UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2018
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission
File Number: 000-26392
CICERO INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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11-2920559
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(State
of incorporation)
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(I.R.S. Employer Identification No.)
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8000 Regency Parkway, Suite 542, Cary, NC 27518
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(Address of principal executive offices, including Zip
Code)
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(919) 380-5000
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(Registrant’s
telephone number, including area code)
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_____________
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Securities
registered pursuant to Section 12(b) of the Act:
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NONE
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, $.001 par value
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_____________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the above
Act. Yes [ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[X] No
[_]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required
to submit such files). Yes [X] No [_]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a shell company. Yes [ ] No
[X]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller
reporting company or an emerging growth company. See definition of
“accelerated filer,” “large accelerated
filer” and “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large accelerated
filer [_]
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Accelerated filer
[_]
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Non - accelerated
filer [_]
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Smaller reporting
company [X]
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Emerging growth
company [_]
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Aggregate
market value of the outstanding shares of common stock held by
non-affiliates of the Registrant as of June 29, 2018 was
approximately $1,767,265 based upon the closing price quoted on the
Over The Counter Bulletin Board.
There
were 207,913,541 shares of common stock outstanding as of March 22,
2019.
Documents
Incorporated by Reference: None
CICERO INC.
Annual
Report on Form 10-K
For the
Fiscal Year Ended December 31, 2018
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Item
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PART
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PART
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PART
III
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PART
IV
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PART I
Overview
Cicero,
Inc. (the “Company”) provides desktop activity
intelligence, process intelligence and automation software to help
organizations isolate issues and automate employee tasks in the
contact center and back office. The Company provides an innovative
and unique combination of application and process integration,
automation, and desktop analytics capabilities, all without
changing the underlying applications or requiring costly
application development. The Company’s software collects
desktop activity and application performance data and tracks
business objects across time and multiple users, as well as
measures against defined expected business process flows, for
either analysis or to feed a third-party application. In addition
to software solutions, the Company also provides technical support,
training and consulting services as part of its commitment to
providing customers with industry-leading solutions. The
Company’s consulting team has in-depth experience in
developing successful enterprise-class solutions as well as
valuable insight into the business information needs of customers
in the largest Fortune 500 corporations worldwide.
The
Company focuses on the activity intelligence, process intelligence
and customer experience management market with emphasis on desktop
analytics and automation with its Cicero Discovery™, Cicero
Insight™ and Cicero Automation™ products. Activity
intelligence captures what employees are doing, what resources they
are using and how long an activity may take. Process intelligence
captures the workflows that are being utilized and identifies any
bottlenecks that exist within those workflows.
Cicero
Discovery collects desktop activity leveraging a suite of sensors.
Cicero Discovery is a lightweight and configurable tool to collect
activity and application performance data and track business
objects across time and across multiple users as well as measure
against a defined "expected" business process flow, either for
analysis or to feed a third-party application.
Cicero
Insight is a measurement and analytics solution that collects and
presents high value information about quality, productivity,
compliance, and revenue from frontline activity to target areas for
improvement. Powered by Cicero’s Deep Sensor Technology
including our System Sensors, our Session Sensors, our Activity
Sensors and our Process Sensors, Cicero Insight collects activity
data about the applications and workflows being used and makes it
readily available for analysis and action to the business
community.
Cicero
Automation delivers all the features of the Cicero Discovery
product as well as desktop automation for enterprise contact center
and back office employees. Leveraging existing IT investments
Cicero Automation integrates applications, automates workflow, and
provides control and adaptability at the end user
desktop.
Cicero
Automation also provide Single Sign-On (SSO) and stay signed on
capability. The software maintains a secure credential store that
facilitates single sign-on. Passwords can be reset but are
non-retrievable. Stored interactions can be selectively encrypted
based on the needs of the enterprise. All network communications
are compressed and encrypted for transmission.
The
Company provides an intuitive configuration toolkit for each
product, which simplifies the process of deploying and managing the
solutions in the enterprise. The Company provides a unique way of
capturing untapped desktop activity data using sensors, combining
it with other data sources, and making it readily available for
analysis and action to the business community. The Company also
provides a unique approach that allows companies to organize
functionality of their existing applications to better align them
with tasks and operational processes. In addition, the
Company’s software solutions can streamline end-user tasks
and enable automatic information sharing among line-of-business
siloed applications and tools. It is ideal for deployment in
organizations that need to provide access to enterprise
applications on desktops to iteratively improve business
performance, the user experience, and customer satisfaction. By
leveraging desktop activity data, integrating disparate
applications, automating business processes and delivering a better
user experience, the Company’s products are ideal for the
financial services, insurance, healthcare, governmental and other
industries requiring a cost-effective, proven business performance
and user experience management solution for enterprise
desktops.
Some of
the companies that have implemented or are implementing the
Company’s software solutions include CitiCorp, Nationwide
Financial Services, First Tennessee Bank, Assurant, JP Morgan
Chase, Convergys, Delta Dental of New Jersey and UBS. We have also
sold our products to healthcare, banking, and government
users.
Cicero
Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc.
and re-incorporated in Delaware in 1999. It was renamed to Cicero,
Inc. in 2007. Our principal executive offices are located at 8000
Regency Parkway, Suite 542, Cary, NC 27518 and our telephone number
is (919) 380-5000. Our web site is www.ciceroinc.com.
Products
The
Company’s software products deliver desktop activity
intelligence and process intelligence to improve business
performance. All of our products - Cicero Discovery, Cicero
Insight, and Cicero Automation - leverage existing technologies by
securely collecting desktop activity data and automating redundant,
manual processes, improving business processes and the user
experience.
Cicero Discovery™
Cicero
Discovery collects activity and application performance data and
tracks business objects across time and across multiple users, as
well as measures against a defined "expected" business process
flow, either for analysis or to feed a third-party application.
Cicero Discovery is invisible to the end user – it gathers
data about what they do, what applications they run, how those
applications are used, the health of their computer and the type of
data they are working on that the company is interested in. These
data are collected and stored centrally and can be tracked in
real-time or via deferred processing.
Cicero Insight™
Cicero
Insight is a measurement and analytics solution that collects and
presents high value information about quality, productivity,
compliance, and revenue from frontline activity to target areas for
improvement. Using a set of configurable sensors at the
employees’ desktop Cicero Insight collects activity data
about the applications, when and how they are used and makes it
readily available for analysis and action to the business
community. Cicero Insight:
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Provides a source
of rich data from the desktop, which is not readily obtainable or
commonly utilized in business level analysis.
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Is a solution to
analyze data and identify areas of improvement with actionable
intelligence (data-driven decisions).
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Helps companies
establish a desktop knowledge baseline.
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Delivers role-based
dashboards, reporting and analytics in a web and mobile
context.
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Supports data
harmonization with the integration and correlation of data from
other data platforms.
Companies
are using Cicero Insight to:
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See how the events
at the desktop impact business goals, the employee and customer
experience.
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Measure and
assessing activity (what activity, by whom, where, how much and
when).
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Identify compliance
issues (installed software and versions, approved/unapproved apps,
web usage and domain access, copying files, external drive access,
etc.).
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Identify top
performers, best practices, etc.
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Have current
hardware configuration and state of utilization data.
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Establish a
knowledge baseline for the employee desktop.
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Measure and assess
performance (hardware and user).
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Measure and assess
process/task efficiency (look at the frequency of use of an
application vs. total time spent in an application).
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Identify
improvement opportunities through automation, training, process
changes, and fraud/regulatory and compliance changes.
Cicero Automation™
Cicero
Automation enables businesses to transform human interaction across
the enterprise. It enables the flow of data between different
applications, regardless of the type and source of the application,
eliminating redundant entry and costly mistakes. Cicero Automation
automates up and down-stream process flows, enforcing compliance
and optimizing handle and transaction time, reducing training time
and enabling delivery of best in class service. Cicero Automation
also captures real-time information about each process at the
desktop, allowing organizations to spot trends and forecast
problems before they occur.
Cicero
Automation software offers a proven, innovative departure from
traditional, costly and labor-intensive enterprise application
integration and automation solutions. The Company provides
non-invasive application integration, reducing enterprise
integration implementation cost and time. Cicero Automation also
enables customers to transform applications, business processes and
human expertise into a cost effective business solution that
improves operational efficiency.
By
using Cicero Automation technology, companies can decrease their
customer management costs, improve the customer experience,
maximize the lifetime value of existing customers, and more
efficiently cross-sell the full range of their products and
services resulting in an overall increase in return on their
information technology investments. In addition, the
Company’s software enables organizations to reduce the
business risks inherent in replacement or re-engineering of
mission-critical applications and extend the productive life and
functional reach of their application portfolio.
Services
We
provide a full spectrum of technical support, training and
consulting services across all of our products as part of our
commitment to providing our customers industry-leading business
integration solutions. Our services organization is staffed with
experts in the field of systems integration having backgrounds in
development, consulting, and business process reengineering. In
addition, our services professionals have substantial industry
specific backgrounds with extraordinary depth in our focus
marketplaces of financial services, contact centers, and the back
office.
Maintenance and Support
We
offer customers varying levels of technical support tailored to
their needs, including periodic software upgrades, and telephone
support. The Company’s products are frequently used in
mission-critical business situations, and our maintenance and
support services are accustomed to the critical demands that must
be met to deliver world-class service to our clients. Many of the
members of our staff have expertise in mission critical
environments and are ready to deliver service commensurate with
those unique client needs.
Training Services
Our
training organization offers a full curriculum of courses and labs
designed to help customers become proficient in the use of our
products and related technology as well as enabling customers to
take full advantage of our field-tested best practices and
methodologies. Our training organization seeks to enable client
organizations to gain the proficiency needed in our products for
full client self-sufficiency but retains the flexibility to tailor
their curriculum to meet specific needs of our
clients.
Consulting Services
We
offer consulting services around our product offerings in project
management, applications and platform integration, application
design and development and application renewal, along with
expertise in a wide variety of development environments and
programming languages. We also have an active partner program in
which we recruit leading IT consulting and system integration firms
to provide services for the design, implementation and deployment
of our solutions. Our consulting organization supports third-party
consultants by providing architectural and enabling
services.
Customers
Our
customers include both end-users to whom we sell our products and
services directly and distributors and other intermediaries who
either resell our products to end-users or incorporate our products
into their own product offerings. Typical end-users of our products
and services are large businesses with sophisticated technology
requirements for contact centers, in the financial services,
insurance and telecommunications industries, and intelligence,
security, law enforcement and other governmental
organizations.
Our
customers are using our solutions to rapidly deploy applications.
Some examples of customers' uses of our products
include:
●
A Regional Bank - A large U.S. regional
bank selected Cicero software to provide intelligent unified
desktop solutions for their customer service operations and
throughout their enterprise. Leveraging existing applications, the
new solution captures desktop activities, automates processes,
provides user guidance, and displays composite views of information
to improve user productivity and the customer
experience.
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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.
●
A financial institution - uses our
software solution to provide real-time integration among market
data, customer account information, existing back-office systems
and other legacy applications, eliminate redundant data entry,
provide real-time data access and processing, and enhance customer
service and service levels.
●
An insurance company –
Information technology and Cicero professionals created a Cicero
desktop solution which integrated computer telephony integration,
key business systems and numerous secondary applications in use in
the contact centers and elsewhere within the organization. Using
Cicero, the contact center agents now use a central, integrated
dashboard to navigate between applications, with key information
(like customer and policy numbers) passed automatically between
applications.
CH
Robinson, Nationwide, UBS, Inc. and Verint each accounted for more
than ten percent (10%) of our operating revenue in fiscal 2018.
Verint and UBS, Inc. each accounted for more than ten percent (10%)
of our operating revenue in fiscal 2017.
Sales and Marketing
Sales
An
important element of our sales strategy is to supplement our direct
sales force by expanding our relationships with third parties to
increase market awareness and acceptance of our business
integration software solutions. As part of these relationships, we
continue to jointly sell and implement our software solutions with
strategic partners such as systems integrators and embed our
software along with other products through reseller
relationships. We provide training and other support
necessary to systems integrators and resellers to aid in the
promotion of our products. To date we have entered into
technology partnerships for integrated business solutions with
Teleopti, Avaya/KnoahSoft, Nexidia, Telnorm and Heartcore. In
addition, we have entered into strategic partnerships with Aspect,
eg solutions and Convergys. These organizations have relationships
with existing customers or have access to organizations requiring
top secret or classified access. In addition, several of
these partners can bundle our software with other software to
provide a comprehensive solution to customers. We are not
materially dependent on any of these organizations. Generally, our
agreements with such partners provide for price discounts based on
their sales volume, with no minimum required volume. The Company
adopted ASU 2014-09 Revenue from Contacts with Customers (Topic
606) as of January 1, 2018. Based on the evaluation the Company
performed on its customer contracts, the adoption did not have a
material impact on the Company’s financial position, results
of operations, cash flow, accounting policies, business processes,
internal controls or disclosures.
Marketing
The
target markets for our products and services are in the financial
services, insurance, and healthcare industries, as well as users in
the intelligence and security communities and other governmental
organizations. Increasing competitiveness and consolidation is
driving companies in such businesses to increase efficiency,
improve the user experience and improve the quality of their
customer contact centers. As a result, companies are compelled by
both economic necessity and internal mandates to find ways to
increase internal efficiency, increase customer satisfaction,
increase effective cross-selling, decrease staff turnover cost and
leverage their investment in current information
technology.
Our
marketing team has an in-depth understanding of business
performance and user experience software marketplaces and the needs
of these customers, as well as experience in all of the key
marketing disciplines. They also have knowledge across industries
in financial services, insurance, healthcare, and government
organizations that have focused on application integration and
business process automation solutions to address needs in mergers
and acquisitions and homeland security.
Core
marketing functions include product marketing, digital marketing
and public relations. We utilize focused marketing programs that
are intended to attract potential customers in our target vertical
industries and to promote our Company and our brands. Our marketing
programs are specifically directed at our target markets, and
include speaking engagements, public relations campaigns, focused
trade shows and web site marketing, while devoting substantial
resources to supporting the field sales team with high quality
sales tools and ancillary material. As product acceptance grows and
our target markets increase, we will shift to broader marketing
programs.
The
marketing department also produces ancillary material for
presentation or distribution to prospects, including
demonstrations, presentation materials, white papers, case studies,
articles, brochures, and data sheets.
Research and Product Development
We
incurred research and development expense of approximately $991,000
and $1,071,000 in 2018 and 2017, respectively.
Cicero
Discovery, Cicero Insight, and Cicero Automation are products that
exist in a rapidly changing technology environment and as such, it
is imperative to constantly enhance the features and functionality
of these products. Our budget for research and development is based
on planned product introductions and enhancements. Actual
expenditures, however, may significantly differ from budgeted
expenditures. Inherent in the product development process are a
number of risks. The development of new, technologically advanced
software products is a complex and uncertain process requiring high
levels of innovation, as well as the accurate anticipation of
technological and market trends.
Competition
The
markets in which we compete are highly competitive and subject to
rapid change. These markets are highly fragmented and served by
numerous firms. We believe that the competitive factors affecting
the markets for our products and services include:
●
Product
functionality and features;
●
Availability and
quality of support services;
●
Ease of product
implementation;
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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 developers to
write new code or rewrite existing applications in an effort to
deploy solutions to desktops. As a result, prospective customers
may decide against purchasing and implementing externally developed
and produced solutions such as ours.
We
compete with companies that utilize varying approaches to
modernize, web-enable and integrate existing software
applications:
●
Middleware software
provides integration of applications through messages and data
exchange implemented typically in the middle tier of the
application architecture. This approach requires modification of
the application source code and substantial infrastructure
investments and operational expense. Reuters, TIBCO and IBM
MQSeries are competitors in the middleware market.
●
CRM software offers
application tools that allow developers to build product specific
interfaces and custom applications. This approach is not designed
to be product neutral and is often dependent on deep integration
with our technology. Siebel and Salesforce.com are representative
products in the CRM software category.
●
Recently, there
have been several companies that offer capabilities similar to our
software in that these companies advertise that they can capture
desktop activity and integrate applications without modifying the
underlying code for those applications. Pegasystems is one company
who advertises that they can capture desktop activity and provide
integration at the point of contact or on the desktop.
Our
product competes directly with other back office and contact center
solutions offered by Pegasystems, Jacada, Verint, and NICE. We
expect additional competition from other established and emerging
companies. Furthermore, our competitors may combine with each
other, or other companies may enter our markets by acquiring or
entering into strategic relationships with our competitors. Many of
our current competitors have greater name recognition, a larger
installed customer base and greater financial, technical, marketing
and other resources than we have.
Intellectual Property
Our
success is dependent upon developing, protecting and maintaining
our intellectual property assets. We rely upon combinations of
copyright, trademark and trade secrecy protections, along with
contractual provisions, to protect our intellectual property rights
in software, documentation, data models, methodologies, data
processing systems and related written materials in the
international marketplace. Copyright protection is generally
available under United States laws and international treaties for
our software and printed materials. The effectiveness of these
various types of protection can be limited, however, by variations
in laws and enforcement procedures from country to country. We use
the registered trademarks “Cicero®”, “United
Data Model®”, and “United
Desktop®”.
All
other product and company names mentioned herein are for
identification purposes only and are the property of, and may be
trademarks of, their respective owners.
Employees
As of
December 31, 2018, we employed 15 full-time employees. Our
employees are not represented by a union or a collective bargaining
agreement.
Available Information
Our web
address is www.ciceroinc.com. We make available free of charge
through our web site our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the
Securities and Exchange Commission. Also, the public may read and
copy such material at the Securities and Exchange
Commission’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Securities
and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains an internet site that contains
reports, proxy and information statements, and other information at
www.sec.gov.
Forward Looking and Cautionary Statements
Certain
statements contained in this Annual Report may constitute "forward
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("Reform Act"). We may also make
forward looking statements in other reports filed with the
Securities and Exchange Commission, in materials delivered to
shareholders, in press releases and in other public statements. In
addition, our representatives may from time to time make oral
forward looking statements. Forward looking statements provide
current expectations of future events based on certain assumptions
and include any statement that does not directly relate to any
historical or current fact. Words such as "anticipates,"
"believes," "expects," "estimates," "intends," "plans," "projects,"
and similar expressions, may identify such forward looking
statements. In accordance with the Reform Act, set forth below are
cautionary statements that accompany those forward looking
statements. Readers should carefully review these cautionary
statements as they identify certain important factors that could
cause actual results to differ materially from those in the forward
looking statements and from historical trends. The following
cautionary statements are not exclusive and are in addition to
other factors discussed elsewhere in our filings with the
Securities and Exchange Commission and in materials incorporated
therein by reference: our future success depends on the market
acceptance of our products and successful execution of the
strategic direction; general economic or business conditions may be
less favorable than expected, resulting in, among other things,
lower than expected revenues; an unexpected revenue shortfall may
adversely affect our business because our expenses are largely
fixed; our quarterly operating results may vary significantly
because we are not able to accurately predict the amount and timing
of individual sales and this may adversely impact our stock price;
trends in sales of our products and general economic conditions may
affect investors' expectations regarding our financial performance
and may adversely affect our stock price; we may lose market share
and be required to reduce prices as a result of competition from
our existing competitors, other vendors and information systems
departments of customers; we may not have the ability to recruit,
train and retain qualified personnel; rapid technological change
could render the Company's products obsolete; loss of any one of
our major customers could adversely affect our business; our
products may contain undetected software errors, which could
adversely affect our business; because our technology is complex,
we may be exposed to liability claims; we may be unable to enforce
or defend our ownership and use of proprietary technology; because
we are a technology company, our common stock may be subject to
erratic price fluctuations; and we may not have sufficient
liquidity and capital resources to meet changing business
conditions.
We have a history of losses and there are no assurances that such
losses may not continue.
We
experienced operating losses and net losses for each of the years
from 2004 through 2018. We incurred a net loss of $2.1 million for
each of 2017 and 2018. As of December 31, 2018, we had a
working capital deficit of $3.5 million. Our ability to generate
positive cash flow is dependent upon sustaining certain cost
reductions and generating sufficient revenues. If we are unable to
generate positive cash flow, our results of operations and
financial condition may be adversely affected.
Our independent registered public accounting firm has expressed
substantial doubt about our ability to continue as a going
concern.
The
report of our independent auditors dated March 29, 2019 on our
consolidated financial statements for the period ended December 31,
2018 included an emphasis of matter paragraph indicating that there
is substantial doubt about our ability to continue as a going
concern. Our auditors’ doubts are based on our recurring
losses from operations and working capital deficit. Our ability to
continue as a going concern will be determined by our ability to
secure customer contracts that will drive sufficient cash flow to
sustain our operations and/or raise additional capital in the form
of debt or equity financing. Our consolidated financial statements
do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should we be
unable to continue as a going concern.
Our inability to obtain sufficient capital either through
internally generated cash or through the use of equity or debt
offerings could impair the growth of our
business.
Historically, we
have relied on equity and debt offerings, borrowings and operating
cash flows to finance our working capital requirements. Reliance on
internally generated cash to finance our operations could
substantially limit our operational and financial flexibility. We
have experienced negative cash flows from operations for a number
of years, including the past three years. To the extent that we
have insufficient operating cash flows, our ability to finance our
operations may be limited by the extent to which we are able to
raise capital through debt or equity financings. The extent to
which we will be able to use shares of capital stock will depend on
the market value of our capital stock from time to time and the
willingness of potential investors to invest in our company. Using
shares of capital stock for this purpose also may result in
significant dilution to our then existing stockholders. Raising
external capital in the form of debt could require periodic
interest payments that could hinder our financial flexibility in
the future. Besides, our ability to obtain external financing is
subject to a number of uncertainties, including:
●
our future financial condition, results of operations and cash
flows;
●
the state of global credit markets; and
●
general market conditions for financing activities by companies in
our industry.
Our
failure to obtain a sufficient amount of capital on acceptable
terms to finance our operations may materially and adversely affect
the growth of our business.
We depend on an acceptance of our products for ongoing
revenue.
The
Company’s future revenues are entirely dependent on
acceptance of Cicero’s products. The Company has experienced
negative cash flows from operations for a number of years,
including the past three years. At December 31, 2018, the Company
had a working capital deficiency of $3.5 million. In order to
generate sufficient revenues to sustain its operations, the Company
will need to attract more accounts in the near future.
Economic conditions could adversely affect our revenue growth and
cause us not to achieve desired revenue.
Our
ability to generate revenue depends on the overall demand for
customer experience management software and services. Our business
depends on overall economic conditions, the economic and business
conditions in our target markets and the spending environment for
information technology projects, and specifically for customer
experience management in those markets. A weakening of the economy
in one or more of our geographic regions, unanticipated major
events and economic uncertainties may make the spending environment
more challenging for our software and services, reduce capital
spending on information technology projects by our customers and
prospective customers, result in longer sales cycles for our
software and services and/or cause customers or prospective
customers to be more cautious in undertaking larger transactions.
Those situations may cause a decrease in our revenue. A decrease in
demand for our software and services caused, in part, by a
weakening of the economy, may result in a decrease in our revenue
rates.
