impairment charge of $1,658,000. There
was no goodwill impairment identified as of December 31, 2015. We
test goodwill for impairment annually on December 31 using a
discounted cash flow methodology. Our goodwill impairment test as
of December 31, 2016, indicated that the carrying value of our SOA
acquisition goodwill exceeded its estimated fair value.
Accordingly, we recorded a non-cash, non-tax deductible goodwill
impairment charge of $1,658,000 in fiscal year 2016, reducing
our goodwill from $1,658,000 to zero.
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 2016 and 2015. Because of the
Company’s inconsistent earnings history, the deferred tax
assets have been fully offset by a valuation
allowance.
Other Income/(Loss). Other loss (net)
decreased $88,000 from other loss of $1,000 in 2015 to other income
of $87,000 in 2016. The increase is primarily due to income from
the write off of old liabilities of approximately
$87,000.
Interest expense
increased $28,000 from $422,000 in 2015 to $450,000 in 2016 due to
additional borrowings with John L. (Launny) Steffens, the Chairman
of the Board of Directors.
Net Loss. Net loss increased $1,065,000
from a net loss of $2,843,000 in 2015 to a net loss of $3,908,000
in fiscal 2016. The increase in net loss is primarily due to lower
revenue and the recording of impairment of goodwill of $1,658,000
in fiscal 2016 partially offset by lower operating costs from a
decrease in headcount and the non-recurring operating costs
associated with the $1 million equity financing in fiscal
2015.
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 $91,000 on December 31, 2016 compared with
$1,009,000 on December 31, 2015, a decrease of $918,000. The
Company incurred a net loss of $3,908,000 for the year ended
December 31, 2016 compared to net loss of $2,843,000 for the
previous fiscal year. The Company has experienced negative cash
flows from operations for fiscal 2016 and 2015. At December 31,
2016, the Company had a working capital deficiency of
$11,142,000.
Operating
activities utilized $1,949,000 in cash, which was primarily
comprised of the loss from operations of $3,908,000, a gain on the
write of old liabilities of $87,000, an increase in accounts
receivable of $22,000 and a decrease in trade payables and other
accruals of $224,000. This was offset by non-cash charges for
depreciation of $5,000 and stock-based compensation expense of
$3,000, impairment of goodwill of $1,658,000, amortization of debt
discount of $268,000, a decrease in prepaid expenses of $201,000
and an increase in deferred revenue of $157,000.
The Company
utilized approximately $3,000 in cash updating the Company’s
network and computer equipment.
Financing Activities
The
Company funded its cash needs during the year ended December 31,
2016 with cash on hand from December 31, 2015, the revenue
generated in fiscal 2016, and through the use of proceeds from
other short-term borrowings in the amount of $1,038,000, net of
repayments.
16
From
time to time during 2012 through 2016, the Company entered into
several short term notes payable with John L. (Launny) Steffens,
the Chairman of the Board of Directors, for various working capital
needs. The notes bear interest at 12% per year and are unsecured.
In March 2014, Mr. Steffens agreed to extend the maturity date of
all outstanding short-term notes until June 30, 2015. In April
2015, the Company entered into agreement with Mr. Steffens to
convert $6,950,514 of principal amount of debt into 69,505,140
share of the Company’s common stock. Subsequent to the
exchange agreement, the Company entered into several short term
notes payable with Mr. Steffens for various working capital needs
in fiscal 2015 and 2016. The notes vary from non-interest bearing
to interest rates of 12% with a maturity date of December 31, 2015.
The Company is obligated to repay the notes with the collection of
any accounts receivables. The Company had repaid $170,000 in
principal as of December 31, 2015. In December 2015, the maturity
dates were extended to December 31, 2016. At December 31, 2016, the
maturity dates were extended to June 30, 2017. Additionally all
notes that were non-interest bearing were amended to an annual
interest rate of 10%. At December 31, 2016, the Company was
indebted to Mr. Steffens in the approximate amount of $2,879,000 of
principal and $1,380,000 of interest.
Although the
Company has incurred an operating loss of approximately $3,908,000
for the year ended December 31, 2016, and has a history of
operating losses, management believes that its repositioned dual
strategy of leading with its Discovery product to use analytics to
measure and then manage how work happens as well as concentrating
on expanding the indirect channel with more resale and OEM
partners, will shorten the sales cycle and allow for value based
selling to our customers and prospects. The Company anticipates
success in this regard based upon current discussions with active
customers and prospects. 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. As a result
of these factors, the report of our independent auditors dated
March 31, 2017, on our consolidated financial statements for the
period ended December 31, 2016 included an emphasis of matter
paragraph indicating that there is a substantial doubt about the
Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in
existence.
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 consolidated 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
consolidated 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 expenses during the period reported. We
are also required to disclose amounts of contingent assets and
liabilities at the date of the consolidated 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 consolidated financial statements to be those surrounding: (1)
revenue recognition; (2) allowance for doubtful trade accounts
receivable; (3) goodwill; and (4) 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.
17
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, there would be an adjustment to goodwill.
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, 2016, we had a valuation allowance of $56,339,000
against $56,339,000 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, 2016, the Company has net operating loss carryforwards
of approximately $143,842,000 which may be applied against future
taxable income. These carryforwards will expire at various times
between 2020 and 2036.
Recent Accounting Pronouncements:
In
January 2017, the FASB issued ASU Update No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the
Test of Goodwill Impairment. This ASU simplifies the accounting for
goodwill impairment for all entities by requiring impairment
charges to be based on the first step of the goodwill impairment
test under ASC 350. Under previous guidance, if the fair value of a
reporting unit is lower than its carrying amount (Step 1), an
entity calculates any impairment charge by comparing the implied
fair value of goodwill with its carrying amount (Step 2). The
implied fair value of goodwill is calculated by deducting the fair
value of all assets and liabilities of the reporting unit from the
reporting unit’s fair value as determined in Step 1. To
determine the implied fair value of goodwill, entities estimate the
fair value of any unrecognized intangible assets (including
in-process research and development) and any corporate-level assets
or liabilities that were included in the determination of the
carrying amount and fair value of the reporting unit in Step 1.
Under this new guidance if a reporting unit’s carrying value
exceeds its fair value, an entity will record an impairment charge
based on that difference with such impairment charge limited to the
amount of goodwill in the reporting unit. This ASU does not change
the guidance on completing Step 1 of the goodwill impairment test.
An entity will still be able to perform today’s optional
qualitative goodwill impairment assessment before determining
whether to proceed to Step 1. This ASU will be applied
prospectively and is effective for annual and interim impairment
test performed in periods beginning after December 15, 2019 for
public business enterprises. Early adoption is permitted for annual
and interim goodwill impairment testing dates after January 1,
2017. The Company is currently in the process of evaluating the
impact of adoption of the ASU on its consolidated financial
statements.
18
In
August 2016, the FASB issued a new accounting standard that
clarifies how companies present and classify certain cash receipts
and cash payments in the statement of cash flows where diversity in
practice exists. The new standard is effective for us in our first
quarter of fiscal 2018 and earlier adoption is permitted. We are
currently evaluating the effect that the updated standard will have
on our consolidated financial statements and related
disclosures.
In
March 2016, the FASB issued a new accounting standard intended to
simplify various aspects related to how share-based payments are
accounted for and presented in the financial statements. The new
guidance includes provisions to reduce the complexity related to
income taxes, statement of cash flows, and forfeitures when
accounting for share-based payment transactions. The new standard
is effective for annual periods beginning after December 15, 2016,
and interim periods within annual periods ending after December 15,
2017. Early adoption is permitted. The Company is currently
evaluating the impact that this new standard will have on its
consolidated financial statements and related
disclosures.
The
FASB's new leases standard ASU 2016-02 Leases (Topic 842) was
issued on February 25, 2016. ASU 2016-02 is intended to improve
financial reporting about leasing transactions. The ASU affects all
companies and other organizations that lease assets such as real
estate, airplanes, and manufacturing equipment. The ASU will
require organizations that lease assets referred to as
“Lessees” to recognize on the balance sheet the assets
and liabilities for the rights and obligations created by those
leases. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. Under the new guidance, a lessee will be
required to recognize assets and liabilities for leases with lease
terms of more than 12 months. Consistent with current GAAP, the
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike
current GAAP which requires only capital leases to be recognized on
the balance sheet the new ASU will require both types of leases
(i.e. operating and capital) to be recognized on the balance sheet.
The FASB lessee accounting model will continue to account for both
types of leases. The capital lease will be accounted for in
substantially the same manner as capital leases are accounted for
under existing GAAP. The operating lease will be accounted for in a
manner similar to operating leases under existing GAAP, except that
lessees will recognize a lease liability and a lease asset for all
of those leases. Public companies will be required to adopt the new
leasing standard for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption
will be permitted for all companies and organizations upon issuance
of the standard. For calendar year-end public companies, this means
an adoption date of January 1, 2019 and retrospective application
to previously issued annual and interim financial statements for
2018. See Note 7 for the Company’s current lease commitments.
The Company is currently in the process of evaluating the impact
that this new leasing ASU will have on its financial
statements.
In
January 2016, the FASB issued a new accounting standard that will
enhance the Company’s reporting through the updating of the
recognition, measurement, presentation, and disclosure of financial
instruments. The new standard is effective for financial statements
issued for annual periods beginning after December 15, 2017, and
interim periods within those annual periods. Earlier adoption for
public companies is permitted for interim and annual reporting
periods as of the beginning of the fiscal year of adoption. The
Company does not believe the adoption of this standard will have a
material impact on its consolidated financial
statements.
In
August 2014, the FASB issued a new accounting standard that will
require management to assess and evaluate whether conditions or
events exist, considered in the aggregate, that raise substantial
doubt about the entity’s ability to continue as a going
concern within one year after the financial statements issue date.
It is effective for annual periods ending after December 15, 2016
and for annual and interim periods thereafter. early adoption is
permitted. The adoption of this standard did not have a material
impact on our consolidated financial statements.
