Item 1. Business
Overview
Cicero, Inc. (the “Company”) provides desktop activity intelligence, process intelligence and automation software to help organizations isolate issues and automate 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, process intelligence and customer experience management market with emphasis on desktop analytics and automation with its Intelligent Analytics Platform (IAP). Activity intelligence captures what employees are doing, what resources they are using and how long an activity may take. Process intelligence captures the workflows that are being utilized and identifies any bottlenecks that exist within those workflows.
Cicero collects desktop activity leveraging a suite of sensors. Cicero IAP 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’s IAP 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’s Deep Sensor Technology including our System Sensors, our Session Sensors, our Activity Sensors and our Process Sensors, Cicero Insight collects activity data about the applications and workflows being used and makes it readily available for analysis and action to the business community.
Cicero Automation delivers all the features of the Cicero IAP 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 CitiCorp, Nationwide Financial Services, First Tennessee Bank, Assurant, JP Morgan Chase, Convergys, Delta Dental of New Jersey, C.H. Robinson and UBS. We have also sold our products to healthcare, banking, and government users.
Cicero Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc. and re-incorporated in Delaware in 1999. It was renamed to Cicero, Inc. in 2007. 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 process intelligence to improve business performance. All of our products - Cicero Intelligent Analytics Platform 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 Intelligent Analytics Platform (IAP)
Cicero IAP 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 IAP 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 IAP 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 IAP 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 IAP:
●
Provides a source of rich data from the desktop, which is not readily obtainable or commonly utilized in business level analysis.
●
Is a solution to analyze data and identify areas of improvement with actionable intelligence (data-driven decisions).
●
Helps companies establish a desktop knowledge baseline.
●
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.
●
Combines proprietary Machine Learning with both process and relational data mining to generate predictive analytics
Companies are using Cicero IAP to:
●
See how the events at the desktop impact business goals, the employee and customer experience.
●
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.
●
Have current hardware configuration and state of utilization data.
●
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 the next best action for the agent
●
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.
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.
●
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.
Verint, UBS, Inc. and Delta Dental each accounted for more than ten percent (10%) of our operating revenue in fiscal 2019. CH Robinson, Nationwide, UBS, Inc. and Verint each accounted for more than ten percent (10%) of our operating revenue in fiscal 2018.
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, NICE and Heartcore. In addition, we have entered into strategic partnerships with Verint 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. The Company adopted ASU 2014-09 Revenue from Contacts with Customers (Topic 606) as of January 1, 2018. Based on the evaluation the Company performed on its customer contracts, the adoption did not have a material impact on the Company’s financial position, results of operations, cash flow, accounting policies, business processes, internal controls or disclosures.
Marketing
The target markets 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 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 team 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.
Research and Product Development
We incurred research and development expense of approximately $1,147,000 and $991,000 in 2019 and 2018, respectively.
Cicero Intelligent Analytics Platform and Cicero Automation are products that exist in a rapidly changing technology environment and as such, 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 Robotic Process Automation and Activity and Process Analytics:
●
Robotic Process Automation software replicates and then automates highly repetitive and rules based activities otherwise manually completed by a person resource. This automation may be completed at the event level or end-to-end. Competitors include UIPath, Blue Prism, Automation Anywhere and Pegasystems.
●
Activity and Process Analytics software listens for human activities in real time and then stores this activity for analysis. Applying Machine Learning to this data enables more sophisticated analysis and greater scale, which results in use cases including process mapping and improvement, fraud detection and social dynamics. Competitors include Celonis, ABBYY, PAFNow.
Our product continues to compete with the customer support focused platforms including NICE and Verint, but to a lesser extent due to our specialization in the Smart Analytics space. Consolidation across the industry continues as RPA startups mature and look toward acquisitions for continued growth. We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with each other, or other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. Many of our current competitors have greater name recognition, a larger installed customer base and greater financial, technical, marketing and other resources than we have.
Intellectual Property
Our success is dependent upon developing, protecting and maintaining our intellectual property assets. We rely upon combinations of copyright, trademark and trade secrecy protections, along with contractual provisions, to protect our intellectual property rights in software, documentation, data models, methodologies, data processing systems and related written materials in the international marketplace. 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, 2019, we employed 14 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.
Item 1A.
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 2005 through 2019. We incurred a net loss of $1.6 million and $2.1 million for fiscal 2019 and 2018, respectively. As of December 31, 2019, we had a working capital deficit of $4.4 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 27, 2020 on our consolidated financial statements for the period ended December 31, 2019 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 than 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, 2019, the Company had a working capital deficiency of $4.4 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.
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 Intelligent Analytics Platform 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 PegaSystems 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. The market is currently referred to as Robotic Processing Automation (RPA). Robotic Process Automation software replicates and then automates highly repetitive and rules based activities otherwise manually completed by a person resource. This automation may be completed at the event level or end-to-end. Competitors include UIPath, Blue Prism, Automation Anywhere and Pegasystems. There can be no assurance that our potential customers will determine that Cicero Automation’s desktop integration methodology is superior to RPA 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.
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 Intelligent Analytics Platform 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.
We may be unable to enforce or defend our ownership and use of proprietary and licensed technology.
Our success depends to a significant degree upon our proprietary and licensed technology. We rely on a combination of patent, trademark, trade secret and copyright law, contractual restrictions and passwords to protect our proprietary technology. However, these measures provide only limited protection, and there is no guarantee that our protection of our proprietary rights will be adequate. Furthermore, the laws of some jurisdictions outside the United States do not protect proprietary rights as fully as in the United States. In addition, our competitors may independently develop similar technology; duplicate our products or design around our patents or our other intellectual property rights. We may not be able to detect or police the unauthorized use of our products or technology, and litigation may be required in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of our proprietary rights. Any litigation to enforce our intellectual property rights would be expensive and time-consuming, would divert management resources and may not be adequate to protect our business.
