ITEM 1. BUSINESS
Overview
Cicero, Inc. (the “Company”) 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. The Company’s business integration software addresses the emerging need for companies' information systems to deliver enterprise-wide views of their business information processes. 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 customer experience management market with emphasis on desktop integration and business process automation with its Cicero XM™ products. Cicero XM enables businesses to transform human interaction across the enterprise. Cicero XM enables the flow of data between different applications, regardless of the type and source of the application, eliminating redundant entry and costly mistakes. Cicero XM automates up and down-stream process flows, enforcing compliance and optimizing handle time and provides a task-oriented desktop, reducing training time and enabling delivery of best in class service. Cicero XM captures real-time information about each interaction, guiding the business user through an activity and capturing usage data to spot trends and forecast problems before they occur.
Cicero XM software offers a proven, innovative departure from traditional, costly and labor-intensive enterprise application integration solutions. The Company provides non-invasive application integration, reduces enterprise integration implementation cost and time, and extends companies' Service-Oriented Architecture (“SOA”) to the desktop. Cicero XM also enables customers to transform applications, business processes and human expertise into a seamless, cost effective business solution that provides a cohesive, task-oriented and role-centric interface that works the way people think.
By using Cicero XM technology, companies can decrease their customer management costs, improve their customer service, maximize the lifetime value of existing customers, and more efficiently cross-sell the full range of their products and services resulting in an overall increase in return on their information technology investments. In addition, the Company’s software enables organizations to reduce the business risks inherent in replacement or re-engineering of mission-critical applications and extend the productive life and functional reach of their application portfolio.
The Company provides an integrated toolkit called Cicero XM Studio that provides an intuitive integration and development environment, which simplifies the integration of complex multi-platform applications. Cicero XM provides a unique approach that allows companies to organize components of their existing applications to better align them with tasks and operational processes. In addition, the Company’s software solutions can streamline end-user tasks by providing a single, seamless user interface for simple access to multiple systems or be configured to display one or more composite applications to enhance productivity. Our technology enables automatic information sharing among line-of-business applications and tools. It is ideal for deployment in contact centers where its highly productive, task-oriented user interface promotes business user efficiency. By integrating diverse applications across multiple operating systems, Cicero is ideal for the financial services, insurance, telecommunications, intelligence, security, law enforcement, governmental and other industries requiring a cost-effective, proven application integration solution.
Some of the companies that have implemented or are implementing the Company’s software solutions include Merrill Lynch, & Co., Inc., Nationwide Financial Services, Affiliated Computer Systems, and Deutsche Bank AG. We have also sold our products to intelligence, security, law enforcement and other government users.
Cicero Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc. and re-incorporated in Delaware in 1999. Our principal executive offices are located at 8000 Regency Parkway, Suite 542, Cary, NC 27518 and our telephone number is (919) 380-5000. Our web site is www.ciceroinc.com.
Products
The Company has five products, Cicero Integrator, Cicero XM Integrator, Cicero XM Discovery, Cicero XM Desktop, and Cicero XM Enterprise, and a configuration toolkit called Cicero XM Studio that is licensed with each Cicero XM product:
Cicero Integrator. The Company’s original desktop integration and automation product is a framework for organizing, integrating, and enabling an organization’s various enterprise software applications to operate seamlessly on user desktops.
Cicero XM Integrator - Empowers business users to integrate applications, functionality and data, and delivers smart workflows to enhance productivity, performance and quality.
Cicero XM Discovery - Cicero XM Discovery is a lightweight and configurable tool to capture and record a variety of desktop activities either locally or in a central data store.
Cicero XM Desktop - Combines the efficiency benefits of Cicero XM Integrator with screen composites that simplify processing by eliminating the need for users to access multiple systems and screens, accompanied by context-sensitive scripts to guide users. It also comes with a soft-phone console to enable the integration of telephony solutions into the Cicero servicing platform.
Cicero XM Enterprise - Builds on the capabilities of Cicero XM Integrator and Desktop. Cicero XM Enterprise delivers communications, telephony and computer telephony integration (CTI) capabilities including presence, IM and email to reduce the need for multiple contact center systems. It enables single sign-on for all user-accessed solutions, and provides oversight for all transactions to facilitate and speed their movement throughout the environment, and to capture relevant data. Cicero XM enterprise provides real-time and historical data, including detailed customer insights based on a mash-up of interaction and business information.
Cicero XM Studio - Enables business analysts and other non-IT staff to build and enhance back-end integrations, scripts, smart workflows and composite screens without any impact on underlying applications or business logic.
The Cicero XM suite is highly secure. It has a credentials store that facilitates single sign-on. Passwords can be reset but are non-retrievable. Stored interactions can be selectively encrypted based on the needs of the enterprise. All network communications are compressed and encrypted for transmission.
All Cicero XM products include the United Data Model™ (UDM). The UDM is supported by a database, enabling the abstraction and separation of the department’s existing technical environment from its business logic. This physical separation empowers IT and the operations managers to build and change the business logic at their discretion. The abstraction capability converts the contact center and other departments into a flexible and agile operating environment that can rapidly and cost effectively respond to the dynamic needs of the enterprise.
Cicero XM works with all desktop interfaces, including home-grown solutions, 3270-style mainframe screens, third-party applications, hosted systems and Web-based applications. By abstracting and capturing the logic and functionality in its patent-pending United Data Model™, Cicero changes the dynamics of desktop servicing and gives control back to business managers to adapt to ever-changing business needs.
Services
We provide a full spectrum of technical support, training and consulting services across all of our operating segments as part of our commitment to providing our customers industry-leading business integration solutions. Experts in the field of systems integration with backgrounds in development, consulting, and business process reengineering staff our services organization. In addition, our services professionals have substantial industry specific backgrounds with extraordinary depth in our focus marketplaces of financial services and contact centers.
Maintenance and Support
We offer customers varying levels of technical support tailored to their needs, including periodic software upgrades, and telephone support. Cicero XM is 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:
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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.
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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.
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An insurance company - uses our software solution to integrate their customer information systems with over thirty software applications including a CRM application.
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A law enforcement organization - uses our software solution to streamline and automate support for arrests and investigations while merging federal, state and local systems within a unified process.
Other customers are systems integrators, which use our software to develop integration solutions for their customers.
Procore Solutions, Merrill Lynch/Bank of America and OpenConnect Systems each accounted for more than ten percent (10%) of our operating revenues in 2010. Affiliated Computer Services Inc., Merrill Lynch and Deutsche Bank each accounted for more than ten percent (10%) of our operating revenues in 2009.
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 strategic partnerships with the following resellers, for integrated business solutions: Affiliated Computer Services, Inc., Tata Consultancy Services, MphasiS, BluePhoenix Solutions, and Piercetech. In addition, we have entered into strategic partnerships with Voice Print International, Empower, Exadel, VGDNA, Pilar Services, Inc. A-CCI, Anchor Systems, Andrew Reise Consulting, Applied Business Technologies, Blue-Beacon Consulting, Vitec, Vortalsoft, and WFM Logic. These organizations have relationships with existing customers or have access to organizations requiring top secret or classified access. In addition, several of these partners can bundle our software with other software to provide a comprehensive solution to customers. We are not materially dependent on any of these organizations. Generally, our agreements with such partners provide for price discounts based on their sales volume, with no minimum required volume.
Marketing
The target market for our products and services are large companies operating contact centers in the financial services, insurance and telecommunications industries, as well as users in the intelligence, security and law enforcement communities and other governmental organizations. Increasing competitiveness and consolidation is driving companies in such businesses to increase the efficiency and quality of their customer contact centers. As a result, customer contact centers are compelled by both economic necessity and internal mandates to find ways to increase internal efficiency, increase customer satisfaction, increase effective cross-selling, decrease staff turnover cost and leverage their investment in current information technology.
Our marketing staff has an in-depth understanding of the customer contact center software marketplace and the needs of these customers, as well as experience in all of the key marketing disciplines. They also have knowledge of the financial services industry and government organizations that have focused on application integration solutions to address needs in mergers and acquisitions and homeland security.
Core marketing functions include product marketing, marketing communications and strategic alliances. We utilize focused marketing programs that are intended to attract potential customers in our target vertical industries and to promote our Company and our brands. Our marketing programs are specifically directed at our target markets, and include speaking engagements, public relations campaigns, focused trade shows and web site marketing, while devoting substantial resources to supporting the field sales team with high quality sales tools and ancillary material. As product acceptance grows and our target markets increase, we will shift to broader marketing programs.
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 $876,000 and $540,000 in 2010 and 2009, respectively.
Since Cicero XM is a new product in a relatively untapped market, it is imperative to constantly enhance the features and functionality of the product. 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:
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Product functionality and features;
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Availability and quality of support services;
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Ease of product implementation;
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Price;
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Product reputation; and
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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 integrators to write new code or rewrite existing applications in an effort to develop integration solutions. As a result, prospective customers may decide against purchasing and implementing externally developed and produced solutions such as ours.
We compete with companies that utilize varying approaches to modernize, web-enable and integrate existing software applications:
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Portal software offers the ability to aggregate information at a single point, but not the ability to integrate transactions from a myriad of information systems on the desktop. Plumtree is a representative company in the market.
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Middleware software provides integration of applications through messages and data exchange implemented typically in the middle tier of the application architecture. This approach requires modification of the application source code and substantial infrastructure investments and operational expense. Reuters, TIBCO and IBM MQSeries are competitors in the middleware market.
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CRM software offers application tools that allow developers to build product specific interfaces and custom applications. This approach is not designed to be product neutral and is often dependent on deep integration with our technology. Siebel is a representative product in the CRM software category.
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Recently, there have been several companies that offer capabilities similar to our software in that these companies advertise that they integrate applications without modifying the underlying code for those applications. OpenSpan is one company who advertises that they can non-invasively integrate at the point of contact or on the desktop.
Other competitors include Above All Software, Attachmate Corporation, Seagull Software Ltd. and Oracle. Our product competes directly with other contact center solutions offered by OpenSpan, Jacada, Sword CiBoodle, and Cincom. We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with each other, or other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. Many of our current competitors have greater name recognition, a larger installed customer base and greater financial, technical, marketing and other resources than we have.
Intellectual Property
Our success is dependent upon developing, protecting and maintaining our intellectual property assets. We rely upon combinations of copyright, trademark and trade secrecy protections, along with contractual provisions, to protect our intellectual property rights in software, documentation, data models, methodologies, data processing systems and related written materials in the international marketplace. We have filed applications for patents on our United Data Model. Copyright protection is generally available under United States laws and international treaties for our software and printed materials. The effectiveness of these various types of protection can be limited, however, by variations in laws and enforcement procedures from country to country. We use the registered trademarks “Cicero®” and “Cicero XM®”.
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, 2010, we employed 31 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 Security 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 Security and Exchange Commission at 1-800-SEC-0330. The Security 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 the Cicero XM product and successful execution of the new strategic direction; general economic or business conditions may be less favorable than expected, resulting in, among other things, lower than expected revenues; an unexpected revenue shortfall may adversely affect our business because our expenses are largely fixed; our quarterly operating results may vary significantly because we are not able to accurately predict the amount and timing of individual sales and this may adversely impact our stock price; trends in sales of our products and general economic conditions may affect investors' expectations regarding our financial performance and may adversely affect our stock price; our future results may depend upon the continued growth and business use of the Internet; we may lose market share and be required to reduce prices as a result of competition from our existing competitors, other vendors and information systems departments of customers; we may not have the ability to recruit, train and retain qualified personnel; rapid technological change could render the Company's products obsolete; loss of any one of our major customers could adversely affect our business; our products may contain undetected software errors, which could adversely affect our business; because our technology is complex, we may be exposed to liability claims; we may be unable to enforce or defend our ownership and use of proprietary technology; because we are a technology company, our common stock may be subject to erratic price fluctuations; and we may not have sufficient liquidity and capital resources to meet changing business conditions.
ITEM 1A.
ITEM 1A. RISK FACTORS
We have a history of losses and expect that we will continue to experience losses at least through the second quarter of 2011.
We experienced operating losses and net losses for each of the years from 2000 through 2010. We incurred a net loss of $1.3 million for 2009, and $0.5 million for 2010. As of December 31, 2010, we had a working capital deficit of $6.5 million and an accumulated deficit of $239 million. Our ability to generate positive cash flow is dependent upon sustaining certain cost reductions and generating sufficient revenues.
Therefore, due to these and other factors, we expect that we will continue to experience net losses through the second quarter of 2011. We have not generated sufficient revenues to pay for all of our operating costs or other expenses and have relied on financing transactions over the last several fiscal years to pay our operating costs and other expenses. We do not have sufficient cash on hand to cover our operating requirements through the calendar year end of December 31, 2011 and there can be no assurance that if we are unable to generate sufficient revenue from operations that we will be able to continue to access the capital markets to fund our operations, or that if we are able to do so that it will be on satisfactory terms, especially in light of the current economic crisis.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
The report of our independent auditors dated March 31, 2011 on our consolidated financial statement for the year ended December 31, 2010 included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our recurring losses, accumulated deficit, and working capital deficit position. Our ability to continue as a going concern will be determined by our ability to obtain additional funding until we can increase our sales to the level required to fund our on-going operations. Our consolidated financial statements do not include any adjustments that might result from the outcome from the uncertainty.
We depend on an unproven strategy for ongoing revenue.
The Company’s future revenues are entirely dependent on acceptance of Cicero’s products. The Company has experienced negative cash flows from operations for the past three years. At December 31, 2010, the Company had a working capital deficiency of approximately $6,526,000. While the Company has repositioned itself and added additional technical award winning products and solutions and demonstrated increase in acceptance in the marketplace, the Company will need to attract more accounts in the near future. The Company’s success to date has been where it has been able to establish solutions specific to certain industry verticals such as financial services, contact centers and healthcare.
