|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
F-9
|
|
To the Board of Directors and Stockholders
Cicero Inc.
Cary, North Carolina
We have audited the accompanying consolidated balance sheet of Cicero Inc. and subsidiaries (the “Company”) as of December 31, 2012, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cicero Inc. as of December 31, 2012, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a working capital deficiency as of December 31, 2012. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Cherry Bekaert LLP
Raleigh, North Carolina
April 15, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Cicero Inc.
Cary, North Carolina
We have audited the accompanying consolidated balance sheet of Cicero Inc. and subsidiaries (the "Company") as of December 31, 2011, and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cicero Inc. and subsidiaries as of December 31, 2011, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
Bala Cynwyd, Pennsylvania
April 16, 2012
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
69
|
|
|
$
|
184
|
|
Trade accounts receivable, net
|
|
|
1,247
|
|
|
|
861
|
|
Prepaid expenses and other current assets
|
|
|
289
|
|
|
|
404
|
|
Total current assets
|
|
|
1,605
|
|
|
|
1,449
|
|
Property and equipment, net
|
|
|
47
|
|
|
|
32
|
|
Intangible asset, net (Note 6)
|
|
|
28
|
|
|
|
729
|
|
Goodwill (Note 6)
|
|
|
2,832
|
|
|
|
2,832
|
|
Total assets
|
|
$
|
4,512
|
|
|
$
|
5,042
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt (Note 7)
|
|
$
|
826
|
|
|
$
|
6,137
|
|
Accounts payable
|
|
|
2,887
|
|
|
|
3,170
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages, and related items
|
|
|
1,119
|
|
|
|
1,407
|
|
Other
|
|
|
271
|
|
|
|
424
|
|
Deferred revenue (Note 2)
|
|
|
1,389
|
|
|
|
1,611
|
|
Total current liabilities
|
|
|
6,492
|
|
|
|
12,749
|
|
Long-term debt (Note 8)
|
|
|
3,509
|
|
|
|
1,916
|
|
Total liabilities
|
|
|
10,001
|
|
|
|
14,665
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 15 and 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized
Series A-1 – 1,541.6 shares issued and outstanding at December 31, 2012 and 1,542.6 shares issued and outstanding at December 31, 2011, $500 per share liquidation preference (aggregate liquidation value of $771)
|
|
|
--
|
|
|
|
--
|
|
Series B – 10,400 shares issued and outstanding at December 31, 2012 and 2011, $500 per share liquidation preference (aggregate liquidation value of $5,200)
|
|
|
--
|
|
|
|
--
|
|
Common stock, $0.001 par value, 215,000,000 shares authorized at December 31, 2012 and 2011, respectively; 73,094,286 issued and outstanding at December 31, 2012 and 47,444,524 issued and outstanding at December 31, 2011 (Note 11)
|
|
|
73
|
|
|
|
47
|
|
Common stock - subscribed
|
|
|
10
|
|
|
|
--
|
|
Additional paid-in-capital
|
|
|
236,919
|
|
|
|
232,506
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(242,491
|
)
|
|
|
(242,176
|
)
|
Total stockholders' deficit
|
|
|
(5,489
|
)
|
|
|
(9,623
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
4,512
|
|
|
$
|
5,042
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Revenue:
|
|
|
|
|
|
|
Software
|
|
$
|
4,061
|
|
|
$
|
676
|
|
Maintenance
|
|
|
1,333
|
|
|
|
1,540
|
|
Services
|
|
|
603
|
|
|
|
1,038
|
|
Total operating revenue
|
|
|
5,997
|
|
|
|
3,254
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Software
|
|
|
701
|
|
|
|
701
|
|
Maintenance
|
|
|
145
|
|
|
|
114
|
|
Services
|
|
|
979
|
|
|
|
1,062
|
|
Total cost of revenue
|
|
|
1,825
|
|
|
|
1,877
|
|
Gross margin
|
|
|
4,172
|
|
|
|
1,377
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,897
|
|
|
|
1,679
|
|
Research and product development
|
|
|
1,476
|
|
|
|
1,183
|
|
General and administrative
|
|
|
949
|
|
|
|
1,189
|
|
Total operating expenses
|
|
|
4,322
|
|
|
|
4,051
|
|
Loss from operations before other income (charges)
|
|
|
(150
|
)
|
|
|
(2,674
|
)
|
Other income (charges):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(547
|
)
|
|
|
(813
|
)
|
Other (Note 1)
|
|
|
509
|
|
|
|
517
|
|
|
|
|
(38
|
)
|
|
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(188
|
)
|
|
|
(2,970
|
)
|
Deemed dividend on preferred stock and
8% preferred stock Series B dividend
|
|
|
127
|
|
|
|
126
|
|
Net loss applicable to common stockholders
|
|
$
|
(315
|
)
|
|
$
|
(3,096
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Average shares outstanding – basic and diluted
|
|
|
67,038
|
|
|
|
47,341
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands)
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
Balance at December 31, 2010
|
|
|
47,098
|
|
|
$
|
47
|
|
|
|
12
|
|
|
|
--
|
|
|
$
|
232,369
|
|
|
$
|
(239,080
|
)
|
|
$
|
(6,664
|
)
|
Dividend for preferred B stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126
|
)
|
|
|
(126
|
)
|
Beneficial conversion of preferred A stock
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
|
|
Issuance of stock for payment of interest
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
Options issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
75
|
|
Restricted shares issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
36
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,970
|
)
|
|
|
(2,970
|
)
|
Balance at December 31, 2011
|
|
|
47,444
|
|
|
$
|
47
|
|
|
|
12
|
|
|
|
--
|
|
|
$
|
232,506
|
|
|
$
|
(242,176
|
)
|
|
$
|
(9,623
|
)
|
Dividend for preferred B stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
(127
|
)