We do not believe any of our products infringe the proprietary rights of third parties. However, companies in the software industry have experienced substantial litigation regarding intellectual property and third parties could assert claims that we have infringed their intellectual property rights. In addition, we may be required to indemnify our distribution partners and end-users for similar claims made against them. Any claims against us would divert management resources, and could require us to spend significant time and money in litigation, pay damages, develop new intellectual property or acquire licenses to intellectual property that is the subject of the infringement claims. These licenses, if required, may not be available on acceptable terms. As a result, intellectual property claims against us could have a material adverse effect on our business, operating results and financial condition.
As the number of software products in the industry increases and the functionality of these products further overlaps, we believe that software developers and licensors may become increasingly subject to infringement claims. Any such claims, with or without merit, could be time consuming and expensive to defend and could adversely affect our business, operating results and financial condition.
Our business may be adversely impacted if we do not provide professional services to implement our solutions.
Customers that license our software typically engage our professional services staff or third-party consultants to assist with product implementation, training and other professional consulting services. We believe that many of our software sales depend, in part, on our ability to provide our customers with these services and to attract and educate third-party consultants to provide similar services. New professional services personnel and service providers require training and education and take time and significant resources to reach full productivity. Competition for qualified personnel and service providers is intense within our industry. Our business may be harmed if we are unable to provide professional services to our customers to effectively implement our solutions or if we are unable to establish and maintain relationships with third-party implementation providers.
Our business may be adversely impacted by cyber security breach.
Third parties may attempt to fraudulently induce employees or customers to disclose sensitive information such as user names, passwords, or other information in order to gain access to our data, which could result in significant legal and financial exposure and a loss of confidence in the security of our service that would harm our future business prospects. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.
Because our software could interfere with the operations of customers, we may be subject to potential product liability and warranty claims by these customers.
Our software enables customers’ software applications to integrate and is often used for mission critical functions or applications. Errors, defects or other performance problems in our software or failure to provide technical support could result in financial or other damages to our customers. Customers could seek damages for losses from us. In addition, the failure of our software and solutions to perform to customers’ expectations could give rise to warranty claims. The integration of our software with our customer’s applications increase the risk that a customer may bring a lawsuit against us. Even if our software is not at fault, a product liability claim brought against us, even if not successful, could be time consuming and costly to defend and could harm our reputation.
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.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
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 expired in 2018. The Company is currently on a month to month lease at the same office location and are in negotiations on a new long term lease. We believe that our present facilities are suitable for continuing our existing and planned operations.
Item 3.
Item 3. Legal Proceedings
Not applicable.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
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, 2019 and 2018.
The closing price of the common stock on March 21, 2020 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 22, 2020, we had 226 registered stockholders of record.
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2019, 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.
Item 6.
Item 6. Selected Financial Data.
Not applicable
Item 7.
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 Intelligent Analytics Platform and Cicero Automation products. Cicero IAP delivers desktop analytics and reporting for the enterprise. Cicero IAP 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 IAP 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 IAP 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.
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.
The following table sets forth data for total revenue for operations by geographic origin as a percentage of total revenue for the periods indicated:
Years Ended December 31, 2019 and 2018
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 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, 2019 increased 81.8% or $691,000 from $845,000 in 2018 to $1,536,000 in 2019. The increase in revenues in 2019 is due primarily to the increase in software sales revenue partially offset by a decrease in consulting revenue.
Software Products. Software products revenue for the year ended December 31, 2019 increased 1,113.6% or $735,000 from $66,000 in 2018 to $801,000 in 2019. The increase is primarily due to additional licenses ordered from a current customer in 2019.
The gross margin on software products was 99.4% and 98.5 % for the years ended December 31, 2019 and 2018, respectively.
The Company expects to see an increase in software sales coupled with improving margins on software products as Cicero Intelligent Analytics Platform and Cicero Automation gain acceptance in the marketplace. Further, the Company believes that its repositioned strategy of leading with a no cost, short, “proof of concept” evaluation of the software’s capabilities 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 and active “proof of concepts” with active partners, customers and prospects. 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 years ended December 31, 2019 and 2018 remained constant at $488,000.
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 68.0% and 67.8% for 2019 and 2018, respectively.
Maintenance revenues are expected to increase as a result of our expected increase in software 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, 2019 decreased 15.1% or $44,000 from $291,000 in 2018 to $247,000 in 2019. The decrease in services revenues in 2019 is primarily attributable to a decrease 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 (76.5%) and (40.2%) for 2019 and 2018, respectively. The increase in gross margin loss in 2019 was primarily attributable to the decrease in consulting revenue.
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 4.4% or $19,000 from $431,000 in 2018 to $412,000 in 2019. The decrease is primarily attributable to lower headcount partially offset by higher and 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 increased 15.7% or $156,000 to from $991,000 in 2018 to $1,147,000 in 2019. The increase in costs is primarily due to an increase in outside professional services partially offset by lower headcount.
The Company intends to continue to make a significant investment in research and development while enhancing efficiencies in this area.
General and Administrative. General and administrative expenses consist of personnel costs for the executive, legal, financial, human resources, investor relations and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses increased 1.3% or $9,000 from $720,000 in 2018 to $729,000 in 2019. The increase is primarily attributable to an increase in personnel costs partially offset by a decrease in corporate insurance expenses.
General and administrative expenses are not expected to increase in 2020.
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 2019 and 2018. Because of the Company’s inconsistent earnings history, the deferred tax assets have been fully offset by a valuation allowance.
Other Income/(Loss). Other income (net) decreased $128,000 from other income of $128,000 in 2018 to zero in 2019. The decrease is primarily due to income from the write off of old liabilities of approximately $125,000 in fiscal 2018.