In May
2014, the FASB issued a new accounting standard update on revenue
recognition from contracts with customers. The new guidance will
replace most current U.S. GAAP guidance on this topic and eliminate
most industry-specific guidance. According to the new guidance,
revenue is recognized when promised goods or services are
transferred to customers in an amount that reflects the
consideration for which the Company expects to be entitled in
exchange for those goods or services. This guidance will be
effective for the Company beginning January 1, 2018 and can be
applied either retrospectively to each period presented or as a
cumulative-effect adjustment as of the date of adoption. The
Company has not yet selected a transition method and is evaluating
the impact of adopting this new accounting standard update on the
consolidated financial statements and related disclosures. We
expect to identify similar performance obligations under ASC 606 as
compared with deliverables and separate units of account previously
identified. As a result, we expect timing of our revenue to be very
similar to how we record revenue currently.
19
Item
7A.
Quantitative
and Qualitative Disclosures about Market Risk
Not
applicable.
Item
8.
Consolidated
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
Not
applicable.
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, 2016. 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, 2016, 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 Consolidated 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
consolidated 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 consolidated 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 consolidated
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 consolidated
financial statements.
20
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,
2016.
(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
21
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
|
75
|
Director
and Chairman
|
|
John
Broderick
|
67
|
Director
and Chief Executive Officer/Chief Financial Officer
|
|
Antony
Castagno
|
49
|
Chief
Technology Officer
|
|
Benjamin
L. Rosenzweig
|
31
|
Director
|
|
Thomas
Avery
|
63
|
Director
|
|
Mark
Landis
|
75
|
Director
|
|
Don
Peppers
|
66
|
Director
|
John L. Steffens
Director
since May, 2007.
Mr.
John L. Steffens is the Founder of Spring Mountain Capital, LP, an
alternative investment firm located in New York City. Prior to
founding Spring Mountain Capital in 2001, Mr. Steffens spent 38
years at Merrill Lynch & Co., Inc., where he held numerous
senior management positions, including President of Merrill Lynch
Consumer Market, Vice Chairman of Merrill Lynch & Co., Inc.,
and Chairman of its U.S. Private Client Group. Under his
leadership, the Private Client Group experienced tremendous growth,
increasing assets under management from $200 billion to $1.6
trillion. Mr. Steffens also served on the board of directors of
Merrill Lynch & Co., Inc. from April 1986 until July
2001.
Mr.
Steffens has served as Chairman of the Securities Industry
Association, as a Trustee of the Committee for Economic Development
and is currently National Chairman Emeritus of the Alliance for
Aging Research. Mr. Steffens currently serves on the advisory
boards of StarVest Partners and Wicks Communication & Media
Partners, L.P. He serves on the board of Colony NorthStar, Inc. and
Colony Starwood Homes. Mr. Steffens serves as Chairman of the board
of directors of Cicero, Inc. In 2011, he was appointed to the
Dartmouth Medical School Board of Overseers. In 2010, Mr. Steffens
was the recipient of the Billie Jean King Contribution Award from
the Women’s Sports Foundation.
In
2001, Mr. Steffens founded Vineyard 7 & 8, a boutique winery
producing premium, limited production wine. Vineyard 7 & 8 is
operated by the Steffens family and is located on Spring Mountain
in Napa Valley, California.
Mr.
Steffens graduated from Dartmouth College in 1963 with a B.A. in
Economics. He also completed the Advanced Management Program of the
Harvard Business School in 1979. We believe Mr. Steffens
qualifications to serve on the 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. degree 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.
22
Antony Castagno
Director
since March 2010.
Mr.
Castagno has been the Chief Technology Officer of the Company since
January 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 B.S. degree 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.
Benjamin L. Rosenzweig
Director
since February 2017.
Mr.
Rosenzweig was appointed to serve on our Board of Directors in
February 2017, pursuant to a director designation right granted to
privet Fund LP in connection with its purchase of the
Company’s common stock and warrants in July 2015. Mr.
Rosenzweig is currently a partner at Privet Fund Management LLC, an
investment management firm. Prior to joining Privet Fund Management
LLC in September 2008, Mr. Rosenzweig served as an investment
banking analyst in the corporate finance group of Alvarez and
Marsal from June 2007 until May 2008, where he completed multiple
distressed mergers and acquisitions, restructurings, capital
formation transactions and similar financial advisory engagements
across several industries. Mr. Rosenzweig is currently a Director
of Startek, Inc., PFSweb, Inc. and Hardinge, Inc. Mr. Rosenzweig
formerly served as a Director of RELM Wireless Corp. Mr. Rosenzweig
graduated magna cum laude
from Emory University with a Bachelor of Business Administration
degree in Finance and a second major in Economics. We believe Mr.
Rosenzweig qualifications to serve on our Board of Directors
include his financial background and previous business
experience.
Thomas Avery
Director
since July 2015.
Mr.
Avery was appointed to serve on our Board of Directors in July
2015, pursuant to a director designation right granted to Privet
Fund LP in connection with its purchase of the Company’s
common stock and warrants in July 2015. Mr. Avery has over 37 years
of investment banking and venture capital experience which includes
serving as a Managing Director at Raymond James & Associates
from 2000 until 2014; the head of the investment banking group at
Interstate/Johnson-Lane from 1995 to 2000; a general partner at
Noro-Moseley Partners from 1989 to 1995; a general partner at
Summit Partners from 1984 to 1989; and Senior Vice President at The
Robinson-Humphrey Company from 1977 to 1984. During his career as a
venture capitalist, Mr. Avery served on numerous private company
boards, assisting those companies with advice and help in financing
their enterprises; planning and executing growth strategies; and
building effective management teams. Mr. Avery is currently serving
on the board of directors of KIPP Metro Atlanta, a national charter
school organization serving low income, minority children. Mr.
Avery also serves on the board of Charles River Associates, a
leading global consulting firm. Mr. Avery graduated Summa Cum Laude
from the Georgia Institute of Technology with a bachelor’s
degree in industrial management and from the Harvard Business
School with a master’s degree in business administration. We
believe Mr. Avery’s qualifications to serve on our Board of
Directors include his over 37 years of investment banking and
venture capital experience.
Mark Landis
Director
since July 2005.
Mr.
Landis has been a Director of the Company since July 2005.
Mr. Landis retired in 2003 from Siemens Building Technologies where
he had served as President of the North American Security
Division. Previously he was CEO of Security Technologies
Group from 1988 to 2001, when it was sold to Siemens Building
Technologies. In 2008 he became Chairman of Docassist, LLC
which became Dataflow Technologies, Inc. as a result of an asset
sale. From 1982 to 1988 he was CEO of CASI, a developer of
access control security systems. Mr. Landis earned a B.A. from
Cornell University, a Juris Doctorate from the University of
Pennsylvania and a Chartered Property and Casualty Underwriter
(CPCU) degree 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.
23
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 eleven 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. In
2016 Mr. Peppers left Teletech and formed CX Speakers, LLC, to
deliver workshops, keynote addresses, and high-level consulting
services to business clients. 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. Mark Landis. 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, 2016. Mr. Landis 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. Mark Landis is
the current “audit committee financial expert” due to
his experience as a senior executive.
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.
24
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.
Item 11. Executive Compensation.
Compensation Committee Membership and Organization
The
Company no longer has a standing Compensation Committee. The
Compensation Committee was disbanded upon the resignation from the
Board of Directors of Jay Kingley and Charles Porciello, its former
members, on July 15, 2015. The Board of Directors now performs many
of the functions of a compensation committee including
establishing, implementing and monitoring adherence with the
Company’s compensation philosophy such as:
●
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.
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. Our
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.
We strongly believe 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, we believe 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.
25
Role of Chief Executive Officer in Compensation
Decisions
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 Board, and makes recommendations, regarding the compensation
of all executive officers other than himself. He does not
participate in the Board’s deliberations regarding his own
compensation. In determining the compensation of our executive
officers, the Board does not engage in any benchmarking of total
compensation or any material element of compensation.
Components of Executive Compensation
The
compensation program for our Named Executive Officers consists
of:
●
Base
salary;
●
Non-equity
incentive plan compensation;
●
Long-term equity
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 Board 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 2016.
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
correlate to stockholder value and individual performance. Our
Chief Executive Officer did not achieve a non-equity bonus in
fiscal 2016 and achieved a non-equity bonus of $25,000 in fiscal
2015. Our Chief Technology Officer did not achieve a non-equity
bonus in fiscal 2016 or 2015.
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 2017.
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 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, 2016, 1,667,788 shares were available for future
option grants and awards.
To
date, awards have been mainly in the form of non-qualified stock
options granted under the Plan. The Board of Directors 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.
26
Grants
to other employees are typically made upon initial employment and
then periodically as the Board so determines. The Board 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 Board 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 2016,
the Company did not grant any options to purchase shares to
employees.
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 years 2016 and 2015.
Summary Compensation Table
|
Name
and
Principal
Position
|
|
Fiscal
Year
|
Salary
|
Stock
Awards
|
Non-
Equity
Incentive
Plan
Compensation
|
All
Other
Compensation
(4)
|
Total
|
|
John P.
Broderick
Chief Executive
Officer,
|
|
2016
|
$175,000(1)
|
--
|
$--
|
$2,383
|
$177,383
|
|
Chief Financial
Officer,
|
|
2015
|
$175,000(1)
|
--
|
$25,000(3)
|
$7,810
|
$207,810
|
|
Corporate
Secretary
|
|
|
|
|
|
|
|
|
Antony
Castagno
|
|
2016
|
$150,000(2)
|
--
|
--
|
$8,616
|
$158,616
|
|
Chief Technology
Officer
|
|
2015
|
$150,000(2)
|
--
|
--
|
$7,638
|
$157,638
|
(1)
Mr. Broderick is
currently deferring $25,000 of his annual salary which commenced in
July 2013.
(2)
Mr. Castagno is
currently deferring $25,000 of his annual salary which commenced in
April 2014.
(3)
Non-equity
incentive plan compensation for Mr. Broderick includes a bonus for
certain revenue transactions earned during fiscal year ended
December 31, 2016 and 2015. The revenue transaction was the
acceptance of the first contract greater than $300,000 for each
fiscal year.