Because we cannot accurately predict the amount and timing of
individual sales, our quarterly operating results may vary
significantly, which could adversely impact our stock
price.
Our
quarterly operating results have varied significantly in the past,
and we expect they will continue to do so in the future. We have
derived, and expect to continue to derive in the near term, a
significant portion of our revenue from relatively large customer
contracts or arrangements. The timing of revenue recognition from
those contracts and arrangements has caused and may continue to
cause fluctuations in our operating results, particularly on a
quarterly basis. Our quarterly revenues and operating results
typically depend upon the volume and timing of customer contracts
received during a given quarter and the percentage of each
contract, which we are able to recognize as revenue during the
quarter. Each of these factors is difficult to forecast. As is
common in the software industry, the largest portion of software
license revenues are typically recognized in the last month of each
fiscal quarter and the third and fourth quarters of each fiscal
year. We believe these patterns are partly attributable to
budgeting and purchasing cycles of our customers and our sales
commission policies, which compensate sales personnel for meeting
or exceeding periodic quotas.
Furthermore,
licensing fees for Cicero Automation are significant and each sale
can or will account for a large percentage of our revenue and a
single sale may have a significant impact on the results of a
quarter. In addition, the substantial commitment of executive time
and financial resources that have historically been required in
connection with a customer’s decision to purchase our
software increases the risk of quarter-to-quarter fluctuations. Our
software sales require a significant commitment of time and
financial resources because it is an enterprise product. Typically,
the purchase of our products involves a significant technical
evaluation by the customer and the delays frequently associated
with customers’ internal procedures to approve large capital
expenditures and to test, implement and accept new technologies
that affect key operations. This evaluation process frequently
results in a lengthy sales process of several months. It also
subjects the sales cycle for our products to a number of
significant risks, including our customers’ budgetary
constraints and internal acceptance reviews. The length of our
sales cycle may vary substantially from customer to
customer.
Our
product revenue may fluctuate from quarter to quarter due to the
completion or commencement of significant assignments, the number
of working days in a quarter and the utilization rate of services
personnel. As a result of these factors, we believe that a
period-to-period comparison of our historical results of operations
is not necessarily meaningful and should not be relied upon as
indications of future performance. In particular, our revenues in
the third and fourth quarters of our fiscal years may not be
indicative of the revenues for the first and second quarters.
Moreover, if our quarterly results do not meet the expectations of
our securities analysts and investors, the trading price of our
common stock would likely decline.
Loss of key personnel associated with Cicero development could
adversely affect our business.
Loss of
key executive personnel or the software engineers we have hired
with specialized knowledge of our technology could have a
significant impact on our execution of our new strategy given that
they have specialized knowledge developed over a long period of
time with respect to our technology.
Different competitive approaches or internally developed solutions
to the same business problem could delay or prevent adoption of
Cicero Discovery, Cicero Insight, and Cicero
Automation.
Cicero
products are designed to provide a unique way for an enterprise to
understand what is truly happening on their users’ desktops.
To effectively penetrate the market for solutions to this problem,
Cicero products will compete with traditional quality assurance and
desktop analytic solutions that attempt to solve this business
problem. Quality assurance and desktop analytics solutions are
currently sold and marketed by companies such as PegaSystems and
Verint. There can be no assurance that our potential customers will
determine that Cicero methodology is superior to solutions provided
by the competitors described above in addressing this business
problem. Moreover, the information systems departments of our
target customers, large financial institutions, are large and may
elect to attempt to internally develop an internal solution to this
business problem rather than to purchase a Cicero
product.
Cicero
Automation is designed to address in a novel way the problems that
large companies face integrating the functionality of different
software applications by integrating these applications at the
desktop. To effectively penetrate the market for solutions to this
disparate application problem, Cicero Automation will compete with
traditional Enterprise Application Integration, or EAI, solutions
that attempt to solve this business problem at the server or
back-office level. Server level EAI solutions are currently sold
and marketed by companies such as NEON, Mercator, Vitria, and BEA.
There can be no assurance that our potential customers will
determine that Cicero Automation’s desktop integration
methodology is superior to traditional middleware EAI solutions
provided by the competitors described above in addressing this
business problem. Moreover, the information systems departments of
our target customers, large financial institutions, are large and
may elect to attempt to internally develop an internal solution to
this business problem rather than to purchase the Cicero Automation
product.
Accordingly, we may
not be able to provide products and services that compare favorably
with the products and services of our competitors or the internally
developed solutions of our customers. These competitive pressures
could delay or prevent adoption of Cicero Discovery, Cicero Insight
or Cicero Automation or require us to reduce the price of our
products, either of which could have a material adverse effect on
our business, operating results and financial
condition.
Our ability to compete may be subject to factors outside our
control.
We
believe that our ability to compete depends in part on a number of
competitive factors outside our control, including the ability of
our competitors to hire, retain and motivate senior project
managers, the ownership of competitors of software used by
potential clients, the development by others of software that is
competitive with our products and services, the price at which
others offer comparable services and the extent of our
competitors’ responsiveness to customer needs.
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product
introductions and short product life cycles.
Our future
success will depend to a substantial degree upon our ability to
enhance our existing products and to develop and introduce, on a
timely and cost-effective basis, new products and features that
meet changing customer requirements and emerging and evolving
industry standards.
The
introduction of new or enhanced products also requires us to manage
the transition from older products in order to minimize disruption
in customer ordering patterns, as well as ensure that adequate
supplies of new products can be delivered to meet customer demand.
There can be no assurance that we will successfully develop,
introduce or manage the transition to new products.
We have
in the past, and may in the future, experience delays in the
introduction of our products, due to factors internal and external
to our business. Any future delays in the introduction or shipment
of new or enhanced products, the inability of such products to gain
market acceptance or problems associated with new product
transitions could adversely affect our results of operations,
particularly on a quarterly basis.
In
order to fully implement our business plan, we will be required to
stay current with common technology enhancements and the needs of
the modern contact center, back and branch office. To that end we
will be required to extend our support for browser-based
applications to support Microsoft Edge on Windows 10 and for
Windows-based application support to include UAP (formerly Metro).
Further, operational changes in the contact center industry, such
as chat and social-media agents, require that we extend support for
concurrent use of applications, enabling agents to work
simultaneously with more than one customer.
The reputation of our software may be damaged and we may face a
loss of revenue if our software products fail to perform as
intended or contain significant defects.
Our
software products are complex, and significant defects may be found
following introduction of new software or enhancements to existing
software or in product implementations in varied information
technology environments. Internal quality assurance testing and
customer testing may reveal product performance issues or desirable
feature enhancements that could lead us to reallocate product
development resources or postpone the release of new versions of
our software. The reallocation of resources or any postponement
could cause delays in the development and release of future
enhancements to our currently available software, require
significant additional professional services work to address
operational issues, damage the reputation of our software in the
marketplace and result in potential loss of revenue. Although we
attempt to resolve all errors that we believe would be considered
serious by our partners and customers, our software is not
error-free. Undetected errors or performance problems may be
discovered in the future, and known errors that we consider minor
may be considered serious by our partners and customers. This could
result in lost revenue, delays in customer deployment or legal
claims and would be detrimental to our reputation. If our software
experiences performance problems or ceases to demonstrate
technology leadership, we may have to increase our product
development costs and divert our product development resources to
address the problems.
We may be unable to enforce or defend our ownership and use of
proprietary and licensed technology.
Our
success depends to a significant degree upon our proprietary and
licensed technology. We rely on a combination of patent, trademark,
trade secret and copyright law, contractual restrictions and
passwords to protect our proprietary technology. However, these
measures provide only limited protection, and there is no guarantee
that our protection of our proprietary rights will be adequate.
Furthermore, the laws of some jurisdictions outside the United
States do not protect proprietary rights as fully as in the United
States. In addition, our competitors may independently develop
similar technology; duplicate our products or design around our
patents or our other intellectual property rights. We may not be
able to detect or police the unauthorized use of our products or
technology, and litigation may be required in the future to enforce
our intellectual property rights, to protect our trade secrets or
to determine the validity and scope of our proprietary rights. Any
litigation to enforce our intellectual property rights would be
expensive and time-consuming, would divert management resources and
may not be adequate to protect our business.
We do
not believe any of our products infringe the proprietary rights of
third parties. However, companies in the software industry have
experienced substantial litigation regarding intellectual property
and third parties could assert claims that we have infringed their
intellectual property rights. In addition, we may be required to
indemnify our distribution partners and end-users for similar
claims made against them. Any claims against us would divert
management resources, and could require us to spend significant
time and money in litigation, pay damages, develop new intellectual
property or acquire licenses to intellectual property that is the
subject of the infringement claims. These licenses, if required,
may not be available on acceptable terms. As a result, intellectual
property claims against us could have a material adverse effect on
our business, operating results and financial
condition.
As the
number of software products in the industry increases and the
functionality of these products further overlaps, we believe that
software developers and licensors may become increasingly subject
to infringement claims. Any such claims, with or without merit,
could be time consuming and expensive to defend and could adversely
affect our business, operating results and financial
condition.
Our business may be adversely impacted if we do not provide
professional services to implement our solutions.
Customers that
license our software typically engage our professional services
staff or third-party consultants to assist with product
implementation, training and other professional consulting
services. We believe that many of our software sales depend, in
part, on our ability to provide our customers with these services
and to attract and educate third-party consultants to provide
similar services. New professional services personnel and service
providers require training and education and take time and
significant resources to reach full productivity. Competition for
qualified personnel and service providers is intense within our
industry. Our business may be harmed if we are unable to provide
professional services to our customers to effectively implement our
solutions or if we are unable to establish and maintain
relationships with third-party implementation
providers.
Our business may be adversely impacted by cyber security
breach.
Third
parties may attempt to fraudulently induce employees or customers
to disclose sensitive information such as user names, passwords, or
other information in order to gain access to our data, which could
result in significant legal and financial exposure and a loss of
confidence in the security of our service that would harm our
future business prospects. Because the techniques used to obtain
unauthorized access, or to sabotage systems, change frequently and
generally are not recognized until launched against a target, we
may be unable to anticipate these techniques or to implement
adequate preventative measures. If an actual or perceived breach of
our security occurs, the market perception of the effectiveness of
our security measures could be harmed and we could lose sales and
customers.
Because our software could interfere with the operations of
customers, we may be subject to potential product liability and
warranty claims by these customers.
Our
software enables customers’ software applications to
integrate and is often used for mission critical functions or
applications. Errors, defects or other performance problems in our
software or failure to provide technical support could result in
financial or other damages to our customers. Customers could seek
damages for losses from us. In addition, the failure of our
software and solutions to perform to customers’ expectations
could give rise to warranty claims. The integration of our software
with our customer’s applications increase the risk that a
customer may bring a lawsuit against us. Even if our software is
not at fault, a product liability claim brought against us, even if
not successful, could be time consuming and costly to defend and
could harm our reputation.
The so-called “penny stock rule” could make it
cumbersome for brokers and dealers to trade in our common stock,
making the market for our common stock less liquid which could
cause the price of our stock to decline.
The
Company’s common stock is quoted on the Over-the-Counter
Bulletin Board. Trading of our common stock on the OTCBB may be
subject to certain provisions of the Securities Exchange Act of
1934, as amended, commonly referred to as the "penny stock" rule. A
penny stock is generally defined to be any equity security that has
a market price less than $5.00 per share, subject to certain
exceptions. Our stock is currently a penny stock and therefore is
subject to additional sales practice requirements on
broker-dealers. These may require a broker-dealer to:
●
make
special
suitability determination for purchasers of our
shares;
●
receive the
purchaser's written consent to the transaction prior to the
purchase; and
●
deliver to a
prospective purchaser of our stock, prior to the first transaction,
a risk disclosure document relating to the penny stock
market.
Consequently, penny
stock rules may restrict the ability of broker-dealers to trade
and/or maintain a market in our common stock. Also, prospective
investors may not want to get involved with the additional
administrative requirements, which may have a material adverse
effect on the trading of our shares.
We have not paid any dividends on our common stock and it is likely
that no dividends will be paid in the future.
We have
never declared or paid cash dividends on our common stock and we do
not anticipate paying any cash dividends on our common stock in the
foreseeable future.
Provisions of our charter and Bylaws could deter takeover
attempts.
Our
certificate of incorporation authorizes the issuance, without
stockholder approval, of preferred stock, with such designations,
rights and preferences as the Board of Directors may determine from
time to time. Such designations, rights and preferences established
by the Board may adversely affect our stockholders. In the event of
issuance, the preferred stock could be used, under certain
circumstances, as a means of discouraging, delaying or preventing a
change of control of the Company. Although we have no present
intention to issue any shares of preferred stock in addition to the
currently outstanding preferred stock, we may issue preferred stock
in the future.
Item 1B. Unresolved Staff
Comments
Not
applicable.
Our
corporate headquarters and administrative functions are based in
offices of approximately 3,080 square feet in our Cary, North
Carolina office pursuant to a lease which expired in 2018. The
Company is currently on a month to month lease at the same office
location and are in negotiations on a new long term lease. We
believe that our present facilities are suitable for continuing our
existing and planned operations.
Not
applicable.
Not
applicable.
PART II
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, 2018 and 2017.
|
|
|
|
|
Quarter
|
|
|
|
|
|
First
|
$0.02
|
$0.01
|
$0.01
|
$0.01
|
|
Second
|
$0.01
|
$0.01
|
$0.01
|
$0.01
|
|
Third
|
$0.02
|
$0.01
|
$0.01
|
$0.01
|
|
Fourth
|
$0.01
|
$0.01
|
$0.01
|
$0.01
|
The
closing price of the common stock on March 21, 2019 was $0.01 per
share.
Dividends and Record Stockholders
We have
never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends on our common stock in
the foreseeable future. As of March 22, 2019, we had 227 registered
stockholders of record.
Equity Compensation Plan Information
The
following table sets forth certain information as of December 31,
2018, about shares of Common Stock outstanding and available for
issuance under the Company’s existing equity compensation
plans: the 2007 Cicero Stock Option Plan and the Outside Director
Stock Option Plan.
|
Plan
Category
|
Number of
Securities tobe issued upon exercise of
outstanding
options
|
Weighted-averageexercise
price of
outstanding
options
|
Number of
securitiesremaining available underequity compensation
plans(excluding securities reflected
in the first
column)
|
|
Equity compensation
plans approved by stockholders
|
706,211
|
$0.08
|
-0-
|
|
Equity compensation
plans not approved by stockholders
|
-0-
|
--
|
-0-
|
Not
applicable
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
General Information
Cicero
Inc. provides businesses the ability to maximize every interaction
from intra-company back office applications to those that take
place between employees, customers and vendors while extending the
value of the best of breed applications in which businesses have
already invested. The Company provides an innovative and unique
combination of application and process integration, automation,
presentation and real-time analysis, all without changes to the
underlying applications or requiring costly development
expenditures. Business integration software addresses the emerging
need for a company's information systems to deliver enterprise-wide
views of the Company's business information processes.
In
addition to software products, the Company also provides technical
support, training and consulting services as part of its commitment
to providing its customers industry-leading integration solutions.
The Company’s consulting team has in-depth experience in
developing successful enterprise-class solutions as well as
valuable insight into the business information needs of customers
in the Global 5000. Cicero offers services around our integration
and customer experience management software products.
This
discussion contains forward looking statements relating to such
matters as anticipated financial performance, business prospects,
technological developments, new products, research and development
activities, liquidity and capital resources and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of
factors could cause its actual results to differ materially from
the anticipated results or other expectations expressed in the
Company's forward-looking statements. See ''Item 1.
Business—Forward Looking and Cautionary
Statements.''
Business Strategy
Management makes
operating decisions and assesses performance of the Company’s
operations based on one reportable segment, the Software product
segment.
The
Software product segment is comprised of the Cicero Discovery,
Cicero Insight and Cicero Automation products. Cicero Discovery
delivers desktop analytics and reporting for the enterprise.
Cicero Discovery collects activity and application performance data
and tracks business objects across time and across multiple users
as well as measures against a defined "expected" business process
flow, either for analysis or to feed a third-party application.
Cicero Insight is a measurement and analytics solution that
collects and presents high value information about quality,
productivity, compliance, and revenue from frontline activity to
target areas for improvement. Using a set of configurable sensors
at the employees’ desktop Cicero Insight collects activity
data about the applications, when and how they are used and makes
it readily available for analysis and action to the business
community. Cicero Automation enables businesses to transform human
interaction across the enterprise. Cicero Automation enables the
flow of data between different applications, regardless of the type
and source of the application, eliminating redundant entry and
costly mistakes. Cicero Automation automates up and down-stream
process flows, enforcing compliance and optimizing handle time,
reducing training time and enabling delivery of best in class
service. Cicero Automation captures real-time information about
business processes at the desktop, allowing organizations to spot
trends and forecast problems before they occur.
Results of Operations
The
following table sets forth, for the years indicated, the Company's
results of operations expressed as a percentage of revenue and
presents information for the three categories of
revenue.
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
Software
|
7.8%
|
41.7%
|
|
Maintenance
|
57.8%
|
39.5%
|
|
Services
|
34.4%
|
18.9%
|
|
Total
|
100.0%
|
100.0%
|
|
|
|
|
|
Cost of
revenue:
|
|
|
|
Software
|
0.1%
|
0.5%
|
|
Maintenance
|
18.6%
|
12.2%
|
|
Services
|
48.3%
|
30.1%
|
|
Total
|
67.0%
|
42.8%
|
|
|
|
|
|
Gross
margin
|
33.0%
|
57.2%
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Sales and
marketing
|
51.0%
|
35.7%
|
|
Research and
product development
|
117.3%
|
81.3%
|
|
General and
administrative
|
85.2%
|
72.8%
|
|
Total
|
253.5%
|
189.7%
|
|
|
|
|
|
Loss from
operations
|
(220.5)%
|
(132.5)%
|
|
Other
income/(expense), net
|
(23.9)%
|
(27.9)%
|
|
Net
loss
|
(244.4)%
|
(160.4)%
|
The
following table sets forth data for total revenue for operations by
geographic origin as a percentage of total revenue for the periods
indicated:
|
|
|
|
|
United
States
|
88%
|
69%
|
|
Europe
|
12%
|
31%
|
|
|
100%
|
100%
|
Years
Ended December 31, 2018 and 2017
Revenue and Gross Margin. The Company
has three categories of revenue: software products, maintenance,
and services. Software products revenue is comprised primarily of
fees from licensing the Company's proprietary software products.
Maintenance revenue is comprised of fees for maintaining,
supporting, and providing periodic upgrades to the Company's
software products. Services revenue is comprised of fees for
consulting and training services related to the Company's software
products.
The
Company's revenues vary from quarter to quarter, due to market
conditions, the budgeting and purchasing cycles of customers and
the effectiveness of the Company’s sales force. The Company
does not have any material backlog of unfilled software orders and
product revenue in any period is substantially dependent upon
orders received in that quarter. Because the Company's operating
expenses are based on anticipated revenue levels and are relatively
fixed over the short term, variations in the timing of the
recognition of revenue can cause significant variations in
operating results from period to period. Fluctuations in operating
results may result in volatility of the price of the Company's
common stock.
Total
revenues for the year ended December 31, 2018 decreased 35.9% or
$473,000 from $1,318,000 in 2017 to $845,000 in 2018. The decrease
in revenues in 2018 is due primarily to the decrease in software
sales and maintenance revenue partially offset by an increase in
consulting revenue.
Software Products. Software products
revenue for the year ended December 31, 2018 decreased 88.0% or
$483,000 from $549,000 in 2017 to $66,000 in 2018. The decrease is
primarily due to additional licenses ordered from a current
customer in 2017, which was not replicated in 2018.
The
gross margin on software products was 98.5 % and 98.9% for the
years ended December 31, 2018 and 2017, respectively.
The
Company expects to see an increase in software sales coupled with
improving margins on software products as Cicero Discovery, Cicero
Insight and Cicero Automation gain acceptance in the marketplace.
Further, the Company believes that its repositioned strategy of
leading with a no cost, short, “proof of concept”
evaluation of the software’s capabilities will shorten the
sales cycle and allow for value based selling to our customers and
prospects. The Company anticipates success in this regard based
upon current discussions and active “proof of concepts”
with active partners, customers and prospects. Using data and
analytics to drive change in an organization begins with capturing
that data. We believe that this approach is being embraced by the
Company’s prospects. In addition, the Company and its
products continue to be recognized in the marketplace with
technology and partnership awards.
Maintenance. Maintenance revenues for
the year ended December 31, 2018 decreased 6.2% or $32,000 from
$520,000 in 2017 to $488,000 in 2018. The decrease in maintenance
revenue in 2018 is primarily due to the cancellation of a
maintenance contract in 2018.
Cost of
maintenance is comprised of personnel costs and related overhead
for the maintenance and support of the Company’s software
products. The Company experienced a gross margin on maintenance
products of 67.8% and 69.0% for 2018 and 2017,
respectively.
Maintenance
revenues are expected to increase as a result of our expected
increase in software sales of the Cicero Discovery, Cicero Insight
and Cicero Automation products. The cost of maintenance as a
percentage should decrease slightly.
Services. Services revenue for the year
ended December 31, 2018 increased 16.9% or $42,000 from $249,000 in
2017 to $291,000 in 2018. The increase in services revenues in 2018
is primarily attributable to an increase in paid consulting
engagements with existing customers.
Cost of
services primarily includes personnel and travel costs related to
the delivery of services. Services gross margin loss was (40.2%)
and (59.4%) for 2018 and 2017, respectively. The decrease in gross
margin loss in 2018 was primarily attributable to the increase in
consulting revenue partially offset by an increase in consulting
expenses from an increase in outside consulting
expenses.
Services revenues
are expected to increase as the Cicero Discovery, Cicero Insight,
and Cicero Automation products gain acceptance.
Sales and Marketing. Sales and marketing
expenses primarily include personnel costs for salespeople,
marketing personnel, travel and related overhead, as well as
industry conference participation and promotional expenses. Sales
and marketing expenses decreased 8.3% or $39,000 from $470,000 in
2017 to $431,000 in 2018. The decrease is primarily attributable to
lower headcount and outside professional services partially offset
by higher advertising and trade show expenses.
Sales
and marketing expenses are expected to increase as the Company adds
variable compensation based on sales.
Research and Development. Research and
development expenses primarily include personnel costs for product
authors, product developers and product documentation and related
overhead. Research and development expense decreased 7.5% or
$80,000 to from $1,071,000 in 2017 to $991,000 in 2018. The
decrease in costs is primarily due to lower headcount and a
decrease in outside professional services.
The
Company intends to continue to make a significant investment in
research and development while enhancing efficiencies in this
area.
General and Administrative. General and
administrative expenses consist of personnel costs for the
executive, legal, financial, human resources, investor relations
and administrative staff, related overhead, and all non-allocable
corporate costs of operating the Company. General and
administrative expenses decreased 24.9% or $239,000 from $959,000
in 2017 to $720,000 in 2018. The decrease is primarily attributable
to a decrease in headcount, outside professional services, legal
and corporate insurance expenses.