Interest expense decreased $70,000 from $330,000 in 2018 to $260,000 in 2019 due a decrease in overall total debt outstanding during fiscal 2019 as compared to 2018.
Net Loss. Net loss decreased $456,000 from a net loss of $2,065,000 in 2018 to a net loss of $1,609,000 in fiscal 2019. The decrease in net loss is primarily due to an increase in total revenue.
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 $17,000 on December 31, 2019 compared with $97,000 on December 31, 2018, a decrease of $80,000. The Company incurred a net loss of $1,609,000 for the year ended December 31, 2019 compared to net loss of $2,065,000 for the previous fiscal year. The Company has experienced negative cash flows from operations for fiscal 2019 and 2018. At December 31, 2019, the Company had a working capital deficiency of $4,389,000.
Operating activities utilized $1,972,000 in cash, which was primarily comprised of the loss from operations of $1,609,000, an increase in accounts receivable of $52,000, an increase in prepaid expenses of $69,000, a decrease in trade payables and other accruals of $5,000 and a decrease of deferred revenue of $243,000. This was offset by non-cash charges for depreciation of $4,000 and stock-based compensation expense of $2,000.
During 2019, the Company utilized approximately $4,000 in cash updating the Company’s network and computer equipment.
Financing Activities
The Company funded its cash needs during the year ended December 31, 2019 with cash on hand from December 31, 2018, the revenue generated in fiscal 2019, and through the use of proceeds from short-term borrowings in the amount of $1,896,000, net of repayments.
From time to time during 2017 through 2019, the Company entered into several short term notes payable with John Steffens, the Company’s Chairman of the Board, for various working capital needs. The notes bear an interest rate of 10% with a maturity date of December 31, 2018. In December 2018, all outstanding notes were amended to a new maturity date of June 30, 2020 and as such were reclassed to long term debt. The Company is obligated to repay the notes with the collection of any accounts receivable. At December 31, 2018, the Company was indebted to Mr. Steffens in the approximate amount of $3,511,500 of principal and $299,000 of interest. In March 2019, the Company issued 4,250 shares of its Series A preferred stock and warrants to purchase up to 17,007,787 shares of the Company’s common stock at an excise price of $0.05 per share to convert the total obligation of $3,891,500 of principal and $358,697 of interest. At December 31, 2019, the Company was indebted to Mr. Steffens in the approximate amount of $1,575,000 of principal and $97,000 of interest.
Although the Company has incurred an operating loss of approximately $1,609,000 for the year ended December 31, 2019, and has a history of operating losses, management believes that its product’s functionality resonates in the marketplace as both “analytics” and “automation” are topics often discussed and written about. Further, the Company believes that its repositioned strategy of leading with a no cost, short, “proof of concept” evaluation of the software’s capabilities 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 and active “proof of concepts” with active partners, customers and prospects. The Company has borrowed $1,955,000 and $2,402,000 in 2019 and 2018, respectively. Should the Company be unable to secure customer contracts that will drive sufficient cash flow to sustain operations, the Company will be forced to seek additional capital in the form of debt or equity financing; however, there can be no assurance that such debt or equity financing will be available on terms acceptable to the Company or at all. As a result of these factors, the report of our independent auditors dated March 27, 2020, on our consolidated financial statements for the period ended December 31, 2019 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. On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers and all the related amendments (“the new revenue standard”) and applied it to all contracts using the modified retrospective method. We completed our review of contracts with our customers and did not need to record a cumulative effect adjustment to accumulated deficit upon adoption of the new revenue standard as of January 1, 2018. Under ASC 606, revenue is recognized when a company transfers the promised goods or services to a customer in an amount that reflects consideration that is expected to be received for those goods and services. Adoption of the standard did not have a material impact on the Company’s financial position, results of operations, cash flow, accounting policies, business processes, internal controls or disclosures.
Cicero utilizes point in time method for revenue recognition for its software license revenue. Our software licenses are distinct and have standalone functionality as it is fully functional without any services purchased. Cicero utilizes the output method over time for revenue recognition as maintenance contracts are invoiced annually prior to the start of the maintenance period and then recognized monthly over the length of the maintenance contract. Cicero utilizes the output method over time for revenue recognition for its services revenue as service hours/days are logged and billed subsequently. Cicero has no upfront fees that are billable to customers.
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.
Leases. As of January 1, 2019, we account for leases under the new codification under Financial Account Standards Board Topic 842. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for our real estate lease that is currently on a month to month lease. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. As of December 31, 2019, the Company reevaluated the lease under the guidance of Topic 842 and estimated an expected term of one year for analysis under Topic 842. Under the new standard, the Company’s lease liability is based on the present value of such payments and the related right-of-use asset will generally be based on the lease liability. The Company recognized on ROU asset and liability of approximately $63,000 as of December 31, 2019. We believe the most significant future effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate operating lease and (2) providing significant new disclosures about our leasing activities. We will continue to assess our lease obligations and determine whether adjustments need to be made to our right-of-use assets and liabilities.
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, 2019, we had a valuation allowance of $35,490,000 against $35,490,000 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, 2019, the Company has net operating loss carryforwards of approximately $135,587,000 which may be applied against future taxable income. These carryforwards will expire at various times between 2020 and 2037.
Recent Accounting Pronouncements:
In February 2016, the Financial Accounting Standards Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard was effective for us on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We elected all of the new standard’s available transition practical expedients.
This standard did not have a material effect on our financial statements. We believe the most significant future effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate operating lease and (2) providing significant new disclosures about our leasing activities.