|
Beneficial conversion of preferred A stock
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
|
|
Issuance of stock for payment of debt/interest
|
|
|
23,884
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
3,560
|
|
|
|
|
|
|
|
3,584
|
|
Issuance of stock for payment of accrued dividends
|
|
|
1,765
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
263
|
|
|
|
|
|
|
|
265
|
|
Common Stock – Subscription
|
|
|
10,200
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
510
|
|
Options issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
48
|
|
Restricted shares issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
42
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188
|
)
|
|
|
(188
|
)
|
Balance at December 31, 2012
|
|
|
83,294
|
|
|
$
|
83
|
|
|
|
12
|
|
|
|
--
|
|
|
$
|
236,919
|
|
|
$
|
(242,491
|
)
|
|
$
|
(5,489
|
)
|
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(188
|
)
|
|
$
|
(2,970
|
)
|
Adjustments to reconcile net loss to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
725
|
|
|
|
722
|
|
Stock compensation expense
|
|
|
90
|
|
|
|
111
|
|
Bad debt expense
|
|
|
18
|
|
|
|
14
|
|
Gain on reversal of earn out contingency
|
|
|
--
|
|
|
|
(517
|
)
|
Gain on forgiveness of debt
|
|
|
(598
|
)
|
|
|
--
|
|
Gain on write down of accrued liability
|
|
|
(390
|
)
|
|
|
--
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable and related party receivables
|
|
|
(404
|
)
|
|
|
(738
|
)
|
Prepaid expenses and other assets
|
|
|
123
|
|
|
|
(125
|
)
|
Accounts payable and accrued expenses
|
|
|
354
|
|
|
|
1,063
|
|
Deferred revenue
|
|
|
(222
|
)
|
|
|
1,237
|
|
Net cash used in operating activities
|
|
|
(492
|
)
|
|
|
(1,203
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(39
|
)
|
|
|
(13
|
)
|
Cash paid for acquisition of SOAdesk assets
|
|
|
--
|
|
|
|
--
|
|
Net cash used in investing activities
|
|
|
(39
|
)
|
|
|
(13
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Common stock subscription
|
|
|
187
|
|
|
|
--
|
|
Borrowings under short and long-term debt
|
|
|
1,998
|
|
|
|
2,021
|
|
Repayments of short and long-term debt
|
|
|
(1,769
|
)
|
|
|
(664
|
)
|
Net cash provided by financing activities
|
|
|
416
|
|
|
|
1,357
|
|
Net (decrease)/increase in cash
|
|
|
(115
|
)
|
|
|
141
|
|
Cash at beginning of year
|
|
|
184
|
|
|
|
43
|
|
Cash at end of year
|
|
$
|
69
|
|
|
$
|
184
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
15
|
|
|
$
|
21
|
|
Interest
|
|
$
|
263
|
|
|
$
|
225
|
|
The accompanying notes are an integral part of the consolidated financial statements.
CICERO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Non-Cash Investing and Financing Activities
2012
During April 2012, the Company converted $6,000 of account payable to a vendor by issuing 40,000 shares of its common stock.
During March 2012, the Company converted $265,000 of accrued Series B Preferred Stock dividends by issuing 1,765,333 shares of its common stock.
During March 2012, the Company converted $3,544,000 of debt and $33,000 of interest payable to private and related party lenders by issuing 23,843,429 shares of its common stock.
2011
During March 2011, the Company converted $9,000 of interest payable to a private lender by issuing 145,339 shares of its common stock.
During May 2011, the Company converted $17,000 of note payable to a private lender by issuing 200,000 shares of its common stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
Cicero Inc., (''Cicero'' or the ''Company''), is a provider of business integration software which enables organizations to integrate new and existing information and processes at the desktop. Business integration software addresses the emerging need for a company's information systems to deliver enterprise-wide views of the company's business information processes. Cicero Inc. was incorporated in New York in 1988 as Level 8 Systems, Inc. and re-incorporated in Delaware in 1999.
Going Concern and Management Plans:
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred an operating loss of approximately $188,000 for the year ended December 31, 2012, and has a history of operating losses. Management feels that the Company has repositioned itself in the marketplace. The creation of Cicero Edge as a proven product in the enterprise mobility space has opened new opportunities in the financial services, insurance, healthcare and government industries where workers are becoming un-tethered from their desktops. The company has entered into several significant contracts in 2011 and 2012 which are generating capital to help sustain its operations. The Company anticipates a continued success in this regard based upon current discussions with active customers and prospects. The Company has also retired approximately $1,900,000 and $416,000 of debt in 2012 and 2013, respectively. Additionally, the Company converted $3,800,000 of debt into common stock and has received notification of additional forgiveness of liabilities of $404,000 during 2012. Should the Company be unable to secure customer contracts that will drive sufficient cash flow to sustain operations, the Company will be forced to seek additional capital in the form of debt or equity financing; however, there can be no assurance that such debt or equity financing will be available. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All of the Company's subsidiaries are wholly-owned for the periods presented.