General
and administrative expenses are not expected to increase in
2019.
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 2018 and 2017. Because of the
Company’s inconsistent earnings history, the deferred tax
assets have been fully offset by a valuation
allowance.
Other Income/(Loss). Other income (net)
increased $128,000 from other income of zero in 2017 to $128,000 in
2018. The increase is primarily due to income from the write off of
old liabilities of approximately $125,000 in fiscal
2018.
Interest expense
decreased $38,000 from $368,000 in 2017 to $330,000 in 2018 due a
decrease in overall total debt outstanding during fiscal 2018 as
compared to 2017.
Net Loss. Net loss decreased $49,000
from a net loss of $2,114,000 in 2017 to a net loss of $2,065,000
in fiscal 2018. The decrease in net loss is primarily due to lower
operating costs and write off of old liabilities partially offset
by a decrease in total revenue.
Impact of Inflation. Inflation has not
had a significant effect on the Company’s operating results
during the periods presented.
Liquidity and Capital Resources
Operating and Investing Activities
The
Company’s cash was $97,000 on December 31, 2018 compared with
$56,000 on December 31, 2017, an increase of $41,000. The Company
incurred a net loss of $2,065,000 for the year ended December 31,
2018 compared to net loss of $2,114,000 for the previous fiscal
year. The Company has experienced negative cash flows from
operations for fiscal 2018 and 2017. At December 31, 2018, the
Company had a working capital deficiency of
$3,458,000.
Operating
activities utilized $2,234,000 in cash, which was primarily
comprised of the loss from operations of $2,065,000, a non-cash
gain on the write off of old liabilities of $125,000, an increase
in prepaid expenses of $89,000 and a decrease in trade payables and
other accruals of $178,000. This was offset by non-cash charges for
depreciation of $3,000, stock-based compensation expense of $2,000,
and a write off of bad debt of $2,000, a decrease in accounts
receivable of $210,000 and an increase in deferred revenue of
$6,000.
During 2018,
the Company utilized approximately $2,000 in cash updating the
Company’s network and computer equipment.
Financing Activities
The
Company funded its cash needs during the year ended December 31,
2018 with cash on hand from December 31, 2017, the revenue
generated in fiscal 2018, and through the use of proceeds from
other short-term borrowings in the amount of $2,277,000, net of
repayments.
From
time to time during 2017 through 2018, the Company entered into
several short term notes payable with John Steffens, the
Company’s Chairman of the Board, for various working capital
needs. The notes bear an interest rate of 10% with a maturity date
of June 30, 2018. In June 2018, all outstanding notes were amended
to a new maturity date of December 31, 2018. The Company is
obligated to repay the notes with the collection of any accounts
receivable. At December 31, 2017, the Company was indebted to Mr.
Steffens in the approximate amount of $1,170,000 of principal and
$75,000 of interest. In December 2018, the all outstanding notes
were amended to a new maturity date of June 30, 2020 and as such
have been reclassed as long term debt as of December 31, 2018. At
December 31, 2018, the Company was indebted to Mr. Steffens in the
approximate amount of $3,511,500 of principal and $299,000 of
interest.
Although the
Company has incurred an operating loss of approximately $2,065,000
for the year ended December 31, 2018, and has a history of
operating losses, management believes that its product’s
functionality resonates in the marketplace as both
“analytics” and “automation” are topics
often discussed and written about. Further, the Company believes
that its repositioned strategy of leading with a no cost, short,
“proof of concept” evaluation of the software’s
capabilities will shorten the sales cycle and allow for value based
selling to our customers and prospects. The Company anticipates
success in this regard based upon current discussions and active
“proof of concepts” with active partners, customers and
prospects. The Company has borrowed $2,402,000 and $1,873,000 in
2018 and 2017, respectively. Should the Company be unable to
secure customer contracts that will drive sufficient cash flow to
sustain operations, the Company will be forced to seek additional
capital in the form of debt or equity financing; however, there can
be no assurance that such debt or equity financing will be
available on terms acceptable to the Company or at all. As a result
of these factors, the report of our independent auditors dated
March 29, 2019, on our consolidated financial statements for the
period ended December 31, 2018 included an emphasis of matter
paragraph indicating that there is a substantial doubt about the
Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in
existence.
Off Balance Sheet Arrangements
The
Company does not have any off balance sheet arrangements. We have
no unconsolidated limited purpose entities, and we have not
guaranteed or otherwise supported the obligations of any other
entity.
Critical Accounting Policies
The
policies discussed below are considered by us to be critical to an
understanding of our consolidated financial statements because they
require us to apply the most judgment and make estimates regarding
matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the following
paragraphs. With respect to the policies discussed below, we note
that because of the uncertainties inherent in forecasting, the
estimates frequently require adjustment.
Our
consolidated financial statements and related disclosures, which
are prepared to conform to accounting principles generally accepted
in the United States of America, require us to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the period reported. We
are also required to disclose amounts of contingent assets and
liabilities at the date of the consolidated financial statements.
Our actual results in future periods could differ from those
estimates. Estimates and assumptions are reviewed periodically, and
the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be
necessary.
We
consider the most significant accounting policies and estimates in
our consolidated financial statements to be those surrounding: (1)
revenue recognition; (2) allowance for doubtful trade accounts
receivable; (3) goodwill; and (4) valuation of deferred tax assets.
These accounting policies, the basis for any estimates and
potential impact to our consolidated financial statements, should
any of the estimates change, are further described as
follows:
Revenue Recognition. On January 1, 2018, we adopted ASC 606,
Revenue from Contracts with Customers and all the related
amendments (“the new revenue standard”) and applied it
to all contracts using the modified retrospective method. We
completed our review of contracts with our customers and did not
need to record a cumulative effect adjustment to accumulated
deficit upon adoption of the new revenue standard as of January 1,
2018. Under ASC 606, revenue is recognized when a company transfers
the promised goods or services to a customer in an amount that
reflects consideration that is expected to be received for those
goods and services. Adoption of the standard did not have a
material impact on the Company’s financial position, results
of operations, cash flow, accounting policies, business processes,
internal controls or disclosures.
Cicero
utilizes point in time method for revenue recognition for its
software license revenue. Our software licenses are distinct and
have standalone functionality as it is fully functional without any
services purchased. Cicero utilizes the output method over time for
revenue recognition as maintenance contracts are invoiced annually
prior to the start of the maintenance period and then recognized
monthly over the length of the maintenance contract. Cicero
utilizes the output method over time for revenue recognition for
its services revenue as service hours/days are logged and billed
subsequently. Cicero has no upfront fees that are billable to
customers.
Allowance for Doubtful Trade Accounts
Receivable. In addition to assessing the probability of
collection in conjunction with revenue arrangements, we continually
assess the collectability of outstanding invoices. Assumptions are
made regarding the customer’s ability and intent to pay and
are based on historical trends, general economic conditions, and
current customer data. Should our actual experience with respect to
collections differ from our initial assessment, there could be
adjustments to bad debt expense.
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, 2018, we had a valuation allowance of $37,600,000
against $37,600,000 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, 2018, the Company has net operating loss carryforwards
of approximately $143,307,000 which may be applied against future
taxable income. These carryforwards will expire at various times
between 2019 and 2037.
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the
“Act”) was signed into law making significant changes
to the Internal Revenue Code. Changes include, but are not limited
to, a corporate tax rate decrease from 35% to 21% effective for tax
years beginning after December 31, 2017, the transition of U.S
international taxation from a worldwide tax system to a territorial
system, and a one-time transition tax on the mandatory deemed
repatriation of cumulative foreign earnings as of December 31,
2017. As a result of The Act, the Company recorded one-time
adjustments for the re-measurement of deferred tax assets
(liabilities). Given the Company's full valuation allowance as of
December 31, 2017, the adjustment does not materially impact the
Company's income tax provision or balance sheet.
As of
December 31, 2018, the valuation allowance of $37,600,000 related
primarily to net operating losses not likely to be realized. The
Company re-measured these non-current assets and liabilities at the
applicable tax rate of 21% in accordance with the Tax Cuts and Jobs
Act of 2017. The re-measurement resulted in a total decrease in
these assets of $18,278,000.
Recent Accounting Pronouncements:
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments, which clarifies how companies present and classify
certain cash receipts and cash payments in the statement of cash
flows where diversity in practice exists. The new standard was
effective for us in our first quarter of fiscal 2018. This standard
did not have a material impact on our consolidated financial
statements and related disclosures.
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.
The new standard establishes a right-of-use model (ROU) that
requires a lessee to recognize a ROU asset and lease liability on
the balance sheet for all leases with a term longer than 12 months.
Leases will be classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the income statement.
The new
standard is effective for us on January 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. We adopted the new standard on January 1, 2019 and use the
effective date as our date of initial application. Consequently,
financial information will not be updated and the disclosures
required under the new standard will not be provided for dates and
periods before January 1, 2019.
The new
standard provides a number of optional practical expedients in
transition. We elected the ‘package of practical
expedients’, which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease
classification and initial direct costs. We do not expect to elect
the use-of-hindsight or the practical expedient pertaining to land
easements; the latter not being applicable to us. We expect to
elect all of the new standard’s available transition
practical expedients.
We
expect that this standard will not have a material effect on our
financial statements. While we continue to assess all of the
effects of adoption, we currently believe the most significant
future effects relate to (1) the recognition of new ROU assets and
lease liabilities on our balance sheet for our real estate
operating lease and (2) providing significant new disclosures about
our leasing activities. We do not expect a significant change in
our leasing activities between now and adoption.
The new
standard also provides practical expedients for an entity’s
ongoing accounting. We currently expect to elect the short-term
lease recognition exemption for our real estate lease that is
currently on a month to month lease. This means, for those leases
that qualify, we will not recognize ROU assets or lease
liabilities, and this includes not recognizing ROU assets or lease
liabilities for existing short-term leases of those assets in
transition. As our real estate lease is a short term lease, the
adoption of this standard will not result in the Company
recognizing any right of use asset or liability.
Quantitative
and Qualitative Disclosures about Market Risk
Not
applicable.
Consolidated
Financial Statements and Supplementary Data
The
information required by this item appears beginning on page F-1 of
this report.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
(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, 2018. 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, 2018, our
Chief Executive Officer and Chief Financial Officer concluded that,
as of such date, our disclosure controls and procedures were
effective.
The
Audit Committee of the Board of Directors, which is composed solely
of independent directors, meets regularly with our independent
registered public accounting firm, Cherry Bekaert LLP, and
representatives of management to review accounting, financial
reporting, internal control and audit matters, as well as the
nature and extent of the audit effort. The Audit Committee is
responsible for the engagement of the independent auditors. The
independent auditors have free access to the Audit
Committee.
(b)
Management’s Responsibility for Consolidated Financial
Statements
Our
management is responsible for the integrity and objectivity of all
information presented in this report. The consolidated financial
statements were prepared in conformity with accounting principles
generally accepted in the United States of America and include
amounts based on management’s best estimates and judgments.
Management believes the consolidated financial statements fairly
reflect the form and substance of transactions and that the
consolidated financial statements fairly represent the
Company’s consolidated financial position and results of
operations for the periods and as of the dates stated
therein.
(c)
Management’s Assessment of Internal Control over Financial
Reporting
The
management of Cicero is responsible for establishing and
maintaining adequate internal control over financial reporting as
defined by Rules 13a–15(f) and 15(d)-15(f) under the
Securities Exchange Act of 1934. This system is designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with accounting
principles generally accepted in the United States of
America.
Our
internal control over financial reporting includes those policies
and procedures that: (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the consolidated
financial statements.
Because
of its inherent limitations, a system of internal control over
financial reporting can only provide reasonable assurance and may
not prevent or detect misstatements. Further, because of
changes in conditions, effectiveness of internal control over
financial reporting may vary over time.
Under
the direction of our Chief Executive Officer and Chief Financial
Officer, management completed an evaluation of the effectiveness of
the system of internal control over financial reporting based on
the framework in Internal
Control-Integrated Framework, published by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and has
determined that the Company’s system of internal control over
financial reporting was effective as of December 31,
2018.
(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.
None
PART III
Item 10. Directors, Executive Officers
and Corporate Governance
The following table sets forth certain
information about our directors and executive
officers:
|
Name
|
Age
|
Position(s)
|
|
John L
Steffens
|
77
|
Director
and Chairman
|
|
John
Broderick
|
69
|
Director
and Chief Executive Officer/Chief Financial Officer
|
|
Benjamin
L. Rosenzweig
|
33
|
Director
|
|
Thomas
Avery
|
65
|
Director
|
|
Mark
Landis
|
77
|
Director
|
|
Don
Peppers
|
68
|
Director
|
|
Todd
Sherin
|
45
|
Chief
Revenue Officer
|
John L. Steffens
Director
since May, 2007.
Mr.
John L. Steffens is the Founder of Spring Mountain Capital, LP, an
alternative investment firm located in New York City. Prior
to founding Spring Mountain Capital in 2001, Mr. Steffens spent 38
years at Merrill Lynch & Co., Inc., where he held numerous
senior management positions, including President of Merrill Lynch
Consumer Market, Vice Chairman of Merrill Lynch & Co., Inc.,
and Chairman of its U.S. Private Client Group. Under his
leadership, the Private Client Group experienced tremendous growth,
increasing assets under management from $200 billion to $1.6
trillion. Mr. Steffens also served on the board of directors
of Merrill Lynch & Co., Inc. from April 1986 until July
2001.
Mr.
Steffens currently serves on the Board of Directors of Colony
Capital, Inc. He also serves on the advisory boards of
StarVest Partners and Wicks Communication & Media Partners,
L.P. In addition, he is currently National Chairman Emeritus
of the Alliance for Aging Research. Previously, Mr. Steffens
served as Chairman of the Securities Industry Association (now the
Securities Industry and Financial Markets Association, or SIFMA),
as a Trustee of the Committee for Economic Development, and as a
member of the Board of Overseers of the Geisel School of Medicine
at Dartmouth. In 2010, Mr. Steffens was the recipient of the Billie
Jean King Contribution Award from the Women’s Sports
Foundation.
In
2001, Mr. Steffens founded Vineyard 7 & 8, a boutique winery
producing premium, limited production wine. Vineyard 7 &
8 is operated by the Steffens family and is located on Spring
Mountain in Napa Valley, California.
Mr.
Steffens graduated from Dartmouth College in 1963 with a B.A. in
Economics. He also completed the Advanced Management Program of the
Harvard Business School in 1979. We believe Mr. Steffens
qualifications to serve on the Board of Directors include his
experience in leading complex enterprises and his experience as a
senior executive.
John P. Broderick
Director
since July 2005.
Mr.
Broderick is currently the Chief Executive Officer and Chief
Financial Officer of the Company and is also a director. Mr.
Broderick has served as the Chief Executive Officer of the Company
since June 2005, as the Chief Financial Officer of the Company
since April 2001, and as Corporate Secretary since August 2001.
Prior to joining our Company, Mr. Broderick was Executive Vice
President of Swell Inc., a sports media e-commerce company where he
oversaw the development of all commerce operations and served as
the organization's interim Chief Financial Officer. Previously, Mr.
Broderick served as Chief Financial Officer and Senior Vice
President of North American Operations for Programmer's Paradise, a
publicly held international software marketer. Mr. Broderick
received his B.S. degree in accounting from Villanova University.
We believe Mr. Broderick’s qualifications to serve on our
Board of Directors include his intimate knowledge of our operations
as a result of day to day leadership as our Chief Executive
Officer.
Benjamin L. Rosenzweig
Director
since February 2017.
Mr.
Rosenzweig was appointed to serve on our Board of Directors in
February 2017, pursuant to a director designation right granted to
Privet Fund LP in connection with its purchase of the
Company’s common stock and warrants in July 2015. Mr.
Rosenzweig is currently a partner at Privet Fund Management LLC, an
investment management firm. Prior to joining Privet Fund Management
LLC in September 2008, Mr. Rosenzweig served as an investment
banking analyst in the corporate finance group of Alvarez and
Marsal from June 2007 until May 2008, where he completed multiple
distressed mergers and acquisitions, restructurings, capital
formation transactions and similar financial advisory engagements
across several industries. Mr. Rosenzweig is currently a Director
of PFSweb, Inc. and Hardinge, Inc. Mr. Rosenzweig is also
currently a board member and director of Potbelly
Corporation. Mr. Rosenzweig formerly served as a Director of
RELM Wireless Corp and Director of Startek, Inc. Mr. Rosenzweig
graduated magna cum laude
from Emory University with a Bachelor of Business Administration
degree in Finance and a second major in Economics. We believe
Mr. Rosenzweig qualifications to serve on our Board of Directors
include his financial background and previous business
experience.
Thomas Avery
Director
since July 2015.
Mr.
Avery was appointed to serve on our Board of Directors in July
2015, pursuant to a director designation right granted to Privet
Fund LP in connection with its purchase of the Company’s
common stock and warrants in July 2015. Mr. Avery has over 37 years
of investment banking and venture capital experience which includes
serving as a Managing Director at Raymond James & Associates
from 2000 until 2014; the head of the investment banking group at
Interstate/Johnson-Lane from 1995 to 2000; a general partner at
Noro-Moseley Partners from 1989 to 1995; a general partner at
Summit Partners from 1984 to 1989; and Senior Vice President at The
Robinson-Humphrey Company from 1977 to 1984. During his
career as a venture capitalist, Mr. Avery served on numerous
private company boards, assisting those companies with advice and
help in financing their enterprises; planning and executing growth
strategies; and building effective management teams. Mr.
Avery currently serves on the board of directors of KIPP Metro
Atlanta, a national charter school organization serving low income,
minority children. Mr. Avery also serves on the board of
Charles River Associates, a leading global consulting firm.
Mr. Avery also serves on the board of Rubicon, a New Zealand based
company that specializes in providing technology improved seed and
seedling products to the forestry industry in the United States,
New Zealand, and Brazil. Mr. Avery graduated Summa Cum Laude
from the Georgia Institute of Technology with a bachelor’s
degree in industrial management and from the Harvard Business
School with a master’s degree in business administration. We
believe Mr. Avery’s qualifications to serve on our Board of
Directors include his over 37 years of investment banking and
venture capital experience.
Mark Landis
Director
since July 2005.
Mr.
Landis has been a Director of the Company since July 2005.
Mr. Landis retired in 2003 from Siemens Building Technologies where
he had served as President of the North American Security
Division. Previously he was CEO of Security Technologies
Group from 1988 to 2001, when it was sold to Siemens Building
Technologies. In 2008 he became Chairman of Dataflow
Technologies, Inc., and continues in that role. From 1982 to
1988 he was CEO of CASI, a developer of access control security
systems. Mr. Landis earned a B.A. from Cornell University, a
Juris Doctorate from the University of Pennsylvania and a Chartered
Property and Casualty Underwriter (CPCU) degree from the
American Institute for Property and Liability Underwriters.
We believe Mr. Landis' qualifications to serve on our Board of
Directors include his experience in leading enterprises and his
experience as a senior executive.
Don Peppers
Director
since June 2007.
Mr. Peppers has been a Director since June 20,
2007. Mr. Peppers formed Marketing 1:1, Inc. in January 1992
which became Peppers & Rogers Group, a customer-centered
management consulting firm with offices located in the United
States, Europe, the Middle East, Latin America and South
Africa. He has written or co-authored eleven books on
marketing, sales, and customer relationships issues. Peppers
& Rogers Group is now a unit of TeleTech Holdings (TTEC), a
business process outsourcer based in Denver, Colorado. In
2016 Mr. Peppers left Teletech and formed CX Speakers, LLC, to
deliver workshops, keynote addresses, and high-level consulting
services to business clients. From October 1990 to January
1992, Mr. Peppers was the Chief Executive Officer of Perkins/Butler
Direct Marketing, a top-20 U.S. direct-marketing agency.
Prior to marketing and advertising, he worked as an economist in
the oil business and as the director of accounting for a regional
airline. Mr. Peppers holds a Bachelor's Degree in astronautical
engineering from the U.S. Air Force Academy, and a Master's Degree
in public affairs from Princeton University's Woodrow Wilson
School. We believe Mr. Peppers’ qualifications
to serve on our Board of Directors include his years of experience
providing strategic advisory services to
organizations.
Todd Sherin
Mr.
Sherin has been the Chief Revenue Officer of the Company since July
2017 where he oversees Sales and Marketing, in addition to
Operations, including Product Strategy and Development. Prior to
his role at Cicero, Inc., Mr. Sherin founded Wysk, LLC a Contact
Center focused Systems Integrator. Under his leadership, the
boutique SI/VAR became a premier Workforce Optimization specialist
firm and was successfully sold to a Pan American Value-Added
Reseller. Previously, Mr. Sherin held multiple technical and sales
roles at Anexinet, Capgemini, Pfizer and IHS Markit. Mr.
Sherin received his B.A. degree in International Relations from
University of Pennsylvania.
There are no family relationships between or among the above
directors or executive officers.
Audit Committee
The
Audit Committee is composed of Mark Landis. The responsibilities of
the Audit Committee include the appointment of, retention,
replacement, compensation and overseeing the work of the
Company’s independent accountants and tax professionals. The
Audit Committee reviews with the independent accountants the
results of the audit engagement, approves professional services
provided by the accountants including the scope of non-audit
services, if any, and reviews the adequacy of our internal
accounting controls. The Audit Committee met formally four times
during our fiscal year ended December 31, 2018. Mr. Landis attended
every meeting while appointed to the Audit Committee. The Board of
Directors has determined that the members of the Audit Committee
are independent as defined in Rule 5605(a)(2) of The NASDAQ Stock
Market’s listing standards. Mr. Landis is an “audit
committee financial expert” due to his experience as a senior
executive.
Code of Ethics and Conduct
Our
Board of Directors has adopted a code of ethics and a code of
conduct that applies to all of our Directors, Chief Executive
Officer, Chief Financial Officer, and employees. We will provide
copies of our code of conduct and code of ethics without charge
upon request. To obtain a copy of the code of ethics or code of
conduct, please send your written request to Cicero Inc., Suite
542, 8000 Regency Pkwy, Cary, North Carolina 27518, Attn: Corporate Secretary. The code of ethics is
also available on the Company’s website at
www.ciceroinc.com.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company’s officers, directors and persons who own more
than ten percent of the Company’s Common Stock (collectively,
“Reporting Persons”) to file reports of ownership and
changes in ownership with the SEC. Reporting Persons are required
by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. Based solely on its review of the
copies of such reports received by it and written representations
all Section 16(a) reports were filed in a timely manner during the
fiscal year ended December 31, 2018.
Item 11. Executive
Compensation.
Compensation Committee Membership and Organization
The
Company no longer has a standing Compensation Committee. The Board
of Directors now performs many of the functions of a compensation
committee including establishing, implementing and monitoring
adherence with the Company’s compensation philosophy such
as:
●
Setting the total
compensation of our Chief Executive Officer and evaluating his
performance based on corporate goals and objectives;
●
Reviewing and
approving the Chief Executive Officer’s decisions relevant to
the total compensation of the Company’s other executive
officer;
●
Making grants with
respect to equity-based plans in order to allow us to attract and
retain qualified personnel; and
●
Reviewing director
compensation levels and practices, and considering, from time to
time, changes in such compensation levels and practices of the
Board of Directors.