(4)
Other compensation
includes the Company’s portion of major medical insurance
premiums and long-term disability premiums for named executives
during fiscal years ended December 31, 2016 and 2015,
respectively.
27
Grants of Plan Based Awards
The
Company did not award any stock options to the named executives
during fiscal 2016. The Company awarded 211,539 stock options to
Mr. Castagno in fiscal 2015. Mr. Broderick did not receive any
stock option awards in fiscal 2015. The Company did not award any
stock appreciation rights (SARs) during fiscal 2016 and
2015.
The
following table presents the number and values of exercisable
options as of December 31, 2016 by the named
executive.
Outstanding
Equity Awards at December 31, 2016
|
|
Option
Awards
|
Stock
Awards
|
||||
|
Name
|
Number of
Securities Underlying Unexercised Options # Exercisable
(Vested)
|
Number of
Securities Underlying Unexercised Unearned Options# Unexercisable
(Unvested)
|
Option Exercise
price ($)
|
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
|
549,360(1)
|
--
|
$0.51
|
08/17/2017
|
|
|
|
|
75,000(2)
|
--
|
$0.09
|
08/20/2020
|
|
|
|
|
|
|
|
|
549,630(4)
|
$3,463
|
|
|
|
|
|
|
1,500,000(5)
|
$9,450
|
|
Antony
Castagno
|
75,000(2)
|
--
|
$0.09
|
08/20/2020
|
|
|
|
|
141,026(3)
|
70,513
|
$0.05
|
07/20/2025
|
|
|
(1)
These options were
granted on August 17, 2007. This stock option vested in three equal
installments with the first installment vesting on August 17,
2007.
(2)
These options were
granted on August 20, 2010. This stock option vested in three equal
installments with the first installment vesting on August 20,
2010.
(3)
These options were
granted on July 21, 2015. This stock option vested in three equal
installments with the first installment vesting on July 21,
2015.
(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, 2016. Mr. Broderick and Mr. Castagno have 624,360 and
286,539 outstanding options respectively at December 31,
2016.
28
Employment Agreements, Termination of Employment and
Change-In-Control Arrangements
Under
the employment agreement between the Company and Mr. Broderick
effective January 1, 2016, 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 Board, 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.
Under
the employment agreement between the Company and Mr. Castagno
effective January 1, 2016, 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.
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 assumes a
termination date of December 31, 2016. 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 2012
through 2016 that had not been paid in fiscal 2016.
|
|
Base
Salary
|
Restricted
Shares Award
|
Deferred
Compensation
|
Total
Compensation and Benefits
|
|
John
P. Broderick
|
|
|
|
|
|
Death
|
$--
|
$12,913
|
$169,792
|
$182,705
|
|
Disability
|
--
|
12,913
|
169,792
|
182,705
|
|
Involuntary
termination without cause
|
175,000
|
12,913
|
169,792
|
357,705
|
|
Change
in Control
|
175,000
|
12,913
|
169,792
|
357,705
|
|
Antony
Castagno
|
|
|
|
|
|
Death
|
$--
|
$--
|
$75,000
|
$75,000
|
|
Disability
|
--
|
--
|
75,000
|
75,000
|
|
Involuntary
termination without cause
|
75,000
|
--
|
75,000
|
150,000
|
|
Change
in Control
|
75,000
|
--
|
75,000
|
150,000
|
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.
29
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. No grants were awarded to our named executive officers
during fiscal 2016. During fiscal 2015, the Company granted options
to purchase 525,000 shares to its employees. This included 211,539
options to Mr. Castagno.
Director Compensation
No cash
or non-cash compensation was paid during fiscal 2016 by us to our
non-employee directors who served during fiscal 2016.
Item
12.
Security
Ownership of Certain Beneficial Owners and Management.
The
following table sets forth information as of February 28, 2017 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 192,253,005 common shares outstanding as of
February 28, 2017. 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
|
|
John L. Steffens
(1)
|
153,341,564
|
65.9%
|
|
Privet Fund
Management LLC (2)
|
168,102,778
|
49.1%
|
|
Jonathan Gallen
(3)
|
10,950,173
|
5.7%
|
|
Mark and Carolyn P.
Landis (4)
|
8,564,020
|
4.4%
|
|
Antony
Castagno/SOAdesk LLC(5)
|
17,719,792
|
8.5%
|
|
Thomas Avery
(6)
|
4,605,555
|
2.3%
|
|
Don Peppers
(7)
|
5,429,957
|
2.8%
|
|
John P. Broderick
(8)
|
2,676,968
|
1.4%
|
|
Benjamin
Rosenzweig
|
--
|
*
|
|
All current
directors and executive officers as a group (7 persons)
(9)
|
192,337,856
|
73.8%
|
*
Represents less
than one percent of the outstanding shares.
1.
The address of John
L. Steffens is 65 East 55th Street, New York,
N.Y. 10022. Includes 112,932,501 shares of common stock, 40,391,063
shares issuable upon the exercise of warrants and 18,000 shares
subject to stock options.
2.
Ryan Levinson holds
voting and dispositive power with respect to these shares. The
address of Mr. Levinson is 79 West Paces Ferry Road, Atlanta, GA
30305. Includes 18,250,000 shares of common stock and 149,852,778
shares issuable upon the exercise of warrants.
30
3.
The address of Mr.
Gallen is 299 Park Avenue New York, New York 10171. 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 10,950,173 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 10,950,173
shares of common stock of the Company.
4.
The address of Mark
and Carolyn P. Landis is 54 Dillon Way, Washington Crossing, Pa.
18977. Includes 5,472,853 shares of
common stock, 3,079,167 shares issuable upon the exercise of
warrants and 12,000 shares subject to stock
options.
5.
The address of Mr.
Castagno is 8000 Regency Parkway, Suite 542, Cary, NC 27518. Mr.
Castagno is a principal owner of SOAdesk LLC. Includes 2,000,000
shares of common stock, 6,511,967 shares of common stock issuable
upon conversion of a convertible promissory note in the
principal amount of $700,000 and accumulated interest of
$277,000, 6,112,600 common shares issuable upon conversion of a
convertible promissory note in the principal
amount of $675,000 and accumulated interest of $242,000,
2,808,687 common shares issuable upon conversion of a convertible
promissory note of $421,303 and 286,539 shares subject to stock
options.
6.
Includes 500,000
shares of common stock and 4,105,555 shares issuable upon the
exercise of warrants.
7.
Includes 3,165,179
shares of common stock, warrants to acquire 2,252,778 shares of
common stock and 12,000 shares subject to stock
options.
8.
Includes 3,248
shares of common stock. 624,360 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.
9.
Includes shares
issuable upon conversion of convertible promissory notes and
exercise of options and warrants as described in above Notes for
each director and officer.
31
Item
13.
Certain
Relationships and Related Transactions, and Director
Independence
Loans from Related Parties
From
time to time during 2012 through 2015, the Company entered into
several short-term notes payable with John L. (Launny) Steffens,
the Chairman of the Board of Directors, for various working capital
needs. The notes bear interest at 12% per year and are unsecured.
In March 2014, Mr. Steffens agreed to extend the maturity date of
all outstanding short-term notes until April 1, 2015. At December
31, 2014, the Company was indebted to Mr. Steffens in the
approximate amount of $6,691,000 of principal and $1,139,000 in
interest. In April 2015, the Company entered into agreement with
Mr. Steffens to convert $6,950,514 of principal amount of debt into
69,505,140 share of the Company’s common stock. Subsequent to
the exchange agreement, the Company entered into several short term
notes payable with Mr. Steffens for various working capital needs
in fiscal 2015 and 2016. The notes vary from non-interest bearing
to interest rates of 12% with a maturity date of December 31, 2015.
The Company is obligated to repay the notes with the collection of
any accounts receivables. The Company had repaid $170,000 in
principal as of December 31, 2015. In December 2015, the maturity
dates were extended to December 31, 2016. At December 31, 2016, the
maturity dates were extended to June 30, 2017. Additionally all
notes that were non-interest bearing were amended to an annual
interest rate of 10%. At December 31, 2016, the Company was
indebted to Mr. Steffens in the approximate amount of $2,879,000 of
principal and $1,380,000 of interest.
In June
2015, the Company entered into a promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) to SOAdesk. The
maturity date of the note was December 31, 2015 with an annual
interest rate of 10%. In December 2015, the maturity date was
extended to December 31, 2016. In December 2016, the maturity date
was extended to December 31, 2017. Included in this last amendment
were two milestone payments of $62,500 each to be paid to interest
first and then principal and payable on June 1, 2017 and December
1, 2017, respectively. The Company’s Chairman has agreed to
personally guarantee these, and only these, milestone
payments.
Antony
Castagno, the Company’s Chief Technology Officer, is
part-owner of SOAdesk LLC which was acquired by the Company in
2010. In January 2016, the Company entered into a short term note
payable for $3,500 with Mr. Castagno for various working capital
needs. The note bore interest of 10% and was unsecured. The note
and interest of $28 were paid in full in February
2016.
Director Independence
Our
Board of Directors currently consists of six members. They are John
L. Steffens, John P. Broderick, Benjamin Rosenzweig, Thomas Avery,
Mark Landis, 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. 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 NYSE MKT LLC (the former American Stock Exchange),
which can be found in the NYSE MKT Company Guide, §803(A)(2).
Under such definition, Messrs. Steffens, Rosenzweig, Avery, Landis,
and Peppers are independent directors.
Item
14.
Principal
Accountant Fees and Services
Independent Registered Public Accounting Firm
Cherry
Bekaert LLP audited our consolidated financial statements for the
years ended December 31, 2016 and 2015.
Audit Fees
Audit
fees include fees for the audit of the Company’s annual
consolidated financial statements, fees for the review of the
Company’s interim consolidated 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 consolidated
financial statements for fiscal year 2016 and 2015 (and reviews of
quarterly consolidated financial statements on Form 10-Q) were
$85,500 and $84,462, 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 consolidated financial statements. There were no
audit-related fees billed by Cherry Bekaert LLP for fiscal year
2016. Audit-related fees billed by Cherry Bekaert LLP for fiscal
year 2015 were $6,725.