All significant inter-company accounts and transactions are eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates. Significant estimates include the recoverability of long-lived assets, valuation and recoverability of goodwill, stock based compensation, deferred taxes and related valuation allowances and valuation of equity instruments.
Financial Instruments:
The carrying amount of the Company’s financial instruments, representing accounts receivable, accounts payable and short-term debt approximate their fair value due to their short term nature.
The fair value and carrying amount of long-term debt were as follows:
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|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Fair Value
|
|
$
|
3,420,397
|
|
|
$
|
1,887,709
|
|
Carrying Value
|
|
$
|
3,509,000
|
|
|
$
|
1,916,000
|
|
Valuations for long-term debt are determined based on borrowing rates currently available to the Company for loans with similar terms and maturities. These loans have been determined to be Level 3 within the fair value hierarchy and use a discounted cash flow model to determine its valuation. There have been no changes to the valuation technique.
Foreign Currency Translation:
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
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 and temporarily provides unlimited coverage through December 31, 2012 qualifying and participating noninterest bearing transaction accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. As of December 31, 2012, the Company did not exceed these insured amounts.
Trade Accounts Receivable:
Trade accounts receivable are stated in the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance of doubtful accounts based on its assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance of doubtful accounts and a credit to trade accounts receivable. Changes in the allowance for doubtful accounts have not been material to the financial statements.
Property and Equipment:
Property and equipment purchased in the normal course of business is stated at cost, and property and equipment acquired in business combinations is stated at its fair market value at the acquisition date. All property and equipment is depreciated using the straight-line method over estimated useful lives.
Expenditures for repairs and maintenance are charged to expense as incurred.
The cost and related accumulated depreciation of property and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in the Consolidated Statements of Operations.
Software Development Costs:
The Company capitalizes certain software costs after technological feasibility of the product has been established. Generally, an original estimated economic life of three years is assigned to capitalized software costs, once the product is available for general release to customers. Costs incurred prior to the establishment of technological feasibility are charged to research and product development expense.
Capitalized software costs are amortized over related sales on a product-by-product basis using the straight-line method over the remaining estimated economic life of the product.
The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technologies.
Long-Lived Assets:
The Company reviews the recoverability of long-lived intangible assets when circumstances indicate that the carrying amount of assets may not be recoverable. This evaluation is based on various analyses including undiscounted cash flow projections. In the event undiscounted cash flow projections indicate impairment, the Company would record an impairment based on the fair value of the assets at the date of the impairment. The Company accounts for impairments under the Financial Accounting Standards Board ("FASB") guidance now codified as Accounting Standards Codification (“ASC”) 360 “Property, Plant and Equipment”.
Revenue Recognition:
We derive revenue from three sources: license fees, recurring revenue and professional services. Recurring revenue include software maintenance and support. Maintenance and support consists of technical support. Professional services primarily consist of consulting, implementation services and training. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in changes to the amount and timing of our revenue for any period if different conditions were to prevail. We present revenue, net of taxes collected from customers and remitted to governmental authorities.
We apply the provisions of ASC 985-605, Software Revenue Recognition, to all transactions involving the licensing of software products. In the event of a multiple element arrangement for a license transaction, we evaluate the transaction as if each element represents a separate unit of accounting taking into account all factors following the accounting standards. When such estimates are not available, the completed contract method is utilized. Under the completed contract method, revenue is recognized only when a contract is completed or substantially complete.
When licenses are sold together with system implementation and consulting services, license fees are recognized upon delivery, provided that (i) payment of the license fees is not dependent upon the performance of the consulting and implementation services, (ii) the services are available from other vendors, (iii) the services qualify for separate accounting as we have sufficient experience in providing such services, have the ability to estimate cost of providing such services, and have vendor-specific objective evidence of fair value, and (iv) the services are not essential to the functionality of the software.
We use signed software license and services agreements and order forms as evidence of an arrangement for sales of software, maintenance and support. We use signed engagement letters to evidence an arrangement for professional services.
License Revenue
We recognize license revenue when persuasive evidence of an arrangement exists, the product has been delivered, no significant obligations remain, the fee is fixed or determinable, and collection of the resulting receivable is probable. In software arrangements that include rights to multiple software products and/or services, we use the residual method under which revenue is allocated to the undelivered elements based on vendor- specific objective evidence of the fair value of such undelivered elements. The residual amount of revenue is allocated to the delivered elements and recognized as revenue, assuming all other criteria for revenue recognition have been met. Such undelivered elements in these arrangements typically consist of software maintenance and support, implementation and consulting services.
Software is delivered to customers electronically. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. We have standard payment terms included in our contracts. We assess collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If we determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.
We consider a software element to exist when we determine that the customer has the contractual right to take possession of our software. Professional services are recognized as described below under “Professional Services Revenue.” If vendor-specific evidence of fair value cannot be established for the undelivered elements of an agreement, the entire amount of revenue from the arrangement is recognized ratably over the period that these elements are delivered.
Maintenance Revenue
Included in recurring revenue is revenue derived from maintenance and support services. We use vendor-specific objective evidence of fair value for maintenance and support to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. Maintenance and support is renewable by the customer on an annual basis. Maintenance and support rates, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.