General Compensation Philosophy
As a
technology company, we operate in an extremely competitive and
rapidly changing industry. We believe that the skill, talent,
judgment and dedication of our executive officers are critical
factors affecting the long term value of our Company. Our
philosophy and objectives in setting compensation policies for
executive officers are to align pay with performance, while at the
same time providing fair, reasonable and competitive compensation
that will allow us to retain and attract superior executive talent.
We strongly believe that executive compensation should align
executives’ interests with those of shareholders by rewarding
achievement of specific annual, long-term and strategic goals by
the Company, with an ultimate objective of providing long-term
stockholder value. The specific goals that our current executive
compensation program rewards are focused primarily on revenue
growth and profitability. To that end, we believe executive
compensation packages provided by the Company to its executive
officers should include a mix of both cash and equity based
compensation that reward performance as measured against
established goals. As a result, the principal elements of our
executive compensation are base salary, non-equity incentive plan
compensation, long-term equity incentives generally in the form of
stock options and/or restricted stock and post-termination
severance and acceleration of stock option vesting upon termination
and/or a change in control.
Our
goal is to maintain an executive compensation program that will
fairly compensate our executives, attract and retain qualified
executives who are able to contribute to our long-term success,
induce performance consistent with clearly defined corporate goals
and align our executives’ long-term interests with those of
our shareholders. The decision on the total compensation for our
executive officers is based primarily on an assessment of each
individual’s performance and the potential to enhance
long-term stockholder value. Often, judgment is utilized in lieu of
total reliance upon rigid guidelines or formulas in determining the
amount and mix of compensation for each executive officer. Factors
affecting such judgment include performance compared to strategic
goals established for the individual and the Company at the
beginning of the year, the nature and scope of the
executive’s responsibilities and effectiveness in leading
initiatives to achieve corporate goals.
Role of Chief Executive Officer in Compensation
Decisions
Our
Board of Directors determines the base salary (and any bonus and
equity-based compensation) for each executive officer annually.
John Broderick, our Chief Executive Officer, confers with members
of the Board, and makes recommendations, regarding the compensation
of all executive officers other than himself. He does not
participate in the Board’s deliberations regarding his own
compensation. In determining the compensation of our executive
officers, the Board does not engage in any benchmarking of total
compensation or any material element of compensation.
Components of Executive Compensation
The
compensation program for our Named Executive Officers consists
of:
●
Non-equity
incentive plan compensation;
●
Long-term equity
incentive compensation; and
Base Salary
The
Company provides our executive officers and other employees with
base salary to compensate them for services rendered during the
fiscal year. The Board considered the scope and accountability
associated with each executive officer’s position and such
factors as the performance and experience of each executive
officer, individual leadership and level of responsibility when
approving the base salary levels for fiscal year 2018.
Non-Equity Incentive Plan Compensation
Non-equity
incentive plan compensation for our executive officers is designed
to reward performance against key corporate goals and for certain
of our executives for performance against individual business
development goals. Our executive officers’ incentive targets
are designed to motivate management to exceed specific goals
related to profitability objectives. We believe that these metrics
correlate to stockholder value and individual performance. Our
Chief Executive Officer did not achieve a non-equity bonus in
fiscal 2018 but did achieve a non-equity bonus of $25,000 in fiscal
2017. Our former Chief Technology Officer and Chief Revenue Office
did not achieve a non-equity bonus in fiscal 2018 or
2017.
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 2019.
Our
Chief Revenue Officer, Mr. Sherin, is eligible to earn a commission
equal to 15% of incremental operating profit attributed to new
clients as defined in his employment agreement.
Long-Term Equity Incentive Awards
The
Company presently has one equity-based compensation plan under
which grants were made, entitled Cicero Inc. 2007 Employee Stock
Option Plan. The Plan provides for the grant of incentive and
non-qualified stock options to employees, and the grant of
non-qualified options to consultants and to directors and advisory
board members. In addition, various other types of stock-based
awards, such a stock appreciation rights, may be granted under the
Plan. The Plan is administered by the Board of Directors, which
determines the individuals eligible to receive options or other
awards under the Plan, the terms and conditions of those awards,
the applicable vesting schedule, the option price and term for any
granted options, and all other terms and conditions governing the
option grants and other awards made under the Plan. Under the 2007
Plan, 4,500,000 shares of our common stock were reserved for
issuance pursuant to options or restricted stock awards. The plan
expired in 2017 and as such there are no shares available for
future option grants and awards.
To
date, awards have been mainly in the form of non-qualified stock
options granted under the Plan. The Board of Directors granted
these stock-based incentive awards from time to time for the
purpose of attracting and retaining key executives, motivating them
to attain the Company's long-range financial objectives, and
closely aligning their financial interests with long-term
stockholder interests and share value.
We
account for equity compensation paid to all of our employees under
the rules of Financial Accounting Standards Board guidance now
codified as ASC 718 “Compensation – Stock
Compensation,” which requires us to estimate and record
compensation expense over the service period of the award. All
equity awards to our employees, including executive officers, and
to our directors have been granted and reflected in our
consolidated financial statements, based upon the applicable
accounting guidance, at fair market value on the date of grant.
Generally, the granting of a non-qualified stock option to our
executive officers is not a taxable event to those employees,
provided, however, that the exercise of such stock would result in
taxable income to the optionee equal to the difference between the
fair market value of the stock on the exercise date and the
exercise price paid for such stock. Similarly, a restricted stock
award subject to a vesting requirement is also not taxable to our
executive officers unless such individual makes an election under
section 83(b) of the Internal Revenue Code of 1986, as amended. In
the absence of a section 83(b) election, the value of the
restricted stock award becomes taxable to the recipient as the
restriction lapses.
Other Benefits
Our
executive officers participate in benefit programs that are
substantially the same as all other eligible employees of the
Company.
The
following summary compensation table sets forth the compensation
earned by all persons serving as the Company’s executive
officers during fiscal years 2018 and 2017.
Summary Compensation Table
Name
and
Principal
Position
|
|
|
|
Non-
Equity
Incentive
Plan
Compensation
|
All
Other
Compensation
(5)
|
|
|
John P.
Broderick
Chief Executive
Officer, Chief Financial Officer, Corporate Secretary
|
2018
|
$175,000(1)
|
--
|
--
|
$2,404
|
$177,404
|
|
|
2017
|
$175,000(1)
|
--
|
$25,000(4)
|
$2,322
|
$177,383
|
|
|
|
|
|
|
|
|
Antony
Castagno
Chief
Technology Officer (6)
|
2018
|
$104,166(2)
|
--
|
--
|
$802
|
$104,968
|
|
|
2017
|
$150,000(2)
|
--
|
--
|
$8,871
|
$158,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd
Sherin
Chief
Revenue Officer
|
2018
|
$150,000(3)
|
--
|
--
|
$26,317
|
$176,317
|
|
|
2017
|
$71,685(3)
|
--
|
--
|
$10,558
|
$82,243
|
(1)
Mr. Broderick is
currently deferring $25,000 of his annual salary which commenced in
July 2013.
(2)
Mr. Castagno was
deferring $25,000 of his annual salary which commenced in April
2014 and ended in August 2018.
(3)
Mr. Sherin was
hired in July 2017.
(4)
Non-equity
incentive plan compensation for Mr. Broderick includes a bonus for
certain revenue transactions earned during fiscal year ended
December 31, 2017. The revenue transaction was the acceptance of
the first contract greater than $300,000 for each fiscal
year.
(5)
Other compensation
includes the Company’s portion of major medical insurance
premiums and long-term disability premiums for named executives
during fiscal years ended December 31, 2018 and 2017,
respectively.
(6)
Mr.
Castagno’s employment with the Company was terminated on
January 15, 2018.
Grants of Plan Based Awards
The
Company did not award any stock options to the named executives
during fiscal 2018 and 2017. The Company did not award any stock
appreciation rights (SARs) during fiscal 2018 and
2017.
The
following table presents the number and values of exercisable
options as of December 31, 2018 by the named
executive.
Outstanding
Equity Awards at December 31, 2018
|
|
|
|
|
Name
|
Number of
Securities Underlying Unexercised Options # Exercisable
(Vested)
|
Number of
Securities Underlying Unexercised Unearned Options# Unexercisable
(Unvested)
|
Option Exercise
price ($)
|
|
Number of Shares
of Stock That Have Not Vested
|
Market Value of
Shares of Stock That Have Not Vested
|
|
John P.
Broderick
|
75,000(1)
|
--
|
$0.09
|
08/20/2020
|
|
|
|
|
|
|
|
|
549,630(2)
|
$2,253
|
|
|
|
|
|
|
1,500,000(3)
|
$6,150
|
|
|
|
|
|
|
|
|
|
Todd
Sherin
|
|
|
|
|
5,000,000(4)
|
$20,500
|
(1)
These options were
granted on August 20, 2010. This stock option vested in three equal
installments with the first installment vesting on August 20,
2010.
(2)
These are
restricted stock granted on August 17, 2007. The shares will vest
to him upon his resignation or termination or a change of
control.
(3)
These are
restricted stock granted on November 9, 2012. The shares will vest
to him in the event of the termination, with or without cause, of
his employment by the Company or his resignation from the Company
with or without cause or in the event of a change of
control.
(4)
These are
restricted stock granted on the effective date of his employment
agreement, July 17, 2017. The shares vest over the first three
years of his employment as long as Mr. Sherin meets certain
performance obligations during those first three years. The shares
vest immediately in the event of a change in control.
Options Exercised and Stock Vested
The
named executives did not exercise any options during the year ended
December 31, 2018. Mr. Broderick has 75,000 outstanding options at
December 31, 2018. Mr. Sherin has never been granted any stock
options.
Employment Agreements, Termination of Employment and
Change-In-Control Arrangements
Under
the employment agreement between the Company and Mr. Broderick
effective January 1, 2017, we agreed to pay Mr. Broderick an annual
base salary of $175,000 and performance bonuses in cash of up to
$250,000 per annum based upon exceeding certain revenue goals and
operating metrics, as determined by the Board, in its discretion.
Upon termination of Mr. Broderick’s employment by the Company
without cause, we agreed to pay Mr. Broderick a lump sum payment of
one year of Mr. Broderick’s then current base salary within
30 days of termination and any unpaid deferred salaries and
bonuses. In the event there occurs a substantial change in Mr.
Broderick’s job duties, there is a decrease in or failure to
provide the compensation or vested benefits under the employment
agreement or there is a change in control of the Company, we agreed
to pay Mr. Broderick a lump sum payment of one year of Mr.
Broderick’s then current base salary within thirty (30) days
of termination. Additionally, Mr. Broderick will be entitled to
receive 1,500,000 shares of the Company’s common stock in the
event of the termination, with or without cause, of his employment
by the Company or his resignation from the Company with or without
cause or in the event of a change of control (as that term is
defined in the Employment Agreement) of the Company. Mr. Broderick
will have thirty (30) days from the date written notice is given
about either a change in his duties or the announcement and closing
of a transaction resulting in a change in control of the Company to
resign and execute his rights under this agreement. If Mr.
Broderick’s employment is terminated for any reason, Mr.
Broderick has agreed that, for two (2) year after such termination,
he will not directly or indirectly solicit or divert business from
us or assist any business in attempting to do so or solicit or hire
any person who was our employee during the term of his employment
agreement or assist any business in attempting to do
so.
Under
the employment agreement between the Company and Mr. Sherin
effective July 17, 2017, we agreed to pay Mr. Sherin an annual base
salary of $150,000 and a commission of 15% on incremental operating
revenue of new clients as designated in an exhibit in his
agreement. If the Company terminates Mr. Sherin’s employment
without cause, we agreed to pay Mr. Sherin an amount equivalent to
three (3) months of Mr. Sherin’s then current base salary in
equal semi-monthly installments over that three (3) month period
following termination. If Mr. Sherin’s employment is
terminated for any reason, Mr. Sherin has agreed that, for eighteen
(18) months after such termination, he will not directly or
indirectly solicit or divert business from us, assist any business
in attempting to solicit or divert business from us, solicit or
hire any person who was our employee during the employment
agreement term, or assist any business in attempting to solicit or
hire any person who was our employee during the employment
agreement term.
Estimated Payments and Benefits Upon Termination
The
amount of compensation and benefits payable to the named executive
officers has been estimated in the table below and assumes a
termination date of December 31, 2018. Since all options held by
the executives are out-of-the-money, we have not estimated any
value for option acceleration. Deferred compensation reflects
amounts voluntarily deferred from salaries during fiscal 2012
through 2018 that had not been paid in fiscal 2018.
|
|
|
|
|
Total
Compensation and Benefits
|
|
John
P. Broderick
|
|
|
|
|
|
Death
|
$--
|
$8,403
|
$282,369
|
$236,189
|
|
Disability
|
--
|
8,403
|
282,369
|
236,189
|
|
Involuntary
termination without cause
|
175,000
|
8,403
|
282,369
|
411,189
|
|
Change
in Control
|
175,000
|
8,403
|
282,369
|
411,189
|
|
Todd
Sherin
|
|
|
|
|
|
Death
|
$--
|
$--
|
$--
|
$--
|
|
Disability
|
--
|
--
|
--
|
--
|
|
Involuntary
termination without cause
|
37,500
|
--
|
--
|
37,500
|
|
Change
in Control
|
37,500
|
--
|
--
|
37,500
|
The amounts shown in the table above do not include payments and
benefits to the extent they are provided on a non-discriminatory
basis to salaried employees generally upon termination, such as
unreimbursed business expenses payable.
Stock Option Plan
In
2007, the Board of Directors approved the 2007 Cicero Employee
Stock Option Plan which permits the issuance of incentive and
nonqualified stock options, stock appreciation rights, performance
shares, and restricted and unrestricted stock to employees,
officers, directors, consultants, and advisors. The aggregate
number of shares of common stock that may be issued under this Plan
shall not exceed 4,500,000 shares upon the exercise of awards and
provide that the term of each award be determined by the Board of
Directors. No grants were awarded to our named executive officers
during fiscal 2017. The plan expired in 2017 and as such there are
no shares available for future option grants and
awards.
Director Compensation
No cash
or non-cash compensation was paid during fiscal 2018 by us to our
non-employee directors who served during fiscal 2018.
Security
Ownership of Certain Beneficial Owners and Management.
The
following table sets forth information as of March 26, 2019 with
respect to beneficial ownership of shares by (i) each person
known to the Company to be the beneficial owner of more than 5% of
the outstanding common stock, (ii) each of the Company’s
directors, (iii) the executive officers of the Company named
in the Summary Compensation Table (the “Named
Executives”) and (iv) all current directors and
executive officers of the Company as a group. Unless otherwise
indicated, the address for each person listed is c/o Cicero Inc.,
8000 Regency Parkway, Suite 542, Cary, North Carolina
27518.
The
chart is based on 207,913,541 common shares outstanding as of March
26, 2019. Beneficial ownership is determined in accordance with
Rule 13-3(d) promulgated by the SEC under the Securities Exchange
Act of 1934. Except as otherwise stated in the footnotes below, the
named persons have sole voting and investment power with regard to
the shares shown as beneficially owned by such
persons.
|
Name of
Beneficial Owner
|
|
|
|
|
|
|
John L. Steffens
(1)
|
344,948,943
|
64.5%
|
9,333
|
100%
|
79.9%
|
|
Privet Fund
Management LLC (2)
|
18,250,000
|
8.8%
|
--
|
|
8.8%
|
|
Mark and Carolyn P.
Landis (3)
|
5,479,853
|
2.6%
|
--
|
|
2.6%
|
|
Thomas Avery
(5)
|
500,000
|
*
|
--
|
|
*
|
|
Don Peppers
(6)
|
3,172,179
|
1.5%
|
--
|
|
1.5%
|
|
John P. Broderick
(7)
|
2,127,608
|
1.0%
|
--
|
|
1.0%
|
|
Benjamin
Rosenzweig
|
--
|
*
|
--
|
|
*
|
|
Todd
Sherin
|
--
|
*
|
--
|
|
*
|
|
Antony
Castagno/SOAdesk LLC(4)
|
17,660,536
|
8.5%
|
--
|
|
8.5%
|
|
All current
directors and executive officers as a group (7 persons)
(8)
|
356,228,583
|
68.5%
|
9,333
|
100%
|
82.1%
|
*
Represents less
than one percent of the outstanding shares.
1.
The address of John
L. Steffens is 65 East 55th Street, New York,
N.Y. 10022. Includes 120,932,501 shares of common stock,
186,672,035 common shares issuable upon conversion of Series A
Convertible Preferred Stock, 37,334,407 shares issuable upon the
exercise of warrants and 10,000 shares subject to stock
options.
2.
Ryan Levinson holds
voting and dispositive power with respect to these shares. The
address of Mr. Levinson is 79 West Paces Ferry Road, Atlanta, GA
30305. Includes 18,250,000 shares of common stock.
3.
The address of Mark
and Carolyn P. Landis is 54 Dillon Way, Washington Crossing, PA.
18977. Includes 5,472,853 shares of
common stock, and 7,000 shares subject to stock
options.
4.
The address of Mr.
Castagno is 1110 3rd Street South, St.
Petersburg, FL 33701. Mr. Castagno is a principal owner of SOAdesk
LLC. Includes 17,660,536 shares of common stock.
5.
Includes 500,000
shares of common stock.
6.
Includes 3,165,179
shares of common stock and 7,000 shares subject to stock
options.
7.
Includes 3,248
shares of common stock. 75,000 shares subject to stock options
exercisable within sixty (60) days and 2,049,360 shares of
restricted stock that is awarded upon termination or change of
control.
8.
Includes shares
issuable upon exercise of options and warrants as described in
above Notes for each director and officer.
Certain
Relationships and Related Transactions, and Director
Independence
Loans from Related Parties
From
time to time during 2017 through 2018, the Company entered into
several short term notes payable with John Steffens, the
Company’s Chairman of the Board, for various working capital
needs. The notes bear an interest rate of 10% with a maturity date
of June 30, 2018. In June 2018, all outstanding notes were amended
to a new maturity date of December 31, 2018. The Company is
obligated to repay the notes with the collection of any accounts
receivable. At December 31, 2017, the Company was indebted to Mr.
Steffens in the approximate amount of $1,170,000 of principal and
$75,000 of interest. In December 2018, the all outstanding notes
were amended to a new maturity date of June 30, 2020 and as such
have been reclassed as long term debt as of December 31, 2018. At
December 31, 2018, the Company was indebted to Mr. Steffens in the
approximate amount of $3,511,500 of principal and $299,000 of
interest.
In June
2015, the Company entered into a promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) to SOAdesk. The
initial maturity date of the note was December 31, 2015 with an
annual interest rate of 10%. Through a series of amendments, the
maturity date was extended to January 1, 2019. Included in the last
two amendments were four milestone payments of $62,500 each to be
paid to interest first and then principal and payable on June 1,
2017, December 1, 2017, June 1, 2018, and December 1, 2018,
respectively. The Company’s Chairman has agreed to personally
guarantee these, and only these, milestone payments. At December
31, 2018, the Company was indebted to SOAdesk for $360,580 in
principal and approximately $17,000 in interest.
Between
July and October 2017, the Company entered into short-term notes
payable totaling $38,000 with John Broderick, the Chief Executive
Officer, for various working capital needs. The notes bore interest
at 10%. The total principal and interest of $38,000 was paid in
full between July and October 2017.
Director Independence
Our
Board of Directors currently consists of six members. They are John
L. Steffens, John P. Broderick, Benjamin Rosenzweig, Thomas Avery,
Mark Landis, and Don Peppers. Mr. Steffens is the Company’s
Chairman of the Board, Mr. Broderick is the Company’s Chief
Executive Officer and Chief Financial Officer. The Company’s
stock is quoted on the Over The Counter Bulletin Board, which does
not have director independence requirements. Under Item 407(a)
of Regulation S-K, the Company has chosen to measure the
independence of its directors under the definition of independence
used by the NYSE American (the former American Stock Exchange),
which can be found in the NYSE American Company Guide,
§803(A)(2). Under such definition, Messrs. Steffens,
Rosenzweig, Avery, Landis, and Peppers are independent
directors.
Principal
Accountant Fees and Services
Independent Registered Public Accounting Firm
Cherry
Bekaert LLP audited our consolidated financial statements for the
years ended December 31, 2018 and 2017.
Audit Fees
Audit
fees include fees for the audit of the Company’s annual
consolidated financial statements, fees for the review of the
Company’s interim consolidated financial statements, and fees
for services that are normally provided by the independent
registered public accounting firm in connection with statutory and
regulatory filings or engagements. The aggregate fees billed by
Cherry Bekaert LLP for professional services rendered to our
Company for the audit of the Company's annual consolidated
financial statements for fiscal year 2018 and 2017 (and reviews of
quarterly consolidated financial statements on Form 10-Q) were
$87,900 and $86,700, respectively.
Audit-Related Fees
Audit-related fees
include fees for assurance and related services that are reasonably
related to the performance of the audit or review of the
Company’s consolidated financial statements. There were no
audit-related fees billed by Cherry Bekaert LLP for fiscal year
2018 and 2017.
Tax Fees
Tax
fees include fees for tax compliance, tax advice and tax planning.
There were no fees billed by Cherry Bekaert LLP for these services
in 2018 and 2017.
Other Fees
All
other fees include fees for all services except those described
above. There were no other fees billed by Cherry Bekaert LLP for
fiscal years 2018 and 2017.
Determination of Auditor Independence
The
Audit Committee considered the provision of non-audit services by
Cherry Bekaert LLP and determined that the provision of such
services was consistent with maintaining the independence of Cherry
Bekaert LLP.
Audit Committee’s Pre-Approval Policies
The
Audit Committee has adopted a policy that all audits,
audit-related, tax and any other non-audit service to be performed
by the Company’s independent registered public accounting
firm must be pre-approved by the Audit Committee. It is the
Company’s policy that all such services be pre-approved prior
to commencement of the engagement. The Audit Committee is also
required to pre-approve the estimated fees for such services, as
well as any subsequent changes to the terms of the
engagement.
PART IV
Item 15. Exhibits and Consolidated
Financial Statement Schedules
(A)
Consolidated
Financial Statements
The
following consolidated financial statements of the Company and the
related reports of Independent Registered Public Accounting Firm
thereon are set forth immediately following the Index of
Consolidated Financial Statements which appears on page F-1 of this
report:
Report
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2018 and 2017
Consolidated
Statements of Operations for the years ended December 31, 2018 and
2017
Consolidated
Statements of Stockholders’ Deficit for the years ended
December 31, 2018 and 2017
Consolidated
Statements of Cash Flows for the years ended December 31, 2018 and
2017
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.
The
exhibits listed under the Exhibit Index are filed as part of this
Annual Report on Form 10-K.