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 more challenging the spending environment for our software and services, reduce capital spending on information technology projects by our customers and prospective customers, result in longer sales cycles for our software and services or cause customers or prospective customers to be more cautious in undertaking larger transactions. Those situations may cause a decrease in our revenue. A decrease in demand for our software and services caused, in part, by a weakening of the economy, may result in a decrease in our revenue rates.
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. If our stock is deemed to be a penny stock, trading in our stock will be subject to additional sales practice requirements on broker-dealers. These may require a broker-dealer to:
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make a special suitability determination for purchasers of our shares;
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receive the purchaser's written consent to the transaction prior to the purchase; and
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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.
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, individual Cicero XM sales are large 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. The sales of Cicero XM can be classified as generally large in size to a small discrete number of customers. 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 the Cicero XM 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 the Cicero XM technology. Furthermore, because of our restructuring and reduction in the number of employees, we may find it difficult to recruit new employees in the future.
Different competitive approaches or internally developed solutions to the same business problem could delay or prevent adoption of Cicero XM.
Cicero XM is designed to address in a novel way the problems that large companies face integrating the functionality of different software applications by integrating these applications at the desktop. To effectively penetrate the market for solutions to this disparate application problem, Cicero XM will compete with traditional Enterprise Application Integration, or EAI, solutions that attempt to solve this business problem at the server or back-office level. Server level EAI solutions are currently sold and marketed by companies such as NEON, Mercator, Vitria, and BEA. There can be no assurance that our potential customers will determine that Cicero XM’s desktop integration methodology is superior to traditional middleware EAI solutions provided by the competitors described above in addressing this business problem. Moreover, the information systems departments of our target customers, large financial institutions, are large and may elect to attempt to internally develop an internal solution to this business problem rather than to purchase the Cicero XM product. The legacy Cicero® itself was originally developed internally by Merrill Lynch to solve these integration needs.
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 XM or require us to reduce the price of our products, either of which could have a material adverse effect on our business, operating results and financial condition.
Our ability to compete may be subject to factors outside our control.
We believe that our ability to compete depends in part on a number of competitive factors outside our control, including the ability of our competitors to hire, retain and motivate senior project managers, the ownership by competitors of software used by potential clients, the development by others of software that is competitive with our products and services, the price at which others offer comparable services and the extent of our competitors’ responsiveness to customer needs.
The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles.
Our future success will depend to a substantial degree upon our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and emerging and evolving industry standards.
The introduction of new or enhanced products also requires us to manage the transition from older products in order to minimize disruption in customer ordering patterns, as well as ensure that adequate supplies of new products can be delivered to meet customer demand. There can be no assurance that we will successfully develop, introduce or manage the transition to new products.
We have in the past, and may in the future, experience delays in the introduction of our products, due to factors internal and external to our business. Any future delays in the introduction or shipment of new or enhanced products, the inability of such products to gain market acceptance or problems associated with new product transitions could adversely affect our results of operations, particularly on a quarterly basis.
We believe that to fully implement our business plan we will be required to enhance our ability to work with the Window 7, Microsoft Vista, Windows XP, and Windows 2000 operating systems as well as the Linux operating system by adding additional development personnel as well as additional direct sales personnel to complement our sales plan.
We may face damage to the reputation of our software and a loss of revenue if our software products fail to perform as intended or contain significant defects.
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 that 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 of if we are unable to establish and maintain relationships with third-party implementation providers.
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 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.
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 preferences as from time to time. Such designations, rights and preferences established by the board may adversely affect our stockholders. In the event of issuance, the preferred stock could be used, under certain circumstances, as a means of discouraging, delaying or preventing a change of control of the Company. Although we have no present intention to issue any shares of preferred stock in addition to the currently outstanding preferred stock, we may issue preferred stock in the future.
Some of the rights granted to the holders of our Series A-1 Preferred Stock and Series B Preferred Stock could prevent a potential acquirer from buying our Company.
Holders of our Series A-1 and Series B Preferred Stock have the right to block the Company from consummating a merger, sale of all or substantially all of its assets or recapitalization. Accordingly, the holder of our Series A-1 Preferred Stock and Series B Preferred Stock could prevent the consummation of a transaction in which our stockholders could receive a substantial premium over the current market price for their shares.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters and United States operations group and administrative functions are based in offices of approximately 5,038 square feet in our Cary, North Carolina office pursuant to a lease which expired in 2010. The Company entered into an amendment with its landlord and renewed its lease through 2014. We also believe that our present facilities are suitable for continuing our existing and planned operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4.
ITEM 4. [RESERVED]
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, 2010 and 2009.
The closing price of the common stock on March 20, 2011 was $0.07 per share.
Dividends and Record Stockholders
We have never declared or paid any cash dividends on our common stock. We anticipate that all of our earnings will be retained for the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. As of March 20, 2011, we had 202 registered stockholders of record.
Recent Sales of Unregistered Securities
Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2010, about shares of Common Stock outstanding and available for issuance under the Company’s existing equity compensation plans: the 2007 Cicero Stock Option Plan, the Level 8 Systems, Inc. 1997 Stock Option Incentive Plan, the 1995 Non-Qualified Option Plan and the Outside Director Stock Option Plan.
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 XM product. Cicero XM enables businesses to transform human interaction across the enterprise. Cicero XM enables the flow of data between different applications, regardless of the type and source of the application, eliminating redundant entry and costly mistakes. Cicero XM automates up and down-stream process flows, enforcing compliance and optimizing handle time and provides a task-oriented desktop, reducing training time and enabling delivery of best in class service. Cicero XM captures real-time information about each interaction, guiding the business user through an activity and capturing usage data to spot trends and forecast problems before they occur.
Results of Operations
The following table sets forth, for the years indicated, the Company's results of continuing operations expressed as a percentage of revenue and presents information for the three categories of revenue. The results listed for 2009 do not include the full software suite of Cicero XM since the acquisition of the SOAdesk LLC assets did not occur until January 2010. The results for 2009 only include the Cicero Integrator software from the Cicero XM suite.
The following table sets forth data for total revenue for continuing operations by geographic origin as a percentage of total revenue for the periods indicated:
Years Ended December 31, 2010 and 2009
Revenue and Gross Margin. The Company has three categories of revenue: software products, maintenance, and services. Software products revenue is comprised primarily of fees from licensing the Company's proprietary software products. Maintenance revenue is comprised of fees for maintaining, supporting, and providing periodic upgrades to the Company's software products. Services revenue is comprised of fees for consulting and training services related to the Company's software products.
The Company's revenues vary from quarter to quarter, due to market conditions, the budgeting and purchasing cycles of customers and the effectiveness of the Company’s sales force. The Company does not have any material backlog of unfilled software orders and product revenue in any period and is substantially dependent upon orders received in that quarter. Because the Company's operating expenses are based on anticipated revenue levels and are relatively fixed over the short term, variations in the timing of the recognition of revenue can cause significant variations in operating results from period to period. Fluctuations in operating results may result in volatility of the price of the Company's common stock.
Total revenues increased 19.1% from $2,498,000 in 2009 to $2,976,000 in 2010. Revenues decreased 27.6% from $3,452,000 in 2008 to $2,498,000 in 2009. The increase in revenues is due to increase in software sales and maintenance revenues due to the introduction of an expanded product line of our software. The decrease in revenues in 2009 is primarily attributable to a decrease in software sales partially offset by an increase in maintenance revenue due to a tiered increase in an existing maintenance agreement and renewals of maintenance agreements. Gross profit margin was 42% and 43% for 2010 and 2009, respectively.
Software Products. Software products revenue increased 152% in 2010 from $431,000 in 2009 to $1,086,000 in 2010. Software product revenue decreased from $1,467,000 in 2008 to $431,000 in 2009 or approximately 71%. The increase in software revenue in 2010 reflects the expanded product suite as a result of the acquisition of the assets of SOAdesk LLC in January 2010. The decrease in software revenue in 2009 is partially attributable to an overall economic slowdown as many companies’ operating and capital budgets were either reduced or frozen.
The gross margin on software products was 38% for the year ended December 31, 2010 and 96% for the year ended December 31, 2009. Cost of software is composed primarily of amortization of the intangible assets acquired as part of the SOAdesk LLC transaction in January 2010. The Company amortizes its intangibles assets over a period of three years.
The Company expects to see an increase in software sales coupled with improving margins on software products as Cicero XM gains acceptance in the marketplace. The Company’s expectations are based on its review of the sales cycle that has developed around the Cicero XM product since being released by the Company, its review of the pipeline of prospective customers and their anticipated capital expenditure commitments and budgeting cycles, as well as the status of in-process proof of concepts or beta sites with select corporations.
Maintenance. Maintenance revenues for the year ended December 31, 2010 increased 21% or $245,000 from $1,182,000 in 2009 to $1,427,000 in 2010. Maintenance revenues for the year ended December 31, 2009 increased $309,000 or approximately 35% from 2008. The increase in maintenance revenues for 2010 is primarily attributed to the increase in new software sales and a tiered increase in the maintenance contract with Merrill Lynch. The increase in maintenance revenues for 2009 is primarily attributable to a tiered increase in the Merrill Lynch agreement, and renewals of expiring maintenance agreements.
Cost of maintenance is comprised of personnel costs and related overhead and the cost of third-party contracts for the maintenance and support of the Company’s software products. The Company experienced a gross margin on maintenance products of 90% and 82% for 2010 and 2009, respectively.
Maintenance revenues are expected to increase as a result of our expected increase in sales of the CiceroXM products. The cost of maintenance should increase slightly.
Services. Services revenue for the year ended December 31, 2010 decreased by approximately 48% or $422,000 from $885,000 in 2009 to $463,000 in 2010. Services revenue for the year ended December 31, 2009 decreased by $227,000 or approximately 20% over the same period in 2008. The decrease in services revenue in 2010 is primarily attributable to general reductions in consulting contracts with existing customers. The decrease in services revenue in 2009 is primarily attributable to lower software product sales as well as general reductions in consulting contracts with existing customers.
Cost of services primarily includes personnel and travel costs related to the delivery of services. Services gross margin loss was 97% and 34% for fiscal 2010 and 2009, respectively. The decrease in gross margin from 2009 to 2010 is due to the decrease in service revenue primarily due to reduction in consulting contracts. The decrease in gross margin from 2008 to 2009 is due to the decrease in service revenue primarily due to lower software sales and reduction in consulting contracts.
Services revenues are expected to increase as the Cicero XM product gains acceptance.
Sales and Marketing. Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses increased 64% or approximately $775,000 to $1,978,000 in 2010 and 26% or approximately $251,000 to $1,203,000 in 2009. The increase in sales and marketing is due to increase in headcount in support of the acquisition of SOAdesk assets, commissions on greater sales in 2010, and greater advertising and trade show participation in support of the introduction of Cicero XM. The increase in sales and marketing in 2009 is primarily driven by an increase in marketing and trade show participation.
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 62% or $336,000 to $876,000 in 2010 as compared to 2009 and decreased 12% or $75,000 to $540,000 in 2009 as compared to 2008. The increase in costs in 2010 is due to an increase in headcount of four employees in support of the acquisition of SOAdesk assets. The decrease in costs in 2009 is primarily due to lower headcount and stock option expense for options issued in 2007 being fully expensed.
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 for the year ended December 31, 2010 decreased by 4% or $50,000 to $1,260,000 over 2009. The decrease is primarily due to a reduction in stock option expenses. General and administrative expenses for the year ended December 31, 2009 increased by 1% or $9,000 to $1,310,000 over 2008. The increase in general administrative costs is primarily due to higher costs due to the annual shareholder meeting partially offset by a reduction in stock option expense as options issued in 2007 were fully expensed.
General and administrative expenses are expected to remain fairly static going forward.
Provision for Taxes. The Company’s effective income tax rate for continuing operations differs from the statutory rate primarily because an income tax benefit was not recorded for the net loss incurred in 2010 and 2009. Because of the Company’s inconsistent earnings history, the deferred tax assets have been fully offset by a valuation allowance.
Other Income/(Charges). Other income (net) increased $3,170,000 in 2010 over 2009. The increase is primarily caused by an adjustment to the SOAdesk LLC earn-out of $1,050,000 along with $1,712,000 of write offs of accounts payables that were in excess of 7 years old. The Company has not had any contact from these vendors and has taken the position that the statute of limitations precludes any vendor from enforcing collection on these amounts.
Interest expense increased $457,000 from $283,000 in 2009 to $740,000 in 2010 due to the increase in debt obligations incurred by the Company.
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 $43,000 on December 31, 2010 compared with $12,000 on December 31, 2009, an increase of $31,000. The Company incurred a net loss of approximately $459,000 for the year ended December 31, 2010 in addition to net losses of approximately $1,280,000 for the previous fiscal year. The Company has experienced negative cash flows from operations for the past three years. At December 31, 2010, the Company had a working capital deficiency of approximately $6,526,000.
Operating activities utilized approximately $1,676,000 in cash, which was primarily comprised of the loss from operations of $459,000, and non-cash income for write off of accounts payable balances of $1,712,000, write off of certain royalty expenses of $298,000 and an adjustment of $1,050,000 for the earn out contingency associated with the SOAdesk acquisition. This was offset by non-cash charges for depreciation of $21,000 and amortization of approximately $673,000, stock compensation expense of $103,000, and amortization of debt discount on Preferred B Stock of $175,000. In addition, the Company had a decrease in accounts receivable of $88,000, a decrease in prepaid and other assets of $66,000, an increase of trade payables of $64,000, an increase of other accruals of $522,000 and an increase of deferred revenue of $131,000.