32
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 2016 and 2015.
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 years 2016 and 2015.
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
(A) Consolidated
Financial Statements
The
following consolidated financial statements of the Company and the
related reports of Independent Registered Public Accounting Firm
thereon are set forth immediately following the Index of
Consolidated 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, 2016 and 2015
Consolidated
Statements of Operations for the years ended December 31, 2016 and
2015
Consolidated
Statements of Stockholders’ Deficit for the years ended
December 31, 2016 and 2015
Consolidated
Statements of Cash Flows for the years ended December 31, 2016 and
2015
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
Second Amended and
Restated Certificate of Incorporation of Cicero Inc., a Delaware
corporation, (incorporated by reference to Annex A to
Cicero’s Definitive Proxy Statement on Schedule 14A filed
August 27, 2015).
3.4
Amended and
Restated Bylaws of Cicero Inc., a Delaware corporation
(incorporated by reference to exhibit 3.1 to Cicero’s Form
8-K filed July 16, 2015).
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).
4.4
Form of Investor
Warrant Agreement (incorporated by reference to exhibit 4.4 to
Cicero Inc.’s Form 10-K filed March 31, 2014)
4.5
Form of Warrant to
Purchase Shares of Common Stock (incorporated by reference to
exhibit 10.3 to Cicero Inc.’s Form 8-K filed July 16,
2015)
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).
10.10
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).
10.21
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).
10.22
Form of Short Term
Secured Promissory Note of Cicero Inc. among Cicero Inc. and John
Broderick (incorporated by reference to exhibit 10.22 to Cicero
Inc.’s Form 10-K filed March 31, 2014).
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).
35
10.25
Form of Short-Term
Promissory Note of Cicero Inc. among Cicero Inc. and Antony
Castagno (incorporated by reference to exhibit 10.25 to Cicero
Inc.’s Form 10-K filed March 31, 2014).
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)*
10.27
Registration Rights
Agreement, dated as of March 20, 2013, by and among Cicero Inc. and
the Purchasers thereto (incorporated by reference to exhibit 10.27
to Cicero Inc.’s Form 10-K filed March 31,
2014).
10.28
Form of Securities
Purchase Agreement by and among Cicero, Inc. and the Purchasers
thereto (incorporated by reference to exhibit 10.28 to Cicero
Inc.’s Form 10-K filed March 31, 2014).
10.29
Amended Employment
Agreement between Antony Castagno and the Company effective July 3,
2013 (incorporated by reference to exhibit 10.29 to Cicero
Inc.’s Form 10-K filed March 31, 2014)*.
10.30
Lease Agreement for
Cary, N.C. offices, dated July 11, 2014, between
Cicero Inc. and Regency Park Corporation (incorporated by reference
to exhibit 10.30 to Cicero Inc.’s Form 10-K filed March 31,
2015).
10.31
Stock and Warrant
Purchase Agreement, dated as of July 15, 2015, by and among Cicero
Inc. and the purchasers named thereto (incorporated by reference to
exhibit 10.1 to Cicero’s Form 8-K filed July 16,
2015)
9.32
Investor Rights
Agreement, dated as of July 15, 2015, by and among Cicero Inc.,
Privet Fund LP and John L. Steffens (incorporated by reference to
exhibit 10.2 to Cicero’s Form 8-K filed July 16,
2015)
10.33
Form of
Indemnification Agreement for Directors of Cicero Inc.
(incorporated by reference to exhibit 10.4 to Cicero’s Form
8-K filed July 16, 2015)
10.34
Form of Inventions
and Non-Competition Agreement for Employees of Cicero Inc.
(incorporated by reference to exhibit 10.5 to Cicero’s Form
8-K filed July 16, 2015)
10.35
Lease Agreement for
Cary, N.C. offices, dated October 26, 2016, between Cicero Inc. and
Regency Park Corporation (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).
23.1
Consent of
Independent Registered Public Accounting Firm (filed
herewith).
31.1
Certification of
Chief Executive pursuant to Rule 13a-14(a) (filed
herewith).
31.2
Certification of
Chief Financial Officer pursuant to Rule 13a-14(a) (filed
herewith).
32.1
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, 2017 |
|
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, 2017
|
|
John L. Steffens
|
|
|
|
|
|
/s/
John P. Broderick
|
|
Chief
Executive Officer/Chief Financial Officer
(Principal
Executive and Financial and Accounting Officer)
|
|
March
31, 2017
|
|
John P. Broderick
|
|
|
|
|
|
/s/
Antony Castagno
|
|
Chief
Technology Officer
|
|
March
31, 2017
|
|
Antony
Castagno
|
|
|
|
|
|
/s/
Benjamin L. Rosenzweig
|
|
Director
|
|
March
31, 2017
|
|
Benjamin
L. Rosenzweig
|
|
|
|
|
|
/s/
Thomas Avery
|
|
Director
|
|
March
31, 2017
|
|
Thomas Avery
|
|
|
|
|
|
/s/
Mark Landis
|
|
Director
|
|
March
31, 2017
|
|
Mark Landis
|
|
|
|
|
|
/s/ Don
Peppers
|
|
Director
|
|
March
31, 2017
|
|
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-6
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-7
|
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,
2016 and 2015, 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, 2016. 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 audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
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, 2016 and 2015, and the results of
its operations and its cash flows for each of the years in the
two-year period ended December 31, 2016, 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, 2016. These
conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans
concerning these matters 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, 2017
F-2
CICERO INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
|
December 31,
2016
|
December 31,
2015
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$91
|
$1,009
|
|
Trade accounts
receivable
|
278
|
256
|
|
Prepaid expenses
and other current assets
|
34
|
235
|
|
Total current
assets
|
403
|
1,500
|
|
Property and
equipment, net
|
9
|
11
|
|
Goodwill (Note
4)
|
--
|
1,658
|
|
Total
assets
|
$412
|
$3,169
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
Current
liabilities:
|
|
|
|
Short-term debt
less unamortized discount (Note 5)
|
$5,483
|
$2,098
|
|
Accounts
payable
|
1,032
|
1,336
|
|
Accrued
expenses:
|
|
|
|
Salaries, wages,
and related items
|
1,529
|
1,601
|
|
Interest payable
|
2,164
|
2,021
|
|
Other
|
589
|
653
|
|
Deferred
revenue
|
748
|
605
|
|
Total current
liabilities
|
11,545
|
8,314
|
|
Long-term
debt
|
--
|
2,132
|
|
Total
liabilities
|
$11,545
|
$10,446
|
|
Commitments and
contingencies (Notes 12 and 13)
|
|
|
|
Stockholders’
deficit:
|
|
|
|
Convertible
preferred stock, $0.001 par value, 10,000,000 shares
authorized Series
A-1 – No
shares issued and outstanding at December 31, 2016 and December 31,
2015; $500 per share liquidation preference
|
--
|
--
|
|
Series B – No
shares issued and outstanding at December 31, 2016 and December 31,
2015; $500 per share liquidation preference
|
--
|
--
|
|
Common stock,
$0.001 par value, 600,000,000 shares authorized at December 31,
2016 and December 31, 2015; 192,253,005 issued and outstanding at
December 31, 2016 and December 31, 2015 (Note 8)
|
192
|
192
|
|
Additional
paid-in-capital
|
246,272
|
246,220
|
|
Accumulated
deficit
|
(257,597)
|
(253,689)
|
|
Total
stockholders’ deficit
|
(11,133)
|
(7,277)
|
|
Total liabilities
and stockholders’ deficit
|
$412
|
$3,169
|
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,
|
|
|
|
2016
|
2015
|
|
Revenue:
|
|
|
|
Software
|
$83
|
$391
|
|
Maintenance
|
885
|
1,479
|
|
Services
|
283
|
73
|
|
Total operating
revenue
|
1,251
|
1,943
|
|
Cost of
revenue:
|
|
|
|
Software
|
--
|
--
|
|
Maintenance
|
159
|
108
|
|
Services
|
423
|
579
|
|
Total cost of
revenue
|
582
|
687
|
|
Gross
margin
|
669
|
1,256
|
|
Operating
expenses:
|
|
|
|
Sales and
marketing
|
515
|
1,080
|
|
Research and
product development
|
1,163
|
1,445
|
|
General and
administrative
|
878
|
1,151
|
|
Goodwill impairment
charge
|
1,658
|
--
|
|
Total operating
expenses
|
4,214
|
3,676
|
|
Loss from
operations before other income (charges)
|
(3,545)
|
(2,420)
|
|
Other income
(charges):
|
|
|
|
Interest
expense
|
(450)
|
(422)
|
|
Other (Note
1)
|
87
|
(1)
|
|
|
(363)
|
(423)
|
|
|
|
|
|
Net
loss
|
(3,908)
|
(2,843)
|
|
8% preferred stock
Series B dividend
|
--
|
(86)
|
|
Deemed dividend
applicable to warrant purchase
|
--
|
(882)
|
|
Net loss applicable
to common stockholders
|
$(3,908)
|
$(3,811)
|
|
|
|
|
|
Loss per share
– basic and diluted
|
$(0.02)
|
$(0.03)
|
|
|
|
|
|
Average shares
outstanding – basic and diluted
|
192,253
|
152,076
|
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, 2014
|
85,848,237
|
86
|
11,899
|
--
|
237,206
|
(249,878)
|
(12,586)
|
|
Dividend for
preferred B stock
|
|
|
|
|
|
(86)
|
(86)
|
|
Conversion of
preferred stock
|
11,899,628
|
12
|
(11,899)
|
|
(12)
|
|
--
|
|
Issuance of stock
for payment of debt
|
69,505,140
|
69
|
|
|
6,882
|
|
6,951
|
|
Options issued as
compensation
|
|
|
|
|
12
|
|
12
|
|
Issuance of common
stock
|
25,000,000
|
25
|
|
|
1,857
|
(882)
|
1,000
|
|
Debt discount due
to imputed interest
|
|
|
|
|
275
|
|
275
|
|
Net
loss
|
|
|
|
|
|
(2,843)
|
(2,843)
|
|
Balance at December
31, 2015
|
192,253,005
|
$192
|
--
|
--
|
$246,220
|
$(253,689)
|
$(7,277)
|
|
Options issued as
compensation
|
|
|
|
|
3
|
|
3
|
|
Debt discount due
to imputed interest
|
|
|
|
|
49
|
|
49
|
|
Net
loss
|
|
|
|
|
|
(3,908)
|
(3,908)
|
|
Balance at December
31, 2016
|
192,253,005
|
$192
|
--
|
--
|
$246,272
|
$(257,597)
|
$(11,133)
|
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,
|
|
|
|
2016
|
2015
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$(3,908)
|
$(2,843)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
5
|
13
|
|
Stock compensation
expense
|
3
|
12
|
|
Amortization of
debt discount
|
268
|
56
|
|
Goodwill impairment
charge
|
1,658
|
--
|
|
Gain on write down
of liabilities
|
(87)
|
--
|
|
Changes in assets
and liabilities:
|
|
|
|
Trade accounts
receivable
|
(22)
|
779
|
|
Prepaid expenses
and other assets
|
201
|
2
|
|
Accounts payable
and accrued expenses
|
(224)
|
709
|
|
Deferred
revenue
|
157
|
(794)
|
|
Net cash used in
operating activities
|
(1,949)
|
(2,066)
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases of
property and equipment
|
(3)
|
(10)
|
|
Net cash used in
investing activities
|
(3)
|
(10)
|
|
Cash flows from
financing activities:
|
|
|
|
Issuance of common
stock
|
--
|
1,000
|
|
Borrowings under
short and long-term debt
|
1,038
|
2,275
|
|
Repayments of short
and long-term debt
|
(4)
|
(210)
|
|
Net cash provided
by financing activities
|
1,034
|
3,065
|
|
Net
increase(decrease) in cash
|
(918)
|
989
|
|
Cash at beginning
of year
|
1,009
|
20
|
|
Cash at end of
year
|
$91
|
$1,009
|
|
|
||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||
|
Cash paid during
the year for:
|
|
|
|
Taxes
|
$11
|
$10
|
|
Interest
|
$38
|
$20
|
Non-Cash Investing and Financing Activities
2016
None.