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for our real estate lease that is currently on a month to month lease. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. As of December 31, 2019, the Company reevaluated the lease under the guidance of Topic 842 and estimated an expected term of one year for analysis under Topic 842. Under the new standard, the Company’s lease liability is based on the present value of such payments and the related right-of-use asset will generally be based on the lease liability. The Company recognized on ROU asset and liability of approximately $63,000 as of December 31, 2019. (See Note 4)
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
The information required by this item appears beginning on page of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
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, 2019. 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, 2019, 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 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.
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, 2019.
(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.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth certain information about our directors and executive officers:
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 currently serves on the Board of Directors of Colony Capital, Inc. He also serves on the advisory boards of StarVest Partners and Wicks Communication & Media Partners, L.P. In addition, he is currently National Chairman Emeritus of the Alliance for Aging Research. Previously, Mr. Steffens served as Chairman of the Securities Industry Association (now the Securities Industry and Financial Markets Association, or SIFMA), as a Trustee of the Committee for Economic Development, and as a member of the Board of Overseers of the Geisel School of Medicine at Dartmouth. 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.
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 PFSweb, Inc. and Hardinge, Inc. Mr. Rosenzweig is also currently a board member and director of Potbelly Corporation. Mr. Rosenzweig formerly served as a Director of RELM Wireless Corp and Director of Startek, Inc. 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.
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 Dataflow Technologies, Inc., and continues in that role. From 1982 to 1988 he was CEO of CASI, a developer of access control security systems. CASI is now part of General Electric. 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.
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 TTEC (formerly “TeleTech”), a business process outsourcer based in Denver, Colorado. In 2016 Mr. Peppers left TTEC 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. Peppers’ qualifications to serve on our Board of Directors include his years of experience providing strategic advisory services to organizations.
Todd Sherin
Mr. Sherin has been the Chief Revenue Officer of the Company since July 2017 where he oversees Sales and Marketing, in addition to Operations, including Product Strategy and Development. Prior to his role at Cicero, Inc., from 2013 to 2017, Mr. Sherin founded Wysk, LLC a Contact Center focused Systems Integrator. Under his leadership, the boutique SI/VAR became a premier Workforce Optimization specialist firm and was successfully sold to a Pan American Value-Added Reseller. Previously, Mr. Sherin held multiple technical and sales roles at Anexinet, Capgemini, Pfizer and IHS Markit. Mr. Sherin received his B.A. degree in International Relations from University of Pennsylvania.
There are no family relationships between or among the above directors or executive officers.
Audit Committee
The Audit Committee is composed of 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, 2019. Mr. Landis attended every meeting while 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. Landis is an “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.
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 during the fiscal year ended December 31, 2019.
Item 11.
Item 11. Executive Compensation.
Compensation Committee Membership and Organization
The Company no longer has a standing Compensation Committee. 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 grants 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 considering, 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.
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 2019.
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 achieve a non-equity bonus of $25,000 in fiscal 2019 but did not achieve a non-equity bonus in fiscal 2018. Our Chief Revenue Officer did not achieve a non-equity bonus in fiscal 2019 or 2018.
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 2020.
Our Chief Revenue Officer, Mr. Sherin, is eligible to earn a commission equal to 15% of incremental operating profit attributed to new clients as defined in his employment agreement.
Long-Term Equity Incentive Awards
The Company presently has one equity-based compensation plan under which grants were 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. The plan expired in 2017 and as such there are no shares 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 granted 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.
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 2019 and 2018.
Summary Compensation Table
(1)
Mr. Broderick is currently deferring $25,000 of his annual salary which commenced in July 2013.
(2)
Non-equity incentive plan compensation for Mr. Broderick includes a bonus for certain revenue transactions earned during fiscal year ended December 31, 2019. The revenue transaction was the acceptance of the first contract greater than $300,000 for each fiscal year.
(3)
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, 2019 and 2018, respectively.
(4)
Mr. Castagno’s employment with the Company was terminated on January 15, 2018.
Grants of Plan Based Awards
The Company did not award any stock options to the named executives during fiscal 2019 and 2018. The Company did not award any stock appreciation rights (SARs) during fiscal 2019 and 2018.
The following table presents the number and values of exercisable options as of December 31, 2019 by the named executive.
Outstanding Equity Awards at December 31, 2019
(1)
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.
(2)
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.
(3)
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, 2019. Mr. Broderick has 75,000 outstanding options at December 31, 2019. Mr. Sherin has never been granted any stock options.
Employment Agreements, Termination of Employment and Change-In-Control Arrangements
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 $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, 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. Sherin effective July 17, 2017, we agreed to pay Mr. Sherin an annual base salary of $150,000 and a commission of 15% on incremental operating revenue of new clients as designated in an exhibit in his agreement. If the Company terminates Mr. Sherin’s employment without cause, we agreed to pay Mr. Sherin an amount equivalent to three (3) months of Mr. Sherin’s then current base salary in equal semi-monthly installments over that three (3) month period following termination. If Mr. Sherin’s employment is terminated for any reason, Mr. Sherin has agreed that, for eighteen (18) months 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, 2019. 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 2019 that had not been paid in fiscal 2019.
The amounts shown in the table above do not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried employees generally upon termination, such as unreimbursed business expenses payable.
Stock Option Plan
In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock that may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. No grants were awarded to our named executive officers during fiscal 2017. The plan expired in 2017 and as such there are no shares available for future option grants and awards.
Director Compensation
No cash or non-cash compensation was paid during fiscal 2019 by us to our non-employee directors who served during fiscal 2019.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of March 26, 2020 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 208,019,141 common shares outstanding as of March 26, 2020. 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.
*
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 120,932,501 shares of common stock, 186,672,035 common shares issuable upon conversion of Series A Convertible Preferred Stock, 37,334,407 shares issuable upon the exercise of warrants and 10,000 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.
3.
The address of Mark and Carolyn P. Landis is 54 Dillon Way, Washington Crossing, PA. 18977. Includes 5,472,853 shares of common stock, and 7,000 shares subject to stock options.