The Company utilized approximately $22,000 in cash in the purchase of updating the Company’s network equipment and furniture. Additionally, the Company acquired the assets of SOAdesk which included a $300,000 payment.
Financing Activities
The Company funded its cash needs during the year ended December 31, 2010 with cash on hand from December 31, 2009, as well as through the use of proceeds from the issuance of Series B preferred stock in the aggregate amount of $700,000 and other short term borrowings of $1,329,000, net of repayments.
The Company funded its cash needs during the year ended December 31, 2009 with cash on hand from December 31, 2008, as well as through the use of proceeds from several secured promissory notes in the aggregate amount of $750,000 and other short term borrowings in the amount of $446,000, net of repayments.
In April 2010, the Company issued to a certain accredited investor 1,333 shares of Series B Convertible Preferred Stock at $150 per share for a total of $200,000. The Series B Convertible Preferred Stock bears an annual dividend of 8%. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. As part of the Series B stock offering, the Company also issued warrants to purchase common stock of the Company at a strike price of $0.25 per share. The warrants expire in five years. 333,333 warrants were issued to this investor.
In January 2010, the Company issued to certain accredited investors 9,067 shares of Series B Convertible Preferred Stock at $150 per share for a total of $1,360,000 including $500,000 in cash, the cancellation of $710,000 of existing indebtedness and the cancellation of a note of $150,000 to memorialize an advance of payment for Series B Stock prior to issuance. The Series B Convertible Preferred Stock bears an annual dividend of 8%. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. As part of the Series B stock offering, the Company also issued warrants to purchase common stock of the Company at a strike price of $0.25 per share. 2,266,667 warrants were issued to these investors. Of the $1,360,000 in Series B Convertible Preferred Stock issued, the Company’s Chairman, Mr. John Steffens invested $910,000 through a combination of $200,000 in cash and $710,000 in the conversion of debt.
In March 2009, the Company entered into several secured Promissory Notes with certain investors in the aggregate amount of $750,000. The Notes bear interest at 15% and mature on January 31, 2012. The Notes are secured by the amount due the Company under its support agreement with Merrill Lynch. In addition, each investor was issued a warrant to purchase common stock of the Company. Under the terms of the warrant, which expires in five years, each Note holder is entitled to purchase 1,000 shares of Cicero common stock for every $1,000 of principal due under the Note. The exercise price on the warrant is $0.20 per share. The shares of common stock underlying the warrants have registration rights and a cashless exercise provision in the event no registration statement is effective for resales, if required.
The Company maintains a Revolving Note Agreement with an Investor in which the Company may from time to time borrow up to $500,000. The borrowings are secured by any outstanding receivables at the time of the loans. The loans bear interest at 36% per annum. At December 31, 2010, $300,000 was due and outstanding under the Revolving Note agreement.
In October 2007, the Company and BluePhoenix entered into a Note payable in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of the Company’s common stock in exchange for $650,000 paid to Bank Hapoalim to retire that indebtedness. Of the new note payable to BluePhoenix, approximately $350,000 was due on January 31, 2009 and the balance is due on December 31, 2011. In March 2008, the Company and BluePhoenix agreed to accelerate the principal reduction payment of $350,000 due on January 31, 2009 and $200,000 was paid in March 2008. The Company paid $100,000 in January 2009. BluePhoenix agreed to convert $50,000 of the repayment into 195,848 shares of the Company’s common stock in July 2008. As of December 31, 2010, a total of $671,000 was due under the Note.
In October 2007, the Company entered into a Long Term Promissory Note in the amount of $300,000 with Mr. John L Steffens, our chairman. The Note bears interest at 3% per annum and had an original maturity date of October 30, 2009. In order to bring the interest rate on the Note in compliance with arm’s length transactions, the Company also issued 188,285 warrants to purchase the Company’s common stock at $0.18 each. The warrants were valued using the Black- Scholes method and a fair value of $34,230 was charged to stock compensation expense in the fourth quarter of 2007. The warrants expire in 10 years. The Company used the proceeds from that loan to pay down the debt to Bank Hapoalim as noted above. In March 2009, the Company and Mr. Steffens agreed to extend the maturity on the above Note to October 2010. In January 2010, Mr. Steffens agreed to convert his note into Series B Convertible Preferred Stock.
The Company believes that its financing activities and capitalization structure will have a positive impact on the future operations of the Company and its ability to raise additional capital, however, there can be no assurance that management will be successful in executing as anticipated or in a timely manner, especially in light of the continued tightness in the global credit markets as a result of the recent economic crisis. If these strategies are unsuccessful, the Company may have to pursue other means of financing that may not be on terms favorable to the Company or its stockholders. The Company has repositioned itself in the marketplace as a result of the acquisition of the assets of SOAdesk along with its key personnel. By combining the SOAdesk products with the Cicero legacy products, the Company is able to offer a complete Customer Experience Management suite of products. The new products have already received awards from within the industry and new customers have contracted to use the products, thereby generating new revenues. The Company anticipates that it will raise additional funds in the next several months however, there can be no assurance the Company will be able to do so. Despite the recent additions of several new clients, the Company continues to struggle to gain additional sources of liquidity on terms that are acceptable to the Company. As such, there is substantial doubt of the Company’s ability to continue as a going concern.
SOAdesk Transaction
On January 15, 2010, the Company entered into an Asset Purchase Agreement with SOAdesk, LLC (“SOAdesk”) and Vertical Thought, Inc. (“VTI” and, together with SOAdesk, the “Sellers”), pursuant to which the Company acquired the Sellers’ “United Desktop” and “United Data Model” software programs, as well as substantially all of the other assets owned by the Sellers directly or indirectly used (or intended to be used) in or related to Sellers’ business of providing customer interaction consulting and technology services for organizations and contact centers throughout the world (the “Business”). The Company also assumed certain liabilities of the Sellers related to the Business, as described in the Asset Purchase Agreement.
The aggregate consideration payable by the Company to the Sellers consists of the following:
· $300,000 paid in cash to the Sellers on the closing date;
· an unsecured convertible note in the aggregate principal amount of $700,000, payable to SOAdesk, with an annual interest rate of 5%, and convertible into shares of the Company’s Series B Preferred Stock (the “Convertible Note”);
· $525,000, payable in cash to SOAdesk on March 31, 2010;
· an unsecured convertible note in the aggregate principal amount of $1,000,000, payable to SOAdesk and convertible into shares of the Company’s Common Stock; and
· contingent earn-out payments of up to $2,410,000 based on certain product and enterprise revenue performance targets being met.
On March 31, 2010, the maturity date of the Convertible Note was extended to September 30, 2010 and then subsequently was further extended to March 31, 2011. Furthermore, the terms of the Asset Purchase Agreement were amended and the Company issued a new $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment. This new note, which carries an annual interest rate of 5%, is payable in shares of the Company’s Series B Preferred Stock and initially matured on June 30, 2010. In November 2010, the Company pre-paid $100,000 of principal due on this note. The maturity on this note was subsequently extended to March 31, 2011. In March 2011, the maturity date of both these notes was further extended to March 31, 2012. In connection with the extension of the maturity dates, the Company issued a five-year warrant to SOAdesk to purchase up to 100,000 shares of common stock at an exercise price of $0.08 per share.
At December 31, 2010, the Company assessed the probability of the earn-out targets being attained and accordingly adjusted the accrued earn-out liability down to $789,000.
Off Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements. We have no subsidiaries or other unconsolidated limited purpose entities, and we have not guaranteed or otherwise supported the obligations of any other entity.
Significant Accounting Policies and Estimates
The policies discussed below are considered by us to be critical to an understanding of our financial statements because they require us to apply the most judgment and make estimates regarding matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. With respect to the policies discussed below, we note that because of the uncertainties inherent in forecasting, the estimates frequently require adjustment.
Our financial statements and related disclosures, which are prepared to conform to accounting principles generally accepted in the United States of America, require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and accounts receivable and expenses during the period reported. We are also required to disclose amounts of contingent assets and liabilities at the date of the financial statements. Our actual results in future periods could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the Consolidated Financial Statements in the period they are determined to be necessary.
We consider the most significant accounting policies and estimates in our financial statements to be those surrounding: (1) revenue recognition; (2) allowance for doubtful trade accounts receivable; (3) capitalization and valuation of software product technology; and (4) valuation of deferred tax assets. These accounting policies, the basis for any estimates and potential impact to our Consolidated Financial Statements, should any of the estimates change, are further described as follows:
Revenue Recognition. Our revenues are derived principally from three sources: (i) license fees for the use of our software products; (ii) fees for consulting services and training; and (iii) fees for maintenance and technical support. We generally recognize revenue from software license fees when a license agreement has been signed by both parties, the fee is fixed or determinable; collection of the fee is probable, delivery of our products has occurred and no other significant obligations remain. We do not have multiple-element arrangements.
Revenues from services include fees for consulting services and training. Revenues from services are recognized on either a time and materials or percentage of completion basis as the services are performed and amounts due from customers are deemed collectible and non-refundable.
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.
Capitalization and Valuation of Software Product Technology. Our policy on capitalized software costs determines the timing of our recognition of certain development costs. In addition, this policy determines whether the cost is classified as development expense or cost of software revenue. Management is required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization. Additionally, we review software product technology assets for net realizable value at each balance sheet date. Should we experience reductions in revenues because our business or market conditions vary from our current expectations, we may not be able to realize the carrying value of these assets and will record a write down at that time.
Valuation of Deferred Tax Assets. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to the extent that it is more likely than not, that we will be unable to utilize deferred income tax assets in the future. At December 31, 2010, we had a valuation allowance of $98,740,000 against $98,740,000 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, 2010, the Company has net operating loss carryforwards of approximately $238,032,000 which may be applied against future taxable income. These carryforwards will expire at various times between 2011 and 2030. A substantial portion of these carryforwards is limited to future taxable income of certain of the Company’s subsidiaries or limited by Internal Revenue Code Section 382. Thus, the utilization of these carryforwards cannot be assured.
Recent Accounting Pronouncements:
In December 2010 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-28, “Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update will be effective for fiscal years beginning after December 15, 2010. The adoption of this standard is still being evaluated by the Company to determine if it will have a material impact on the Company’s consolidated financial position and results of operations.
In February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements." ASU 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard had no effect on our consolidated financial position or results of operations.
The FASB has published FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. FASB Accounting Standards Update 2009-13 is effectively prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have any impact on the Company’s consolidated financial position and results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8.
ITEM 8. 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, 2010. 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, 2010, 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, Marcum LLP, and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors have free access to the Audit Committee.
(b) Management’s Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s consolidated financial position and results of operations for the periods and as of the dates stated therein.
(c) Management’s Assessment of Internal Control over Financial Reporting
The management of Cicero Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
Under the direction of our Chief Executive Officer and Chief Financial Officer, management completed an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control-Integrated Framework, published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and has determined that the Company’s system of internal control over financial reporting was effective as of December 31, 2010.
(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. Steffens was appointed to our Board of Directors on May 16, 2007 and is the Founder and Managing Director of Spring Mountain Capital, L. P. Prior to establishing Spring Mountain Capital, Mr. Steffens spent 38 years at Merrill Lynch & Co., where he held numerous senior management positions, including President of Merrill Lynch Consumer Markets, which was later named the Private Client Group, from July 1985 until April 1997, and both Vice Chairman of Merrill Lynch & Co., Inc. (the parent company) and Chairman of its U.S. Private Client Group from April 1997 until July 2001. Mr. Steffens was elected a member of the Board of Directors of Merrill Lynch & Co., Inc. in April 1986 and served on the board until July 2001. Mr. Steffens was Chairman of the Securities Industry Association during 1994 and 1995, and is currently a Trustee of the Committee for Economic Development. He is the National Chairman Emeritus of the Alliance for Aging Research and serves on the Board of Aozora Bank in Japan. Mr. Steffens graduated from Dartmouth University in 1963 with a B.A. degree in Economics. He also attended the Advanced Management Program of the Harvard Business School in 1979. We believe Mr. Steffen’s qualifications to serve on our Board of Directors include his experience in leading complex enterprises and his experience as a senior executive.
John P. Broderick
Director since July 2005.
Mr. Broderick is currently the Chief Executive Officer and Chief Financial Officer of the Company and is also a director. Mr. Broderick has served as the Chief Operating Officer of the Company since June 2002, 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 (NASDAQ: PROG) international software marketer. Mr. Broderick received his B.S. in accounting from Villanova University. We believe Mr. Broderick’s qualifications to serve on our Board of Directors include his intimate knowledge of our operations as a result of day to day leadership as our Chief Executive Officer.
Antony Castagno
Director since March 2010.
Mr. Castagno is currently the Chief Technology Officer of the Company and is also a director. Mr. Castagno brings over 20 years of leadership and technology experience to Cicero and is responsible for the technology vision and execution for Cicero’s Customer Experience software. Prior to joining Cicero in January 2010, Mr. Castagno was the Chief Executive Officer of SOAdesk LLC, which pioneered the Intelligent Agent Desktop and Customer Interaction Management space. From 2005 to 2007, Mr. Castagno was the co-founder and Chief Technology Officer for OpenSpan, where he led the development of client side integration. Mr. Castagno graduated from the United States Military Academy at West Point in 1989 with a BS in Computer Science. Over the course of Mr. Castagno’s career, he has held leadership and technology positions with Deloitte, Verifone, ADP, Personic and was the founder of Vertical Thought an Atlanta-based technology incubator. We believe Mr. Castagno’s qualifications to serve on our Board of Directors include his experience as Chief Executive Officer of SOAdesk, LLC.