2015
During
April 2015, the Company converted $6,951 of debt to related party
lender by issuing 69,505,140 shares of its common
stock.
The
accompanying notes are an integral part of the consolidated
financial statements.
F-6
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 consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred an operating loss of
approximately $3,908,000 for the year ended December 31, 2016, and
has a history of operating losses. Management believes that its
repositioned dual strategy of leading with its Discovery product to
use analytics to measure and then manage how work happens, as well
as, concentrating on expanding the indirect channel with more
resale and OEM partners will shorten the sales cycle and allow for
value based selling to our customers and prospects. The
Company anticipates success in this regard based upon current
discussions with active customers and prospects. 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 within one year after the date that the financial
statements are issued. The consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the
Company be unable to continue 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 consolidated 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
consolidated 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, revenue
recognition, 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.
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, 2016, the Company did not
exceed these insured amounts.
F-7
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 consolidated
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.
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.”
Accrued Other:
Accrued
other is primarily comprised of accrued dividends of $447,000 at
December 31, 2016 and 2015, respectively, and the remaining balance
is comprised of accrued tax, royalty, consulting and
other.
Revenue Recognition:
We
derive revenue from three sources: license fees, maintenance and
support revenue and professional services. 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.
F-8
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
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.
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
maintenance and services is compensation expense.
Advertising Expenses:
The
Company expenses advertising costs as incurred. Advertising
expenses were approximately $117,000 and $217,000 for the years
ended December 31, 2016 and 2015, respectively.
Research and Product Development:
Research
and product development costs are expensed as incurred unless such
costs meet the software capitalization criteria. Research and
development expenses were approximately $1,163,000 and $1,445,000
for the years ended December 31, 2016 and 2015,
respectively.
F-9
Goodwill impairment charge:
In
2016, we recorded a non-cash goodwill impairment charge of
$1,658,000. We test goodwill for impairment annually on December 31
using a discounted cash flow methodology. Our goodwill impairment
test as of December 31, 2016, indicated that the carrying value of
our SOAdesk acquisition goodwill exceeded its estimated fair value.
Accordingly, we recorded a non-cash, non-tax deductible goodwill
impairment charge of $1,658,000 in fiscal year 2016, reducing
our goodwill from $1,658,000 to zero. No impairment of
goodwill was identified as of December 31, 2015.
Other Income/(Charges):
Other
income/(charges) in fiscal 2016 consists primarily of a write off
of certain liabilities deemed no longer payable of
$87,000.
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 consolidated
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 6.)
Loss Per Share:
Basic
loss per share is computed based upon the weighted average number
of common shares outstanding. Diluted loss per share is computed
based upon the weighted average number of common shares outstanding
and any potentially dilutive securities. During 2016 and 2015,
potentially dilutive securities included stock options, warrants to
purchase common stock, and preferred stock.
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:
|
|
2016
|
2015
|
|
Stock
options
|
2,832,212
|
3,657,110
|
|
Warrants
|
207,859,113
|
207,959,113
|
|
Preferred
stock
|
--
|
--
|
|
|
210,691,325
|
211,616,223
|
There
was no accrual for dividends on the Series B Preferred Stock in
fiscal 2016. $86,000 was accrued for dividends on the Series B
Preferred Stock in fiscal year 2015.
F-10
Stock-Based Compensation:
The
Company accounts for stock-based compensation to employee under 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 did not grant any options in fiscal year
2016 and recognized approximately $3,000 of stock-based
compensation. The Company granted 525,000 options in fiscal year
2015 at an exercise price of $0.05 per share and recognized
approximately $12,000 of stock-based compensation.
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:
|
|
2016
|
2015
|
|
Fair value of
common stock
|
--
|
$0.05
|
|
Expected life (in
years)
|
--
|
9.99
years
|
|
Expected
volatility
|
--
|
160%
|
|
Risk free interest
rate
|
--
|
2.33%
|
|
Expected dividend
yield
|
--
|
0%
|
Recent Accounting Pronouncements:
In
January 2017, the FASB issued ASU Update No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the
Test of Goodwill Impairment. This ASU simplifies the accounting for
goodwill impairment for all entities by requiring impairment
charges to be based on the first step of the goodwill impairment
test under ASC 350. Under previous guidance, if the fair value of a
reporting unit is lower than its carrying amount (Step 1), an
entity calculates any impairment charge by comparing the implied
fair value of goodwill with its carrying amount (Step 2). The
implied fair value of goodwill is calculated by deducting the fair
value of all assets and liabilities of the reporting unit from the
reporting unit’s fair value as determined in Step 1. To
determine the implied fair value of goodwill, entities estimate the
fair value of any unrecognized intangible assets (including
in-process research and development) and any corporate-level assets
or liabilities that were included in the determination of the
carrying amount and fair value of the reporting unit in Step 1.
Under this new guidance if a reporting unit’s carrying value
exceeds its fair value, an entity will record an impairment charge
based on that difference with such impairment charge limited to the
amount of goodwill in the reporting unit. This ASU does not change
the guidance on completing Step 1 of the goodwill impairment test.
An entity will still be able to perform today’s optional
qualitative goodwill impairment assessment before determining
whether to proceed to Step 1. This ASU will be applied
prospectively and is effective for annual and interim impairment
test performed in periods beginning after December 15, 2019 for
public business enterprises. Early adoption is permitted for annual
and interim goodwill impairment testing dates after January 1,
2017. The Company is currently in the process of evaluating the
impact of adoption of the ASU on its consolidated financial
statements.
In
August 2016, the FASB issued a new accounting standard that
clarifies how companies present and classify certain cash receipts
and cash payments in the statement of cash flows where diversity in
practice exists. The new standard is effective for us in our first
quarter of fiscal 2018 and earlier adoption is permitted. We are
currently evaluating the effect that the updated standard will have
on our consolidated financial statements and related
disclosures.
In
March 2016, the FASB issued a new accounting standard intended to
simplify various aspects related to how share-based payments are
accounted for and presented in the financial statements. The new
guidance includes provisions to reduce the complexity related to
income taxes, statement of cash flows, and forfeitures when
accounting for share-based payment transactions. The new standard
is effective for annual periods beginning after December 15, 2016,
and interim periods within annual periods ending after December 15,
2017. Early adoption is permitted. The Company is currently
evaluating the impact that this new standard will have on its
consolidated financial statements and related
disclosures.
F-11
The
FASB's new leases standard ASU 2016-02 Leases (Topic 842) was
issued on February 25, 2016. ASU 2016-02 is intended to improve
financial reporting about leasing transactions. The ASU affects all
companies and other organizations that lease assets such as real
estate, airplanes, and manufacturing equipment. The ASU will
require organizations that lease assets referred to as
“Lessees” to recognize on the balance sheet the assets
and liabilities for the rights and obligations created by those
leases. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. Under the new guidance, a lessee will be
required to recognize assets and liabilities for leases with lease
terms of more than 12 months. Consistent with current GAAP, the
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike
current GAAP which requires only capital leases to be recognized on
the balance sheet the new ASU will require both types of leases
(i.e. operating and capital) to be recognized on the balance sheet.
The FASB lessee accounting model will continue to account for both
types of leases. The capital lease will be accounted for in
substantially the same manner as capital leases are accounted for
under existing GAAP. The operating lease will be accounted for in a
manner similar to operating leases under existing GAAP, except that
lessees will recognize a lease liability and a lease asset for all
of those leases. Public companies will be required to adopt the new
leasing standard for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption
will be permitted for all companies and organizations upon issuance
of the standard. For calendar year-end public companies, this means
an adoption date of January 1, 2019 and retrospective application
to previously issued annual and interim financial statements for
2018. See Note 7 for the Company’s current lease commitments.
The Company is currently in the process of evaluating the impact
that this new leasing ASU will have on its financial
statements.