Exhibit Index
|
Exhibit
Number
|
Description
|
|
|
|
|
|
Second
Amended and Restated Certificate of Incorporation of Cicero Inc., a
Delaware corporation, (incorporated by reference to Annex A to
Cicero’s Definitive Proxy Statement on Schedule 14A filed
August 27, 2015).
|
|
|
|
|
|
Certificate
of Designation, preferences and Rights of Series A Convertible
Preferred Stock, (incorporated by reference to exhibit 3.1 to
Cicero’s Form 8-K filed August 14, 2017).
|
|
|
|
|
|
Amended
and Restated Bylaws of Cicero Inc., a Delaware corporation
(incorporated by reference to exhibit 3.1 to Cicero’s Form
8-K filed July 16, 2015).
|
|
|
|
|
|
Form of
Long-term Promissory Note Stock Purchase Warrant (incorporated by
reference to exhibit 4.19 to Cicero Inc.’s Form 10-K filed
March 31, 2008).
|
|
|
|
|
|
Form of
Long-term Promissory Note Stock Purchase Warrant (incorporated by
reference to exhibit 4.17 to Cicero Inc.’s Form 10-K filed
March 31, 2009).
|
|
|
|
|
|
Form of
Amended Long-term Promissory Note Stock Purchase Warrant
(incorporated by reference to exhibit 4.3 to Cicero Inc.’s
Form 10-K filed March 31, 2011).
|
|
|
|
|
|
Form of
Investor Warrant Agreement (incorporated by reference to exhibit
4.4 to Cicero Inc.’s Form 10-K filed March 31,
2014)
|
|
|
|
|
|
Form of
Warrant to Purchase Shares of Common Stock (incorporated by
reference to exhibit 10.3 to Cicero Inc.’s Form 8-K filed
July 16, 2015)
|
|
|
|
|
|
Amended
PCA Shell License Agreement, dated as of January 3, 2002, between
Level 8 Systems, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (incorporated by reference to exhibit 10.2 to Level
8’s Form 8-K, filed January 11, 2002).
|
|
|
|
|
|
PCA
Shell License Agreement between Level 8 Systems, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated (incorporated by
reference to exhibit 10.2 to Level 8’s Report on Form 8-K,
filed September 11, 2000).
|
|
|
|
|
10.3B
|
OEM
License Agreement between Cicero Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to
exhibit 10.12A to Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
|
|
|
10.3C
|
Software
Support and Maintenance Schedule between Cicero Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated (incorporated by
reference to exhibit 10.12A to Cicero Inc.’s Form 10-K filed
March 31, 2008).
|
|
|
|
|
|
Cicero
Inc. 2007 Employee Stock Option Plan (incorporated by reference to
exhibit 10.22 to Cicero Inc.’s Form 10-K filed March 31,
2008).
|
|
|
|
|
|
Registration
Rights Agreement, dated as of January 15, 2010, by and among Cicero
Inc. and the Purchasers thereto (incorporated by reference to
exhibit 4.4 to Cicero Inc.’s Form 8-K filed January 20,
2010).
|
|
|
|
|
|
Source
Code License Agreement between Cicero Inc. and Convergys Customer
Management Group Inc. (incorporated by reference to exhibit 10.16
to Cicero Inc., Form 10-K filed April 16, 2012).
|
|
|
|
|
|
Form of
Short-Term Promissory Note of Cicero Inc. among Cicero Inc. and
John L. Steffens (incorporated by reference to exhibit 10.16 to
Cicero Inc., Form 10-K filed April 16, 2012).
|
|
|
|
|
|
Amended
Employment Agreement between John P. Broderick and the Company
effective January 1, 2012 (incorporated by reference to exhibit
10.26 to Cicero Inc., Form 10-K filed April 15, 2013)*
|
|
|
|
|
|
Registration
Rights Agreement, dated as of March 20, 2013, by and among Cicero
Inc. and the Purchasers thereto (incorporated by reference to
exhibit 10.27 to Cicero Inc.’s Form 10-K filed March 31,
2014).
|
|
|
|
|
|
Form of
Securities Purchase Agreement by and among Cicero, Inc. and the
Purchasers thereto (incorporated by reference to exhibit 10.28 to
Cicero Inc.’s Form 10-K filed March 31, 2014).
|
|
|
|
|
|
Amended
Employment Agreement between Antony Castagno and the Company
effective July 3, 2013 (incorporated by reference to exhibit 10.29
to Cicero Inc.’s Form 10-K filed March 31,
2014)*.
|
|
|
|
|
|
Lease
Agreement for Cary, N.C. offices, dated July 11, 2014, between
Cicero Inc. and Regency Park Corporation (incorporated by reference
to exhibit 10.30 to Cicero Inc.’s Form 10-K filed March 31,
2015).
|
|
|
|
|
|
Stock
and Warrant Purchase Agreement, dated as of July 15, 2015, by and
among Cicero Inc. and the purchasers named thereto (incorporated by
reference to exhibit 10.1 to Cicero’s Form 8-K filed July 16,
2015)
|
|
|
|
|
|
Investor
Rights Agreement, dated as of July 15, 2015, by and among Cicero
Inc., Privet Fund LP and John L. Steffens (incorporated by
reference to exhibit 10.2 to Cicero’s Form 8-K filed July 16,
2015)
|
|
|
|
|
|
Form of
Indemnification Agreement for Directors of Cicero Inc.
(incorporated by reference to exhibit 10.4 to Cicero’s Form
8-K filed July 16, 2015)
|
|
|
|
|
|
Form of
Inventions and Non-Competition Agreement for Employees of Cicero
Inc. (incorporated by reference to exhibit 10.5 to Cicero’s
Form 8-K filed July 16, 2015)
|
|
|
|
|
10.35
|
Lease
Agreement for Cary, N.C. offices, dated October 26, 2016, between
Cicero Inc. and Regency Park Corporation (filed
herewith)
|
|
|
|
|
|
Todd
Sherin Employment Agreement*
|
|
|
|
|
|
Code of
Ethics (incorporated by reference to exhibit 14.1 to Level
8’s Form 10-K/A, filed March 31, 2004).
|
|
|
|
|
|
List of
subsidiaries of the Company (filed herewith).
|
|
|
|
|
|
Consent
of Independent Registered Public Accounting Firm (filed
herewith).
|
|
|
|
|
|
Certification
of Chief Executive pursuant to Rule 13a-14(a) (filed
herewith).
|
|
|
|
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) (filed
herewith).
|
|
|
|
|
|
Certification
of John P. Broderick pursuant to 18 USC § 1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
*
Management contract or compensatory agreement.
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
|
|
CICERO
INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/
John P.
Broderick
|
|
|
|
|
John P.
Broderick
|
|
|
|
|
Chief Executive
Officer and Chief Financial Officer
|
|
|
|
|
Date: March 29,
2019
|
|
Pursuant to the
requirements of the Securities and Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities
and on the dates indicated have signed the report
below.
|
/s/ John L.
Steffens
John L.
Steffens
|
|
Chairman
of the Board
|
|
March
29, 2019
|
|
/s/ John P.
Broderick
John P.
Broderick
|
|
Chief
Executive Officer/Chief Financial Officer
(Principal
Executive and Financial and Accounting Officer) and
Director
|
|
March
29, 2019
|
|
/s/ Benjamin L.
Rosenzweig
Benjamin
L. Rosenzweig
|
|
Director
|
|
March
29, 2019
|
|
/s/ Thomas
Avery
Thomas
Avery
|
|
Director
|
|
March
29, 2019
|
|
/s/ Mark
Landis
Mark
Landis
|
|
Director
|
|
March
29, 2019
|
|
/s/ Don
Peppers
Don
Peppers
|
|
Director
|
|
March
29, 2019
|
INDEX TO FINANCIAL
STATEMENTS
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders
Cicero
Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Cicero Inc.
and Subsidiaries (the “Company”) as of December 31,
2018 and 2017, and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for each of
the years in the two-year period ended December 31, 2018 and the
related note to the consolidated financial statements (collectively
referred to as the “financial statements”). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and
its cash flows for each of the years in the two-year period ended
December 31, 2018, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses from
operations and has a working capital deficiency as of December 31,
2018. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern.
Management’s plans concerning these matters are described in
Note 1 to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/
CHERRY BEKAERT LLP
We have
served as the Company’s auditor since 2012.
Raleigh,
North Carolina
March
29, 2019
CICERO INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
|
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$97
|
$56
|
|
Trade accounts
receivable
|
11
|
223
|
|
Prepaid expenses
and other current assets
|
142
|
53
|
|
Total current
assets
|
250
|
332
|
|
Property and
equipment, net
|
6
|
7
|
|
Total
assets
|
$256
|
$339
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
Current
liabilities:
|
|
|
|
Short-term debt
(Note 5)
|
$411
|
$1,220
|
|
Accounts
payable
|
982
|
1,102
|
|
Accrued
expenses:
|
|
|
|
Salaries, wages,
and related items
|
1,363
|
1,680
|
|
Interest payable
|
456
|
216
|
|
Other
|
36
|
589
|
|
Deferred
revenue
|
460
|
454
|
|
Total current
liabilities
|
3,708
|
5,261
|
|
Long-term
debt
|
3,976
|
890
|
|
Total
liabilities
|
$7,684
|
$6,151
|
|
Commitments and
contingencies (Notes 12 and 13)
|
|
|
|
Stockholders’
deficit:
|
|
|
|
Convertible
preferred stock, $0.001 par value, 10,000,000 shares
authorized
5,083 Series A
shares issued and outstanding at December 31, 2018 and December 31,
2017.
$500 per share
liquidation preference
|
--
|
--
|
|
Common stock,
$0.001 par value, 600,000,000 shares authorized at December 31,
2018 and
December 31, 2017;
207,913,541 issued and outstanding at December 31, 2018
and
December 31, 2017
(Note 8)
|
208
|
208
|
|
Additional
paid-in-capital
|
253,693
|
253,691
|
|
Accumulated
deficit
|
(261,329)
|
(259,711)
|
|
Total
stockholders’ deficit
|
(7,428)
|
(5,812)
|
|
Total liabilities
and stockholders’ deficit
|
$256
|
$339
|
The
accompanying notes are an integral part of the consolidated
financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
Software
|
$66
|
$549
|
|
Maintenance
|
488
|
520
|
|
Services
|
291
|
249
|
|
Total operating
revenue
|
845
|
1,318
|
|
Cost of
revenue:
|
|
|
|
Software
|
1
|
6
|
|
Maintenance
|
157
|
161
|
|
Services
|
408
|
397
|
|
Total cost of
revenue
|
566
|
564
|
|
Gross
margin
|
279
|
754
|
|
Operating
expenses:
|
|
|
|
Sales and
marketing
|
431
|
470
|
|
Research and
product development
|
991
|
1,071
|
|
General and
administrative
|
720
|
959
|
|
Total operating
expenses
|
2,142
|
2,500
|
|
Loss from
operations before other income (charges)
|
(1,863)
|
(1,746)
|
|
Other income
(charges):
|
|
|
|
Interest
expense
|
(330)
|
(368)
|
|
Other (Note
1)
|
128
|
--
|
|
Total
other income/(expense)
|
(202)
|
(368)
|
|
|
|
|
|
Net
loss
|
$(2,065)
|
$(2,114)
|
|
|
|
|
|
Loss per share
applicable to common stockholders:
|
|
|
|
|
|
|
|
Basic and
diluted
|
$(0.01)
|
$(0.01)
|
|
|
|
|
|
Weighted Average
shares outstanding – basic and diluted
|
207,914
|
200,191
|
The
accompanying notes are an integral part of the consolidated
financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ DEFICIT
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
|
Balance at December
31, 2016
|
192,253,005
|
$192
|
--
|
--
|
$246,272
|
$(257,597)
|
$(11,133)
|
|
Options issued as
compensation
|
|
|
|
|
3
|
|
3
|
|
Common Stock issued
for conversion of debt/interest
|
15,660,536
|
16
|
|
|
2,333
|
|
2,349
|
|
Series A Preferred
Stock issued for conversion of debt/interest
|
|
|
5
|
--
|
5,083
|
|
5,083
|
|
Net
loss
|
|
|
|
|
|
(2,114)
|
(2,114)
|
|
Balance at December
31, 2017
|
207,913,541
|
$208
|
5
|
--
|
$253,691
|
$(259,711)
|
$(5,812)
|
|
Restricted stock
issued as compensation
|
|
|
|
|
2
|
|
2
|
|
Reversal of Series
B Dividends
|
|
|
|
|
|
447
|
447
|
|
Net
loss
|
|
|
|
|
|
(2,065)
|
(2,065)
|
|
Balance at December
31, 2018
|
207,913,541
|
$208
|
5
|
--
|
$253,693
|
$(261,329)
|
$(7,428)
|
The
accompanying notes are an integral part of the consolidated
financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$(2,065)
|
$(2,114)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
3
|
6
|
|
Stock compensation
expense
|
2
|
3
|
|
Write off of bad
debt
|
2
|
--
|
|
Gain on write down
of liabilities
|
(125)
|
--
|
|
Changes in assets
and liabilities:
|
|
|
|
Trade accounts
receivable
|
210
|
55
|
|
Prepaid expenses
and other assets
|
(89)
|
(19)
|
|
Accounts payable
and accrued expenses
|
(178)
|
497
|
|
Deferred
revenue
|
6
|
(294)
|
|
Net cash used in
operating activities
|
(2,234)
|
(1,866)
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases of
property and equipment
|
(2)
|
(4)
|
|
Net cash used in
investing activities
|
(2)
|
(4)
|
|
Cash flows from
financing activities:
|
|
|
|
Borrowings under
short and long-term debt
|
2,402
|
1,873
|
|
Repayments of short
and long-term debt
|
(125)
|
(38)
|
|
Net cash provided
by financing activities
|
2,277
|
1,835
|
|
Net
increase/(decrease) in cash
|
41
|
(35)
|
|
Cash at beginning
of year
|
56
|
91
|
|
Cash at end of
year
|
$97
|
$56
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
Cash paid during
the year for:
|
|
|
|
Taxes
|
$5
|
$6
|
|
Interest
|
$90
|
$93
|
Non-Cash Investing and Financing Activities
2018
None.
2017
During
August 2017, the Company converted $3,544 of debt and $1,539 of
interest to a related party lender by issuing 5,083 shares of its
Series A preferred stock.
During
June 2017, the Company converted $1,796 of debt and $553 of
interest to a related party lender by issuing 15,660,536 shares of
its common stock.
The
accompanying notes are an integral part of the consolidated
financial statements.
CICERO INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
1. SUMMARY OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND
RECENT ACCOUNTING PRONOUNCEMENTS
Cicero
Inc., (‘’Cicero’’ or the
‘’Company’’), is a provider of business
integration software which enables organizations to integrate new
and existing information and processes at the desktop. Business
integration software addresses the emerging need for a
company’s information systems to deliver enterprise-wide
views of the company’s business information processes. Cicero
Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc.
and re-incorporated in Delaware in 1999.
Going Concern and Management Plans:
The
accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred an operating loss of
approximately $2,065,000 for the year ended December 31, 2018, and
has a history of operating losses. Management believes that its
product’s functionality resonates in the marketplace as both
“analytics” and “automation” are topics
often discussed and written about. Further, the Company believes
that its repositioned strategy of leading with a no cost, short,
“proof of concept” evaluation of the software’s
capabilities will shorten the sales cycle and allow for value based
selling to our customers and prospects. The Company anticipates
success in this regard based upon current discussions and active
“proof of concepts” with active partners, customers and
prospects. Should the Company be unable to secure customer
contracts that will drive sufficient cash flow to sustain
operations, the Company will be forced to seek additional capital
in the form of debt or equity financing; however, there can be no
assurance that such debt or equity financing will be available.
These factors raise substantial doubt about the Company’s
ability to continue as a going concern within one year after the
date that the financial statements are issued. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Principles of Consolidation:
The
accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All of the Company’s
subsidiaries are wholly owned for the periods
presented.
All
significant inter-company accounts and transactions are eliminated
in consolidation.
Use of Estimates:
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts
could differ from these estimates. Significant estimates include
the recoverability of long-lived assets, valuation and
recoverability of goodwill, stock based compensation, revenue
recognition, deferred taxes and related valuation allowances and
valuation of equity instruments.
Financial Instruments:
The
carrying amount of the Company’s financial instruments,
representing accounts receivable, accounts payable and short-term
debt approximate their fair value due to their short-term
nature.
Cash:
The
Company places substantially all cash with various financial
institutions. The Federal Deposit Insurance Corporation (FDIC)
covers $250,000 for substantially all depository accounts. The
Company from time to time may have amounts on deposit in excess of
the insured limits. As of December 31, 2018, the Company did not
exceed these insured amounts.
Trade Accounts Receivable:
Trade
accounts receivable are stated in the amount management expects to
collect from outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to
the allowance of doubtful accounts based on its assessment of the
current status of individual accounts. Balances still outstanding
after management has used reasonable collection efforts are written
off through a charge to the allowance of doubtful accounts and a
credit to trade accounts receivable. Changes in the allowance for
doubtful accounts have not been material to the consolidated
financial statements.
Property and Equipment:
Property
and equipment purchased in the normal course of business is stated
at cost, and property and equipment acquired in business
combinations is stated at its fair market value at the acquisition
date. All property and equipment is depreciated using the
straight-line method over estimated useful lives.
Expenditures
for repairs and maintenance are charged to expense as
incurred.
The
cost and related accumulated depreciation of property and equipment
are removed from the accounts upon retirement or other disposition
and any resulting gain or loss is reflected in the Consolidated
Statements of Operations.
Long-Lived Assets:
The
Company reviews the recoverability of long-lived intangible assets
when circumstances indicate that the carrying amount of assets may
not be recoverable. This evaluation is based on various analyses
including undiscounted cash flow projections. In the event
undiscounted cash flow projections indicate impairment, the Company
would record an impairment based on the fair value of the assets at
the date of the impairment. The Company accounts for impairments
under the Financial Accounting Standards Board (“FASB”)
guidance now codified as Accounting Standards Codification
(“ASC”) 360 “Property, Plant and
Equipment.”
Accrued Other:
Accrued
other at December 31, 2017 is primarily comprised of accrued
dividends of $447,000. In fiscal year 2018, the Company reversed
the accrued dividends in fiscal year 2018 that were associated with
previously issued Series B preferred stock since there were no
longer any outstanding Series B shareholders. The remaining balance
is comprised of accrued tax, royalty, consulting and
other.
Cost of Revenue:
The
primary component of the Company’s cost of revenue for
maintenance and services is compensation expense.
Advertising Expenses:
The
Company expenses advertising costs as incurred. Advertising
expenses were approximately $125,000 and $91,000 for the years
ended December 31, 2018 and 2017, respectively.
Research and Product Development:
Research
and product development costs are expensed as incurred unless such
costs meet the software capitalization criteria. Research and
development expenses were approximately $991,000 and $1,071,000 for
the years ended December 31, 2018 and 2017,
respectively.
Other Income/(Charges):
Other
income/(charges) in fiscal year 2018 consists primarily of a write
off of certain liabilities deemed no longer payable in the amount
of $125,000. These liabilities were deemed no longer payable as the
statute of limitations obligated by the Company for these
liabilities had lapsed.
Income Taxes:
The
Company uses FASB guidance now codified as ASC 740 “Income
Taxes” to account for income taxes. This statement requires
an asset and liability approach that recognizes deferred tax assets
and liabilities for the expected future tax consequences of events
that have been recognized in the Company’s consolidated
financial statements or tax returns. In estimating future tax
consequences, all expected future events, other than enactments of
changes in the tax law or rates, are generally considered. A
valuation allowance is recorded when it is ‘’more
likely than not’’ that recorded deferred tax assets
will not be realized. (See Note 6.)
Loss Per Share:
Basic
loss per share is computed based upon the weighted average number
of common shares outstanding. Diluted loss per share is computed
based upon the weighted average number of common shares outstanding
and any potentially dilutive securities. During 2018 and 2017,
potentially dilutive securities included stock options, warrants to
purchase common stock, and preferred stock.
The
following table sets forth the potential shares that are not
included in the diluted net loss per share calculation because to
do so would be anti-dilutive for the periods
presented:
|
|
|
|
|
Stock
options
|
706,211
|
1,577,750
|
|
Warrants
|
20,333,620
|
228,004,448
|
|
Preferred
stock
|
101,668,101
|
101,668,101
|
|
|
122,707,932
|
331,250,299
|
Stock-Based Compensation:
The
Company accounts for stock-based compensation to employees under
ASC 718 “Compensation – Stock Compensation,”
which addresses the accounting for stock-based payment transactions
in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments. The Company did not grant any options in fiscal year
2018 and 2017. The Company granted 500,000 restricted stock units
to certain employees in fiscal 2018. The Company recognized
approximately $2,000 and $3,000 of stock-based compensation in
fiscal year 2018 and 2017, respectively.
Recent Accounting Pronouncements:
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments, which clarifies how companies present and classify
certain cash receipts and cash payments in the statement of cash
flows where diversity in practice exists. The new standard was
effective for us in our first quarter of fiscal 2018. This standard
did not have a material impact on our consolidated financial
statements and related disclosures.
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.
The new standard establishes a right-of-use model (ROU) that
requires a lessee to recognize a ROU asset and lease liability on
the balance sheet for all leases with a term longer than 12 months.
Leases will be classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the income statement.
The new
standard is effective for us on January 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. We adopted the new standard on January 1, 2019 and use the
effective date as our date of initial application. Consequently,
financial information will not be updated and the disclosures
required under the new standard will not be provided for dates and
periods before January 1, 2019.
The new
standard provides a number of optional practical expedients in
transition. We elected the ‘package of practical
expedients’, which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease
classification and initial direct costs. We do not expect to elect
the use-of-hindsight or the practical expedient pertaining to land
easements; the latter not being applicable to us. We expect to
elect all of the new standard’s available transition
practical expedients.
We
expect that this standard will not have a material effect on our
financial statements. While we continue to assess all of the
effects of adoption, we currently believe the most significant
future effects relate to (1) the recognition of new ROU assets and
lease liabilities on our balance sheet for our real estate
operating lease and (2) providing significant new disclosures about
our leasing activities. We do not expect a significant change in
our leasing activities between now and adoption.
The new
standard also provides practical expedients for an entity’s
ongoing accounting. We currently expect to elect the short-term
lease recognition exemption for our real estate lease that is
currently on a month to month lease. This means, for those leases
that qualify, we will not recognize ROU assets or lease
liabilities, and this includes not recognizing ROU assets or lease
liabilities for existing short-term leases of those assets in
transition. As our real estate lease is a short term lease, the
adoption of this standard will not result in the Company
recognizing any right of use asset or liability.
NOTE 2. REVENUE
On
January 1, 2018, we adopted ASC 606, Revenue from Contracts with
Customers and all the related amendments (“the new revenue
standard”) and applied it to all contracts using the modified
retrospective method. We completed our review of contracts with our
customers and did not need to record a cumulative effect adjustment
to accumulated deficit upon adoption of the new revenue standard as
of January 1, 2018. Under ASC 606, revenue is recognized when a
company transfers the promised goods or services to a customer in
an amount that reflects consideration that is expected to be
received for those goods and services. Adoption of the standard did
not have a material impact on the Company’s financial
position, results of operations, cash flow, accounting policies,
business processes, internal controls or disclosures.