Anthony C. Pizi
Director since August 2000.
Mr. Pizi is presently the Chief Technology Officer for Wealth Management Americas of UBS, Inc. Mr. Pizi was formerly the CIO of the Asset Management Platform Services Group of Deutsche Bank AG from August 2007 to February 2011. Mr. Pizi was the Company’s Chief Information Officer until August 2007 and served as Chief Executive Officer and Chief Technology Officer from February 2001 to July 2005. Mr. Pizi also served as Chairman of the Board of Directors from December 1, 2000 until March 7, 2005 and from June 1, 2005 until July 22, 2005. Mr. Pizi has been a director since August 2000. Until December 2000, he was First Vice President and Chief Technology Officer of Merrill Lynch’s Private Client Technology Architecture and Service Quality Group. Mr. Pizi’s 16 years with Merrill Lynch included assignments in Corporate MIS, Investment Banking and Private Client. Mr. Pizi earned his B.S. in Engineering from West Virginia University. We believe Mr. Pizi’s qualifications to serve on our Board of Directors include his experience in various senior executive roles at UBS, Inc and Deutsche Bank AG.
Mark Landis
Director since July 2005.
Mr. Landis is the Managing Member of Catalyst Partners, a family investment vehicle created in 1995. From 2003 to 2005 he was Executive in Residence of The Jordan Company, a private equity firm based in New York City. In 2003 Mr. Landis retired from being President of the North American Security Division of Siemens Building Technologies, Inc., (SBT) having been C.E.O. of Security Technologies Group, Inc. (STG) which was acquired by SBT in 2001. Mr. Landis earned his B.A. from Cornell University and his Juris Doctorate from the University of Pennsylvania. Mr. Landis received his CPCU - Chartered Property and Casualty Underwriter from the American Institute for Property and Liability Underwriters. We believe Mr. Landis’ qualifications to serve on our Board of Directors include his experience in leading enterprises and his experience as a senior executive.
Bruce W. Hasenyager
Director since October 2002.
Mr. Hasenyager has been a director of the Company since October 2002. Since November 2004, Mr. Hasenyager has served as Principal of Bergen & Webster Executive Communications. Prior to that, he served as Director of Business and Technology Development at the Hart eCenter at Southern Methodist University (SMU) and Chief Operating Officer of the Guildhall at SMU. From April 1996 to April 2002, Mr. Hasenyager was a founder and served as Senior Vice President of Technology and Operations and Chief Technology Officer at MobilStar Network Corporation. Prior to April 1996, Mr. Hasenyager held executive and senior management positions in information technology at Chemical Bank, Merrill Lynch, Kidder Peabody, and Citibank. We believe Mr. Hasenyager’s qualifications to serve on our Board of Directors include his many years experience in the industry.
Jay R. Kingley
Director since November 2002.
Mr. Kingley has been a director of the Company since November 2002. Mr. Kingley is currently the Chief Executive Officer of Kingley Institute LLC, a medical wellness company. Prior to that, Mr. Kingley has served as CEO of Warren Partners, LLC, a software development and consultancy company. Mr. Kingley was Managing Director of a business development function of Zurich Financial Services Group from 1999-2001. Prior to joining Zurich Financial Services Group, Mr. Kingley was Vice President of Diamond Technology Partners, Inc., a management-consulting firm. We believe Mr. Kingley’s qualifications to serve on our Board of Directors include his experience as Chief Executive Officer of a software development and consultancy company.
Charles B. Porciello
Director since June 2005.
Mr. Porciello has been a director since June 6, 2005. From 2003 until 2011, Mr. Porciello had been the Chief Executive Officer of Pilar Services, Inc. From 2001 until 2003, he served as Chief Operating Officer of Enterprise Integration Corporation, a minority-owned IT services company. Prior to that Mr. Porciello worked for various IT companies, developing and facilitating in their growth. Mr. Porciello retired from the U.S. Air Force in 1982 after serving his country for twenty five years. Mr. Porciello graduated from the U.S. Military Academy with a B.S. in Engineering and received his Masters Degree in Management from the University of Nebraska. We believe Mr. Porciello’s qualifications to serve on our Board of Directors include his experience as Chief Operating Officer of an IT service company and his many years of experience in the industry.
Bruce D. Miller
Director since July 2005.
Mr. Bruce D. Miller has been a General Partner of Delphi Partners, Ltd. a privately-owned investment partnership since 1989. He is the treasurer and a director of American Season Corporation. Mr. Miller is a board member of Cape Air/Nantucket Airlines, Inc. Mr. Miller is a trustee of the Egan Maritime Foundation and is involved in other non-profit activities. Mr. Miller received his B.S. in Finance from Lehigh University and subsequently earned an M.B.A. from Lehigh. We believe Mr. Miller’s qualifications to serve on our Board of Directors include his experience as General Partner of a privately owned investment partnership.
John W. Atherton
Director since May 2006.
Mr. Atherton has been a director since May 12, 2006. Since 2005, Mr. Atherton has been the Vice President and Chief Financial Officer of CityFed Financial, a financial holding company, based in Nantucket, Massachusetts. He served as Chairman of CityFed Financial from 1991 until 2005. Mr. Atherton received his B.A. degree from Wesleyan University (Middletown, Connecticut) and an M.B.A. with Distinction from Babson College (Wellesley, Massachusetts). We believe Mr. Atherton’s qualifications to serve on our Board of Directors include his experience as Chief Financial Officer and Chairman of a financial holding company.
Don Peppers
Director since June 2007.
Mr. Peppers has been a director since June 20, 2007. Mr. Peppers formed Marketing 1:1, Inc. in January 1992 which became Peppers & Rogers Group, a customer-centered management consulting firm with offices located in the United States, Europe, the Middle East, Latin America and South Africa. From October 1990 to January 1992, Mr. Peppers was the Chief Executive Officer of Perkins/Butler Direct Marketing, a top-20 U.S.-direct-marketing agency. Prior to marketing and advertising, he worked as an economist in the oil business and as the director of accounting for a regional airline. Mr. Peppers holds a Bachelor's Degree in astronautical engineering from the U.S. Air Force Academy, and a Master's Degree in public affairs from Princeton University's Woodrow Wilson School. We believe Mr. Pepper’s qualifications to serve on our Board of Directors include his years of experience providing strategic advisory services to organizations.
Mr. Mark Landis is the father-in-law of Mr. Anthony Pizi. There are no other family relationships between or among the above directors or executive officers.
Audit Committee
The Audit Committee is composed of Mr. Bruce Miller, Mr. Bruce Hasenyager and Mr. John W. Atherton. The responsibilities of the Audit Committee include the appointment of, retention, replacement, compensation and overseeing the work of the Company’s independent accountants and tax professionals. The Audit Committee reviews with the independent accountants the results of the audit engagement, approves professional services provided by the accountants including the scope of non-audit services, if any, and reviews the adequacy of our internal accounting controls. The Audit Committee met formally four times during our fiscal year ended December 31, 2010. Each member attended every meeting while they were appointed to the Audit Committee. The Board of Directors has determined that the members of the Audit Committee are independent as defined in Rule 4350(d) of the National Association of Securities Dealers’ listing standards. Mr. John W. Atherton was designated the “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S due to his experience as a Chief Financial Officer of a public company.
Code of Ethics and Conduct
Our Board of Directors has adopted a code of ethics and a code of conduct that applies to all of our directors, Chief Executive Officer, Chief Financial Officer, and employees. We will provide copies of our code of conduct and code of ethics without charge upon request. To obtain a copy of the code of ethics or code of conduct, please send your written request to Cicero Inc., Suite 542, 8000 Regency Pkwy, Cary, North Carolina 27518, Attn: Corporate Secretary. The code of ethics is also available on the Company’s website at www.ciceroinc.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers, directors and persons who own more than ten percent of the Company’s Common Stock (collectively, “Reporting Persons”) to file reports of ownership and changes in ownership with the SEC. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. Based solely on its review of the copies of such reports received by it and written representations all Section 16(a) reports were filed in a timely manner.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation Committee Membership and Organization
The Compensation Committee of the Board of Directors has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy. Its duties include:
●
Setting the total compensation of our Chief Executive Officer and evaluating his performance based on corporate goals and objectives;
●
Reviewing and approving the Chief Executives Officer’s decisions relevant to the total compensation of the Company’s other executive officer;
●
Making recommendations to the Board of Directors with respect to equity-based plans in order to allow us to attract and retain qualified personnel; and
●
Reviewing director compensation levels and practices, and recommending, from time to time, changes in such compensation levels and practices of the Board of Directors.
The members of the Compensation Committee are Messrs. Kingley and Porciello. None of the current members of the Compensation Committee has served as an executive officer of the Company, and no executive officer of the Company has served as a member of the Compensation Committee of any other entity of which Messrs. Kingley and Porciello have served as executive officers. Mr. Porciello is the former Chief Executive Officer of Pilar Services Inc., a reseller partner. We recognized no revenue with Pilar Services Inc. during 2010 and 2009. There were no interlocking relationships between us and other entities that might affect the determination of the compensation of the directors and executive officers of the Company. The Compensation Committee meets on an as necessary basis during the year.
General Compensation Philosophy
As a technology company, we operate in an extremely competitive and rapidly changing industry. We believe that the skill, talent, judgment and dedication of our executive officers are critical factors affecting the long term value of our company. The Compensation Committee’s philosophy and objectives in setting compensation policies for executive officers are to align pay with performance, while at the same time providing fair, reasonable and competitive compensation that will allow us to retain and attract superior executive talent. The Compensation Committee strongly believes that executive compensation should align executives’ interests with those of shareholders by rewarding achievement of specific annual, long-term and strategic goals by the Company, with an ultimate objective of providing long-term stockholder value. The specific goals that our current executive compensation program rewards are focused primarily on revenue growth and profitability. To that end, the Compensation Committee believes executive compensation packages provided by the Company to its executive officers should include a mix of both cash and equity based compensation that reward performance as measured against established goals. As a result, the principal elements of our executive compensation are base salary, non-equity incentive plan compensation, long-term equity incentives generally in the form of stock options and/or restricted stock and post-termination severance and acceleration of stock option vesting upon termination and/or a change in control.
Our goal is to maintain an executive compensation program that will fairly compensate our executives, attract and retain qualified executives who are able to contribute to our long-term success, induce performance consistent with clearly defined corporate goals and align our executives’ long-term interests with those of our shareholders. The decision on the total compensation for our executive officers is based primarily on an assessment of each individual’s performance and the potential to enhance long-term stockholder value. Often, judgment is utilized in lieu of total reliance upon rigid guidelines or formulas in determining the amount and mix of compensation for each executive officer. Factors affecting such judgment include performance compared to strategic goals established for the individual and the Company at the beginning of the year, the nature and scope of the executive’s responsibilities and effectiveness in leading initiatives to achieve corporate goals.
Role of Chief Executive Officer in Compensation Decisions
The Compensation Committee of our Board of Directors determines the base salary (and any bonus and equity-based compensation) for each executive officer annually. John Broderick, our Chief Executive Officer, confers with members of the Compensation Committee, and makes recommendations, regarding the compensation of all executive officers other than himself. He does not participate in the Compensation Committee's deliberations regarding his own compensation. In determining the compensation of our executive officers, the Compensation Committee does not engage in any benchmarking of total compensation or any material element of compensation.
Components of Executive Compensation
The compensation program for our Named Executive Officers consists of:
●
Base salary;
●
Non-equity incentive plan compensation;
●
Long-term incentive compensation; and
●
Other benefits
Base Salary
The Company provides our executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. The Compensation Committee considered the scope and accountability associated with each executive officer’s position and such factors as the performance and experience of each executive officer, individual leadership and level of responsibility when approving the base salary levels for fiscal year 2010.
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 chief executive officer’s incentive targets are designed to motivate management to exceed specific goals related to profitability objectives. We believe that these metrics closely correlate to stockholder value. We believe that these metrics also correlate to stockholder value and individual performance. Our Chief Executive Officer achieved a non-equity bonus of $25,000 in fiscal 2010. No executive achieved a non-equity incentive bonus in fiscal 2009.
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 2011.
Our Chief Technology Officer, Mr. Castagno, is eligible for non-equity incentive plan compensation with a target bonus of $75,000 for achieving targeted pretax income for fiscal 2011.
Long-Term Equity Incentive Awards
The Company presently has one equity-based compensation plan, entitled Cicero Inc. 2007 Employee Stock Option Plan. The Plan provides for the grant of incentive and non-qualified stock options to employees, and the grant of non-qualified options to consultants and to directors and advisory board members. In addition, various other types of stock-based awards, such a stock appreciation rights, may be granted under the Plan. The Plan is administered by the Compensation Committee of our Board of Directors, which determines the individuals eligible to receive options or other awards under the Plan, the terms and conditions of those awards, the applicable vesting schedule, the option price and term for any granted options, and all other terms and conditions governing the option grants and other awards made under the Plan. Under the 2007 Plan, 4,500,000 shares of our common stock were reserved for issuance pursuant to options or restricted stock awards; at December 31, 2010, 1,019,857 shares were available for future option grants and awards. The Company’s previous equity-based compensation plan, entitled Level 8 Systems 1997 Employee Stock Option Plan, expired during fiscal 2007. There are 21,814 options outstanding under that plan.
To date, awards have been mainly in the form of non-qualified stock options granted under the Plans. The Compensation Committee grant these stock-based incentive awards from time to time for the purpose of attracting and retaining key executives, motivating them to attain the Company's long-range financial objectives, and closely aligning their financial interests with long-term stockholder interests and share value.