In
January 2016, the FASB issued a new accounting standard that will
enhance the Company’s reporting through the updating of the
recognition, measurement, presentation, and disclosure of financial
instruments. The new standard is effective for financial statements
issued for annual periods beginning after December 15, 2017, and
interim periods within that annual periods. Earlier adoption for
public companies is permitted for interim and annual reporting
periods as of the beginning of the fiscal year of adoption. The
Company does not believe the adoption of this standard will have a
material impact on its consolidated financial
statements.
In
August 2014, the FASB issued a new accounting standard that will
require management to assess and evaluate whether conditions or
events exist, considered in the aggregate, that raise substantial
doubt about the entity’s ability to continue as a going
concern within one year after the financial statements issue date.
It is effective for annual periods ending after December 15, 2016
and for annual and interim periods thereafter. early adoption is
permitted. The adoption of this standard did not have a material
impact on our consolidated financial statements.
In May
2014, the FASB issued a new accounting standard update on revenue
recognition from contracts with customers. The new guidance will
replace most current U.S. GAAP guidance on this topic and eliminate
most industry-specific guidance. According to the new guidance,
revenue is recognized when promised goods or services are
transferred to customers in an amount that reflects the
consideration for which the Company expects to be entitled in
exchange for those goods or services. This guidance will be
effective for the Company beginning January 1, 2018 and can be
applied either retrospectively to each period presented or as a
cumulative-effect adjustment as of the date of adoption. The
Company has not yet selected a transition method and is evaluating
the impact of adopting this new accounting standard update on the
consolidated financial statements and related disclosures. We
expect to identify similar performance obligations under ASC 606 as
compared with deliverables and separate units of account previously
identified. As a result, we expect timing of our revenue to be very
similar to how we record revenue currently.
NOTE
2. ACCOUNTS RECEIVABLE
Trade
accounts receivable was composed of the following at December 31
(in thousands):
|
|
2016
|
2015
|
|
Current trade
accounts receivable
|
$278
|
$256
|
F-12
NOTE 3. PROPERTY AND EQUIPMENT
Property
and equipment was composed of the following at December 31 (in
thousands):
|
|
2016
|
2015
|
|
Computer
equipment
|
$138
|
$160
|
|
Furniture and
fixtures
|
19
|
24
|
|
Office
equipment
|
35
|
35
|
|
|
193
|
219
|
|
Less: accumulated
depreciation
|
(184)
|
(208)
|
|
|
|
|
|
|
$9
|
$11
|
Depreciation
expense of property and equipment was $5,000 and $13,000 for the
years ended December 31, 2016 and 2015, 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 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.
Upon
completion of the fiscal year 2016 test, the goodwill of our SOA
acquisition was determined to be impaired and the Company recorded
an impairment charge of $1,658,000. There was no impairment of
goodwill in year 2015.
|
|
Goodwill
|
|
Balance at December
31, 2014
|
$1,658,000
|
|
Additions
|
--
|
|
Impairment
|
--
|
|
Balance at December
31, 2015
|
1,658,000
|
|
Additions
|
--
|
|
Impairment
|
1,658,000
|
|
Balance at December
31, 2016
|
$--
|
F-13
NOTE
5. DEBT
Debt
and notes payable to related parties consists of the following (in
thousands):
|
|
December 31,
2015
|
December 31,
2015
|
|
Note payable
– asset purchase agreement (a)
|
$1,518
|
$1,518
|
|
Note payable
– related parties (b)
|
2,879
|
1,845
|
|
Notes payable
(c)
|
1,086
|
1,086
|
|
Unamortized debt
discount (b)
|
--
|
(219)
|
|
Total
debt
|
5,483
|
4,230
|
|
Less current
portion
|
--
|
(2,098)
|
|
Total long term
debt
|
$--
|
$2,132
|
(a)
In January 2010,
the Company entered into an unsecured convertible promissory note
with SOAdesk for $700,000 with an annual interest rate of 5%. The
note was originally scheduled to mature on March 31, 2010 but was
subsequently amended and through a series of amendments, the
maturity date was extended to June 30, 2015. In June 2015, the note
was amended and the maturity date was extended to June 30, 2017. In
July 2015, the Company paid $25,000 toward the principal amount of
the note. At December 31, 2015, the Company was indebted to SOAdesk
in the amount of $675,000 in principal and $208,000 in interest. At
December 31, 2016, the Company was indebted to SOAdesk in the
amount of $675,000 in principal and $242,000 in
interest.
In June
2015, the note was amended so that the note is convertible into
shares of the Company’s common stock at the rate of one share
for every $0.15 of principal and interest due under the note from
the original conversion to shares of Series B Convertible Preferred
Stock at the rate of one share per every $150 of principal and
interest due under the note. The note was further amended that
should the Company’s earnings before interest, taxes,
depreciation and amortization (“EBITDA”) exceed
$1,000,000 in either 12 month period beginning June 30, 2015 and
June 30, 2016, respectively, then the Company shall repay, in cash,
a portion of the outstanding principal of the note at the rate of
$0.50 for each $1.00 that exceeds the EBITDA threshold. The note is
convertible at the holder’s option at any time or at
maturity.
As part
of a prior acquisition, the Company was obligated to certain
earn-out obligation payments of up to $2,410,000 over an 18 month
period from January 15, 2010 through July 31, 2011, based upon the
achievement of certain revenue performance targets. The earn-out
was payable fifty percent in cash and fifty percent in common stock
of the Company at the rate of one share for every $0.15 earn-out
payable. The Company had recorded $842,606 in its accounts payable
as of December 31, 2014 due to a portion of earn-out obligations
being met. In June 2015, the Company entered into a promissory note
with SOAdesk for fifty percent of the earn-out payable ($421,303)
to SOAdesk. The maturity date of the note is December 31, 2015 with
an annual interest rate of 10%. In December 2015, the maturity date
was extended to December 31, 2016. In December 2016, the maturity
date was extended to December 31, 2017. Included in the amendment
were two milestone payments of $62,500 each to be applied to
interest and then principal and payable on June 1, 2017 and
December 1, 2017, respectively. The Company’s Chairman has
agreed to personally guarantee these, and only these, milestone
payments. At December 31, 2015, the Company was indebted to SOAdesk
for $421,303 in principal and approximately $21,000 in interest. At
December 31, 2016, the Company was indebted to SOAdesk for $421,303
in principal and approximately $63,000 in interest. The Company
also entered into a convertible promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) with a maturity
date of June 30, 2017 that was non-interest bearing. The note is
only convertible into shares of the Company’s common stock at
the rate of one share for every $0.15 of principal due under the
note. The note is convertible at the holder’s option at any
time or at maturity. At December 31, 2015 and 2016 the Company was
indebted to SOAdesk for $421,303 in principal.
(b)
From time to time
during 2012 through 2015, the Company entered into several
short-term notes payable with John L. (Launny) Steffens, the
Chairman of the Board of Directors, for various working capital
needs. The notes bear interest at 12% per year, are unsecured and
mature on June 30, 2015. At December 31, 2014, the Company was
indebted to Mr. Steffens in the approximate amount of $6,691,000 of
principal and $1,139,000 in interest. On April 8, 2015, the Company
entered into an Exchange Agreement with Mr. Steffens to convert an
aggregate of $6,950,514 of principal amount of debt into 69,505,140
shares of the Company’s common stock at a conversion rate of
$0.10 per share.
F-14
Subsequent to the
exchange agreement, the Company entered into several short term
notes payable with Mr. Steffens for various working capital needs
in fiscal 2015 and 2016. The notes vary from non-interest bearing
to interest rates of 12% with a maturity date of December 31, 2015.
The Company is obligated to repay the notes with the collection of
any accounts receivables. The Company had repaid $170,000 in
principal as of December 31, 2015. In December 2015, the maturity
dates were extended to December 31, 2016. At December 31, 2015, the
Company was indebted to Mr. Steffens in the approximate amount of
$1,845,000 of principal and $1,362,000 of interest. At December 31,
2015, the Company recorded $275,000 of unamortized discount on debt
on the non-interest bearing notes with Mr. Steffens. Imputed
interest was calculated based on a 12% interest rate based on
historical notes with Mr. Steffens and comparative non-related
party loans with the Company. The Company has recorded $56,000 of
amortization of the debt discount in interest expense through
December 31, 2015. In 2016, the Company recorded an additional
$50,000 of unamortized discount on debt on non-interest bearing
debt issued in fiscal 2016. Imputed interest was calculated based
on a 12% interest rate based on historical notes with Mr. Steffens
and comparative non-related party loans with the Company. The
Company has recorded $266,000 of amortization of the debt discount
in interest expense through December 31, 2016. In December 2016,
the maturity dates were extended to June 30, 2017. Additionally
notes totaling $2,269,000 that were previously non-interest bearing
were amended to an annual interest rate of 10%. At December 31,
2016, the Company was indebted to Mr. Steffens in the approximate
amount of $2,879,000 of principal and $1,380,000 of
interest.
(c)
The Company has
issued a series of short-term unsecured promissory notes with
private lenders, which provide for short term borrowings. The notes
in the aggregate principal amount of $50,000 of principal and
$53,000 of interest and $50,000 of principal and $64,000 of
interest, respectively, as of December 31, 2015 and December 31,
2016, bear interest between 10% and 36% per annum.
In
March 2014, the Company reclassified to short-term debt its
unsecured convertible promissory note with SOAdesk that was entered
into as part of the Asset Purchase Agreement with SOAdesk for
$1,000,000 with an annual interest rate of 5% and a maturity date
of January 14, 2015. In March 2012, SOAdesk elected to convert
$300,000 of the outstanding note balance into 2,000,000 shares of
the Company’s Common Stock. Through a series of amendments,
the note was amended to extend the maturity date until June 30,
2015. In June 2015, the note was amended to extend the maturity
date until June 30, 2017. The note was further amended that should
the Company’s earnings before interest, taxes, depreciation
and amortization (“EBITDA”) exceed $1,000,000 in either
12 month period beginning June 30, 2015 and June 30, 2016,
respectively, then the Company shall repay, in cash, a portion of
the outstanding principal of the note at the rate of $0.50 for each
$1.00 that exceeds the EBITDA threshold. At December 31, 2015, the
Company was indebted to SOAdesk in the amount of $700,000 in
principal and $242,000 in interest. At December 31, 2016, the
Company was indebted to SOAdesk in the amount of $700,000 in
principal and $277,000 in interest. The note is only convertible
into shares of the Company’s common stock at the rate of one
share for every $0.15 of principal and interest due under the
note.