Contract Balances
Timing
differences among revenue recognition may result in contract assets
or liabilities. Contract liabilities (deferred revenue) totaled
$454,000 and $460,000 as of January 1, 2018 and December 31, 2018,
respectively. Revenue recognized from the contract liabilities for
the 12 months ended December 31, 2018 was $426,000. The contract
liability balances reflect the unrecognized transaction
price.
Our net
trade accounts receivables were $223,000 and $11,000 as of January
1, 2018 and December 31, 2018, respectively. Trade accounts
receivable are stated in the amount management expects to collect
from outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to
the allowance of doubtful accounts based on its assessment of the
current status of individual accounts. Balances still outstanding
after management has used reasonable collection efforts are written
off through a charge to the allowance of doubtful accounts and a
credit to trade accounts receivable. Changes in the allowance for
doubtful accounts have not been material to the consolidated
financial statements.
Performance Obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer and is the unit of account
under the new revenue recognition standard. The transaction price
is allocated to each distinct performance obligation and recognized
as revenue when, or as, the performance obligation is satisfied.
Most of our contracts have multiple performance obligations, which
include software, maintenance and professional
services.
Revenue Recognition
Cicero
utilizes point in time method for revenue recognition for its
software license revenue. Our software licenses are distinct and
have standalone functionality as it is fully functional without any
services purchased. Cicero utilizes the output method over time for
revenue recognition as maintenance contracts are invoiced annually
prior to the start of the maintenance period and then recognized
monthly over the length of the maintenance contract. Cicero
utilizes the output method over time for revenue recognition for
its services revenue as service hours/days are logged and billed
subsequently. Cicero has no upfront fees that are billable to
customers.
Cicero
established a standalone selling price for its lines of revenue
based on price list and historical sales.
Practical Expedients and Exemptions
There
are several practical expedients and exemptions allowed under ASC
606 that impact timing of revenue recognition and our disclosures.
Below is a list of practical expedients we applied in the adoption
and application of ASC 606:
Application
●
The Company is
making the election not to disclose variable consideration
allocated to performance obligations related to either: (1) sales-
or usage-based royalties on licenses of intellectual property or
(2) variable consideration allocated entirely to a wholly
unsatisfied performance obligation or to a wholly unsatisfied
promise to transfer a distinct good or service that forms part of a
single performance obligation when certain criteria are
met.
●
The Company is
making an election to treat sales tax on a net basis, which would
not include it in the transaction price to allocate across
performance obligations.
●
The Company elects
to treat similar contracts among the business units as part of a
portfolio of contracts, primarily software license and maintenance
contracts. These contracts have the same provision terms, and
management has the expectation the result will not be materially
different from the consideration of each individual
contract.
●
The Company does
not evaluate a contract for a significant financing component if
payment is expected within one year or less from the transfer of
the promised items to the customer.
●
The Company
generally expenses sales commissions when incurred when the
amortization period would have been one year or less. These costs
are recorded within selling, general and administrative
expenses.
NOTE
3.
ACCOUNTS
RECEIVABLE
Trade
accounts receivable was composed of the following at December 31
(in thousands):
|
|
|
|
|
Current trade
accounts receivable
|
$11
|
$223
|
NOTE 4. PROPERTY AND EQUIPMENT
Property
and equipment was composed of the following at December 31 (in
thousands):
|
|
|
|
|
Computer
equipment
|
$138
|
$143
|
|
Furniture and
fixtures
|
19
|
19
|
|
Office
equipment
|
35
|
35
|
|
|
192
|
197
|
|
Less: accumulated
depreciation
|
(186)
|
(190)
|
|
|
|
|
|
|
$6
|
$7
|
Depreciation
expense of property and equipment was $3,000 and $6,000 for the
years ended December 31, 2018 and 2017, respectively.
Debt
and notes payable to related parties consists of the following (in
thousands):
|
|
|
|
|
Note payable
– asset purchase agreement (a)
|
$361
|
$421
|
|
Note payable
– related parties (b)
|
3,512
|
1,170
|
|
Notes payable
(c)
|
514
|
519
|
|
Total
debt
|
4,387
|
2,110
|
|
Less current
portion
|
411
|
1,220
|
|
Total long term
debt
|
$3,976
|
$890
|
(a)
As part of a prior
acquisition, the Company was subject to certain earn-out obligation
payments of up to $2,410,000 over an 18-month period from January
15, 2010 through July 31, 2011, based upon the achievement of
certain revenue performance targets. The earn-out was payable fifty
percent in cash and fifty percent in common stock of the Company at
the rate of one share for every $0.15 earn-out payable. The Company
had recorded $842,606 in its accounts payable as of December 31,
2014 due to a portion of earn-out obligations being met. In June
2015, the Company entered into a promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) to SOAdesk. The
maturity date of the note was December 31, 2015 with an annual
interest rate of 10%. Through a series of amendments, the maturity
date was extended to December 31, 2017 and two milestone payments
of $62,500, to be applied to outstanding interest and then
principal, payable on June 1, 2017 and December 1, 2017,
respectively, were added. In April 2017, the maturity date was
extended to January 1, 2019 and two milestone payments of $62,500,
to be applied to outstanding interest and then principal, payable
on June 1, 2018 and December 1, 2018, respectively, were added. As
such, the Company has reclassed this debt to long term debt as of
December 31, 2017. At December 31, 2017, the Company was indebted
to SOAdesk for $421,303 in principal and approximately $43,000 in
interest. At December 31, 2018, the Company was indebted to SOAdesk
for $360,580 in principal and approximately $17,000 in interest and
the principal has been reclassed to short term debt.
(b)
From time to time
during 2017 through 2018, the Company entered into several short
term notes payable with John Steffens, the Company’s Chairman
of the Board, for various working capital needs. The notes bear an
interest rate of 10% with a maturity date of June 30, 2018. In June
2018, all outstanding notes were amended to a new maturity date of
December 31, 2018. The Company is obligated to repay the notes with
the collection of any accounts receivable. At December 31, 2017,
the Company was indebted to Mr. Steffens in the approximate amount
of $1,170,000 of principal and $75,000 of interest. In December
2018, the all outstanding notes were amended to a new maturity date
of June 30, 2020 and as such have been reclassed as long term debt
as of December 31, 2018. At December 31, 2018, the Company was
indebted to Mr. Steffens in the approximate amount of $3,511,500 of
principal and $299,000 of interest.
(c)
The Company has
issued a series of short-term unsecured promissory notes with
private lenders, which provide for short term borrowings. The
notes, in the aggregate amount of $50,000 of principal and $76,000
of interest and $50,000 of principal and $88,000 of interest, as of
December 31, 2017 and December 31, 2018, respectively, bear
interest between 10% and 36% per annum.
In
March 2012 the Company entered into an unsecured promissory note
with a private lender for $336,000 at an interest rate of 12% and a
maturity date of March 31, 2013. Through a series of amendments,
the note was amended to extend the maturity date to January 31,
2021 and a new principal balance of $498,500. Simultaneously a
$30,000 principal payment was made to the lender. A new repayment
schedule of quarterly principal and interest payments was added
beginning in January 31, 2018 with a payment of $30,000. $25,000
quarterly principal and interest payments are required to be made
beginning on April 30, 2018 through January 31, 2019. $40,000
principal and interest payments are required to be made on
beginning on April 30, 2019 through October 31, 2020. Final payment
of remaining principal and interest is due on January 31, 2021. The
lender agreed to waive certain quarterly payments in fiscal 2018 as
business conditions so warrant without triggering any default and
that any deferred payments would be added to the next quarterly
payment. At December 31, 2017, the Company was indebted to this
private lender in the amount of $468,500 in principal and $21,000
in interest and has been reclassified as long term debt due to its
maturity date of January 31, 2021. At December 31, 2018, the
Company was indebted to this private lender in the amount of
$464,350 in principal and $51,000 in interest.
NOTE 6. INCOME TAXES
The
Company follows the provisions of ASC Topic 740, “Income
Taxes,” and recognizes the financial statement benefit of a
tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the consolidated financial statements is the
largest benefit that has a greater than 50 percent likelihood of
being realized upon settlement with the relevant tax authority. The
Company applies ASC Topic 740 to all tax positions for which the
statute of limitations remains open.
The
Company has identified its federal tax return and its state tax
return in North Carolina as “major” tax jurisdictions.
Based on the Company’s evaluation, it has been concluded that
there are no significant uncertain tax positions requiring
recognition in the Company’s consolidated financial
statements. The evaluation was performed for the tax years 2016
through 2018, and may be subject to audits for amounts related to
net operating loss carryforwards generated in periods prior to
December 31, 2015. The Company believes that its income tax
positions and deductions will be sustained on audit and does not
anticipate any adjustments that will result in a material change to
its financial position. The tax returns for the prior three years
are generally subject to review by federal and state taxing
authorities.
The
Company’s policy for recording interest and penalties
associated with audits is to record such items as a component of
income tax expense. There were no amounts accrued for penalties and
interest as of or during the period for the tax years 2018 and
2017. 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):
|
|
|
|
|
Expected income tax
benefit at statutory rate (34%)
|
$(434)
|
$(711)
|
|
State taxes, net of
federal tax benefit
|
(101)
|
(85)
|
|
Effect of change in
valuation allowance
|
(1,256)
|
(17,483)
|
|
Non-deductible
expenses
|
1
|
1
|
|
Expired net
operating loss carryforwards
|
1,386
|
--
|
|
Expired employee
stock options
|
404
|
--
|
|
Impact of tax rate
change
|
--
|
18,278
|
|
Total
|
$--
|
$--
|
Significant
components of the net deferred tax asset at December 31 were as
follows:
|
|
|
|
|
|
|
|
|
Accrued expenses,
non-tax deductible
|
$5
|
$5
|
|
Deferred
revenue
|
119
|
118
|
|
Contingent
payments
|
(538)
|
(538)
|
|
Stock compensation
expense
|
--
|
403
|
|
Loss
carryforwards
|
37,125
|
37,935
|
|
Depreciation and
amortization
|
889
|
933
|
|
|
37,600
|
38,856
|
|
|
|
|
|
Less: valuation
allowance
|
(37,600)
|
(38,856)
|
|
|
|
|
|
|
$--
|
$--
|
As of
December 31, 2018, we had federal and state net operating loss
carryforwards of approximately $143,307,000. The associated
deferred tax asset related to these federal and state net operating
loss carryforwards was $37,125,000. The net operating loss
carryforwards expire between 2019 and 2037. The value of these
carryforwards depends on our ability to generate taxable income. As
of December 31, 2018 and 2017, we had deferred tax assets of
$37,600,000 and $38,856,000 upon which we had a full valuation
allowance. The net change in the valuation allowance of $18,300,000
for both federal and state deferred tax assets were due to the
impact of the tax rate change.
A
valuation allowance for deferred tax assets, including NOL
carryforwards, is recognized when it is more-likely- than-not that
all or some portion of the benefit from the deferred tax asset will
not be realized. To assess that likelihood, we use estimates and
judgment regarding our future taxable income, and we consider the
tax consequences in the jurisdiction where such taxable income is
generated, to determine whether a valuation allowance is required.
Such evidence can include our current financial position, our
results of operations, both actual and forecasted, the reversal of
deferred tax liabilities, and tax planning strategies, as well as
the current and forecasted business economics of our industry.
Management assesses all available positive and negative evidence to
estimate whether sufficient future taxable income will be generated
to permit the use of deferred tax assets. A significant piece of
objectively verifiable negative evidence is the cumulative loss
incurred over the three-year period ending December 31, 2017. Such
objective negative evidence limits our ability to consider various
forms of subjective positive evidence, such as our projections for
future income. Accordingly, management has not changed its
judgement with respect to the need for a valuation allowance
against substantially all of our net deferred tax asset position.
The amount of the deferred tax asset considered realizable,
however, could be adjusted if estimates of future taxable income
are increased or if objective negative evidence in the form of
cumulative losses is no longer present and additional weight is
given to subjective positive evidence such as future expected
growth.
The
Company provided a full valuation allowance on the total amount of
its deferred tax assets at December 31, 2018 and 2017 since
management does not believe that it is more likely than not that
these assets will be realized.
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the
“Act”) was signed into law making significant changes
to the Internal Revenue Code. Changes include, but are not limited
to, a corporate tax rate decrease from 35% to 21% effective for tax
years beginning after December 31, 2017, the transition of U.S
international taxation from a worldwide tax system to a territorial
system, and a one-time transition tax on the mandatory deemed
repatriation of cumulative foreign earnings as of December 31,
2017. As a result of The Act, the Company recorded one-time
adjustments for the re-measurement of deferred tax assets
(liabilities). Given the Company's full valuation allowance as of
December 31, 2017, the adjustment does not materially impact the
Company's income tax provision or balance sheet.
As of
December 31, 2017, the valuation allowance of $38,900,000 related
primarily to net operating losses not likely to be realized. The
Company re-measured these non-current assets and liabilities at the
applicable tax rate of 21% in accordance with the Tax Cuts and Jobs
Act of 2017. The re-measurement resulted in a total decrease in
these assets of $18,300,000.
NOTE 7. STOCKHOLDERS’ EQUITY
Stock Grants:
None.
Restricted Stock Units:
The
Company issued 500,000 restricted stock units to certain employees
in fiscal 2018. The Company is accounting for the stock
compensation for the restricted shares using ASC 718
Compensation-Stock Compensation. The restricted stock vests on the
two-year anniversary of the date of grant and the employee needs to
still be employed at the time of vesting to receive the grant. The
Company uses the Black Scholes calculation to determine the expense
and records the expense over the life of the vesting period of each
grant. The Company recorded approximately $2,000 in stock
compensation expense in fiscal 2018 in relation to these
grants.
The
Company entered into an employment agreement with its Chief Revenue
Officer, Mr. Todd Sherin, that included the granting of 5,000,000
restricted shares that vest over a three-year period and included
meeting certain performance obligations. The Company is accounting
for the stock compensation for the restricted shares using ASC 718
Compensation-Stock Compensation, specifically ASC 718-10-30-28,
718-10-55-10, and 718-10-55-61. Pursuant to these guidelines the
Company is not obligated to record compensation expense until the
point in time at which it is probable that Mr. Sherin would meet
the performance obligation set forth in the agreement. At such
time, the Company would record compensation expense by multiplying
the amount of shares vesting at that point by the stock price on
the effective date of the agreement. As of December 31, 2018, the
Company determined that the probability of meeting these
obligations was minimal and as such has not recorded any stock
compensation expense for this restricted stock grant.
Stock Options:
In
2007, the Board of Directors approved the 2007 Cicero Employee
Stock Option Plan which permits the issuance of incentive and
nonqualified stock options, stock appreciation rights, performance
shares, and restricted and unrestricted stock to employees,
officers, directors, consultants, and advisors. The aggregate
number of shares of common stock which may be issued under this
Plan shall not exceed 4,500,000 shares upon the exercise of awards
and provide that the term of each award be determined by the Board
of Directors. The Company also has a stock incentive plan for
outside directors and the Company has set aside 1,200 shares of
common stock for issuance under this plan.
Under
the terms of the Plans, the exercise price of the stock options may
not be less than the fair market value of the stock on the date of
the award and the options are exercisable for a period not to
exceed ten years from date of grant. Stock appreciation rights
entitle the recipients to receive the excess of the fair market
value of the Company's stock on the exercise date, as determined by
the Board of Directors, over the fair market value on the date of
grant. Performance shares entitle recipients to acquire Company
stock upon the attainment of specific performance goals set by the
Board of Directors. Restricted stock entitles recipients to acquire
Company stock subject to the right of the Company to repurchase the
shares in the event conditions specified by the Board are not
satisfied prior to the end of the restriction period. The Board may
also grant unrestricted stock to participants at a cost not less
than 85% of fair market value on the date of sale. Options granted
vest at varying periods up to five years and expire in ten years.
The plan expired in fiscal 2017 and as such no further options are
available to grant.
Activity
for stock options issued under these plans for the years ending
December 31, 2018 and 2017 was as follows:
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate
Intrinsic Value
|
|
Balance at December
31, 2016
|
2,832,212
|
0.05-0.51
|
$0.24
|
|
|
Granted
|
--
|
--
|
--
|
|
|
Forfeited
|
(389,102)
|
0.05-0.51
|
$0.30
|
|
|
Expired
|
(865,360)
|
0.51
|
$0.51
|
|
|
Balance at December
31, 2017
|
1,577,750
|
0.05-0.51
|
$0.08
|
|
|
Granted
|
--
|
--
|
--
|
|
|
Forfeited
|
(796,539)
|
0.05-0.09
|
$0.07
|
|
|
Expired
|
(75,000)
|
0.23
|
$0.23
|
|
|
Balance at December
31, 2018
|
706,211
|
0.05-0.11
|
$0.08
|
$0.00
|
There
was no activity for non-vested stock options under these plans for
the fiscal year ending December 31, 2018 and 2017.
There
were no options granted in 2018 and 2017.
At
December 31, 2018, there was no unrecognized compensation cost
related to stock options.
At
December 31, 2018 and 2017, options to purchase 706,211 and
1,577,750 shares of common stock were exercisable, respectively,
pursuant to the plans at prices ranging from $0.05 to $0.11 .
The following table summarizes information about stock options
outstanding at December 31, 2018:
|
|
|
Remaining
Contractual Life for Options Outstanding
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
203,461
|
3.7
|
203,641
|
$0.06
|
|
|
452,750
|
1.6
|
452,750
|
0.09
|
|
|
50,000
|
1.2
|
50,000
|
0.11
|
|
|
|
|
|
|
|
|
706,211
|
2.2
|
706,211
|
$0.08
|
Preferred Stock:
On
August 14, 2017, the Company entered into agreement with John L.
Steffens, the Chairman of the Board of Directors, to convert
$3,544,500 of principal amount of debt and $1,538,905 of interest
into 5,083 shares of the Company’s Series A Preferred Stock.
Per the Certificate of Designation, the initial conversion of
preferred stock to common equaled 101,668,101 of common stock of
the Company at a price of $0.05 per share, subject to adjustment
for stock dividends, stock splits and similar events. Additionally,
Mr. Steffens was granted a warrant for 20,333,620 of the
Company’s common shares at a price of $0.07 per share. (See
Note 2). The Company accounted for the transaction pursuant to
Topic ASC 470-50, Modification and Extinguishment of Debt. Due to
the fact that the transaction was with Mr. Steffens, the
Company’s Chairman of the Board, the Company determined that
this was not an arm’s length agreement and as such has
recorded the entire transaction through additional paid in
capital.
Series A
The
Series A Preferred Stock ranks senior in preference and priority to
the Company’s common stock with respect to dividend and
liquidation rights and, except as provided in the Certificate of
Designation or otherwise required by law, will vote with the common
stock on an as converted basis on all matters presented for a vote
of the holders of common stock, including directors. The Series A
Preferred Stock is convertible at any time at the option of the
holder at an initial conversion ratio of 20,000 shares of Common
Stock for each share of Series A Preferred Stock. The initial
conversion ratio shall be adjusted in the event of any stock
splits, stock dividends and other recapitalizations. The holders of
the Series A Preferred Stock are entitled to a liquidation
preference of $1,000 per share of Series A Preferred Stock plus any
declared but unpaid dividends upon the liquidation of the Company.
The Series A Preferred Stock may be redeemed by the Company at any
time and must be redeemed by the Company, upon the written request
of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock, after the occurrence of one of
the following events: (x) the Company’s trailing 12 month
EBITDA exceeds $5,000,000, (y) the sale of all, or substantially
all of the assets of the Company, or (z) the sale of all or
substantially all the intellectual property of the Company, which
in the case of “y” or “z” result in net
proceeds to the Company in excess of $6,000,000, at a redemption
price equal to $1,000 plus all declared but unpaid dividends, which
amount will be paid in three annual installments. The approval of
at least two thirds of the holders of Series A Preferred Stock,
voting together as a separate class, is required for: (i) the
merger, sale of all, or substantially all of the assets or
intellectual property, recapitalization, or reorganization of the
Company, unless such action (x) results in net proceeds to the
stockholders of the Company in excess of $5,000,000, and (y) has
received the prior approval of the Board of Directors. (ii) the
authorization or issuance of any equity security having any right,
preference or priority superior to or on parity with the Series A
Preferred Stock. (iii) the redemption, repurchase or acquisition,
directly or indirectly, through subsidiaries or otherwise, of any
equity securities (other than the redemption of the Series A
Preferred Stock) or the payment of dividends or other distributions
on equity securities by the Company (other than on the Series A
Preferred Stock). (iv) any amendment or repeal of any provision of
the Company’s Certificate of Incorporation or Bylaws that
would adversely affect the rights, preferences, or privileges of
the Series A Preferred Stock. and (v) the liquidation, dissolution
or winding up of the business and affairs of the Company, the
effectuation of any Liquidation Event (as defined in Certificate of
Designation), or the consent to any of the foregoing, unless such
action (x) results in net proceeds to the stockholders of the
Company in excess of $5,000,000, and (y) has received the prior
approval of the Board of Directors.
Stock Warrants:
The
Company values warrants based on the Black-Scholes pricing model.
In accordance with ASC 815, these warrants are classified as
equity. The warrants were issued in conjunction with certain
promissory notes and the private investment in the Company’s
shares. At December 31, 2018, there were 20,333,620 exercisable
warrants outstanding at an exercise price of $0.07 per
share.
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December
31, 2016
|
207,859,113
|
$0.04-$0.20
|
$0.05
|
|
Issued
|
20,333,620
|
$0.07
|
$0.07
|
|
Exercised
|
--
|
--
|
--
|
|
Forfeited
|
(188,285)
|
$0.18
|
$0.18
|
|
Balance at December
31, 2017
|
228,004,448
|
$0.04-$0.20
|
$0.05
|
|
Issued
|
--
|
--
|
--
|
|
Exercised
|
--
|
--
|
--
|
|
Forfeited
|
(207,670,828)
|
$0.04-$0.20
|
$0.05
|
|
Balance at December
31, 2018
|
20,333,620
|
$0.07
|
$0.07
|
Accrued Dividends:
The
Company reversed approximately $447,000 of accrued dividends
associated with previously issued Series B preferred stock. The
dividends were only payable to current shareholders of Series B if
there was a liquidation of the Company or if approved by the Board
of Directors. As an automatic conversion of all outstanding Series
B preferred stock was approved by the Board of Directors in
September 2015, the Company is no longer under any obligation to
pay dividends to the former holders of the Series B preferred
stock.
NOTE 8. EMPLOYEE BENEFIT PLANS
The
Company sponsors one defined contribution plan for its employees -
the Cicero Inc. 401(K) Plan. Under the terms of the Plan, the
Company, at its discretion, provides a 50% matching contribution up
to 6% of an employee’s salary. Participants must be eligible
and employed at December 31 of each calendar year to be eligible
for employer matching contributions. The Company opted not to make
any matching contributions for 2018 and 2017.