Professional Services Revenue
Included in professional services revenue is revenue derived from system implementation, consulting and training. For software transactions, the majority of our consulting and implementation services and accompanying agreements qualify for separate accounting. We use vendor-specific objective evidence of fair value for the services to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our consulting and implementation service contracts are bid on a fixed-fee basis. For fixed fee contracts, where the services are not essential to the functionality, we recognize revenue as services are performed. If the services are essential to functionality, then both the product license revenue and the service revenue are deferred until the services are performed.
Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.
Cost of Revenue:
The primary component of the Company's cost of revenue for its software products is the amortization of software for the assets acquired from SOAdesk in January 2010. (See Note 6)
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 $506,000 and $395,000, for the years ended December 31, 2012 and 2011, respectively.
Research and Product Development:
Research and product development costs are expensed as incurred. Research and development expenses were approximately $1,476,000 and $1,183,000, for the years ended December 31, 2012 and 2011, respectively.
Other Income/(Charges):
Other income (net) in fiscal 2012 consists primarily of a write off of certain debt forgiveness of $414,000. Other income (net) in fiscal 2011 consists of an additional adjustment of $517,000 to the SOAdesk LLC earn-out.
Income Taxes:
The Company uses FASB guidance now codified as ASC 740 “Income Taxes”', to account for income taxes. This statement requires an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events, other than enactments of changes in the tax law or rates, are generally considered. A valuation allowance is recorded when it is ''more likely than not'' that recorded deferred tax assets will not be realized. (See Note 10.)
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 2012 and 2011, 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:
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2012
|
|
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2011
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|
Stock options
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|
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3,921,493
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|
|
|
4,296,193
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|
Warrants
|
|
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5,928,285
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|
|
|
3,888,285
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|
Preferred stock
|
|
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11,941,618
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|
|
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11,942,618
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|
|
|
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21,791,396
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20,127,096
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|
$127,000 and $126,000 was accrued for dividends on the Series B Preferred Stock in fiscal 2012 and 2011, respectively. During March 2012, the Company converted $265,000 of accrued dividends into 1,765,333 of common shares of the Company.
Stock-Based Compensation:
The Company adopted ASC 718 “Compensation – Stock Compensation”, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company granted 70,000 options in fiscal 2012 at exercise prices between $0.05 and $0.19 per share and recognized approximately $48,000 of stock-based compensation. The Company granted 880,000 options in fiscal 2011 at exercise prices between $0.06 and $0.10 per share and recognized approximately $75,000 of stock-based compensation. The Company recognized as stock-based compensation approximately $36,000 in fiscal 2012 and 2011 for the restricted shares issued in 2007 to John Broderick, the Chief Executive Officer. Additionally, the Company recognized as stock based compensation approximately $6,000 in fiscal 2012 for the 1,500,000 restricted shares issued in 2012 to John Broderick.
The fair value of the Company's stock-based awards to employees was estimated as of the date of the grant using the Black-Scholes option-pricing model, using the following weighted-average assumptions:
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2012
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|
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2011
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|
Fair value of common stock
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$
|
0.14
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|
|
$
|
0.07
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|
Expected life (in years)
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|
9.85 years
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|
|
10.0 years
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|
Expected volatility
|
|
|
186
|
%
|
|
|
140
|
%
|
Risk free interest rate
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|
|
0.19
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%
|
|
|
0.12
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%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Recent Accounting Pronouncements:
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to simplify how entities test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company adopted this standard during the year ended December 31, 2011, and it did not have material impact on the Company’s consolidated financial position and results of operations.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 became effective for the Company on January 1, 2012. The adoption of ASU 2011-04 did not have a material impact on our financial position or results of operations.
Reclassification
Certain accounts in the prior annual year-end income statement have been reclassified for comparative purposes to conform with the presentation in the current financial statements. The Company reclassed a department from sales and marketing to research and product development. The reclass of $214,000 was based on management’s election to reclass one department to reflect that department’s reporting in fiscal 2012. These reclassifications have no effect on previously reported loss.
NOTE 2. DEFERRED REVENUE
In December 2011, the Company entered into a contract with a major Business Process Outsourcer in the amount of $1,200,000. The contract contained multiple elements and under ASC 985-605, the Company evaluated those elements for vendor specific objective evidence. Included in the multiple elements were licenses and advanced training that was scheduled to last approximately six months. The Company was unable to establish vendor specific evidence of the value of the training and as such was required to defer recognition of income on the entire contract until 2012. The Company amortized this income over the initial six months in 2012. The Company received $600,000 in proceeds at the time of the sale and has recognized $600,000 as a receivable as of December 31, 2011.
NOTE 3. SOAdesk ACQUISITION
On January 15, 2010, the Company entered into an Asset Purchase Agreement with SOAdesk, LLC (“SOAdesk”) and Vertical Thought, Inc. (“VTI” and, together with SOAdesk, the “Sellers”), pursuant to which the Company acquired the Sellers’ “United Desktop” and “United Data Model” software technology, as well as substantially all of the other assets owned by the Sellers directly or indirectly used (or intended to be used) in or related to Sellers’ business of providing customer interaction consulting and technology services for organizations and contact centers throughout the world (the “Business”). The Company also assumed certain liabilities of the Sellers related to the Business, as described in the Asset Purchase Agreement.