4.
The address of Mr. Castagno is 1110 3rd Street South, St. Petersburg, FL 33701. Mr. Castagno is a principal owner of SOAdesk LLC. Includes 17,660,536 shares of common stock.
5.
Includes 3,165,179 shares of common stock and 7,000 shares subject to stock options.
6.
Includes 3,248 shares of common stock. 75,000 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.
7.
Includes shares issuable upon exercise of options and warrants as described in above Notes for each director and officer.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Loans from Related Parties
From time to time during 2017 through 2019, the Company entered into several short term notes payable with John Steffens, the Company’s Chairman of the Board, for various working capital needs. The notes bear an interest rate of 10% with a maturity date of June 30, 2018. In June 2018, all outstanding notes were amended to a new maturity date of December 31, 2018. In December 2018, all outstanding notes were amended to a new maturity date of June 30, 2020 and as such were reclassed to long term debt. The Company is obligated to repay the notes with the collection of any accounts receivable. At December 31, 2018, the Company was indebted to Mr. Steffens in the approximate amount of $3,511,500 of principal and $299,000 of interest. In March 2019, the Company issued 4,250 shares of its Series A preferred stock and warrants to purchase up to 17,007,787 shares of the Company’s common stock at an excise price of $0.05 per share to convert the total obligation of $3,891,500 of principal and $358,697 of interest. At December 31, 2019, the Company was indebted to Mr. Steffens in the approximate amount of $1,575,000 of principal and $97,000 of interest.
Director Independence
Our Board of Directors currently consists of five members. They are John L. Steffens, John P. Broderick, Benjamin Rosenzweig, 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 American (the former American Stock Exchange), which can be found in the NYSE American Company Guide, §803(A)(2). Under such definition, Messrs. Steffens, Rosenzweig, Avery, Landis, and Peppers are independent directors.
Item 14.
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, 2019 and 2018.
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 2019 and 2018 (and reviews of quarterly consolidated financial statements on Form 10-Q) were $89,000 and $87,900, 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 2019 and 2018.
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 2019 and 2018.
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 2019 and 2018.
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.
PART IV
Item 15.
Item 15. Exhibits and Consolidated Financial Statement Schedules
(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 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019 and
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and
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.
Exhibit Index
* Management contract or compensatory agreement.
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 27, 2020
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 27, 2020
John L. Steffens
/s/ John P. Broderick
Chief Executive Officer/Chief Financial Officer
March 27, 2020
John P. Broderick
(Principal Executive and Financial and Accounting Officer) and Director
/s/ Benjamin L. Rosenzweig
Director
March 27, 2020
Benjamin L. Rosenzweig
/s/ Mark Landis
Director
March 27, 2020
Mark Landis
/s/ Don Peppers
Director
March 27, 2020
Don Peppers
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Cicero Inc.
Cary, North Carolina
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cicero Inc. and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, 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, 2019 and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
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, 2019. 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.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CHERRY BEKAERT LLP
We have served as the Company’s auditor since 2012.
Raleigh, North Carolina
March 27, 2020
CICERO INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands, except share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Non-Cash Investing and Financing Activities
During May 2019, the Company converted $1 of account payable to a vendor by issuing 105,600 shares of its common stock.
During March 2019, the Company converted $3,892 of debt and $356 of interest to a related party lender by issuing 4,250 shares of its Series A preferred stock.
None.
The accompanying notes are an integral part of the consolidated financial statements.
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 $1,609,000 for the year ended December 31, 2019, and has a history of operating losses. Management believes that its product’s functionality resonates in the marketplace as both “analytics” and “automation” are topics often discussed and written about. Further, the Company believes that its repositioned strategy of leading with a no cost, short, “proof of concept” evaluation of the software’s capabilities 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 and active “proof of concepts” with active partners, 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, 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, 2019, the Company did not exceed these insured amounts.
Trade Accounts Receivable:
Trade accounts receivable are stated in the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance of doubtful accounts based on its assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance of doubtful accounts and a credit to trade accounts receivable. Changes in the allowance for doubtful accounts have not been material to the 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 comprised of right of use lease liability, accrued legal, consulting and other.
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 $96,000 and $125,000 for the years ended December 31, 2019 and 2018, 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 $1,147,000 and $991,000 for the years ended December 31, 2019 and 2018, respectively.
Other Income/(Charges):
Other income/(charges) in fiscal year 2018 consists primarily of a write off of certain liabilities deemed no longer payable in the amount of $125,000. These liabilities were deemed no longer payable as the statute of limitations obligated by the Company for these liabilities had lapsed. No such write off occurred in fiscal year 2019.
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 7.)
Loss Per Share:
Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities. During 2019 and 2018, 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:
Stock-Based Compensation:
The Company accounts for stock-based compensation to employees 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 2019 and 2018. The Company granted 500,000 restricted stock units to certain employees in fiscal 2018. The Company recognized approximately $1,000 and $2,000 of stock-based compensation in fiscal year 2019 and 2018, respectively.
Recent Accounting Pronouncements:
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard was effective for us on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We elected all of the new standard’s available transition practical expedients.
This standard did not have a material effect on our financial statements. We believe the most significant future effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate operating lease and (2) providing significant new disclosures about our leasing activities.
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for our real estate lease that is currently on a month to month lease. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. As of December 31, 2019, the Company reevaluated the lease under the guidance of Topic 842 and estimated an expected term of one year for analysis under Topic 842. Under the new standard, the Company’s lease liability is based on the present value of such payments and the related right-of-use asset will generally be based on the lease liability. The Company recognized on ROU asset and liability of approximately $63,000 as of December 31, 2019. (See Note 4)
NOTE 2. REVENUE
On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers and all the related amendments (“the new revenue standard”) and applied it to all contracts using the modified retrospective method. We completed our review of contracts with our customers and did not need to record a cumulative effect adjustment to accumulated deficit upon adoption of the new revenue standard as of January 1, 2018. Under ASC 606, revenue is recognized when a company transfers the promised goods or services to a customer in an amount that reflects consideration that is expected to be received for those goods and services. Adoption of the standard did not have a material impact on the Company’s financial position, results of operations, cash flow, accounting policies, business processes, internal controls or disclosures.