Grants to other employees are typically made upon initial employment and then periodically as the Compensation Committee so determines. The Compensation Committee has empowered our Chief Executive Officer to issue grants of up to 75,000 options to new employees at the fair market value of the stock on the date of employment. Any proposed option grants in excess of that amount require Compensation Committee approval. Our stock options typically vest over two years with one third being immediately vested upon the date of grant and one third vesting on each of the next two anniversaries of the date of grant. During fiscal 2010, the Company granted options to purchase 1,444,750 shares to employees.
We account for equity compensation paid to all of our employees under the rules of Financial Accounting Standards Board guidance now codified as ASC 718 “Compensation - Stock Compensation”, which requires us to estimate and record compensation expense over the service period of the award. All equity awards to our employees, including executive officers, and to our directors have been granted and reflected in our consolidated financial statements, based upon the applicable accounting guidance, at fair market value on the date of grant. Generally, the granting of a non-qualified stock option to our executive officers is not a taxable event to those employees, provided, however, that the exercise of such stock would result in taxable income to the optionee equal to the difference between the fair market value of the stock on the exercise date and the exercise price paid for such stock. Similarly, a restricted stock award subject to a vesting requirement is also not taxable to our executive officers unless such individual makes an election under section 83(b) of the Internal Revenue Code of 1986, as amended. In the absence of a section 83(b) election, the value of the restricted stock award becomes taxable to the recipient as the restriction lapses.
Other Benefits
Our executive officers participate in benefit programs that are substantially the same as all other eligible employees of the Company.
The following summary compensation table sets forth the compensation earned by all persons serving as the Company’s executive officers during fiscal year 2010 and 2009.
Summary Compensation Table
_____________
* Mr. Castagno joined our Company in January 2010.
(1)
Represents the aggregate grant date fair value of stock option awards granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation - Stock Compensation. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model.
(2)
Non-equity incentive plan compensation includes a bonus for certain revenue transactions for named executive earned during fiscal year ended December 31, 2010. The revenue transaction was the acceptance of the first contract greater than $300,000.
(3)
Other compensation includes the Company’s portion of major medical insurance premiums and long term disability premiums for named executives during fiscal year ended December 31, 2010 and 2009, respectively.
Grants of Plan Based Awards
The Company awarded 75,000 stock options to the named executives in fiscal 2010. The Company did not award any stock options to the named executive during fiscal 2009. The Company did not award any stock appreciation rights (“SARs”) during fiscal 2010 and 2009.
The following table presents the number and values of exercisable options as of December 31, 2010 by the named executive.
Outstanding Equity Awards at December 31, 2010
________________
(1)
These options were granted on May 17, 2001. This stock option vested and became exercisable in four equal installments with the first installment vesting on May 17, 2002.
(2)
These options were granted on September 25, 2001. This stock option vested and became exercisable in four equal annual installments with the first installment vesting on September 25, 2002.
(3)
These options were granted on December 3, 2001. This stock option vested and became exercisable in three equal annual installments with the first installment vesting on December 3, 2001.
(4)
These options were granted on July 8, 2002. This stock option vested and became exercisable in three equal annual installments with the first installment vesting on July 8, 2002.
(5)
These options were granted on April 24, 2003. This stock option vested and became exercisable in three equal annual installments with the first installment vesting on April 24, 2003.
(6)
These options were granted on February 18, 2004. This stock option vested and became exercisable in three equal annual installments with the first installment vesting on February 18, 2004.
(7)
These options were granted on August 17, 2007. This stock option vests in three equal installments with the first installment vesting on August 17, 2007.
(8)
These options were granted on August 20, 2010. This stock option vests in three equal installments with the first installment vesting on August 20, 2010.
(9)
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.
Options Exercised and Stock Vested
The named executives did not exercise any options during the year ended December 31, 2010. Mr. Broderick and Mr. Castagno have 586,969 and 25,000 outstanding options respectively at December 31, 2010.
Employment Agreements, Termination of Employment and Change-In-Control Arrangements
Under the employment agreement between the Company and Mr. Broderick effective January 1, 2011, we agreed to pay Mr. Broderick an annual base salary of $175,000 and performance bonuses in cash of up to $275,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion. Upon termination of Mr. Broderick’s employment by the Company without cause, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within 30 days of termination and any unpaid deferred salaries and bonuses. In the event there occurs a substantial change in Mr. Broderick’s job duties, there is a decrease in or failure to provide the compensation or vested benefits under the employment agreement or there is a change in control of the Company, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within thirty (30) days of termination. Mr. Broderick will have thirty (30) days from the date written notice is given about either a change in his duties or the announcement and closing of a transaction resulting in a change in control of the Company to resign and execute his rights under this agreement. If Mr. Broderick’s employment is terminated for any reason, Mr. Broderick has agreed that, for two (2) year after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so.
Under the employment agreement between the Company and Mr. Castagno effective January 1, 2011, we agreed to pay Mr. Castagno an annual base salary of $150,000 and performance bonuses in cash of up to $250,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion. Upon termination of Mr. Castagno’s employment by the Company without cause, we agreed to pay Mr. Castagno an amount equivalent to six (6) months of Mr. Castagno’s then current base salary within in equal semi-monthly installments over the six (6) month period following the termination. If Mr. Castagno’s employment is terminated for any reason, Mr. Castagno has agreed that, for two (2) 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.
Estimated Payments and Benefits Upon Termination
The amount of compensation and benefits payable to named executive has been estimated in the table below. Since all options held by the executive are out-of-the-money, we have not estimated any value for option acceleration. Deferred compensation reflects amounts voluntarily deferred from salaries during fiscal 2004 and 2005 plus accrued but unpaid bonuses from 2003.
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.
Director Compensation
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. In August 2010, outside directors were each granted an option to purchase 7,000 shares of common stock, at a price equal to the fair market value on the date of grant. The value of each of these awards was $622. These options vested over three years with 33% vesting immediately and provided that the director is still a member of the Board of Directors. In addition, each outside director who serves on either the Audit Committee, the Compensation Committee or as the Chairman of the Board, were each granted an additional option to purchase 3,000 shares of common stock at a price equal to the fair value on the date of grant. The value of each of these awards was $267. These options vested over three years with 33% vesting immediately and provided that the director is still a member of the Board of Directors.
No cash compensation was paid during Fiscal 2010 by us to each of our non-employee directors who served during Fiscal 2010.
Non-employee Director Compensation Table for Year Ended December 31, 2010
_________
(1)
Represents the aggregate grant date fair value of stock option awards granted in the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation - Stock Compensation. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of February 28, 2011 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 named person has furnished stock ownership information to the Company. Beneficial ownership as reported in this section was determined in accordance with Securities and Exchange Commission regulations and includes shares as to which a person possesses sole or shared voting and/or investment power and shares that may be acquired on or before April 29, 2010 upon the exercise of stock options as well as exercise of warrants. The chart is based on 47,098,185 common shares, 1,543.618 Series A1 preferred shares and 10,400 Series B preferred shares outstanding as of February 28, 2011. 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.
2.
Includes 5,160,307 shares of common stock, 14,832 common shares issuable upon conversion of the Series A-1 Convertible Preferred Stock, 6,400,000 common shares issuable upon conversion of the Series B Convertible Preferred Stock, and 2,052,617 shares issuable upon the exercise of warrants and 11,333 shares subject to stock options. The exercise prices of the warrants are as follows: 14,332 at $10.00 per share, 188,285 at $0.18 per share, 250,000 at $0.20 per share and 1,600,000 at $0.25. The exercise price of the stock options is 8,000 at $0.51 per share and 3,333 at $0.09 per share.
3.
The address of Mr. Gallen is 299 Park Avenue New York, New York 10171.
4.
Ahab Partner, L.P. (“Partners”), Ahab International, Ltd. (“International”), Queequeg Partners, L.P. (“Queequeg”) and Queequeg, Ltd. (“Limited,” and collectively with Partners, International, and Queequeg, , the “Funds”) held in aggregate 8,896,136 shares of common stock, 1,667,000 common shares issuable upon conversion of the Series B Convertible Preferred Stock and warrants to acquire 416,667 shares of common stock. The exercise prices of the warrants are 416,667 at $0.25. Jonathan Gallen possesses the sole power to vote and the sole power to direct the disposition of all securities of the Company held by the Funds. In addition, Jonathan Gallen held the power to direct the disposition of 100,000 shares of common stock held in private investment account. Accordingly, for the purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, Mr. Gallen may be deemed to beneficially own 11,079,803 shares of common stock of the Company.
5.
The address of Mark and Carolyn P. Landis is 503 Lake Drive, Princeton, New Jersey 08540.
6.
Includes 3,748,155 shares of common stock, 1,326,136 common shares issuable upon conversion of the Series A-1 Convertible Preferred Stock, 30,572 shares of common stock issuable upon the exercise of warrants and 7,333 shares subject to stock options. The exercise prices of the warrants are $10.00 per share. The exercise price of the stock options is 5,000 at $0.51 per share and 2,333 at $0.09 per share. Disclaims beneficial ownership of 42,572 shares because they are anti-dilutive.
7.
Includes 2,328,767 shares of common stock issuable upon conversion of one-third of the principal of a $1,000,000 convertible promissory note and 7,831,667 common shares issuable upon the conversion of the Series B Convertible Preferred Stock issuable upon conversion of two convertible promissory notes in an aggregate principal amount of $1,125,000.
8.
Consists of 1,745,388 shares of common stock, 13,195 shares of common stock issuable upon the exercise of warrants and 11,333 shares subject to stock options. The exercise prices of the warrants are $10.00 per share. The exercise price of the stock options is 8,000 at $0.51 per share and 3,333 at $0.09 per share. Mr. Miller has sole or shared voting or dispositive power with respect to the securities held by Delphi Partners, Ltd., which holds 509,267 shares of common stock and 3,514 shares of common stock issuable upon the exercise of warrants with an exercise price at $10.00 per share.
9.
Includes 352,327 shares of common stock and 1,333,333 common shares issuable upon conversion of the Series B Convertible Preferred Stock, warrants to acquire 333,333 shares of common stock and 7,333 shares subject to stock options. The exercise prices of the warrants are 333,333 at $0.25 per share. The exercise price of stock options is 5,000 at $0.51 per share and 2,333 at $0.09 per share.
10.
Includes 1,274,951 shares of common stock, 111,016 common shares issuable upon conversion of the Series A-1 Convertible Preferred Stock, 11,667 shares of common stock issuable upon the exercise of warrants and 7,333 shares subject to stock options. The exercise prices of warrants are $10.00. The exercise price of the stock options is 5,000 at $0.51 and 2,333 at $0.09 per share of common stock.
11.
Includes 3,248 shares of common stock. 586,969 shares subject to stock options exercisable within sixty (60) days and 549,360 shares of restricted stock that is awarded upon resignation or termination and change of control. The exercise prices of stock options range from $0.09 to $404 per share of common stock.
12.
Includes 148,784 shares of common stock, and 100 shares of common stock held in a self-directed IRA and 11,333 shares subject to stock options. The exercise price of stock options is 8,000 at $0.51 per share and 3,333 at $0.09 per share of common stock.
13.
Consists of 32,652 shares of common stock and 12,333 shares subject to stock options. The exercise prices of stock options are as follows: 1,000 at $35.00 per share, 8,000 at $0.51 per share and 2,333 at $0.09 per share of common stock. Disclaims beneficial ownership of 1,000 shares of common stock because they are anti-dilutive.
14.
Consists of 80,286 shares of common stock and 11,333 shares subject to stock options. The exercise price of stock options is 8,000 at $0.51 per share and 3,333 at $0.09 per share of common stock.
15.
Consists of 25,000 shares subject to stock options. The exercise price of the stock options is $0.09 per share of common stock.
16.
Consists of 1,000 shares of common stock and 12,333 shares subject to stock options. The exercise prices of stock options are as follows: 1,000 at $34.00 per share, 8,000 at $0.51per share and 3,333 at $0.09 per share of common stock.
17.
Includes 1,000,000 common shares issuable upon conversion of the Series B Convertible Preferred Stock
18.
Includes shares issuable upon exercise of options and warrants exercisable within sixty (60) days as described in Notes 7-14 to our financial statements.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Loans from Related Parties
At December 31, 2009, the Company was indebted to John L. (Launny) Steffens in the amount of $710,000. The Notes bore interest rates from 3% to 12%.
All these notes were converted into 4,733 shares of Series B Convertible Preferred Shares at $150 per share in January 2010 as part of the Company’s issuance of Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock bears an annual interest of 8% and provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. The total principal converted was $710,000. Accrued interest of approximately $39,000 on these notes is still outstanding at December 31, 2010.
From April 2010 through December 2010, the Company entered into multiple short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The Notes bear interest at 12% per year and are unsecured. At December 31, 2010, the Company was indebted to Mr. Steffens in the amount of $1,665,000. The loans mature at various dates through March 31, 2011.
In March 2011, Mr. Steffens agreed to extend the maturity on these Notes until March 31, 2012.
At December 31, 2010 the Company was indebted to Mr. Steffens for $1,665,000 and had paid no interest in 2010.
During 2005, the Company entered into short term notes payable with Anthony Pizi, the Company’s former Chief Information Officer, for various working capital needs. The Notes bear interest at 1% per month and are unsecured. At December 31, 2010, the Company was indebted to Mr. Pizi in the amount of $9,000. No interest was paid in fiscal 2010.
Antony Castagno, the Company’s Chief Technology Officer, is part-owner of SOAdesk LLC. For a description of the transactions between the Company and SOAdesk, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - SOAdesk Transaction.