The aggregate consideration payable by the Company to the Sellers consists of the following:
●
$300,000 paid in cash to the Sellers on the closing date;
●
an unsecured convertible note in the aggregate principal amount of $700,000, payable to SOAdesk, with an annual interest rate of 5% and an original maturity date of March 31, 2010. On March 31, 2010, the maturity date of the unsecured Convertible Note was extended from March 31, 2010 to September 30, 2010 and was secured by shares of the Company’s Series B Preferred Stock (the “Convertible Note”). At September 30, 2010 the maturity date was extended from September 30, 2010 to March 31, 2011. Through a series of amendments, the maturity date was extended to December 31, 2012. In January 2013, the maturity date was further extended to April 1, 2014;
●
$525,000, payable in cash to SOAdesk on March 31, 2010 (subsequently converted into a convertible promissory note as stated below);
●
an unsecured convertible note in the aggregate principal amount of $1,000,000, payable to SOAdesk and convertible into shares of the Company’s Common Stock. In March 2012, SOAdesk elected to convert $300,000 of the outstanding note balance into 2,000,000 shares of Company’s Common Stock. At December 31, 2012 the Company was indebted to SOAdesk in the amount of $700,000; and
●
certain earn-out contingencies of $2,410,000 based on product and enterprise revenue performance targets being met.
The terms of the Asset Purchase Agreement were amended on March 31, 2010, and the Company issued a $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment. This note, which carried an annual interest rate of 5%, was convertible into shares of the Company’s Series B Preferred Stock (Note 7) at the holder’s option and originally matured on June 30, 2010. The Company paid principal in the amount of $100,000 in April 2010. On June 30, 2010, the convertible note was amended to extend the maturity date from June 30, 2010 to September 30, 2010. As of September 30, 2010, the convertible note was further amended to extend the maturity date from September 30, 2010 to March 31, 2011. In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company has determined the embedded conversion option is beneficial and has intrinsic value to the holder. The total debt discount to be recognized was $175,000 and the Company had reduced the note by that amount and increased Additional Paid in Capital by the same amount. As of December 31, 2010, the Company has fully amortized the debt discount of $175,000 in the statement of operations.
The total outstanding debt as of December 31, 2011 was $421,000. In March 2011, the Company and SOAdesk LLC agreed to extend the maturity date until March 31, 2012.
In April 2012, the Company paid this note in full.
The Company was obligated to make additional payments of up to $2,410,000 over an 18 month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets. Such payments are payable quarterly during the 18 month period over which the performance targets are being measured. The earn-out award is to be calculated, subject to adjustment, based upon the cumulative effect of achieved revenue performance targets during the applicable earn-out period. The obligation was determined by management after consultation with an independent appraiser using the income approach methodology analyzing the Company’s discounted cash flow and management’s input on probability of attaining the different revenue performance targets. As of March 31, 2011, the Company had determined that the earn-out targets originally recorded as part of the acquisition will not be completely met. The Company therefore recorded a gain of $517,000 in the first quarter of 2011, in addition to the $1,050,000 gain recorded in the fourth quarter of 2010, in the statement of operations from the reversal of part of the earn-out accrual. At December 31, 2012 and 2011 the Company has recorded $843,000 in accounts payable for the earn-out earned through July 31, 2011.
We account for contingent consideration payable to sellers of the acquired assets in accordance with the provisions of ASC Topic 805 “Business Combinations” to ensure that we account for any post combination payments made to sellers of acquired businesses as either additional purchase consideration or compensation based upon the (i) economic form of the transaction and (ii) subsequent involvement (if any) of the sellers in the business on a post combined basis.
Consideration:
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|
|
|
Cash paid
|
|
$
|
300,000
|
|
Convertible notes payable
|
|
|
2,225,000
|
|
Earn-out contingency
|
|
|
2,410,000
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|
Total Consideration
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|
$
|
4,935,000
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|
Allocated to:
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|
|
|
|
Software
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|
$
|
2,103,000
|
|
Goodwill ($141,000 is expected to be deductible for tax purposes)
|
|
$
|
2,832,000
|
|
|
|
$
|
4,935,000
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|
Simultaneously with the acquisition of the assets of SOAdesk, the Company also closed an initial round of Series B Convertible Preferred Stock of approximately $1,560,000, including $700,000 in cash, the cancellation of $710,000 of existing indebtedness and the cancellation of a note of $150,000 to memorialize an advance of payment for Series B Stock prior to issuance. The Series B Convertible Preferred Stock bears an annual dividend of 8% and provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Of the $1,560,000 raised, the Company’s Chairman, Mr. John Steffens invested $910,000 through a combination of cash and debt retirement. Dividends accrued at December 31, 2011 amounted to $244,000. In March 2012, the Company converted this amount into 1,765,333 shares of common stock of the Company. Dividends accrued at December 31, 2012 amounted to $106,000.
NOTE 4. ACCOUNTS RECEIVABLE
Trade accounts receivable was composed of the following at December 31 (in thousands):
|
|
2012
|
|
|
2011
|
|
Current trade accounts receivable
|
|
$
|
1,247
|
|
|
$
|
861
|
|
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment was composed of the following at December 31 (in thousands):
|
|
2012
|
|
|
2011
|
|
Computer equipment
|
|
$
|
134
|
|
|
$
|
322
|
|
Furniture and fixtures
|
|
|
24
|
|
|
|
24
|
|
Office equipment
|
|
|
35
|
|
|
|
169
|
|
|
|
|
193
|
|
|
|
515
|
|
Less: accumulated depreciation and amortization
|
|
|
(146
|
)
|
|
|
(483
|
)
|
|
|
$
|
47
|
|
|
$
|
32
|
|
Depreciation and amortization expense of property and equipment was $24,000 and $21,000 for the years ended December 31, 2012 and 2011, respectively.