Contract Balances
Timing differences among revenue recognition may result in contract assets or liabilities. Contract liabilities (deferred revenue) totaled $217,000 and $460,000 as of December 31, 2019, and December 31, 2018, respectively. Revenue recognized from the contract liabilities for the 12 months ended December 31, 2019 was $380,000. The contract liability balances reflect the unrecognized transaction price.
Our net trade accounts receivables were $63,000 and $11,000 as of December 31, 2019, and December 31, 2018, respectively. 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.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under the new revenue recognition standard. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Most of our contracts have multiple performance obligations, which include software, maintenance and professional services.
Revenue Recognition
Cicero utilizes point in time method for revenue recognition for its software license revenue. Our software licenses are distinct and have standalone functionality as it is fully functional without any services purchased. Cicero utilizes the output method over time for revenue recognition as maintenance contracts are invoiced annually prior to the start of the maintenance period and then recognized monthly over the length of the maintenance contract. Cicero utilizes the output method over time for revenue recognition for its services revenue as service hours/days are logged and billed subsequently. Cicero has no upfront fees that are billable to customers. Cicero established a standalone selling price for its lines of revenue based on price list and historical sales.
Practical Expedients and Exemptions
There are several practical expedients and exemptions allowed under ASC 606 that impact timing of revenue recognition and our disclosures. Below is a list of practical expedients we applied in the adoption and application of ASC 606:
Application
●
The Company is making the election not to disclose variable consideration allocated to performance obligations related to either: (1) sales- or usage-based royalties on licenses of intellectual property or (2) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation when certain criteria are met.
●
The Company is making an election to treat sales tax on a net basis, which would not include it in the transaction price to allocate across performance obligations.
●
The Company elects to treat similar contracts among the business units as part of a portfolio of contracts, primarily software license and maintenance contracts. These contracts have the same provision terms, and management has the expectation the result will not be materially different from the consideration of each individual contract.
●
The Company does not evaluate a contract for a significant financing component if payment is expected within one year or less from the transfer of the promised items to the customer.
●
The Company generally expenses sales commissions when incurred when the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.
NOTE 3. ACCOUNTS RECEIVABLE
Trade accounts receivable was composed of the following at December 31 (in thousands):
NOTE 4. LEASES
On January 1, 2019, the Company adopted Topic 842, which is intended to improve financial reporting about leasing transactions. Under the standard, organizations that lease assets, referred to as “Lessees” shall recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In addition, the standard requires disclosures including financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
The Company elected to use the practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classifications. The Company made an accounting policy election to account for leases with an initial term of 12 months or less similar to existing guidance for operating leases today. The Company recognized those lease payments in the Consolidated Statement of Operations on a straight-line basis over the lease term. 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. The lease expired in October 2018 and the Company is currently on a month to month lease with the landlord as it negotiates a new long term lease and as such the Company has accounted for it as a practical expedient in fiscal and accounted for it as an operating lease. As of December 31, 2019, the Company reevaluated the lease under the guidance of Topic 842 and estimated an expected term of one year for analysis under Topic 842. Under the new standard, the Company’s lease liability is based on the present value of such payments and the related right-of-use asset will generally be based on the lease liability.
The impact of the adoption of Topic 842 on the accompanying consolidated balance sheet as of December 31, 2019, is as follows (in thousands):
Components of lease assets and liabilities
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment was composed of the following at December 31 (in thousands):
Depreciation expense of property and equipment was $4,000 and $3,000 for the years ended December 31, 2019 and 2018, respectively.
Rent expense was $66,000 for each years ended December 31, 2019 and 2018, respectively. The Company is currently on a month to month lease with the landlord as it negotiates a new long term lease.
NOTE 6. DEBT
Debt and notes payable to related parties consists of the following (in thousands):
(a)
As part of a prior acquisition, the Company was subject to certain earn-out obligation payments of up to $2,410,000 over an 18-month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets. The earn-out was payable fifty percent in cash and fifty percent in common stock of the Company at the rate of one share for every $0.15 earn-out payable. The Company had recorded $842,606 in its accounts payable as of December 31, 2014 due to a portion of earn-out obligations being met. In June 2015, the Company entered into a promissory note with SOAdesk for fifty percent of the earn-out payable ($421,303) to SOAdesk. The maturity date of the note was December 31, 2015 with an annual interest rate of 10%. Through a series of amendments, the maturity date was extended to January 31, 2020 and two milestone payments of $62,500, to be applied to outstanding interest and then principal, payable on June 1, 2018 and December 1, 2018, respectively, were added. At December 31, 2018, the Company was indebted to SOAdesk for $360,580 in principal and approximately $17,000 in interest. At December 31, 2019, the Company was indebted to SOAdesk for $301,282 in principal and approximately $11,000 in interest.