NOTE 9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT
RISK
In
2018, one customer accounted for 48% of operating revenues and one
customer accounted for 100% of accounts receivable at December 31,
2018. In 2017, two customers accounted for 33% and 30%,
respectively, of operating revenues and two customers accounted for
67% and 12% of accounts receivable at December 31,
2017.
In
2018, one vendor accounted for 68% of accounts payable at December
31, 2018. In 2017, one vendor accounted for 63% of accounts payable
at December 31, 2017.
NOTE 10. RELATED PARTY INFORMATION
From
time to time during 2017 through 2018, the Company entered into
several short term notes payable with John Steffens, the
Company’s Chairman of the Board, for various working capital
needs. The notes bear an interest rate of 10% with a maturity date
of June 30, 2018. In June 2018, all outstanding notes were amended
to a new maturity date of December 31, 2018. The Company is
obligated to repay the notes with the collection of any accounts
receivable. At December 31, 2017, the Company was indebted to Mr.
Steffens in the approximate amount of $1,170,000 of principal and
$75,000 of interest. In December 2018, the all outstanding notes
were amended to a new maturity date of June 30, 2020 and as such
have been reclassed as long term debt as of December 31, 2018. At
December 31, 2018, the Company was indebted to Mr. Steffens in the
approximate amount of $3,511,500 of principal and $299,000 of
interest.
In June
2015, the Company entered into a promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) to SOAdesk. The
initial maturity date of the note was December 31, 2015 with an
annual interest rate of 10%. Through a series of amendments, the
maturity date was extended to January 1, 2019. Included in the last
two amendments were four milestone payments of $62,500 each to be
paid to interest first and then principal and payable on June 1,
2017, December 1, 2017, June 1, 2018, and December 1, 2018,
respectively. The Company’s Chairman has agreed to personally
guarantee these, and only these, milestone payments. At December
31, 2018, the Company was indebted to SOAdesk for $360,580 in
principal and approximately $17,000 in interest.
Between
July and October 2017, the Company entered into short-term notes
payable totaling $38,000 with John Broderick, the Chief Executive
Officer, for various working capital needs. The notes bore interest
at 10%. The total principal and interest of $38,000 was paid in
full between July and October 2017.
NOTE 11. COMMITMENTS AND EMPLOYMENT AGREEMENTS
In June
2014, the Company entered into an amendment with its landlord and
renewed its lease through 2018. In October 2016, the Company
entered into an amendment reducing the square footage being leased
for the remaining term of the lease. The lease expired in October
2018 and the Company is currently on a month to month lease with
the landlord as it negotiates a new long term lease.
Rent
expense was $65,000 for each years ended December 31, 2018 and
2017, respectively.
Under
the employment agreement between the Company and Mr. Broderick
effective January 1, 2018, we agreed to pay Mr. Broderick an annual
base salary of $175,000 and performance bonuses in cash of up to
$275,000 per annum based upon exceeding certain revenue goals and
operating metrics, as determined by the Board of Directors, at its
discretion. Upon termination of Mr. Broderick’s employment by
the Company without cause, we agreed to pay Mr. Broderick a lump
sum payment of one year of Mr. Broderick’s then current base
salary within 30 days of termination and any unpaid deferred
salaries and bonuses. In the event a substantial change in Mr.
Broderick’s job duties occurs, there is a decrease in or
failure to provide the compensation or vested benefits under the
employment agreement or there is a change in control of the
Company, we agreed to pay Mr. Broderick a lump sum payment of one
year of Mr. Broderick’s then current base salary within
thirty (30) days of termination. Additionally, as part of his
employment agreement for fiscal 2012, Mr. Broderick will be
entitled to receive 1,500,000 shares of the Company’s common
stock in the event of the termination, with or without cause, of
his employment by the Company or his resignation from the Company
with or without cause or in the event of a change of control (as
that term is defined in the Employment Agreement) of the Company.
Mr. Broderick will have thirty (30) days from the date written
notice is given about either a change in his duties or the
announcement and closing of a transaction resulting in a change in
control of the Company to resign and execute his rights under this
agreement. If Mr. Broderick’s employment is terminated for
any reason, Mr. Broderick has agreed that, for two (2) years after
such termination, he will not directly or indirectly solicit or
divert business from us or assist any business in attempting to do
so or solicit or hire any person who was our employee during the
term of his employment agreement or assist any business in
attempting to do so.
Under
the employment agreement between the Company and Mr. Sherin
effective July 17, 2017, we agreed to pay Mr. Sherin an annual base
salary of $150,000 and a commission of 15% on incremental operating
revenue of new clients as designated in an exhibit in his
agreement. If the Company terminates Mr. Sherin’s employment
without cause, we agreed to pay Mr. Sherin an amount equivalent to
three (3) months of Mr. Sherin’s then current base salary in
equal semi-monthly installments over that three (3) month period
following termination. If Mr. Sherin’s employment is
terminated for any reason, Mr. Sherin has agreed that, for eighteen
(18) months after such termination, he will not directly or
indirectly solicit or divert business from us, assist any business
in attempting to solicit or divert business from us, solicit or
hire any person who was our employee during the employment
agreement term, or assist any business in attempting to solicit or
hire any person who was our employee during the employment
agreement term.
NOTE 12. CONTINGENCIES
The
Company, from time to time, is involved in legal matters arising in
the ordinary course of its business including matters involving
proprietary technology. While management believes that such matters
are currently not material, there can be no assurance that matters
arising in the ordinary course of business for which the Company is
or could become involved in litigation, will not have a material
adverse effect on its business, financial condition or results of
operations.
Under
the indemnification clause of the Company’s standard reseller
agreements and software license agreements, the Company agrees to
defend the reseller/licensee against third-party claims asserting
infringement by the Company’s products of certain
intellectual property rights, which may include patents,
copyrights, trademarks or trade secrets, and to pay any judgments
entered on such claims against the reseller/licensee. There were no
claims against the Company as of December 31, 2018 and
2017.
NOTE 13. SUBSEQUENT EVENTS
In
January 2019, the Company amended its promissory note with SOAdesk
extending the maturity date from January 1, 2019 to March 31, 2019
and promising repayment of total outstanding principal amount of
$360,580 and any outstanding interest. All other terms of the
original promissory note and earlier amendments were still in
effect.
In
first quarter of fiscal 2019, the Company entered into various
notes payable totaling $460,000 with Mr. Steffens. The notes bear
interest at 10% annually. They are unsecured and mature on June 30,
2020. Subsequent events have been evaluated through March 30,
2019.
In
March 2019, the Company issued 4,250 of its Series A preferred
stock to its Chairman, John Steffens as part of a conversion of
debt and interest totaling $4,250,197. The Company accounted for
the transaction pursuant to Topic ASC 470-50, Modification and
Extinguishment of Debt. Due to the fact that the transaction was
with Mr. Steffens, the Company’s Chairman of the Board, the
Company determined that this was not an arm’s length
agreement and as such has recorded the entire transaction through
additional paid in capital.
In
March 2019, the Company issued a Warrant to purchase up to
17,000,787 shares of the Company’s Common Stock at an
exercise price of $0.05 per share to its Chairman, John L.
Steffens, as part of his debt conversion of principal and interest
totaling $4,250,197. The Warrant is exercisable for a period of ten
years, and subject to customary anti-dilution provisions. The
Company is obligated to reserve a sufficient number of shares of
the Company’s common stock to enable the exercise of the
Warrant.
The
Company’s management, in consultation with its outside tax
professionals, have determined that the stock conversion will not
trigger an Internal Revenue Code Section 382
limitation.
EMPLOYMENT AGREEMENT
This
EMPLOYMENT AGREEMENT (this “Agreement”) is dated and entered
into as of July 10, 2017 (the “Effective Date”) by and between
CICERO, INC., a Delaware corporation with an address at 8000
Regency Parkway, Suite 542, Cary, North Carolina 27518 (the
“Company”), and
TODD SHERIN, an individual residing in the Commonwealth of
Pennsylvania (“Executive”).
W I
T N E S S E T H:
WHEREAS, the
Company desires to employ Executive as Chief Revenue Officer of the
Company, and the parties hereto desire to enter into this Agreement
embodying the terms of such employment.
NOW,
THEREFORE, in consideration of the premises and the mutual
covenants and promises of the parties contained herein, the parties
hereto, intending to be legally bound, hereby agree as
follows:
1. Title and Job
Duties.
(a) Subject to the
terms and conditions set forth in this Agreement, during the Term
(as defined below), the Company agrees to employ Executive as Chief
Revenue Officer of the Company. In this capacity, Executive shall
be responsible for (i) developing and implementing long term sales
and revenue growth strategies for the Company, (ii) leadership and
direction of Software Development and Information Technology
operations of the Company, and (iii) expenditures and staffing
needs in the functional areas of sales, customer support and
outreach, partner & channel development, product development
and information technology. In addition, Executive will work
alongside the Chief Executive Officer of the Company and the
Chairman of the board of directors of the Company (the
“Board”) to
develop strategic direction as well as corporate messaging for the
Company. Executive’s duties shall be commensurate with those
of persons in similar capacities in similarly-sized companies, and
Executive shall have such other duties, authorities and
responsibilities as the Chairman of the Board shall designate from
time to time that are not inconsistent with Executive’s
position. In performing his duties under this Agreement, Executive
shall report to the Chairman of the Board.
(b) Executive accepts
such employment with the Company and agrees, during the Term, to
devote his full business and professional time and energy to the
Company. The Company and Executive agree that Executive will work
out of his home office in Pennsylvania. Executive agrees to carry
out and abide by all lawful directions of the Chairman of the Board
that are consistent with his position as Chief Revenue Officer of
the Company.
(c) Without limiting
the generality of the foregoing, Executive shall not, without the
written approval of the Board, render services of a business or
commercial nature on his own behalf or on behalf of any other
person, firm, or corporation, whether for compensation or
otherwise, during the Term; provided, that the foregoing shall not
prevent Executive from (i) serving on the boards of directors of,
or holding any other offices or positions in, non-profit
organizations and, with the prior written approval of the Company,
other for-profit companies, (ii) participating in charitable,
civic, educational, professional, community or industry affairs,
and (iii) managing Executive’s passive personal investments,
so long as such activities in the aggregate do not materially
interfere or conflict with Executive’s duties hereunder or
create a business or fiduciary conflict for Executive or the
Company.
2. Base Salary and Additional
Compensation.
(a) Base Salary. During the Term,
the Company shall pay to Executive an annual base salary of
$150,000 (“Base
Salary”), less applicable withholdings and deductions,
payable in accordance with the Company’s normal payroll
procedures. Base Salary shall be reviewed by the Board annually and
shall be increased at the discretion of the Board.
(b) Commission. During the Term,
Executive shall be eligible to earn a commission (the
“Commission”)
equal to fifteen percent (15%) of the Incremental Operating Revenue
(as defined below) attributed to any New Clients (as defined below)
generated during each fiscal year of the Company.
(i) For purposes of
this Agreement, (A) “Incremental Operating Revenue”
means (x) gross profit on incremental revenue from New Clients less
(y) a proportionate percentage of development, professional
services, marketing and general and administrative expenses of the
Company allocated to such revenue (such percentage to be equal to
the ratio of New Client revenue to total Company revenue), and (B)
“New Clients”
means new customers or clients of the Company (provided that the
existing businesses or verified pipeline leads for Company clients
and prospects listed on Exhibit A
attached hereto shall not constitute New Clients).
(ii) The
Commission shall not be considered earned by Executive until both a
commissionable sales transaction has been finalized and the Company
has recognized the applicable revenue from the New Client. The
Commission shall be paid by the Company to Executive, if earned,
within thirty (30) days of the end of each fiscal
quarter.
(iii) If
total Company revenue remains the same or increases in the fiscal
year following the first fiscal year (“Fiscal Year 1”) for which
Executive is eligible to receive the Commission
(“Fiscal Year
2”), the Company shall pay to Executive an additional
commission payment (the “Additional Commission”) (in
addition to the Commission) equal to five percent (5%) of
Incremental Operating Revenue attributed to any New Clients within
Fiscal Year 1, which Additional Commission payment shall be paid by
the Company to Executive within thirty (30) days of the end of
Fiscal Year 2. For the avoidance of doubt, this additional
commission payment constitutes a “tail” on Fiscal Year
1 earnings.
(iv) Executive
need not be employed by the Company at the time that the Commission
or the Additional Commission is paid by the Company, and in the
event that Executive’s employment with the Company is
terminated before any Commission or Additional Commission is paid
by the Company, Executive shall be entitled to receive such
Commission or Additional Commission when paid by the Company in
accordance with Section 2(b).
(c) Equity. On the Effective Date,
and subject to approval of the Board, the Company shall grant to
Executive five million (5,000,000) restricted shares of the
Company’s common stock (the “Restricted Stock”).1 The Restricted Stock shall vest as
follows: (i) fifty percent (50%) of the Restricted Stock shall vest
on the second (2nd) anniversary of the
Effective Date, provided that Executive has generated a minimum of
$1,000,000 in revenues during the two (2)-year period prior to such
second (2nd) anniversary; and
(ii) fifty percent (50%) of the Restricted Stock shall vest on the
third (3rd) anniversary of the
Effective Date, provided that Executive has generated a minimum of
$1,000,000 in revenues during the one (1)-year period prior to such
third (3rd) anniversary. Upon
the occurrence of a Change in Control (as defined below), all
Restricted Stock that has not yet vested shall immediately vest one
hundred percent (100%). For purposes of this Agreement,
“Change in
Control” shall mean each of the following with respect
to the Company:
(i) a sale of all or
substantially all of the Company’s assets;
(ii) a
sale of the voting securities of the Company such that any person
or group of persons who did not hold voting securities of the
Company prior to the transaction hold more than fifty percent (50%)
of the combined voting power of the securities of the Company after
the transaction; or
(iii) any
merger, consolidation or other transaction of the Company with or
into another corporation or other entity, other than a transaction
in which the holders of voting securities of the Company
immediately prior to such transaction continue to represent (either
by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), at least
fifty percent (50%) of the combined voting power of the securities
of the Company or such surviving entity or parent thereof
immediately after such transaction.
(d) Transaction Economics. Upon a
sale of the operating assets of the Company relating to desktop
automation software, the Company shall pay to Executive a
percentage of the Net Proceeds (as defined below) in the following
amount: (i) ten percent (10%) of the first $8,000,000 of the Net
Proceeds to be received from such sale; plus (ii) fifteen percent
(15%) of any Net Proceeds from such sale in excess of $8,000,000.
For purposes of this Agreement, “Net Proceeds” shall mean proceeds
to be received by the Company from such asset sale less all closing
costs associated and incurred by the Company in connection with the
consummation of such asset sale; provided, that the proceeds from
any transaction or asset sale between the Company and Aspect
Software, Intradiem or Dell occurring within one (1) year of the
Effective Date shall not be included in the calculation of Net
Proceeds.
3. Benefits.
(a) Vacation.
Executive shall be entitled to vacation in accordance with the
Company’s standard vacation policy extended to employees of
the Company generally, at levels commensurate with
Executive’s position.
(b) Health Insurance and Other Benefit
Plans. Executive shall be eligible to participate in the
Company’s health insurance and other employee benefit
programs, if any, that are provided by the Company for its
similarly-situated employees generally, at levels commensurate with
Executive’s position, in accordance with the provisions of
any such plans, as the same may be in effect from time to
time.
4. Expenses. In accordance with
the Company’s reimbursement policy, the Company shall
reimburse Executive for all reasonable business expenses properly
and reasonably incurred and paid by Executive in the performance of
his duties under this Agreement upon his presentment of detailed
receipts in the form required by the Company’s
policy.
5. Term of Employment. The term of
Executive’s employment with the Company shall commence on the
Effective Date and shall remain in effect until termination by
either party as set forth in Section 6 below (the
“Term”).
6. Termination.
(a) Termination by the
Company.
(i) For Cause. Executive’s
employment may be terminated by the Company for Cause (as defined
below) upon written notice to Executive delivered pursuant to
Section 12 of this Agreement. For purposes of this Agreement,
“Cause” shall
mean that Executive (A) pleads “guilty” or “no
contest” to, or is indicted for or convicted of, a felony
under federal or state law or a crime under federal or state law
which involves Executive’s fraud or dishonesty, (B) in
carrying out his duties, engages in conduct that constitutes gross
negligence or willful misconduct, (C) engages in misconduct that
causes material harm to the reputation of the Company (D)
materially fails to perform the responsibilities of his position,
or (E) materially breaches any term of this Agreement or written
policy of the Company.
(ii) Upon
Disability, Death or Without Cause. At the election of the
Board, Executive’s employment may be terminated by the
Company (A) should Executive, by reason of any medically
determinable physical or mental impairment (as determined by a
physician satisfactory to both the Company and Executive), become
unable to perform, with or without reasonable accommodation, the
essential functions of his job for the Company hereunder and such
incapacity has continued for a total of ninety (90) consecutive
days or for any one hundred eighty (180) days in a period of three
hundred sixty-five (365) consecutive days (a “Disability”), (B) upon
Executive’s death or (C) upon fourteen (14) days’ prior
written notice to Executive delivered pursuant to Section 12 of
this Agreement for any other reason or for no reason at all
(“Without
Cause”).
(b) Termination by
Executive.
(i) For Good Reason.
Notwithstanding anything contained elsewhere in this Agreement to
the contrary, Executive may terminate his employment with the
Company at any time for Good Reason (as defined below) upon written
notice to the Company delivered pursuant to Section 12 of this
Agreement stating the particular action(s) or inaction(s) giving
rise to the termination for Good Reason. The Company shall have
thirty (30) days after receipt of such a notice of termination to
cure the particular action(s) or inaction(s), and if the Company so
effects a cure, the notice shall be deemed rescinded and of no
further force and effect. For purposes of this Agreement,
“Good Reason”
means (i) the material diminution by the Company of the duties of
Executive as set forth in this Agreement without Executive’s
prior consent, other than reducing his responsibilities for Cause
or as a result of Executive’s Disability, (ii) the
Company’s requiring Executive to be primarily based at any
location other than his home office in Pennsylvania or (iii) any
material breach by the Company of this Agreement (provided that any
such act, omission, violation or breach must remain uncured after
notice from Executive and thirty (30) days’ opportunity to
cure prior to Executive’s termination of employment for Good
Reason).
(ii) Without
Good Reason. Notwithstanding anything contained elsewhere in
this Agreement to the contrary, Executive may terminate his
employment with the Company at any time and for any reason
whatsoever or for no reason at all in Executive’s sole
discretion by giving fourteen (14) days’ prior written notice
to the Company delivered pursuant to Section 12 of this Agreement
(“Voluntary Resignation
Without Good Reason”).
7. Payments Upon Termination of
Employment.
(a) Termination for Cause, Without Cause
During the First Six (6) Months of the Term, Death, Disability or
Voluntary Resignation Without Good Reason. If
Executive’s employment is terminated by the Company for
Cause, Without Cause during the first six (6) months of the Term or
upon Executive’s death or Disability or is terminated by
Executive by Voluntary Resignation Without Good Reason, then the
Company shall pay or provide to Executive only the following
amounts in connection with the termination of Executive’s
employment: (i) all Base Salary, Commission and Additional
Commission accrued up to and including the date of termination or
resignation, to be paid by the Company at such time that such Base
Salary would have been paid to Executive in accordance with the
Company’s normal payroll procedures or, with respect to the
payment of Commission and Additional Commission, the terms of this
Agreement; (ii) an amount for all accrued, unused vacation time, to
be paid by the Company in accordance with the Company’s
policies and applicable law; (iii) all unreimbursed expenses, to be
paid by the Company in accordance with this Agreement and the
Company’s policies; and (iv) all accrued benefits under any
Company benefit plan, to be paid by the Company pursuant to the
terms of each such benefit plan (the amounts under clauses (i)
through (iv), collectively, the “Accrued
Obligations”).
(b) Termination Without Cause After the
First Six (6) Months of the Term or for Good Reason. If
Executive’s employment is terminated by the Company Without
Cause after the first six (6) months of the Term or by Executive
for Good Reason, then the Company shall pay or provide to Executive
the following amounts in connection with the termination of
Executive’s employment: (i) the Accrued Obligations; and (ii)
a severance payment equal to Executive’s Base Salary for
three (3) months (the “Severance Amount”), to be paid in
installments in accordance with the Company’s normal payroll
procedures. The Company’s payment of the Severance Amount is
subject to Executive’s execution and delivery of a general
release (that is no longer subject to revocation under applicable
law) of the Company, its parents, subsidiaries and affiliates
(collectively, “Affiliated
Entities”) and each of their respective officers,
directors, employees, agents, successors and assigns in the form
attached hereto as Exhibit B
(the “General
Release”). The payment of the Severance Amount shall
begin to be made within sixty (60) days following termination of
Executive’s employment; provided, however, that if the sixty
(60) day period begins in one calendar year and ends in the
following calendar year, then all payments of the Severance Amount
will be made in the second calendar year beginning with the first
pay period of such calendar year.
(c) Notwithstanding the
foregoing, Executive agrees that in the event that all or a portion
of any payment described in subsection (b) of this Section 7
constitutes nonqualified deferred compensation within the meaning
of Section 409A of the Internal Revenue Code of 1986, as amended
(the “Code”),
such payment or payments that constitute nonqualified deferred
compensation within the meaning of the Code shall not be made prior
to the date which is six (6) months after the date Executive
separates from service (within the meaning of the
Code).
8. Confidentiality.
(a) Executive
understands that, during the Term, he may have access to
unpublished and otherwise confidential information both of a
technical and non-technical nature, relating to the business of the
Company or any of its Affiliated Entities, or clients, including,
without limitation, any of their actual or anticipated business,
research or development, any of their technology or the
implementation or exploitation thereof, including, without
limitation, information Executive and others have collected,
obtained or created, information pertaining to clients, accounts,
vendors, prices, costs, materials, processes, codes, material
results, technology, system designs, system specifications,
materials of construction, trade secrets or equipment designs,
including information disclosed to the Company or any of its
Affiliated Entities by others under agreements to hold such
information confidential (collectively, the “Confidential Information”).
Executive agrees to observe all policies and procedures of the
Company and its Affiliated Entities concerning such Confidential
Information. Executive further agrees not to disclose or use,
either during his employment or at any time thereafter, any
Confidential Information for any purpose, including, without
limitation, any competitive purpose, unless authorized to do so by
the Company in writing, except that he may disclose and use such
information in the good faith performance of his duties for the
Company during the Term. Executive’s obligations under this
Agreement will continue with respect to Confidential Information,
whether or not his employment is terminated, until such information
becomes generally available from public sources through no wrongful
act of Executive. Notwithstanding the foregoing, however, Executive
shall be permitted to disclose Confidential Information as may be
required by law, a subpoena or other governmental order, provided
that he provides prompt notice to the Company of such required or
requested disclosure so that the Company may attempt to obtain a
protective order or other assurance that confidential treatment
will be accorded to such Confidential Information and cooperates
with the Company (at the sole cost and expense of the Company) in
attempting to obtain such order or assurance.