Director Independence
Our board of directors currently consists of eleven members. They are John L. Steffens, John P. Broderick, Antony Castagno, Mark Landis, Anthony C. Pizi, Bruce Hasenyager, Jay Kingley, Bruce D. Miller, Charles Porciello, John W. Atherton, and Don Peppers. Mr. Steffens is the Company’s Chairman of the Board, Mr. Broderick is the Company’s Chief Executive Officer and Chief Financial Officer and Mr. Castagno is the Company’s Chief Technology Officer. The Company’s stock is quoted on the Over The Counter Bulletin Board, which does not have director independence requirements. Under Item 407(a) of Regulation S-K, the Company has chosen to measure the independence of its directors under the definition of independence used by the American Stock Exchange, which can be found in the NYSE Amex Company Guide, §803(A)(2). Under such definition, Messrs. Steffens, Landis, Pizi, Hasenyager, Kingley, Miller, Porciello, Atherton and Peppers are independent directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Registered Public Accounting Firm
Marcum LLP audited our financial statements for the years ended December 31, 2010 and 2009.
Audit Fees
Audit fees include fees for the audit of the Company’s annual financial statements, fees for the review of the Company’s interim financial statements, and fees for services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements. The aggregate fees billed by Marcum LLP for professional services rendered to our company for the audit of the Company's annual financial statements for fiscal years 2010 and 2009 (and reviews of quarterly financial statements on form 10-Q) were $81,000 and $65,000, respectively.
Audit-Related Fees
Audit-related fees include fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements. There were no audit-related fees billed by Marcum LLP for fiscal years 2010 and 2009.
Tax Fees
Tax fees include fees for tax compliance, tax advice and tax planning. There were no fees billed by Marcum LLP for these services in 2010 and 2009.
Other Fees
All other fees include fees for all services except those described above. There were no other fees billed by Marcum LLP for fiscal year 2010 and 2009.
Determination of Auditor Independence
The Audit Committee considered the provision of non-audit services by Marcum LLP and determined that the provision of such services was consistent with maintaining the independence of Marcum 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 FINANCIAL STATEMENT SCHEDULES.
(A) Financial Statements
The following financial statements of the Company and the related reports of Independent Registered Public Accounting Firms thereon are set forth immediately following the Index of Financial Statements which appears on page of this report:
Independent Registered Public Accounting Firm Report
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2010 and 2009
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2010and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
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
Exhibit
Number
Description
* 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.
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 on the dates indicated have signed the report below.
Signature
Title
Date
/s/John L. Steffens
Chairman of the Board
March 31, 2011
John L. Steffens
/s/ John P. Broderick
Chief Executive Officer/Chief Financial Officer (Principal Executive Officer)
March 31, 2011
John P. Broderick
/s/ Antony Castagno
Chief Technology Officer
March 31, 2011
Antony Castagno
/s/ Mark Landis
Director
March 31, 2011
Mark Landis
/s/ Anthony C. Pizi
Director
March 31, 2011
Anthony C. Pizi
/s/ Bruce Hasenyager
Director
March 31, 2011
Bruce Hasenyager
/s/ Jay Kingley
Director
March 31, 2011
Jay Kingley
/s/ Bruce D. Miller
Director
March 31, 2011
Bruce D. Miller
/s/ Charles Porciello
Director
March 31, 2011
Charles Porciello
/s/ John W. Atherton
Director
March 31, 2011
John W. Atherton
/s/ Don Peppers
Director
March 31, 2011
Don Peppers
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Stockholders of
Cicero Inc.
Cary, North Carolina
We have audited the accompanying consolidated balance sheets of Cicero Inc. and subsidiaries (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' deficit, comprehensive loss and cash flows for the years then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cicero Inc. and subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations and working capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Marcum LLP
Bala Cynwyd, Pennsylvania
March 31, 2011
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)
The accompanying notes are an integral part of the consolidated financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Non-Cash Investing and Financing Activities
During January 2010, the Company converted $860,000 of promissory notes into 5,733 shares of its Series B Convertible Preferred B stock.
During January 2010, the Company paid $300,000, entered into notes payable agreements of $2,225,000 and accrued $2,410,000 for an earn-out contingency to acquire substantially all the assets of SOAdesk LLC, which included $2,832,000 of Goodwill and $1,803,000 of software.
During April 2009, the Company issued 250,000 shares of common stock for the conversion of debt of $30,000 to an investor who had a short term promissory note with the Company.
During June 2009, the Company issued 85,789 shares of common stock for the conversion of debt of $22,000 to an investor who had a short term promissory note with the Company.
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.
Going Concern and Management Plans:
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred an operating loss of approximately $459,000 for the year ended December 31, 2010 and has experienced negative cash flows from operations for each of the years ended December 31, 2010 and 2009. At December 31, 2010, the Company had a working capital deficiency of approximately $6,526,000. Management feels that the Company has repositioned itself in the marketplace as a result of the acquisition of the assets of SOAdesk along with its key personnel. By combining the SOAdesk products with the Cicero legacy products, the Company is able to offer a complete Customer Experience Management suite of products. The new products have already received awards from within the industry and new customers have contracted to use the products, thereby generating new revenues. The Company anticipates that it will raise additional funds in the next several months however, there can be no assurance the Company will be able to do so. The Company has extended the maturity dates of several debt obligations that were due in 2011 to 2012, to assist with liquidity. Despite the recent additions of several new clients, the Company continues to struggle to gain additional sources of liquidity on terms that are acceptable to the Company. As such, there is substantial doubt of the Company’s ability to continue as a going concern.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All of the Company's subsidiaries are wholly-owned for the periods presented.
All significant inter-company accounts and transactions are eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates. Significant estimates include the recoverability of long-lived assets, valuation and recoverability of goodwill, stock based compensation, deferred taxes and related valuation allowances and valuation of equity instruments.
Financial Instruments:
The carrying amount of the Company’s financial instruments, representing accounts receivable, accounts payable and short-term debt approximate their fair value due to their short term nature.
The fair value and carrying amount of long-term debt were as follows:
Valuations for long-term debt are determined based on borrowing rates currently available to the Company for loans with similar terms and maturities.
Foreign Currency Translation:
The assets and liabilities of foreign subsidiaries are translated to U.S. dollars at the current exchange rate as of the balance sheet date. The resulting translation adjustment is recorded in other comprehensive income as a component of stockholders' equity. Statements of operations items are translated at average rates of exchange during each reporting period.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. The Company no longer has any foreign operations and any remaining assets were eliminated in the write off of discontinued operations in fiscal 2009.
Cash:
The Company places substantially all cash with various financial institutions. At times, such cash and cash equivalents may be in excess of FDIC insurance limits.
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 that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance of doubtful accounts and a credit to trade accounts receivable. Changes in the allowance for doubtful accounts have not been material to the financial statements.
Property and Equipment:
Property and equipment purchased in the normal course of business is stated at cost, and property and equipment acquired in business combinations is stated at its fair market value at the acquisition date. All property and equipment is depreciated using the straight-line method over estimated useful lives.
Expenditures for repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in the Consolidated Statements of Operations.
Software Development Costs:
The Company capitalizes certain software costs after technological feasibility of the product has been established. Generally, an original estimated economic life of three years is assigned to capitalized software costs, once the product is available for general release to customers. Costs incurred prior to the establishment of technological feasibility are charged to research and product development expense.
Capitalized software costs are amortized over related sales on a product-by-product basis using the straight-line method over the remaining estimated economic life of the product.
The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies.
Long-Lived Assets:
The Company reviews the recoverability of long-lived intangible assets when circumstances indicate that the carrying amount of assets may not be recoverable. This evaluation is based on various analyses including undiscounted cash flow projections. In the event undiscounted cash flow projections indicate impairment, the Company would record an impairment based on the fair value of the assets at the date of the impairment. The Company accounts for impairments under the Financial Accounting Standards Board ("FASB") guidance now codified as ASC 360 “Property, Plant and Equipment”.
Revenue Recognition:
Our revenues are derived principally from three sources: (i) license fees for the use of our software products; (ii) fees for consulting services and training; and (iii) fees for maintenance and technical support. We generally recognize revenue from software license fees when a license agreement has been signed by both parties, the fee is fixed or determinable; collection of the fee is probable, delivery of our products has occurred and no other significant obligations remain. We do not have multiple-element arrangements.
Revenue from recurring maintenance contracts is recognized ratably over the maintenance contract period, which is typically twelve months. Maintenance revenue that is not yet earned is included in deferred revenue.
Revenue from consulting and training services is recognized as services are performed. Any unearned receipts from service contracts result in deferred revenue.
Cost of Revenue:
The primary component of the Company's cost of revenue for its software products is the amortization of software for the assets acquired from SOAdesk in January 2010. 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 $439,000 and $275,000, for the years ended December 31, 2010 and 2009, respectively.
Research and Product Development:
Research and product development costs are expensed as incurred.
Other Income/(Charges):
Other income (net) consists of an adjustment to the SOAdesk LLC earn-out of $1,050,000 along with $1,712,000 of write offs of accounts payables that were in excess of 7 years old. The Company has not had any contact from these vendors and has taken the position that the statute of limitations precludes any vendor from enforcing collection on these amounts.
Income Taxes:
The Company uses FASB guidance now codified as ASC 740 “Income Taxes”', to account for income taxes. This statement requires an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events, other than enactments of changes in the tax law or rates, are generally considered. A valuation allowance is recorded when it is ''more likely than not'' that recorded deferred tax assets will not be realized. (See Note 8.)
Loss Per Share:
Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities. During 2010 and 2009, 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:
In 2010, $117,000 was accrued for dividends on the Series B Preferred Stock. In 2009 no dividends were declared on preferred stock.
Stock-Based Compensation:
The Company adopted Financial Accounting Standards Board (“FASB”) guidance now codified as ASC 718 “Compensation - Stock Compensation”, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards under ASC 718. The Company granted 1,444,750 options in fiscal 2010 at an exercise price of $0.09 per share and recognized approximately $67,000 of stock-based compensation. The Company granted 475,000 options in fiscal 2009 at exercise prices between $.11 and $0.15 per share and recognized approximately $280,000 of stock-based compensation. Additionally, the Company recognized as stock-based compensation approximately $36,000 in fiscal 2010 and 2009 for the restricted shares issued in 2007 to John Broderick, the Chief Executive Officer. The Company also recognized approximately $62,000 as stock-based in compensation in 2009 for warrants issued in conjunction with promissory notes issued in 2009.
The fair value of the Company's stock-based awards to employees was estimated as of the date of the grant using the Black-Scholes option-pricing model, using the following weighted-average assumptions:
Recent Accounting Pronouncements:
In December 2010 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-28, “Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update will be effective for fiscal years beginning after December 15, 2010. The adoption of this standard is still being evaluated by the Company to determine if it will have a material impact on the Company’s consolidated financial position and results of operations.
In February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements." ASU 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard had no effect on the Company’s consolidated financial position or results of operations.
The FASB has published FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. FASB Accounting Standards Update 2009-13 is effectively prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of this standard is not expected to have any impact on the Company’s consolidated financial position and results of operations.
NOTE 2. SOAdesk ACQUISITION
On January 15, 2010, the Company entered into an Asset Purchase Agreement with SOAdesk, LLC (“SOAdesk”) and Vertical Thought, Inc. (“VTI” and, together with SOAdesk, the “Sellers”), pursuant to which the Company acquired the Sellers’ “United Desktop” and “United Data Model” software technology, as well as substantially all of the other assets owned by the Sellers directly or indirectly used (or intended to be used) in or related to Sellers’ business of providing customer interaction consulting and technology services for organizations and contact centers throughout the world (the “Business”). The Company also assumed certain liabilities of the Sellers related to the Business, as described in the Asset Purchase Agreement.
The aggregate consideration payable by the Company to the Sellers consists of the following:
· $300,000 paid in cash to the Sellers on the closing date;
· an unsecured convertible note in the aggregate principal amount of $700,000, payable to SOAdesk, with an annual interest rate of 5% and an original maturity date of March 31, 2010. On March 31, 2010, the maturity date of the unsecured Convertible Note was extended from March 31, 2010 to September 30, 2010 and was secured by shares of the Company’s Series B Preferred Stock (the “Convertible Note”). In March 2011, the maturity date was extended to March 31, 2012;
· $525,000, payable in cash to SOAdesk on March 31, 2010 (subsequently converted into a new convertible promissory note as stated below);
· an unsecured convertible note in the aggregate principal amount of $1,000,000, payable to SOAdesk and convertible into shares of the Company’s Common Stock; and
· certain earn-out contingencies of $2,410,000 based on product and enterprise revenue performance targets being met.
The terms of the Asset Purchase Agreement were amended on March 31, 2010, and the Company issued a new $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment. This new note, which carries an annual interest rate of 5%, is convertible into shares of the Company’s Series B Preferred Stock (Note 6) at the holder’s option and originally matured on June 30, 2010. The Company paid principal in the amount of $100,000 in April 2010. On June 30, 2010, the new convertible note was amended to extend the maturity date from June 30, 2010 to September 30, 2010. As of September 30, 2010, the new convertible note was further amended to extend the maturity date from September 30, 2010 to March 31, 2011. The total outstanding debt as of December 31, 2010 is $425,000. In March 2011, the Company SOAdesk LLC agreed to extend the maturity date until March 31, 2012. In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company has determined the embedded conversion option is beneficial and has intrinsic value to the holder. The total debt discount to be recognized was $175,000 and the Company had reduced the Note by that amount and increased Additional Paid in Capital by the same amount. As of December 31, 2010, the company has fully amortized the debt discount of $175,000 in the statement of operations.