(b)
From time to time during 2017 through 2019, the Company entered into several short term notes payable with John Steffens, the Company’s Chairman of the Board, for various working capital needs. The notes bear an interest rate of 10% with a maturity date of December 31, 2018. In December 2018, all outstanding notes were amended to a new maturity date of June 30, 2020 and as such were reclassed to long term debt. The Company is obligated to repay the notes with the collection of any accounts receivable. At December 31, 2018, the Company was indebted to Mr. Steffens in the approximate amount of $3,511,500 of principal and $299,000 of interest. In March 2019, the Company issued 4,250 shares of its Series A preferred stock and warrants to purchase up to 17,007,787 shares of the Company’s common stock at an excise price of $0.05 per share to convert the total obligation of $3,891,500 of principal and $358,697 of interest. At December 31, 2019, the Company was indebted to Mr. Steffens in the approximate amount of $1,575,000 of principal and $97,000 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 amount of $50,000 of principal and $88,000 of interest and $50,000 of principal and $99,000 of interest, as of December 31, 2018 and December 31, 2019, respectively, bear interest between 10% and 36% per annum.
In March 2012 the Company entered into an unsecured promissory note with a private lender for $336,000 at an interest rate of 12% and a maturity date of March 31, 2013. Through a series of amendments, the note was amended to extend the maturity date to January 31, 2021 and a new principal balance of $498,500. Simultaneously a $30,000 principal payment was made to the lender. A new repayment schedule of quarterly principal and interest payments was added beginning in January 31, 2018 with a payment of $30,000. $25,000 quarterly principal and interest payments are required to be made beginning on April 30, 2018 through January 31, 2019. $40,000 principal and interest payments are required to be made on beginning on April 30, 2019 through October 31, 2020. Final payment of remaining principal and interest is due on January 31, 2021. The lender agreed to waive certain quarterly payments in fiscal 2018 as business conditions so warrant without triggering any default and that any deferred payments would be added to the next quarterly payment. At December 31, 2018, the Company was indebted to this private lender in the amount of $464,350 in principal and $51,000 in interest and has been reclassified as long term debt due to its maturity date of January 31, 2021. At December 31, 2019, the Company was indebted to this private lender in the amount of $464,350 in principal and $55,000 in interest.
NOTE 7. 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.
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 2016 through 2019, and may be subject to audits for amounts related to net operating loss carryforwards generated in periods prior to December 31, 2015. 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 2019 and 2018. 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):
Significant components of the net deferred tax asset at December 31 were as follows:
As of December 31, 2019, we had federal and state net operating loss carryforwards of approximately $135,587,000. The associated deferred tax asset related to these federal and state net operating loss carryforwards was $35,125,000. The net operating loss carryforwards expire between 2020 and 2037. The value of these carryforwards depends on our ability to generate taxable income. As of December 31, 2019 and 2018, we had deferred tax assets of $35,490,000 and $37,600,000 upon which we had a full valuation allowance.
A valuation allowance for deferred tax assets, including NOL carryforwards, is recognized when it is more-likely- than-not that all or some portion of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies, as well as the current and forecasted business economics of our industry. Management assesses all available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. A significant piece of objectively verifiable negative evidence is the cumulative loss incurred over the three-year period ending December 31, 2017. Such objective negative evidence limits our ability to consider various forms of subjective positive evidence, such as our projections for future income. Accordingly, management has not changed its judgement with respect to the need for a valuation allowance against substantially all of our net deferred tax asset position. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective positive evidence such as future expected growth.
The Company provided a full valuation allowance on the total amount of its deferred tax assets at December 31, 2019 and 2018 since management does not believe that it is more likely than not that these assets will be realized.
NOTE 8. STOCKHOLDERS’ EQUITY
Stock Grants:
None.
Restricted Stock Units:
The Company issued 500,000 restricted stock units to certain employees in fiscal 2018. 250,000 units were forfeited in 2019 due to the termination of an employee. The Company is accounting for the stock compensation for the restricted shares using ASC 718 Compensation-Stock Compensation. The restricted stock vests on the two-year anniversary of the date of grant and the employee needs to still be employed at the time of vesting to receive the grant. The Company uses the Black Scholes calculation to determine the expense and records the expense over the life of the vesting period of each grant. The Company recorded approximately $1,000 and $2,000 in stock compensation expense in fiscal 2019 and 2018, respectively, in relation to these grants.
The Company entered into an employment agreement with its Chief Revenue Officer, Mr. Todd Sherin, that included the granting of 5,000,000 restricted shares that vest over a three-year period and included meeting certain performance obligations. The Company is accounting for the stock compensation for the restricted shares using ASC 718 Compensation-Stock Compensation, specifically ASC 718-10-30-28, 718-10-55-10, and 718-10-55-61. Pursuant to these guidelines the Company is not obligated to record compensation expense until the point in time at which it is probable that Mr. Sherin would meet the performance obligation set forth in the agreement. At such time, the Company would record compensation expense by multiplying the amount of shares vesting at that point by the stock price on the effective date of the agreement. As of December 31, 2019, the Company determined that the probability of meeting these obligations was minimal and as such has not recorded any stock compensation expense for this restricted stock grant.
Stock Options:
In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock which may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. The Company also has a stock incentive plan for outside directors and the Company has set aside 1,200 shares of common stock for issuance under this plan.
Under the terms of the Plans, the exercise price of the 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. The plan expired in fiscal 2017 and as such no further options are available to grant.
Activity for stock options issued under these plans for the years ending December 31, 2019 and 2018 was as follows:
There was no activity for non-vested stock options under these plans for the fiscal year ending December 31, 2019 and 2018.
There were no options granted in 2019 and 2018.
At December 31, 2019, there was no unrecognized compensation cost related to stock options.
At December 31, 2019 and 2018, options to purchase 681,211 and 706,211 shares of common stock were exercisable, respectively, pursuant to the plans at prices ranging from $0.05 to $0.11 . The following table summarizes information about stock options outstanding at December 31, 2019:
Preferred Stock:
On March 26, 2019, the Company entered into agreement with John L. Steffens, the Chairman of the Board of Directors, to convert $3,891,500 of principal amount of debt and $358,697 of interest into 4,250 shares of the Company’s Series A Preferred Stock. Per the Certificate of Designation, the initial conversion of preferred stock to common equaled 85,003,934 shares of common stock of the Company at a price of $0.05 per share, subject to adjustment for stock dividends, stock splits and similar events. Additionally, Mr. Steffens was granted a warrant for 17,000,787 of the Company’s common shares at a price of $0.05 per share. 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.