In June
2014, the Company reclassified to short-term debt its unsecured
promissory note with a private lender that was originally entered
into in March 2012 for $336,000 at an interest rate of 12% and a
maturity date of March 31, 2013. In March 2013, the maturity date
of the note was extended to June 30, 2015. In June 2015, the
maturity date of the note was extended to June 30, 2017, a
repayment schedule of quarterly principal and interest payments of
$12,000 beginning on September 30, 2015 and two milestone payments
of $125,000 on February 28, 2016 and 2017, respectively were added.
In February 2016, the note was amended that the first milestone
payment due on February 29, 2016, was now payable quarterly
beginning February 29, 2016 through November 29, 2016. At December
31, 2015, the Company was indebted to this private lender in the
amount of $336,000 in principal and $134,000 in interest. At
December 31, 2016, the Company was indebted to this private lender
in the amount of $336,000 in principal and $137,000 in
interest.
NOTE 6. 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 consolidated 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.
F-15
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 consolidated financial
statements. The evaluation was performed for the tax years 2014
through 2016, and may be subject to audits for amounts related to
net operating loss carryforwards generated in periods prior to
December 31, 2013. 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 2016 and
2015. 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):
|
|
2016
|
2015
|
|
Expected income tax
benefit at statutory rate (34%)
|
$(1,329)
|
$(967)
|
|
State taxes, net of
federal tax benefit
|
(160)
|
(170)
|
|
Effect of change in
valuation allowance
|
(1,249)
|
(5,860)
|
|
Non-deductible
expenses
|
1
|
3
|
|
Change in state tax
rate
|
2,737
|
|
|
Expiration of net
operating loss deductions
|
--
|
6,994
|
|
Total
|
$--
|
$--
|
Significant
components of the net deferred tax asset at December 31 were as
follows:
|
|
2016
|
2015
|
|
|
|
|
|
Accrued expenses,
non-tax deductible
|
$15
|
$7
|
|
Deferred
revenue
|
281
|
242
|
|
Contingent
payments
|
(788)
|
(831)
|
|
Stock compensation
expense
|
593
|
621
|
|
Loss
carryforwards
|
54,802
|
56,583
|
|
Depreciation and
amortization
|
1,436
|
966
|
|
|
56,339
|
57,588
|
|
|
|
|
|
Less: valuation
allowance
|
(56,339)
|
(57,588)
|
|
|
|
|
|
|
$--
|
$--
|
At
December 31, 2016, the Company had net operating loss carryforwards
of approximately $143,842,000, which may be applied against future
taxable income. These carryforwards will expire at various times
between 2020 and 2036. 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, 2016 and 2015 since
management does not believe that it is more likely than not that
these assets will be realized.
F-16
In
accordance with Section 382 of the Internal Revenue Code of 1986,
as amended, a change in equity ownership of greater than 50% of the
Company within a three-year period can result in an annual
limitation on the Company’s ability to utilize its NOL
carryforwards that were created during tax periods prior to the
change in ownership. In December 2014, the Company completed a
Section 382 study which concluded that an ownership change occurred
for the three year testing period ended March 2000 but that no
other ownership change occurred through December 2014 leaving our
NOL carryforwards balance at December 31, 2014 at approximately
$136,914,000. The
study further concluded that the NOL limitation would not affect
the three years in question as the total NOL’s for those
years is less than the calculated limitation. Subsequent analysis
after the study determined that the debt conversion by Mr. Steffens
and equity financing of $1 million in fiscal 2015 would not trigger
a Section 382 limitation.
NOTE 7. STOCKHOLDERS’ EQUITY
At the Company’s Annual Meeting held on September 11, 2015,
the shareholders approved the following proposals:
1.
An
amendment to the Company’s Amended and Restated Certificate
of Incorporation (“Charter”) to increase the number of
authorized shares of common stock, par value $0.001 per share, from
215,000,000 to 600,000,000;
2.
An
amendment to the Company’s Charter to allow stockholders to
be able to act by written consent only while Privet Fund LP and its
affiliates (a “Privet Stockholder”) own an aggregate of
at least 30% of the Company’s outstanding voting
stock;
3.
An
amendment to the Company’s Charter to provide that only the
Board of Directors may call a special meeting of stockholders of
the Company;
4.
An
amendment to the Company’s Charter to renounce the
Company’s expectancy regarding certain corporate
opportunities presented to a Privet Stockholder;
5.
An
amendment to the Company’s Charter to not be governed by the
provisions of Section 203 of the Delaware General Corporation
Law;
6.
An
amendment to the Company’s Charter establishing the courts
located within the State of Delaware as the exclusive forum for the
adjudication of certain legal actions by the stockholders;
and
7.
An
amendment to the Company’s Charter to authorize 10,000,000
shares of “blank check” preferred stock, par value
$0.001 per share.
Also at the Annual Meeting, the holders of the Company’s
Series A-1 Convertible Preferred Stock approved an amendment to
Article IV (Conversion) of the Series A-1 Convertible Preferred
Stock Certificate of Designations to the effect that the Series A-1
Preferred Stock automatically converted into common stock as a
result of the Company consummation of an equity financing of at
least $1,000,000 on July 15, 2015; and the holders of the
Company’s Series B Convertible Preferred Stock approved an
amendment to Section 6 (Automatic Conversion) of the Series B
Convertible Preferred Stock Certificate of Designations to the
effect that the Series B Preferred Stock automatically converted
into common stock as a result of the Company consummation of an
equity financing of at least $1,000,000 on July 15, 2015 (see
below).
On July 15, 2015, the Company entered into a Stock and Warrant
Purchase Agreement (the “Purchase Agreement”) with
investors named therein, including Privet Fund LP
(“Privet”), five directors of the Company, including
John L. Steffens, Donald Peppers, Bruce D. Miller, Mark Landis, and
Thomas Avery, and three other persons (collectively the nine
investors are referred to as the “Purchasers”),
pursuant to which the Purchasers severally purchased, in the
aggregate, 25,000,000 shares of the Company’s common stock
and warrants to purchase up to an aggregate of 205,277,778 shares
of the Company’s common stock (“Warrants”) for an
aggregate consideration of $1,000,000.
The Warrants are exercisable for a period of three years beginning
at any time after 60 days of issuance. The exercise prices of the
Warrants are as follows: (i) Warrants to purchase up to 87,500,000
shares of the Company’s common stock are exercisable at a
price of $0.04 per share (“Tranche I”); (ii) Warrants
to purchase up to 77,777,778 shares of the Company’s common
stock are exercisable at a price of $0.045 per share
(“Tranche II”); and (iii) Warrants to purchase up to
40,000,000 shares of the Company’s common stock are
exercisable at a price of $0.05 per share (“Tranche
III”). The Warrants are exercisable only for cash, as the
exercise price paid is intended to increase the funding of the
Company. All the exercise prices and numbers of shares are subject
to customary anti-dilution provisions. The Warrants contain an
exercise limitation provision that prohibits exercise of the
Warrants to the extent that the exercise would result in the
issuance of shares of the Company’s common stock that would
cause either (a) the Company to be deemed an investment company
under the Investment Company Act of 1940, as amended, or (b) an
ownership change within the meaning of Internal Revenue Code
Section 382 (and applicable U.S. Treasury regulations pursuant to
such section) limiting the use of the Company’s net operating
losses, carryforwards and other tax attributes. The Company is
obligated to reserve a sufficient number of shares of the
Company’s common stock to enable the exercise of the
Warrants.
F-17
The use of proceeds from this transaction are for general corporate
purposes, as approved from time to time by the Board of Directors
(the “Board”), which approval must include approval by
a majority of the directors that have been designated by
Privet.
In connection with the execution of the Purchase Agreement, the
Company entered into an Investor Rights Agreement with Privet and
Mr. Steffens (the “Investors”), granting the Investors
the right to require the Company to file with the Securities and
Exchange Commission up to four requested registration statements to
register for resale the Investors’ shares of common stock
purchased under the Purchase Agreement and purchased upon exercise
of any of the Warrants (the “Registrable Securities”).
The Investors also are granted unlimited “piggy-back”
registration rights with respect to the Registrable Securities. The
obligation to register the Registrable Securities continues until
those securities have been sold or transferred by the holders of
the registration rights or may be sold without limitation under
Rule 144 or otherwise may be sold without restriction.
As a result of the transaction, (i) Privet became the record holder
of approximately 10.1% of the outstanding and issued shares of
common stock, and has the right to purchase under the Warrants an
additional 149,852,778 shares of common stock which would
correspondingly increase its percentage of ownership and it has the
right to appoint directors, and (ii) Mr. Steffens decreased his
current 65.5% ownership of the common stock of the Company to
59.3%, while retaining his current control position in the common
stock. Together Privet and Mr. Steffens, excluding the exercise of
the Warrants, have a majority of the voting control of the
Company.
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 bore an annual dividend of 8%. The Series B stock would have
converted into common stock at a conversion rate of $0.15 per
share. Additionally, the Series B stock provided 333,333 warrants
to purchase common stock of the Company at a strike price of $0.25
per share. The warrants expired in April 2015. 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 bore an annual dividend of 8%. The Series B would
have converted into common stock at a conversion rate of $0.15 per
share. Additionally, the Series B stock investors were issued
2,266,667 warrants to purchase common stock of the Company at a
strike price of $0.25 per share. The warrants expired in January
2015. All shares of the Company’s Series B Preferred Stock
were automatically converted into shares of the common stock as a
result of an amendment to the Company’s Series B Convertible
Preferred Stock Certificate of Designations approved by the holders
of the Series B preferred stock at Company’s Annual Meeting
held on September 11, 2015.