The Company is obligated to make additional payments of up to $2,410,000 over an 18 month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets. Such payments are payable quarterly during the eighteen month period over which the performance targets are being measured. The earn-out award is to be calculated, subject to adjustment, based upon the cumulative effect of achieved revenue performance targets during the applicable earn-out period. The obligation was determined by management after consultation with an independent appraiser using the income approach methodology analyzing the Company’s discounted cash flow and management’s input on probability of attaining the different revenue performance targets. As of December 31, 2010, the Company has determined that the earn-out targets originally recorded as part of the acquisition will not be completely met. The Company has therefore recorded a gain of $1,050,000 through its statement of operations from the reversal of part of the earn-out accrual. At December 31, 2010 the Company has recorded $571,000 in accounts payable for the earn-out earned through December 31, 2010. At December 31, 2010 the Company believes that the remaining targeted earn out of $789,000 will be achieved.
We account for contingent consideration payable to sellers of the acquired assets in accordance with the provisions of ASC Topic 805 “Business Combinations” to ensure that we account for any post combination payments made to sellers of acquired businesses as either additional purchase consideration or compensation based upon the (i) economic form of the transaction and (ii) subsequent involvement (if any) of the sellers in the business on a post combined basis. The following information was determined by an independent appraiser.
The following unaudited consolidated pro forma information gives effect to the acquisitions of substantially all the assets of SOAdesk LLC as if these transactions had occurred on January 1, 2009. The following pro-forma information as of December 31, 2010 and 2009, respectively, is presented for illustration purposes only and is not necessarily indicative of the results that would have been attained had the acquisition of this business been completed on January 1, 2009, nor are they indicative of results that may occur in any future periods. Results of operations of the acquired business are included in the condensed consolidated statement of operations from January 15, 2010, the date of acquisition. (in thousands)
Simultaneously with the acquisition of the assets of SOAdesk LLC, the Company also closed an initial round of Series B Convertible Preferred Stock, of approximately $1,560,000 including $700,000 in cash, the cancellation of $710,000 of existing indebtedness and the cancellation of a note of $150,000 to memorialize an advance of payment for Series B Stock prior to issuance. The Series B Convertible Preferred Stock bears an annual dividend of 8% and provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Of the $1.56 million raised, the Company’s Chairman, Mr. John Steffens invested $910,000 through a combination of cash and debt retirement. Dividends accrued at December 31, 2010 amounted to $117,000.
NOTE 3. ACCOUNTS RECEIVABLE
Trade accounts receivable was composed of the following at December 31 (in thousands):
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment was composed of the following at December 31 (in thousands):
Depreciation and amortization expense of property and equipment was $21,000 for the years ended December 31, 2010 and 2009.
NOTE 5. INTANGIBLE ASSET, NET AND GOODWILL
The Company accounts for goodwill in accordance ASC Topic 350 “Intangibles - Goodwill and Other” which requires that goodwill and intangible assets with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
Goodwill includes the excess of the purchase price over the fair value of net assets acquired of $2,832,000 in connection with the SOAdesk LLC acquisition in Note 2. The Codification requires that goodwill be tested for impairment at the reporting unit level. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.
The Company will review for possible goodwill impairment by comparing the fair value of the reporting unit to the carrying value of the respective net assets. If the fair value exceeds the carrying values of the net assets, no goodwill impairment is deemed to exist. If the fair values of the reporting units do not exceed the carrying values of the net assets, goodwill is tested for impairment and written down to its implied value if it is determined to be impaired. The Company performs an evaluation of its goodwill on an annual basis and on an interim basis if there has been a triggering event or other indication of impairment.
The Company’s intangible asset with a finite life in the amount of $2,103,000 is being amortized over its estimated useful life of 3 years for software acquired from SOAdesk LLC. Amortization expense for fiscal 2010 was $673,000, resulting in a net intangible asset of $1,430,000 at December 31, 2010. At December 31, 2010, the estimated future amortization expense for each of the succeeding years is as follows: $701,000 for fiscal years 2011 and 2012, and $28,000 for fiscal year 2013. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors.
Based upon our annual evaluation testing, we have determined that the fair value of goodwill and the intangible asset exceeds the carrying value of the net assets acquired as of December 31, 2010.
NOTE 6. SHORT-TERM DEBT
Term loan, notes payable, and notes payable to related party consist of the following at December 31 (in thousands):
(a)
At December 31, 2010, the Company was indebted to BluePhoenix Solutions for the remaining portion of the related long term debt of $671,000. (See Note 7)
(b)
In October 2007, the Company entered into a long-term unsecured note with John L. (Launny) Steffens, the Chairman of the Board of Directors, as part of the restructuring of the note payable to Bank Hapoalim. The note bears interest of 3% and matured in October 2009. In March 2009, the Company and Mr. Steffens agreed to extend the maturity on the above Note until October 2010. In April 2009, the Company awarded Mr. Steffens, in consideration for the extended maturity, 250,000 warrants to purchase the Company’s common stock at a price of $0.20 per share. These warrants expire in five years. The Company utilized the Black-Scholes formula to calculate the value of these warrants which amounted to $12,000 and were included in general and administrative expenses. At December 31, 2009, the Company was indebted to John L. (Launny) Steffens, the Chairman of the Board of Directors, for the current portion of the related long term debt of $300,000. (See Note 13)
From time to time from November 2007 through December 2009, Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The Notes bear interest at 12% per year and are unsecured. At December 31, 2009, the Company was indebted to Mr. Steffens in the amount of $410,000. (See Note 13)
All these notes were converted into 4,733 shares of Series B Convertible Preferred Shares at $150 per share in January 2010 as part of the Company’s issuance of Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock bears an annual interest of 8% and provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. The total principal converted was $710,000.
From time to time the Company entered into promissory notes with one of the Company’s directors and the former Chief Information Officer, Anthony Pizi. The notes bear interest at 12% per annum. As of December 31, 2010 and 2009, the Company was indebted to Anthony Pizi in the amount of $9,000.
(c)
The Company has issued a series of short term promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured. The notes in the amount of $703,000 bear interest between 10% and 36% per annum.
In July 2010 and August 2010 the Company entered into two promissory notes with two employees for various working capital needs. The Notes bear interest at 10% and 12% per year and are unsecured. As of December 31, 2010, the Company was indebted to these employees in the amount of $90,000.
NOTE 7. LONG-TERM DEBT
Long-term loan and notes payable to related party consist of the following at December 31(in thousands):
(a)
In October 2007, the Company entered into an unsecured note, with Blue Phoenix Solutions in the principal amount of $1,021,000 with interest at LIBOR plus 1% (approximately 2.2% at December 31, 2010) maturing in December 2011. Interest is payable quarterly. At December 31, 2010, the Company was indebted to BluePhoenix Solutions in the amount of $671,000 of which amount has been reclassified to short term debt (Note 6).
(b)
In January 2010, per the Asset Purchase Agreement, the Company entered into an unsecured convertible promissory note with SOAdesk for $700,000 with an annual interest rate of 5%. The note was to mature on June 30, 2010 but was subsequently amended to extend the maturity date to September 30, 2010 and to securitize it with shares of the Company’s Series B Preferred Stock. As of September 30, 2010, the maturity date was extended to March 31, 2011. In March 2011, the Company and SOAdesk LLC agreed to extend the maturity on the note to March 31, 2012. The note is convertible into shares of Series B Convertible Preferred Stock at the rate of one share per every $150 of principal and interest due under the note. The Company is obligated to repay any principal of the loan with fifty percent of any gross proceeds of any Series B Preferred capital raise through maturity of the note. The note is convertible at the holder’s option at any time or at maturity.
Also, as part of the Asset Purchase Agreement, the Company was to pay to the shareholders of SOAdesk LLC the sum of $525,000 on March 31, 2010. In March 2010, the terms of the Asset Purchase Agreement were amended and the Company issued a new $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment originally due on March 31, 2010. This new note, which carries an annual interest rate of 5%, is secured by shares of the Company’s Series B Preferred Stock. The note was to mature on June 30, 2010 but was subsequently amended to extend the maturity date to September 30, 2010. As of September 30, 2010, the maturity date was further extended to March 31, 2011. In March 2011, the Company and SOAdsek LLC agreed to extend the maturity on the note until March 31, 2012. The note is convertible into shares of Series B Convertible Preferred Stock at the rate of one share per every $150 of principal and interest due under the note. The Company is obligated to repay any principal of the loan with fifty percent of any gross proceeds of any Series B Preferred capital raise through maturity of the note. The note is convertible into Series B Preferred Stock at the holder’s option at any time or at maturity. In April 2010, the Company paid $100,000 against the principal resulting in the amount due of $425,000 at December 31, 2010. In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company has determined the embedded conversion option is beneficial and has intrinsic value to the holder. The total debt discount to be recognized is $175,000 and the Company has reduced the Note by that amount and increased Additional Paid in Capital by the same amount. As of December 31, 2010, the Company has amortized $175,000 in the statement of operations.
(c)
From time to time during 2010, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The Notes bear interest at 12% per year and are unsecured. At December 31, 2010 the Company was indebted to Mr. Steffens in the amount of $1,665,000. In March 2011 the Company and Mr. Steffens agreed to extend the maturity on the notes until March 31, 2012.
(d)
In March 2009, the Company entered into several secured Promissory Notes with certain investors in the aggregate amount of $750,000. The Notes bear interest at 15% and mature on January 31, 2012. The Notes are secured by the amount due under the Company’s support contract with Merrill Lynch. In addition, each investor was issued a warrant to purchase common stock of the Company. Under the terms of the warrant, which expires in five years, each Note holder is entitled to purchase 1,000 shares of Cicero common stock for every $1,000 of principal due under the Note. The exercise price on the warrant is $0.20 per share. The shares of common stock underlying the warrants have registration rights and a cashless exercise provision in the event no registration statement is effective for resales, if required. The Company has allocated the proceeds received from the Note and Warrant Offering based on relative fair value and is amortizing such amount under the terms of the notes as additional interest expense in the amount of $50,349. In February 2010, the Company reduced the principal indebtedness by $100,000. At December 31, 2010, the Company was indebted to these investors in the amount of $650,000.
In January 2010, as part of the Asset Purchase Agreement, the Company entered into an unsecured Convertible Promissory Note with SOAdesk in the amount of $1,000,000. The note bears interest at 5% and is due November 14, 2015. The note is only convertible into shares of the Company’s common stock at the rate of one share for every $0.15 of principal and interest due under the note. The note is convertible at the option of the holder with one-third convertible in January 2011, two-thirds convertible in January 2012, and the entire note convertible in January 2013 or at maturity.
Scheduled maturities of the above long-term debt are as follows:
NOTE 8. INCOME TAXES
The Company follows the provisions of FASB ASC Topic 740, “Income Taxes”, and recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. The Company applies ASC Topic 740 to all tax positions for which the statute of limitations remains open.
The Company has identified its federal tax return and its state tax return in North Carolina as “major” tax jurisdictions. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years 2008 through 2010, and may be subject to audits for amounts related to net operating loss carryforwards generated in periods prior to December 31, 2008. 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 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 2009 and 2010. 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 (liability) at December 31 were as follows:
At December 31, 2010, the Company had net operating loss carryforwards of approximately $238,032,000, which may be applied against future taxable income. These carryforwards will expire at various times between 2011 and 2030. Net operating loss carryforwards include tax deductions for the disqualifying dispositions of incentive stock options. When the Company utilizes the net operating loss related to these deductions, the tax benefit will be reflected in additional paid-in capital and not as a reduction of tax expense. The total amount of these deductions included in the net operating loss carryforwards is $21,177,000.
The undistributed earnings of certain foreign subsidiaries are not subject to additional foreign income taxes nor considered to be subject to U.S. income taxes unless remitted as dividends. The Company intends to reinvest such undistributed earnings indefinitely; accordingly, no provision has been made for U.S. taxes on those earnings. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.
The Company provided a full valuation allowance on the total amount of its deferred tax assets at December 31, 2010 and 2009 since management does not believe that it is more likely than not that these assets will be realized.
NOTE 9. STOCKHOLDERS’ EQUITY
Preferred Stock:
In April 2010, the Company issued to a certain accredited investor 1,333 shares of Series B Convertible Preferred Stock at $150 per share for a total of $200,000. The Series B Convertible Preferred Stock bears an annual dividend of 8%. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Additionally, the Series B stock provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The warrants expire in five years. 333,333 warrants were issued to the investor. In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company has allocated the proceeds received from the Convertible Series B Preferred Stock and Warrant Offering based upon relative fair value. Using Black-Scholes, the Company has determined that the fair value of the warrants issued is $54,455 and the beneficial conversion amount is $66,667. Since this beneficial conversion feature is immediately convertible upon issuance, the Company has fully amortized this beneficial conversion feature in the Statement of Operations during the year ended December 31, 2010.
In January 2010, the Company issued to certain accredited investors 9,067 shares of Series B Convertible Preferred Stock at $150 per share for a total of $1,360,000, including $500,000 in cash, the cancellation of $710,000 of existing indebtedness and the cancellation of a note of $150,000 to memorialize an advance of payment for Series B Stock prior to issuance. The Series B Convertible Preferred Stock bears an annual dividend of 8%. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Additionally, the Series B stock investors were issued warrants to purchase common stock of the Company at a strike price of $0.25 per share. The warrants expire in five years. 2,266,667 warrants were issued to these investors.
Common Stock:
In June 2009, the Company issued 85,789 shares of common stock for the conversion of debt of $22,000 to an investor who had a short term promissory note with the Company originally entered into in October 2008.
In April 2009, the Company issued 120,000 shares of common stock to BluePhoenix Solutions due to a filing deadline penalty.
In April 2009, the Company issued 250,000 shares of common stock for the conversion of debt of $30,000 to an investor who had entered into a short term promissory note with the Company in April 2009.