(b) Upon the
Company’s request during the Term, or upon the termination of
his employment for any reason, Executive will promptly deliver to
the Company all documents, records, files, notebooks, manuals,
letters, notes, reports, customer and supplier lists, cost and
profit data, e-mail, apparatus, laptops, computers, smartphones,
tablets or other PDAs, hardware, software, drawings, blueprints,
and any other material of the Company or any of its Affiliated
Entities or clients, including all materials pertaining to
Confidential Information developed by Executive or others, and all
copies of such materials, whether of a technical, business or
fiscal nature, whether on the hard drive of a laptop or desktop
computer, in hard copy, disk or any other format, which are in his
possession, custody or control.
9. Assignment of Intellectual
Property.
(a) Executive will
promptly disclose to the Company any idea, invention, discovery or
improvement, whether patentable or not (“Creations”), conceived or made by
him alone or with others at any time during the Term. Executive
agrees that the Company owns any such Creations, and Executive
hereby assigns and agrees to assign to the Company all moral and
other rights he has or may acquire therein and agrees to execute
any and all applications, assignments and other instruments
relating thereto which the Company deems necessary or desirable.
These obligations shall continue beyond the termination of his
employment with respect to Creations and derivatives of such
Creations conceived or made during his employment with the Company.
Notwithstanding the foregoing provisions of this Section 9, the
Company and Executive understand that the obligation to assign
Creations to the Company shall not apply to any Creation which is
developed entirely on Executive’s own time without using any
of the Company’s equipment, supplies, facilities, and/or
Confidential Information and which does not result from or relate
to any work performed by Executive in connection with his
employment with the Company.
(b) In any jurisdiction
in which moral rights cannot be assigned, Executive hereby waives
any such moral rights and any similar or analogous rights under the
applicable laws of any country of the world that Executive may have
in connection with the Creations, and to the extent such waiver is
unenforceable, hereby covenants and agrees not to bring any claim,
suit or other legal proceeding against the Company or any of its
Affiliated Entities claiming that Executive’s moral rights to
the Creations have been violated.
(c) Executive agrees to
cooperate fully with the Company, both during and after the Term,
with respect to the procurement, maintenance and enforcement of
copyrights, patents, trademarks and other intellectual property
rights (both in the United States and foreign countries) relating
to such Creations. Executive shall sign all papers, including,
without limitation, copyright applications, patent applications,
declarations, oaths, formal assignments, assignments of priority
rights and powers of attorney, which the Company may deem necessary
or desirable in order to protect its rights and interests in any
Creations.
10. Non-Competition;
Non-Solicitation.
(a) During the Term and
for a period of eighteen (18) months thereafter, Executive shall
not, within the Territory (as defined below), directly or
indirectly, on his own behalf or on behalf of any person, firm or
corporation, or in any capacity whatsoever, own, manage, operate,
join, control, participate in or invest in, whether as an officer,
director, employee, partner, investor or otherwise, any business or
business entity that is primarily engaged in the development,
creation or sale of desktop automation software that competes
directly with the business of the Company (including, but not
limited to, PegaSystems, Automation Anywhere, Blue Prism,
WorkFusion, Jacada, Kofax and UIPath); provided, that the foregoing
shall not prohibit Executive from investing his funds in securities
of an issuer if the securities of such issuer are listed for
trading on a national securities exchange or are traded in the
over-the-counter market and Executive’s holdings therein
represent less than two percent (2%) of the total number of shares
or principal amount of the securities of such issuer outstanding;
provided further, that if Executive’s employment with the
Company is terminated by the Company Without Cause or by Executive
for Good Reason, then the provisions of this Section 10(a) shall
not apply.
(b) During the Term and
for a period of six (6) months thereafter, the Executive shall not
solicit for business or accept the business of, any person or
entity who is, or was at any time within the previous twelve
months, a Customer (defined below) of the Company or its Affiliated
Entities.
(c) During the Term and
for a period of eighteen (18) months thereafter, the Executive
shall not, directly or indirectly, (i) employ, solicit for
employment or otherwise contract for or hire or engage any
individual who is then an employee of the Company or its Affiliated
Entities or who was an employee of the Company and its Affiliated
Entities during the twelve (12) month period preceding the
termination of Executive’s employment or (ii) take any action
that could reasonably be expected to have the effect of encouraging
or inducing any employee of the Company or any of its Affiliated
Entities to cease his or her employment with the Company or any of
its Affiliated Entities for any reason; provided, that general
solicitations of employment by Executive (whether through
advertisements, the use of placement agencies or otherwise) that
are not specifically targeted to employees of the Company (and the
hiring of any person by Executive resulting from any such general
solicitation) shall not be prohibited by this Section
10(b).
(d) For purposes of
this Agreement, “Territory” means the United States
of America, but if such area is determined by a court of competent
jurisdiction to be too broad, then “Territory” shall
mean the area comprising the Company’s or any of its
Affiliated Entities’, as applicable, market for its services
and products within which area Executive was materially concerned
during the twelve (12) month period prior to the termination of
this Agreement.
(e) For purposes of
this Agreement, the term “Customer(s)” shall mean any
individual, corporation, partnership, business or other entity,
whether for-profit or not-for-profit, public, privately held, or
owned by the United States government that is a business entity or
individual with whom the Company or any of its Affiliated Entities
has done business or with whom Executive has actively negotiated
with during the twelve (12) month period preceding the termination
of his employment.
(f) Executive agrees
that in the event a court of competent jurisdiction determines the
length of the covenants, the coverage of the Territory or the
activities prohibited under this Section 10 are too restrictive to
be enforceable, the court may reduce the scope of the restriction
to the extent necessary to make the restriction
enforceable.
11. Representation and Warranty.
Executive represents and warrants to the Company that he is not
subject to any agreement restricting his ability to enter into this
Agreement and fully carry out his duties and responsibilities
hereunder.
12. Notice. Any notice or other
communication required or permitted to be given to any of the
parties hereto shall be deemed to have been given if personally
delivered, or if sent by nationally recognized overnight courier,
and addressed as follows:
If to
Executive, to:
Todd
Sherin
2401
Walnut St
Philadelphia, PA
19103
If to
the Company, to:
c/o
Cicero, Inc.
8000
Regency Parkway
Cary,
North Carolina 25718
Attention: Launny
Steffens, Chairman
with a
copy to:
Olshan
Frome Wolosky LLP
1325
Avenue of the Americas
New
York, New York 10019
Attention:
Jeffery S. Spindler, Esq.
13. Severability. If any provision
of this Agreement is declared void or unenforceable by a court of
competent jurisdiction, all other provisions shall nonetheless
remain in full force and effect.
14. Governing Law; Jurisdiction.
This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of North Carolina without
regard to the conflict of laws provisions thereof. Each of the
parties hereto hereby irrevocably submits to the exclusive
jurisdiction of any appropriate state court of record in the State
of North Carolina over any action or proceeding arising out of or
relating to this Agreement and each of the parties hereto hereby
irrevocably agrees that all claims in respect of such action or
proceeding shall be heard and determined in such North Carolina
state or Federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent legally possible, the
defense of an inconvenient forum to the maintenance of such action
or proceeding.
15. Code Section 409A
Compliance.
(a) The intent of
the parties is that payments and benefits under this Agreement
comply with, or be exempt from, Code Section 409A and the
regulations and guidance promulgated thereunder (collectively
“Code Section
409A”) and, accordingly, to the maximum extent
permitted, this Agreement shall be interpreted to be in compliance
therewith.
(b) A termination of
employment shall not be deemed to have occurred for purposes of any
provision of this Agreement providing for the payment of any
amounts or benefits upon or following a termination of employment
that are considered “nonqualified deferred
compensation” under Code Section 409A unless such termination
is also a “separation from service” within the meaning
of Code Section 409A and, for purposes of any such provision of
this Agreement, references to a “termination,”
“termination of employment” or like terms shall mean
“separation from service.”
(c) With regard to any
provision herein that provides for reimbursement of costs and
expenses or in-kind benefits, except as permitted by Code Section
409A, (i) the right to reimbursement or in-kind benefits shall not
be subject to liquidation or exchange for another benefit, (ii) the
amount of expenses eligible for reimbursement, or in-kind benefits,
provided during any taxable year shall not affect the expenses
eligible for reimbursement, or in-kind benefits to be provided, in
any other taxable year, provided that the foregoing clause (ii)
shall not be violated without regard to expenses reimbursed under
any arrangement covered by Code Section 105(b) solely because such
expenses are subject to a limit related to the period the
arrangement is in effect and (iii) such payments shall be made on
or before the last day of Executive’s taxable year following
the taxable year in which the expense occurred.
(d) For purposes of
Code Section 409A, Executive’s right to receive any
installment payments pursuant to this Agreement shall be treated as
a right to receive a series of separate and distinct payments.
Whenever a payment under this Agreement specifies a payment period
with reference to a number of days (e.g., “within sixty (60)
days following the date of termination”), the actual date of
payment within the specified period shall be within the sole
discretion of the Company.
16. Waiver. The waiver by any of
the parties hereto of a breach of any provision of this Agreement
shall not be construed as a waiver of any subsequent breach. The
failure of a party to insist upon strict adherence to any provision
of this Agreement on one or more occasions shall not be considered
a waiver or deprive that party of the right thereafter to insist
upon strict adherence to that provision or any other provision of
this Agreement. Any waiver must be in writing.
17. Assignment. This Agreement is a
personal contract and Executive may not sell, transfer, assign,
pledge or hypothecate his rights, interests and obligations
hereunder. Except as otherwise herein expressly provided, this
Agreement shall be binding upon and shall inure to the benefit of
Executive and his heirs and personal representatives and shall
inure to the benefit of and be binding upon the Company and its
successors and assigns, except that the Company may not assign this
Agreement without Executive’s prior written consent, except
to an acquirer of all or substantially all of the assets of the
Company.
18. Injunctive Relief.
Without limiting the remedies available to the Company, Executive
acknowledges that a breach of any of the covenants contained in
Sections 8, 9 and 10 would result in material irreparable injury to
the goodwill of the Company for which there is no adequate remedy
at law, that it will not be possible to measure damages for such
injuries precisely and that, in the event of such a breach or
threat thereof, the Company shall be entitled, without the
requirement to post bond or other security, to obtain a temporary
restraining order and/or preliminary or permanent injunction
restraining Executive from engaging in activities prohibited by
this Agreement or such other relief as may be required to
specifically enforce any of the covenants in Sections 8, 9 and 10
of this Agreement, in addition to all other remedies available at
law or in equity.
19. Counterparts. This Agreement
may be executed in multiple counterparts, each of which shall be
deemed an original and all of which together shall be considered
one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the parties and
delivered to the other party. Facsimile or .pdf signatures shall
have the same force and effect as original signatures.
20. Entire Agreement. This
Agreement embodies all of the representations, warranties, and
agreements between the parties hereto relating to Executive’s
employment with the Company. No other representations, warranties,
covenants, understandings, or agreements exist between the parties
hereto relating to Executive’s employment. This Agreement
shall supersede all prior agreements, written or oral, relating to
Executive’s employment. This Agreement may not be amended or
modified except by a writing signed by each of the parties hereto.
Sections 2(b)(iv) and 7 through 20 of this Agreement shall survive
the termination of this Agreement.
[Signature
Page Follows]
1 Note to Draft: Will there be a
separate equity award agreement reflecting the issuance of
Restricted Stock? Is there a Restricted Stock Plan pursuant to
which the equity will be issued?
IN
WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed and delivered on the date first set
forth above.
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COMPANY:
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CICERO,
INC.
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By:
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Launny
Steffens
Chairman
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EXECUTIVE:
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TODD
SHERIN
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EXHIBIT A
EXCLUDED BUSINESSES AND LEADS
Consistent
with the terms as defined in Paragraph 2(b)(i) above, the following
shall govern the definition of a New Client:
1.
Any profits from
existing business with a client or customer prior to July 1, 2017
or any maintenance of that business, regardless of the date, is
excluded from Incremental Operating Revenue or Additional
Commission for purposes of this Agreement.
2.
Any profits from
existing agreements with CH Robinson, Dell, Intertek, and Intradiem
regardless of the date on which the Company sees revenue or profit
from the business, is excluded from Incremental Operating Revenue
or Additional Commission for purposes of this
Agreement.
3.
New business
generated from existing clients or customers or new clients that is
not otherwise excluded by 1 and/or 2 above is a “New
Client” for purposes of calculating Incremental Operating
Revenue or Additional Commission under this Agreement. This would
apply to new business through any channel, including direct,
reseller, or original equipment manufacturer (“OEM”)
transactions.
EXHIBIT B
FORM OF AGREEMENT AND RELEASE
This
Agreement and Release (this “Agreement”), executed this
10 day of July, 2017, is entered into by and between TODD SHERIN
(“Executive”), an individual residing in the
Commonwealth of Pennsylvania with an address at 2401 Walnut St.,
Philadelphia, PA 19103, and CICERO, INC. (on behalf of its parents,
subsidiaries and affiliates, the “Company”),
a Delaware corporation with an address
at 8000 Regency Parkway, Suite 542, Cary, North Carolina
25718.
1. Executive’s
employment with the Company shall be terminated effective ________
(“Termination Date”). As of the Termination Date,
Executive’s duties, responsibilities, office and title shall
cease. Capitalized terms used without definition in this Agreement
shall have the meanings set forth in the Employment Agreement by
and between Executive and the Company, dated as of July 10,
2017 (the
“Employment Agreement”).
2. If
Executive’s employment terminates pursuant to Section 6(C) of
the Employment Agreement, then within ten (10) days of the Release
Effective Date (as defined below), the Company shall begin to pay
to Executive the Severance Amount defined in Section 7(b) of the
Employment Agreement in accordance with the terms set forth
therein.
(b) The Company and
Executive agree that in the event that any of the payments in this
Section 2 constitute deferred compensation within the meaning of
Section 409(A) of the Code, such payment or payments that
constitute nonqualified deferred compensation within the meaning of
the Code shall not be made prior to the date which is the earlier
of (A) the expiration of the six (6) month period measured from the
date of the “separation from service” of Executive, and
(B) thirty (30) days from the date of Executive’s death
(within the meaning of the Code).
1. Executive agrees
and acknowledges that the payments and/or benefits provided in
Section 2 above exceed any payments and benefits to which Executive
would otherwise be entitled under any policy, plan, and/or
procedure of the Company absent his signing this Agreement.
Executive acknowledges that he has been paid for work performed up
to and including the Termination Date and for accrued but unused
vacation.
2. [IF EXECUTIVE IS
OVER 40 AT THE TIME OF TERMINATION] Executive shall have up to
twenty-one (21) days from the date of his receipt of this Agreement
to consider the terms and conditions of this Agreement. Executive
may accept this Agreement at any time within the twenty-one (21)
day period by executing it and returning it to the Chairman of the
board of directors of the Company at 8000 Regency Parkway, Suite
542, Cary, North Carolina 25718, no later than 5:00 p.m. on the
twenty-first (21st) day after
Executive’s receipt of this Agreement. Thereafter, Executive
will have seven (7) days to revoke this Agreement by stating his
desire to do so in writing to the Chairman at the address listed
above, and delivering it to the Chairman no later than 5:00 p.m. on
the seventh (7th) day following the
date Executive signs this Agreement. The effective date of this
Agreement shall be the eighth (8th) day following
Executive’s signing of this Agreement (the “Release
Effective Date”), provided Executive does not revoke the
Agreement during the revocation period. In the event Executive does
not accept this Agreement as set forth above, or in the event
Executive revokes this Agreement during the revocation period, this
Agreement, including, but not limited to, the obligation of the
Company to provide the payment referred to in Section 2 above,
shall automatically be deemed null and void.
3. In consideration of
the payment referred to in Section 2 above, Executive, for himself
and for his heirs, executors, and assigns (hereinafter collectively
referred to as the “Releasors”), forever releases and
discharges the Company and any and all of its parent corporations,
subsidiaries, divisions, affiliated entities, predecessors,
successors and assigns, and any and all of its and their employee
benefit and/or pension plans and funds, and any and all of its and
their past or present officers, directors, stockholders, agents,
trustees, administrators, employees and assigns (whether acting as
agents for such entities or in their individual capacities)
(hereinafter collectively referred to as the
“Releasees”), from any and all claims, demands, causes
of action, fees and liabilities of any kind whatsoever (based upon
any legal or equitable theory, whether contractual, common-law,
statutory, decisional, federal, state, local or otherwise), whether
known or unknown, which Releasors ever had, now have or may have
against the Releasees or any of them by reason of any actual or
alleged act, omission, transaction, practice, conduct, occurrence,
or other matter from the beginning of the world up to and including
the Release Effective Date, except for the obligations of the
Company under this Agreement and the remaining obligations of the
Company under the Employment Agreement.
(a) Without limiting
the generality of the foregoing subsection (a), this Agreement is
intended to and shall release the Releasees from any and all claims
arising out of Executive’s employment with Releasees and/or
the termination of Executive’s employment, including, but not
limited to, any claim(s) under or arising out of the following: (i)
Title VII of the Civil Rights Act of 1964, as amended; (ii) the
Americans with Disabilities Act, as amended; (iii) the Employee
Retirement Income Security Act of 1974, as amended (excluding
claims for accrued, vested benefits under any employee benefit plan
of the Company in accordance with the terms of such plan and
applicable law); (iv) the Age Discrimination in Employment Act, as
amended, or the Older Workers Benefit Protection Act; (v) the North
Carolina Equal Employment Practices Act; (vi) alleged
discrimination or retaliation in employment (whether based on
federal, state or local law, statutory or decisional); (vii) the
terms and conditions of Executive’s employment with the
Company, the termination of such employment, and/or any of the
events relating directly or indirectly to or surrounding that
termination; and (viii) any law (statutory or decisional) providing
for attorneys’ fees, costs, disbursements and/or the
like.
(b) Notwithstanding the
foregoing, nothing in this Agreement shall be construed to prevent
Executive from filing a charge with or participating in an
investigation conducted by any governmental agency, including,
without limitation, the United States Equal Employment Opportunity
Commission (“EEOC”) or applicable state or city fair
employment practices agency, to the extent required or permitted by
law. Nevertheless, Executive understands and agrees that he is
waiving any relief available (including, for example, monetary
damages or reinstatement), under any of the claims and/or causes of
action waived in Sections 5(a) and (b), including, but not limited
to, financial benefit or monetary recovery from any lawsuit filed
or settlement reached by the EEOC or anyone else with respect to
any claims released and waived in this Agreement.
4. Executive agrees
that he has not and will not engage in any conduct that is
injurious to the Company’s or any of the Releasees’
reputation or interest, including, but not limited to, publicly
disparaging (or inducing or encouraging others to publicly
disparage) the Company or the Releasees.
(a) Executive
acknowledges that he has returned to the Company any and all
originals and copies of documents, materials, records, credit
cards, keys, building passes, computers, blackberries and other
electronic devices and other items in his possession or control
belonging to the Company or containing proprietary information
relating to the Company.
(b) Executive
acknowledges that the terms of Section 8, Confidentiality, Section
9, Assignment of Intellectual Property, and Section 10,
Non-Competition; Non-Solicitation, of the Employment Agreement are
incorporated herein by reference, and Executive agrees and
acknowledges that he is bound by their terms.
5. Executive will
cooperate with the Company and/or its subsidiaries and affiliates
and its/their counsel in connection with any investigation,
administrative proceeding or litigation relating to any matter in
which Executive was involved or of which Executive has
knowledge.
(a) Executive agrees
that, in the event he is subpoenaed by any person or entity
(including, but not limited to, any government agency) to give
testimony (in a deposition, court proceeding or otherwise) that in
any way relates to Executive’s employment with the Company,
he will give prompt notice of such request to the Chairman, and
will make no disclosure until the Company has had a reasonable
opportunity to contest the right of the requesting person or entity
to such disclosure, provided that nothing herein shall prevent
Executive from complying with the requirements of the
law.
6. The terms and
conditions of this Agreement are and shall be deemed to be
confidential, and shall not be disclosed by Executive to any person
or entity without the prior written consent of the Chairman, except
if required by law, and to Executive’s accountants,
attorneys, and spouse, provided that they agree to maintain the
confidentiality of this Agreement. Executive further represents
that he has not disclosed the terms and conditions of this
Agreement to anyone other than his attorneys, accountants and
spouse.
7. The making of this
Agreement is not intended, and shall not be construed, as an
admission that any of the Releasees has violated any federal, state
or local law (statutory or decisional), ordinance or regulation,
breached any contract, or committed any wrong whatsoever against
Executive.
8. The parties agree
that this Agreement may not be used as evidence in a subsequent
proceeding except in a proceeding to enforce the terms of this
Agreement.
9. Executive
acknowledges that: (a) he has carefully read this Agreement in its
entirety; (b) he has had an opportunity to consider fully the terms
of this Agreement; (c) he has been advised by the Company in
writing to consult with an attorney of his choosing in connection
with this Agreement; (d) he fully understands the significance of
all of the terms and conditions of this Agreement and he has
discussed it with his independent legal counsel, or has had a
reasonable opportunity to do so; (e) he has had answered to his
satisfaction any questions he has asked with regard to the meaning
and significance of any of the provisions of this Agreement; and
(f) he is signing this Agreement voluntarily and of his own free
will and assents to all the terms and conditions contained
herein.
10. This Agreement is
binding upon, and shall inure to the benefit of, the parties and
their respective heirs, executors, administrators, successors and
assigns.
11. If any provision of
this Agreement shall be held by a court of competent jurisdiction
to be illegal, void, or unenforceable, such provision shall be of
no force and effect. However, the illegality or unenforceability of
such provision shall have no effect upon, and shall not impair the
enforceability of, any other provision of this Agreement; provided,
however, that, upon any finding by a court of competent
jurisdiction that the release or any of the covenants provided for
by Section 5 and/or Section 6 above is illegal, void, or
unenforceable, Executive agrees to execute a release, waiver and/or
covenant with substantially similar provisions that is legal and
enforceable. Finally, any breach of any of the terms of Sections 6,
7 and/or 8 above shall constitute a material breach of this
Agreement as to which the Company may seek appropriate relief in a
court of competent jurisdiction.
12. This Agreement
shall be governed by, and construed and enforced in accordance
with, the laws of the State of North Carolina, without regard to
the conflict of laws provisions thereof. Actions to enforce the
terms of this Agreement, or that relate to Executive’s
employment with the Company, shall be submitted to the exclusive
jurisdiction of any appropriate state court of record in the State
of North Carolina.
13. This Agreement may
be executed in multiple counterparts, each of which shall be deemed
an original and all of which together shall be considered one and
the same agreement and shall become effective when one or more
counterparts have been signed by each of the parties and delivered
to the other party. Facsimile or .pdf signatures shall have the
same force and effect as original signatures.
14. This Agreement
(including any exhibits attached hereto) constitutes the complete
understanding between the parties with respect to the termination
of Executive’s employment at the Company and supersedes any
and all agreements, understandings, and discussions, whether
written or oral, between the parties. No amendment of any provision
of this Agreement shall be valid unless the same shall be in
writing and signed by each of the parties hereto.
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CICERO,
INC.
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By:
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Date:
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Name:
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Title:
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