Common Stock:
On
April 8, 2015, the Company entered into agreement with John L.
Steffens, the Chairman of the Board of Directors, to convert
$6,950,514 of principal amount of debt into 69,505,140 share of the
Company’s common stock. (See Note 5) The Company accounted
for the transaction pursuant to Topic ASC 470-50, Modification and
Extinguishment of Debt. Due to the fact that the transaction was
with Mr. Steffens, the Company’s Chairman of the Board, the
Company determined that this was not an arm’s length
agreement and as such has recorded the entire transaction through
additional paid in capital. We had no such transactions in
2016.
Stock Grants:
None.
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.
F-18
Under
the terms of the Plans, the exercise price of the 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.
Activity
for stock options issued under these plans for the years ending
December 31, 2016 and 2015 was as follows:
|
|
Number of
Options
|
Option
Price Per
Share
|
Weighted
Average Exercise
Price
|
Aggregate Intrinsic Value |
|
Balance at December
31, 2014
|
3,150,110
|
0.02-0.51
|
$0.24
|
|
|
Granted
|
525,000
|
0.05
|
$0.05
|
|
|
Forfeited
|
(10,000)
|
0.09
|
$0.09
|
|
|
Expired
|
(8,000)
|
0.51
|
$0.51
|
|
|
Balance at December
31, 2015
|
3,657,110
|
0.03-0.51
|
$0.21
|
|
|
Granted
|
--
|
--
|
--
|
|
|
Forfeited
|
(770,898)
|
0.02-0.51
|
$0.11
|
|
|
Expired
|
(54,000)
|
0.02-0.51
|
$0.11
|
|
|
Balance at December
31, 2016
|
2,832,212
|
0.05-0.51
|
$0.24
|
$0.00
|
Activity
for non-vested stock options under these plans for the fiscal year
ending December 31, 2016 and 2015 was as follows:
|
|
Number of
Options
|
Option
Price
Per
Share
|
Weighted
Average Exercise
Price
|
|
Balance at December
31, 2014
|
18,333
|
0.02-0.05
|
$0.04
|
|
Granted
|
525,000
|
0.05
|
$0.05
|
|
Vested
|
(188,332)
|
0.05
|
$0.05
|
|
Forfeited
|
--
|
---
|
--
|
|
Balance at December
31, 2015
|
355,001
|
0.05
|
$0.05
|
|
Granted
|
--
|
--
|
--
|
|
Vested
|
(104,702)
|
0.05
|
$0.05
|
|
Forfeited
|
(145,599)
|
0.05
|
$0.05
|
|
Balance at December
31, 2016
|
104,700
|
0.05
|
$0.05
|
There
were no options granted in 2016 and 525,000 options granted during
2015. The weighted average grant date fair value of options issued
during the years ended December 31, 2015 was equal to $0.05. There
were no option grants issued below fair market value during
2015.
At
December 31, 2016, there was unrecognized compensation cost of
$2,800 related to stock options which is expected to be recognized
over a weighted-average amortization period of six
months.
F-19
At
December 31, 2016 and 2015, options to purchase 2,752,512 and
3,302,109 shares of common stock were exercisable, respectively,
pursuant to the plans at prices ranging from $0.05 to $0.51 .
The following table summarizes information about stock options
outstanding at December 31, 2016:
|
Exercise
Price
|
Number
Outstanding
|
Remaining
Contractual Life for Options Outstanding
|
Number
Exercisable
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
$0.05-0.06
|
479,102
|
7.3
|
374,402
|
$0.05
|
|
0.07-0.08
|
500,000
|
4.6
|
500,000
|
0.07
|
|
0.09-0.37
|
787,750
|
3.4
|
787,750
|
0.10
|
|
0.38-0.51
|
1,065,360
|
0.7
|
1,065,360
|
0.51
|
|
|
|
|
|
|
|
|
2,832,212
|
3.2
|
2,727,512
|
$0.25
|
Preferred Stock:
As of
July 15, 2015, all preferred shares for Series A-1 and Series B
converted to common stock.
Series A-1
The
Series A-1 preferred stock provides rights and preferences set
forth in the Certificate of Designations filed with the Secretary
of State of the State of Delaware. The Series A-1 preferred stock
was 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 was
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 consolidated financial statements prepared in
accordance with generally accepted accounting principles (GAAP) and
filed with the Securities Exchange Commission. The 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 are not redeemable.
The
Series A-1 preferred stock provides the following voting rights.
Each share of Series A-1 preferred stock represents 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, the series B preferred stock (see
below) and the holders of common stock would 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, would 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.
F-20
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 would be entitled to receive all information received by
members of the Board of Directors, and would 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. 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.
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 would accrue on each share of Series B Preferred
Stock at the rate per annum of eight percent (8%). Dividends
would 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 would 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 would 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.
F-21
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 and the private investment in the Company’s
shares. At December 31, 2016, there were 207,859,113 exercisable
warrants outstanding at an exercise price between $0.04 and $0.20
per share.
|
|
Number of
Warrants
|
Warrant
Price
Per
Share
|
Weighted
Average
Exercise
Price
|
|
Balance at December
31, 2014
|
5,281,333
|
$0.08-$0.25
|
$0.22
|
|
Issued
|
205,277,780
|
$0.04-$0.05
|
$0.05
|
|
Exercised
|
--
|
--
|
--
|
|
Forfeited
|
(2,600,000)
|
$0.25
|
$0.25
|
|
Balance at December
31, 2015
|
207,959,113
|
$0.04-$0.20
|
$0.05
|
|
Issued
|
--
|
--
|
--
|
|
Exercised
|
--
|
--
|
--
|
|
Forfeited
|
(100,000)
|
$0.08
|
$0.08
|
|
Balance at December
31, 2016
|
207,859,113
|
$0.04-$0.20
|
$0.05
|
NOTE 8. 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 2016 and 2015.
NOTE 9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT
RISK
In
2016, two customers accounted for 40% and 33%, respectively, of
operating revenues and two customers accounted for 78% and 15% of
accounts receivable at December 31, 2016. In 2015, two customers
accounted for 51% and 16%, respectively, of operating revenues and
one customer accounted for 98% of accounts receivable at December
31, 2015.
In
2016, one vendor accounted for 65% of accounts payable at December
31, 2016. In 2015, two vendors accounted for 53% and 12%,
respectively, of accounts payable at December 31,
2015.
NOTE 10. RELATED PARTY INFORMATION
From time to time
during 2012 through 2016, the Company entered into several
short-term notes payable with John L. (Launny) Steffens, the
Chairman of the Board of Directors, for various working capital
needs. The notes bear interest at 12% per year and are unsecured.
In March 2014, Mr. Steffens agreed to extend the maturity date of
all outstanding short-term notes until June 30, 2015. At December
31, 2014, the Company was indebted to Mr. Steffens in the
approximate amount of $6,691,000 of principal and $1,139,000 in
interest. In April 2015, the Company entered into agreement with
Mr. Steffens to convert $6,950,514 of principal amount of debt into
69,505,140 share of the Company’s common stock. Subsequent to
the exchange agreement, the Company entered into several short term
notes payable with Mr. Steffens for various working capital needs.
The notes vary from non-interest bearing to interest rate of 12%
with a maturity date of December 31, 2015. The Company is obligated
to repay the notes with the collection of any accounts receivable.
The Company had repaid $170,000 in principal as of December 31,
2015. In December 2015, the maturity dates were extended to
December 31, 2016. At December 31, 2015, the Company was indebted
to Mr. Steffens in the approximate amount of $1,845,000 of
principal and $1,362,000 of interest. At December 31, 2016, the
maturity dates were extended to June 30, 2017. Additionally all
notes that were non-interest bearing were amended to an annual
interest rate of 10%. At December 31, 2016, the Company was
indebted to Mr. Steffens in the approximate amount of $2,879,000 of
principal and $1,380,000 of interest.
F-22
In June
2015, the Company entered into a promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) to SOAdesk. The
maturity date of the note is December 31, 2015 with an annual
interest rate of 10%. In December 2015, the maturity date was
extended to December 31, 2016. In December 2016, the maturity date
was extended to December 31, 2017. Included in this last amendment
were two milestone payments of $62,500 each to be paid to interest
first and then principal and payable on June 1, 2017 and December
1, 2017, respectively. The Company’s Chairman has agreed to
personally guarantee these, and only these, milestone
payments.
Antony
Castagno, the Company’s Chief Technology Officer, is
part-owner of SOAdesk LLC, which was acquired by the Company in
2010. In January 2016, the Company entered into a short term note
payable for $3,500 with Mr. Castagno for various working capital
needs. The note bears interest of 10% and was unsecured. The note
and interest was repaid in full in February 2016.
NOTE 11. COMMITMENTS AND EMPLOYMENT AGREEMENTS
In June
2014, the Company entered into an amendment with its landlord and
renewed its lease through 2018. In October 2016, the Company
entered into an amendment reducing the square footage being leased
for the remaining term of the lease. Future minimum lease
commitments on operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31,
2016 consisted of only one lease as follows (in
thousands):
|
|
Lease
Commitments
|
|
|
|
|
2017
|
$64
|
|
2018
|
55
|
|
|
|
|
|
$119
|
Rent
expense was $91,000 and $93,000 for each years ended December 31,
2016 and 2015, respectively.
Under
the employment agreement between the Company and Mr. Broderick
effective January 1, 2017, 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 Board of Directors, at 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 a substantial change in Mr.
Broderick’s job duties occurs, 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.
Under
the employment agreement between the Company and Mr. Castagno
effective January 1, 2017, 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 12. 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.
F-23
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, 2016 and
2015.
NOTE 13. SUBSEQUENT EVENTS
In
first quarter of fiscal 2017, the Company entered into various
notes payable totaling $460,000 with Mr. Steffens. The notes bear
interest at 10% annually. They are unsecured and mature on June 30,
2017. Subsequent events have been evaluated through March 31,
2017.
F-24