NOTE 6. INTANGIBLE ASSET, NET AND GOODWILL
The Company accounts for goodwill in accordance ASC Topic 350 “Intangibles – Goodwill and Other” which requires that goodwill and intangible assets with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
Goodwill includes the excess of the purchase price over the fair value of net assets acquired of $2,832,000 in connection with the SOAdesk LLC acquisition in Note 3. The Codification requires that goodwill be tested for impairment at the reporting unit level. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value.
Pursuant to recent authoritative accounting guidance, the Company may elect to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless the Company determines that it is more likely than not that its fair value is less than its carrying amount. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test is performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of that goodwill. Any excess of the goodwill carrying value over the respective implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. Through December 31, 2012, no impairment of goodwill has been identified.
The Company’s intangible asset with a finite life in the amount of $2,103,000 is being amortized over its estimated useful life of 3 years for software acquired from SOAdesk LLC. Amortization expense is $701,000 for fiscal 2012 and 2011, respectively. At December 31, 2012, the net balance of the intangible asset is $28,000, which will be amortized in fiscal year 2013. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors.
Based upon our annual evaluation testing, we have determined that the fair value of goodwill and the intangible asset exceeds the carrying value of the net assets acquired as of December 31, 2012.
NOTE 7. SHORT-TERM DEBT
Term loan, notes payable, and notes payable to related party consist of the following at December 31 (in thousands):
|
|
2012
|
|
|
2011
|
|
Term loan (a)
|
|
$
|
--
|
|
|
$
|
753
|
|
Note payable asset purchase agreement (b)
|
|
|
--
|
|
|
|
1,121
|
|
Note payable related parties (c)
|
|
|
3
|
|
|
|
2,959
|
|
Notes payable (d)
|
|
|
823
|
|
|
|
1,304
|
|
|
|
$
|
826
|
|
|
$
|
6,137
|
|
(a)
|
In October 2007, the Company agreed to restructure the note payable to Bank Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with BluePhoenix, the Company made a principal reduction payment to Bank Hapoalim in the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix entered into a new note in the amount of $1,021,000, bearing interest at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix acquired 2,546,149 shares of the Company’s common stock in exchange for $650,000 paid to Bank Hapoalim to retire that indebtedness. Of the new note payable to BluePhoenix, approximately $350,000 was due on January 31, 2009 and the balance was due on December 31, 2011. During 2008, the Company paid $200,000 against the principal and BluePhoenix converted $50,000 of principal into 195,848 shares of Cicero common stock. In January 2009, the Company paid $100,000 against the principal. In January 2012, the Company entered into an addendum to the original note to extend the maturity of all outstanding principal and interest of $752,594 to December 31, 2012. At the time of the extension, the Company paid $150,000 towards principal and interest on this note. The unpaid principal and accumulated interest shall bear interest at a rate of LIBOR (3 months LIBOR, 0.581%) plus 6.7% per annum calculated quarterly. In March 2012, the Company made a $50,000 principal reduction payment. In April 2012, the Company paid off the note at a discount in the amount of $380,000 and recognized approximately $170,000 as a gain.
|
(b)
|
At December 31, 2011, the Company was indebted to SOAdesk LLC for the remaining portion of the related long term debt of $1,121,000. (See Note 8)
As part of the Asset Purchase Agreement, the Company was to pay to the shareholders of SOAdesk the sum of $525,000 on March 31, 2010. In March 2010, the terms of the Asset Purchase Agreement were amended and the Company issued a $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment originally due on March 31, 2010. This note, which carried an annual interest rate of 5%, was secured by shares of the Company’s Series B Preferred Stock. The note was to mature on June 30, 2010 but was subsequently amended to extend the maturity date to September 30, 2010. As of September 30, 2010, the maturity date was further extended to March 31, 2011. In March 2011, the Company and SOAdesk agreed to extend the maturity on the note until March 31, 2012. In March 2012, the Company and SOAdesk agreed to extend the maturity on the note until December 31, 2012. In April 2010 and May 2011, the Company paid $100,000 and $4,000, respectively, against the principal. In April 2012, the note was paid in full.
|
(c)
|
From 2010 through 2012, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. At December 31, 2011, the Company was indebted to Mr. Steffens in the amount of $3,065,000. In March 2012, Mr. Steffens converted $3,000,000 of his debt, which included $350,000 which was lent to the Company in the first quarter of 2012, into 20,000,000 shares of common stock of the Company at a price of $0.15 per share. In March 2012, Mr. Steffens agreed to refinance $465,000 of debt, of which only $115,000 was outstanding as of December 31, 2011, and $417,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long term debt as of December 31, 2011 (See Note 8). At December 31, 2012, the Company was indebted to Mr. Steffens in the approximate amount of $1,773,000 of principal and $168,000 in interest. In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes till April 1, 2014. As such this amount has been reclassified to long-term debt as of December 31, 2012. (See Note 8)
During 2012, the Company entered into short term notes payable with John Broderick, the Chief Executive Office and Chief Financial Officer, for various working capital needs. The notes bear interest at 12% and was unsecured. At December 31, 2012, the Company was indebted to Mr. Broderick in the approximate amount of $3,000. No interest was paid in fiscal 2012.