Series A
The Series A Preferred Stock ranks senior in preference and priority to the Company’s common stock with respect to dividend and liquidation rights and, except as provided in the Certificate of Designation or otherwise required by law, will vote with the common stock on an as converted basis on all matters presented for a vote of the holders of common stock, including directors. The Series A Preferred Stock is convertible at any time at the option of the holder at an initial conversion ratio of 20,000 shares of Common Stock for each share of Series A Preferred Stock. The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations. The holders of the Series A Preferred Stock are entitled to a liquidation preference of $1,000 per share of Series A Preferred Stock plus any declared but unpaid dividends upon the liquidation of the Company. The Series A Preferred Stock may be redeemed by the Company at any time and must be redeemed by the Company, upon the written request of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, after the occurrence of one of the following events: (x) the Company’s trailing 12 month EBITDA exceeds $5,000,000, (y) the sale of all, or substantially all of the assets of the Company, or (z) the sale of all or substantially all the intellectual property of the Company, which in the case of “y” or “z” result in net proceeds to the Company in excess of $6,000,000, at a redemption price equal to $1,000 plus all declared but unpaid dividends, which amount will be paid in three annual installments. The approval of at least two thirds of the holders of Series A Preferred Stock, voting together as a separate class, is required for: (i) the merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the Company, unless such action (x) results in net proceeds to the stockholders of the Company in excess of $5,000,000, and (y) has received the prior approval of the Board of Directors. (ii) the authorization or issuance of any equity security having any right, preference or priority superior to or on parity with the Series A Preferred Stock. (iii) the redemption, repurchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any equity securities (other than the redemption of the Series A Preferred Stock) or the payment of dividends or other distributions on equity securities by the Company (other than on the Series A Preferred Stock). (iv) any amendment or repeal of any provision of the Company’s Certificate of Incorporation or Bylaws that would adversely affect the rights, preferences, or privileges of the Series A Preferred Stock. and (v) the liquidation, dissolution or winding up of the business and affairs of the Company, the effectuation of any Liquidation Event (as defined in Certificate of Designation), or the consent to any of the foregoing, unless such action (x) results in net proceeds to the stockholders of the Company in excess of $5,000,000, and (y) has received the prior approval of the Board of Directors.
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, 2019, there were 37,334,407 exercisable warrants outstanding at an exercise price of $0.05 and $0.07 per share.
Accrued Dividends:
The Company reversed approximately $447,000 of accrued dividends associated with previously issued Series B preferred stock in fiscal 2018. The dividends were only payable to current shareholders of Series B if there was a liquidation of the Company or if approved by the Board of Directors. As an automatic conversion of all outstanding Series B preferred stock was approved by the Board of Directors in September 2015, the Company is no longer under any obligation to pay dividends to the former holders of the Series B preferred stock.
NOTE 9. 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 2019 and 2018.
NOTE 10. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
In 2019, two customers accounted for 77% of operating revenues and one customer accounted for 100% of accounts receivable at December 31, 2019. In 2018, one customer accounted for 48% of operating revenues and one customer accounted for 100% of accounts receivable at December 31, 2018.
In 2019, one vendor accounted for 73% of accounts payable at December 31, 2019. In 2018, one vendor accounted for 68% of accounts payable at December 31, 2018.
NOTE 11. RELATED PARTY INFORMATION
From time to time during 2017 through 2019, the Company entered into several short term notes payable with John Steffens, the Company’s Chairman of the Board, for various working capital needs. The notes bear an interest rate of 10% with a maturity date of December 31, 2018. In December 2018, all outstanding notes were amended to a new maturity date of June 30, 2020 and as such were reclassed to long term debt. The Company is obligated to repay the notes with the collection of any accounts receivable. At December 31, 2018, the Company was indebted to Mr. Steffens in the approximate amount of $3,511,500 of principal and $299,000 of interest. In March 2019, the Company issued 4,250 shares of its Series A preferred stock and warrants to purchase up to 17,007,787 shares of the Company’s common stock at an excise price of $0.05 per share to convert the total obligation of $3,891,500 of principal and $358,697 of interest. At December 31, 2019, the Company was indebted to Mr. Steffens in the approximate amount of $1,575,000 of principal and $97,000 of interest.
NOTE 12. COMMITMENTS AND EMPLOYMENT AGREEMENTS
Under the employment agreement between the Company and Mr. Broderick effective January 1, 2019, 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. Sherin effective July 17, 2017, we agreed to pay Mr. Sherin an annual base salary of $150,000 and a commission of 15% on incremental operating revenue of new clients as designated in an exhibit in his agreement. If the Company terminates Mr. Sherin’s employment without cause, we agreed to pay Mr. Sherin an amount equivalent to three (3) months of Mr. Sherin’s then current base salary in equal semi-monthly installments over that three (3) month period following termination. If Mr. Sherin’s employment is terminated for any reason, Mr. Sherin has agreed that, for eighteen (18) months 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.
NOTE 13. CONTINGENCIES
The Company, from time to time, is involved in legal matters arising in the ordinary course of its business including matters involving proprietary technology. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.
Under the indemnification clause of the Company’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third-party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee. There were no claims against the Company as of December 31, 2019 and 2018.
NOTE 14. SUBSEQUENT EVENTS
In the first quarter of 2020, the Company entered into notes payable totaling $355,000 with Mr. Steffens. The note bears interest at 10% per annum. The notes are unsecured and mature on June 30, 2020. The Company is obligated to repay the notes with the collection of any accounts receivables.