Stock Grants:
In August 2007, the Company issued Mr. John P. Broderick, our Chief Executive Officer, a restricted stock award in the amount of 549,360 shares which will vest to him upon his resignation or termination. The Company used the Black-Scholes method to value these shares and assumed a life of 10 years. The Company recorded compensation expense of approximately $36,000 for fiscal 2010 and 2009.
Stock Options:
In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock which may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. The Company also has a stock incentive plan for outside directors and the Company has set aside 1,200 shares of common stock for issuance under this plan.
Under the terms of the Plans, the exercise price of the incentive stock options may not be less than the fair market value of the stock on the date of the award and the options are exercisable for a period not to exceed ten years from date of grant. Stock appreciation rights entitle the recipients to receive the excess of the fair market value of the Company's stock on the exercise date, as determined by the Board of Directors, over the fair market value on the date of grant. Performance shares entitle recipients to acquire Company stock upon the attainment of specific performance goals set by the Board of Directors. Restricted stock entitles recipients to acquire Company stock subject to the right of the Company to repurchase the shares in the event conditions specified by the Board are not satisfied prior to the end of the restriction period. The Board may also grant unrestricted stock to participants at a cost not less than 85% of fair market value on the date of sale. Options granted vest at varying periods up to five years and expire in ten years.
Activity for stock options issued under these plans for the fiscal years ending December 31, 2010 and 2009 was as follows:
Activity for non-vested stock options under these plans for the fiscal year ending December 31, 2010 was as follows:
There were 1,444,750 options granted in during 2010 and 475,000 options granted during 2009. The weighted average grant date fair value of options issued during the years ended December 31, 2010 and 2009 was equal to $0.09 and $0.12 per share, respectively. There were no option grants issued below fair market value during 2010 and 2009.
At December 31, 2010, there was unrecognized compensation cost of $70,000 related to stock options which is expected to be recognized over a weighted-average amortization period of 2 years.
At December 31, 2010 and 2009, options to purchase 2,481,654 and 2,368,672 shares of common stock were exercisable, respectively, pursuant to the plans at prices ranging from $0.09 to $581.00. The following table summarizes information about stock options outstanding at December 31, 2010:
Preferred Stock:
As part of the recapitalization plan approved by shareholders in November 2006, the Company offered to exchange its existing Series A-3, B-3, C and D preferred shares at reduced conversion rates in exchange for shares of a new Series A-1 preferred stock in Cicero Inc. This proposal also required approval by existing preferred shareholders as a class. The new conversion prices with respect to the Series A-3, B-3 and D preferred stock were negotiated with the holders of each series based upon such factors as the current conversion price in relation to the market, the dollar amount represented by such series and, waiver of anti-dilution, liquidation preferences, seniority and other senior rights. The conversion price for the Series C preferred stock was determined in relation to the conversion price for the Series D preferred stock. The Board of Directors determined the new conversion price of each series of Level 8 preferred stock after discussion and review of those rights, ranks and privileges that were being waived by the present holders of preferred stock. Among those rights being waived are anti-dilution protection, liquidation preferences and seniority.
The holders of the Series A-1 preferred stock shall have the rights and preferences set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware upon the approval of the Recapitalization. The rights and interests of the Series A-1 preferred stock of the Company will be substantially similar to the rights interests of each of the series of the former Level 8 preferred stock other than for (i) anti-dilution protections that have been permanently waived and (ii) certain voting, redemption and other rights that holders of Series A-1 preferred stock will not be entitled to. All shares of Series A-1 preferred stock will have a liquidation preference pari passu with all other Series A-1 preferred stock.
The Series A-1 preferred stock is convertible at any time at the option of the holder into an initial conversion ratio of 1,000 shares of Common Stock for each share of Series A-1 preferred stock. The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations. The Series A-1 preferred stock is also convertible on an automatic basis in the event that (i) the Company closes on an additional $5,000,000 equity financing from strategic or institutional investors, or (ii) the Company has four consecutive quarters of positive cash flow as reflected on the Company’s financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) and filed with the Commission. The holders of Series A-1 preferred stock are entitled to receive equivalent dividends on an as-converted basis whenever the Company declares a dividend on its Common Stock, other than dividends payable in shares of Common Stock. The holders of the Series A-1 preferred stock are entitled to a liquidation preference of $500 per share of Series A-1 preferred stock upon the liquidation of the Company. The Series A-1 preferred stock is not redeemable.
The holders of Series A-1 preferred stock also possess the following voting rights. Each share of Series A-1 preferred stock shall represent that number of votes equal to the number of shares of Common Stock issuable upon conversion of a share of Series A-1 preferred stock. The holders of Series A-1 preferred stock and the holders of Common Stock shall vote together as a class on all matters except: (i) regarding the election of the Board of Directors of the Company (as set forth below); (ii) as required by law; or (iii) regarding certain corporate actions to be taken by the Company (as set forth below).
The approval of at least two-thirds of the holders of Series A-1 preferred stock voting together as a class, shall be required in order for the Company to: (i) merge or sell all or substantially all of its assets or to recapitalize or reorganize; (ii) authorize the issuance of any equity security having any right, preference or priority superior to or on parity with the Series A-1 preferred stock; (iii) redeem, repurchase or acquire indirectly or directly any of its equity securities, or to pay any dividends on the Company’s equity securities; (iv) amend or repeal any provisions of its certificate of incorporation or bylaws that would adversely affect the rights, preferences or privileges of the Series A-1 preferred stock; (v) effectuate a significant change in the principal business of the Company as conducted at the effective time of the Recapitalization; (vi) make any loan or advance to any entity other than in the ordinary course of business unless such entity is wholly owned by the Company; (vii) make any loan or advance to any person, including any employees or directors of the Company or any subsidiary, except in the ordinary course of business or pursuant to an approved employee stock or option plan; and (viii) guarantee, directly or indirectly any indebtedness or obligations, except for trade accounts of any subsidiary arising in the ordinary course of business. In addition, the unanimous vote of the Board of Directors is required for any liquidation, dissolution, recapitalization or reorganization of the Company. The voting rights of the holders of Series A-1 preferred stock set forth in this paragraph shall be terminated immediately upon the closing by the Company of at least an additional $5,000,000 equity financing from strategic or institutional investors.
In addition to the voting rights described above, the holders of a majority of the shares of Series A-1 preferred stock are entitled to appoint two observers to the Company’s Board of Directors who shall be entitled to receive all information received by members of the Board of Directors, and shall attend and participate without a vote at all meetings of the Company’s Board of Directors and any committees thereof. At the option of a majority of the holders of Series A-1 preferred stock, such holders may elect to temporarily or permanently exchange their board observer rights for two seats on the Company’s Board of Directors, each having all voting and other rights attendant to any member of the Company’s Board of Directors. There are three current Board of Directors that are holders of the Series A-1 preferred stock. As part of the Recapitalization, the right of the holders of Series A-1 preferred stock to elect a majority of the voting members of the Company’s Board of Directors shall be terminated.
Stock Warrants:
The Company values warrants based on the Black-Scholes pricing model. Warrants granted in 2010 and 2009 were valued using the following assumptions:
NOTE 10. EMPLOYEE BENEFIT PLANS
The Company sponsors one defined contribution plan for its employees - the Cicero Inc 401(K) Plan. Under the terms of the Plan, the Company, at its discretion, provides a 50% matching contribution up to 6% of an employee’s salary. Participants must be eligible and employed at December 31 of each calendar year to be eligible for employer matching contributions. The Company opted not to make any matching contributions for 2010 and 2009.
NOTE 11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
In 2010, three customers accounted for 41%, 20% and 13% of operating revenues and two customers accounted for 84% of accounts receivable at December 31, 2010. In 2009, three customers accounted for 51%, 29% and 13% of operating revenues and one of those customers accounted for 89% of accounts receivable at December 31, 2009.
NOTE 12. FOREIGN CURRENCIES
The Company’s net foreign currency transaction losses/ (gains) were $0 and $3,000, for the years ended 2010 and 2009, respectively.
NOTE 13. RELATED PARTY INFORMATION
At December 31, 2009, the Company was indebted to John L. (Launny) Steffens in the amount of $710,000. The Notes bore interest rates from 3% to 12%.
All these notes were converted into 4,733 shares of Series B Convertible Preferred Shares at $150 per share in January 2010 as part of the Company’s issuance of Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock bears an annual interest of 8% and provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. The total principal converted was $710,000.
From April 2010 through December 2010, the Company entered into multiple short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The Notes bear interest at 12% per year and are unsecured. At December 31, 2010, the Company was indebted to Mr. Steffens in the amount of $1,665,000. The loans mature at various dates through March 31, 2011.
In March 2011, Mr. Steffens agreed to extend the maturity on these Notes until March 31, 2012.
In October 2007, the Company agreed to restructure the note payable to Bank Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with BluePhoenix, the Company made a principal reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix entered into a new Note in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of the Company’s common stock in exchange for $650,000 paid to Bank Hapoalim to retire that indebtedness. Of the new note payable to BluePhoenix, approximately $350,000 was due on January 31, 2009 and the balance is due on December 31, 2011. During 2008, the Company paid $200,000 against the principal and BluePhoenix converted $50,000 of principal into 195,848 shares of Cicero common stock. In January 2009, the Company paid $100,000 against the principal. At December 31, 2010, the Company was indebted to BluePhoenix Solutions in the amount of $671,000.
Antony Castagno, the Company’s Chief Technology Officer, is part-owner of SOAdesk LLC. For a description of the transactions between the Company and SOAdesk, see Note 2.
NOTE 14. LEASE COMMITMENTS AND EMPLOYMENT AGREEMENTS
The Company leases certain facilities and equipment under various operating leases. Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2010 consisted of only one lease as follows (in thousands):
Rent expense for the years ended December 31, 2010 and 2009, was $59,000 and $97,000, respectively. As of December 31, 2010 and 2009, the Company had no sublease arrangements.
Under the employment agreement between the Company and Mr. Broderick effective January 1, 2011, we agreed to pay Mr. Broderick an annual base salary of $175,000 and performance bonuses in cash of up to $275,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion. Upon termination of Mr. Broderick’s employment by the Company without cause, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within 30 days of termination and any unpaid deferred salaries and bonuses. In the event there occurs a substantial change in Mr. Broderick’s job duties, there is a decrease in or failure to provide the compensation or vested benefits under the employment agreement or there is a change in control of the Company, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within thirty (30) days of termination. Mr. Broderick will have thirty (30) days from the date written notice is given about either a change in his duties or the announcement and closing of a transaction resulting in a change in control of the Company to resign and execute his rights under this agreement. If Mr. Broderick’s employment is terminated for any reason, Mr. Broderick has agreed that, for two (2) year after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so.
Under the employment agreement between the Company and Mr. Castagno effective January 1, 2011, we agreed to pay Mr. Castagno an annual base salary of $150,000 and performance bonuses in cash of up to $250,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion. Upon termination of Mr. Castagno’s employment by the Company without cause, we agreed to pay Mr. Castagno an amount equivalent to six (6) months of Mr. Castagno’s then current base salary in equal semi-monthly installments over the six (6) month period following the termination. If Mr. Castagno’s employment is terminated for any reason, Mr. Castagno has agreed that, for two (2) 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.
NOTE 15. CONTINGENCIES
Various lawsuits and claims have been brought against us in the normal course of our business.
In October 2003, we were served with a summons and complaint in Superior Court of North Carolina regarding unpaid invoices for services rendered by one of our subcontractors. The amount in dispute was approximately $200,000 and is included in accounts payable. Subsequent to March 31, 2004, we settled this litigation. Under the terms of the settlement agreement, we agreed to pay a total of $189,000 plus interest over a 19-month period ending November 15, 2005. The Company has not made any additional payments and has a remaining liability of approximately $88,000.
Under the indemnification clause of the Company’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee. The Company has never paid any such third party claims.
NOTE 16. DISCONTINUED OPERATIONS
The Company had classified certain assets and liabilities as assets and liabilities of discontinued operations. These assets and liabilities related to foreign subsidiaries of the Company for which there have been no operations for the past several years. In addition, as part of the Company’s reorganization charge in 2001, the Company had established a tax reserve specifically for foreign operations. The Company believes that the foreign assets and liabilities are worthless and there is no expectation of any tax exposure on these operations. As such, as of December 31, 2009, the Company has written off $74,000 of foreign assets, $445,000 of foreign liabilities and $626,000 of related tax reserves as Gain on Discontinued Operations on the accompanying Statement of Operations.
NOTE 17. SUBSEQUENT EVENTS
As of March 25, 2011, Cicero Inc. (the “Company”) and SOAdesk, LLC (“SOAdesk”) entered into (i) an Amendment No. 3 to the $700,000 aggregate principal amount unsecured convertible note (the “$700,000 Note”) that was issued to SOAdesk under the Asset Purchase Agreement, dated as January 15, 2010, between the Company, SOAdesk and Vertical Thought, Inc. (the “Asset Purchase Agreement”), and (ii) an Amendment No. 3 to the $525,000 aggregate principal amount unsecured convertible note (the “$525,000 Note”) that was issued to SOAdesk under the Asset Purchase Agreement (collectively, the “Note Amendments”). The purpose of the Note Amendments was to extend the maturity of each of the $700,000 Note and the $525,000 Note to March 31, 2012. In connection with the Note Amendments, the Company issued a five-year warrant to SOAdesk to purchase up to 100,000 shares of its common stock at an exercise price of $0.08 per share.
On March 30, 2011, John L. Steffens, the Chairman of the Board of Directors, agreed to extend the maturity date of all outstanding notes totaling $1,665,000 to March 31, 2012.
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.