From time to time the Company entered into promissory notes with one of the Company’s former directors and the former Chief Information Officer, Anthony Pizi. The notes bear interest at 12% per annum. As of December 31, 2011, the Company was indebted to Anthony Pizi in the amount of $9,000. In March 2012, Mr. Pizi converted his indebtedness into 171,487 shares of common stock of the Company at a price of $0.15 per share.
|
(d)
|
The Company has issued a series of short term promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured. The notes in the amount of $407,000 and $718,000, respectively, as of December 31, 2012, and 2011 bear interest between 10% and 36% per annum. In March 2012, the Company converted $235,000 of these notes into 1,566,667 shares of Company’s common stock. In March 2012, certain private lenders agreed to refinance $83,000 of debt and $301,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long-term debt at December 31, 2011. (See Note 8) In March 2013, the same private lenders agreed to extend the maturity date to April 4, 2014. As such this amount has been classified as long term debt as of December 31, 2012. (See Note 8).
In July 2012, the Company entered into a restructuring settlement with a private lender whereby the lender agreed to accept $495,000 in full satisfaction of all principal and interest due under the Note agreements, as of June 1, 2012, plus interest in the amount of approximately $21,000 for the period from June 1, 2012 to July 31, 2012. In addition, the Company agreed to pay interest for the period after July 31, 2012 in the aggregate amount of approximately $67,000. This interest is to be paid in seven monthly installments of approximately $9,750 each from August 2012 through February 2013. The final payment of the remaining principal of approximately $416,000 was paid in February 2013.
|
|
At December 31, 2011, the Company was indebted for the remaining portion of the related long-term debt for several secured Promissory Notes with certain investors in the aggregate amount of $650,000 that were secured by the amount due under the Company’s support contract with Merrill Lynch (See Note 8) In March 2012, these notes were paid in full.
In August 2011, the Company entered into a promissory note with an employee for various working capital needs. The note bears interest at 6% per year and is unsecured. As of December 31, 2011, the Company was indebted to this employee in the amount of $19,000. In April 2012, this loan was paid in full.
|
NOTE 8. LONG-TERM DEBT
Long-term loan and notes payable to related party consist of the following at December 31(in thousands):
|
|
2012
|
|
|
2011
|
|
Note payable asset purchase agreement (a)
|
|
$
|
700
|
|
|
$
|
--
|
|
Note payable – related party (b)
|
|
|
1,773
|
|
|
|
532
|
|
Other long-term debt (c)
|
|
|
1,036
|
|
|
|
1,384
|
|
|
|
$
|
3,509
|
|
|
$
|
1,916
|
|
(a)
|
In January 2010, per the Asset Purchase Agreement, the Company entered into an unsecured convertible promissory note with SOAdesk for $700,000 with an annual interest rate of 5%. The note was originally scheduled to mature on March 31, 2010 but was subsequently amended to extend the maturity date to September 30, 2010 and was secured with shares of the Company’s Series B Preferred Stock. As of September 30, 2010, the maturity date was extended to March 31, 2011. Through a series of amendments, the maturity date was extended to December 31, 2012. In January 2013, the Company and SOAdesk LLC agreed to extend the maturity on the note to April 1, 2014 and as such the Company has reclassed the debt to long term. At December 31, 2012, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $104,000 in interest.
The note is convertible into shares of Series B Convertible Preferred Stock at the rate of one share per every $150 of principal and interest due under the note. The Company is obligated to repay any principal of the loan with fifty percent of any gross proceeds of any Series B Preferred capital raise through maturity of the note. The note is convertible at the holder’s option at any time or at maturity.
|
(b)
|
From time to time during 2010 and 2011, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. At December 31, 2011, the Company was indebted to Mr. Steffens in the amount of $3,065,000. In March 2012, Mr. Steffens converted $3,000,000 of his debt, which included $50,000 which was lent to the Company in the first quarter of 2012, into 20,000,000 shares of common stock of the Company at a price of $0.15 per share. In March 2012, Mr. Steffens agreed to refinance $465,000 of debt, of which only $115,000 was outstanding as of December 31, 2011,
and $417,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013, (See Note 7). As such this amount has been reclassified to long-term debt as of December 31, 2011. In December 2012, Mr. Steffens converted $300,000 of his debt into a subscription of 6,000,000 shares of the Company’s common stock at a price of $0.05 per share as part of a private investment in the Company’s stock. At December 31, 2012, the Company was indebted to Mr. Steffens in the approximate amount of $1,773,000 of principal and $168,000 in interest. In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes till April 1, 2014. As such this amount has been reclassified to long term debt as of December 31, 2012.
|
(c)
|
In January 2010, as part of the Asset Purchase Agreement, the Company entered into an unsecured Convertible Promissory Note with SOAdesk in the amount of $1,000,000. The note bears interest at 5% and is due November 14, 2015. The note is only convertible into shares of the Company’s common stock at the rate of one share for every $0.15 of principal and interest due under the note. The note is convertible at the option of the holder with one-third convertible in January 2011, two-thirds convertible in January 2012, and the entire note convertible in January 2013 or at maturity. In March 2012, SOAdesk elected to convert $300,000 of the outstanding note balance into 2,000,000 shares of Company’s Common Stock. At December 31, 2012 the Company was indebted to SOAdesk in the amount of $700,000.
|
|
In March 2012, certain private lenders agreed to refinance $83,000 of debt and $301,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long term debt at December 31, 2011. In March 2013, the maturity date of the note was extended to April 4, 2014. (See Note 7)
|
Scheduled maturities of the above long-term debt are as follows:
Year
|
|
|
|
2014
|
|
$
|
2,809,000
|
|
2015
|
|
|
700,000
|
|
|
|
$
|
3,509,000
|
|
NOTE 9. CONVERSION OF DEBT TO EQUITY
On March 30, 2012, the Company entered into agreements with private lenders and investors, and officers, directors and significant shareholders of the Company; including John L. Steffens, the Chairman of the Board of Directors, to convert $3,243,502 of debt and $33,013 of interest into 21,843,429 common share of the Company’s stock (See Note 6). The Company accounted for the transaction pursuant to Topic ASC 470-50, Modification and Extinguishment of Debt. Pursuant to ASC 470-50, when debt is extinguished by delivering noncash assets owned by the debtor, the gain or loss on the extinguishment should be measured by the difference between the net carrying amount of the debt and the fair value of the noncash assets. Any difference between the fair value and the carrying amount of the noncash assets should be recognized as a gain or loss on transfer. As part of management’s analysis in determining the fair market value, the Company engaged an independent expert to help management determine the fair market value of the Company stock and whether a discount to the price of the stock needed to be applied. In analysis of historical studies of discounts attributable to trading restrictions as well as analysis from an option pricing model of protective puts of the Company’s stock, the Company determined that a 25% discount to the closing stock price on the day of the transaction would be necessitated to establish fair market value. The Company calculated an approximately $246,000 gain on the extinguishment of the debt, however, due to the fact that 20,000,000 shares of the transaction were being issued to Mr. Steffens, the Company determined that this was not an arm’s length agreement and as such has recorded the gain through additional paid in capital.
NOTE 10. INCOME TAXES
The Company follows the provisions of ASC Topic 740, “Income Taxes”, and recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. The Company applies ASC Topic 740 to all tax positions for which the statute of limitations remains open.
The Company has identified its federal tax return and its state tax return in North Carolina as “major” tax jurisdictions. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years 2009 through 2011, and may be subject to audits for amounts related to net operating loss carryforwards generated in periods prior to December 31, 2008. The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. The 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 2011 and 2012. 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):
|
|
2012
|
|
|
2011
|
|
Expected income tax benefit at statutory rate (34%)
|
|
$
|
(64
|
)
|
|
$
|
(1,010
|
)
|
State taxes, net of federal tax benefit.
|
|
|
(10
|
)
|
|
|
(176
|
)
|
Effect of change in valuation allowance
|
|
|
(9,848
|
)
|
|
|
(15,568
|
)
|
Non-deductible expenses
|
|
|
6
|
|
|
|
12
|
|
Expiration of net operating loss deductions
|
|
|
9,916
|
|
|
|
16,742
|
|
Total
|
|
$
|
--
|
|
|
$
|
--
|
|
Significant components of the net deferred tax asset (liability) at December 31 were as follows:
|
|
2012
|
|
|
2011
|
|
Current assets:
|
|
|
|
|
|
|
Accrued expenses, non-tax deductible
|
|
$
|
5
|
|
|
$
|
344
|
|
Deferred revenue
|
|
|
556
|
|
|
|
645
|
|
Contingent payments
|
|
|
(831
|
)
|
|
|
(627
|
)
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
543
|
|
|
|
513
|
|
Loss carryforwards
|
|
|
71,122
|
|
|
|
79,811
|
|
Depreciation and amortization
|
|
|
1,929
|
|
|
|
2,486
|
|
|
|
|
73,324
|
|
|
|
83,172
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(73,324
|
)
|
|
|
(83,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
--
|
|
|
$
|
--
|
|
At December 31, 2012, the Company had net operating loss carryforwards of approximately $177,808,000, which may be applied against future taxable income. These carryforwards will expire at various times between 2013 and 2032. Net operating loss carryforwards include tax deductions for the disqualifying dispositions of incentive stock options. When the Company utilizes the net operating losses related to these deductions, the tax benefit will be reflected in additional paid-in capital and not as a reduction of tax expense. The total amount of these deductions included in the net operating loss carryforwards is $21,177,000.
The Company provided a full valuation allowance on the total amount of its deferred tax assets at December 31, 2012 and 2011 since management does not believe that it is more likely than not that these assets will be realized.
NOTE 11. STOCKHOLDERS’ EQUITY
Preferred Stock
:
In April 2010, the Company issued to a certain accredited investor 1,333 shares of Series B Convertible Preferred Stock at $150 per share for a total of $200,000. The Series B Convertible Preferred Stock bears an annual dividend of 8%. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Additionally, the Series B stock provides warrants to purchase common stock of the Company at a strike price of $0.25 per share. The warrants expire in five years. 333,333 warrants were issued to the investor. In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company has allocated the proceeds received from the Convertible Series B Preferred Stock and Warrant Offering based upon relative fair value. Using Black-Scholes, the Company has determined that the fair value of the warrants issued is $54,455 and the beneficial conversion amount is $66,667. Since this beneficial conversion feature is immediately convertible upon issuance, the Company has fully amortized this beneficial conversion feature in the Statement of Operations during the year ended December 31, 2010.
In January 2010, the Company issued to certain accredited investors 9,067 shares of Series B Convertible Preferred Stock at $150 per share for a total of $1,360,000, including $500,000 in cash, the cancellation of $710,000 of existing indebtedness and the cancellation of a note of $150,000 to memorialize an advance of payment for Series B Stock prior to issuance. The Series B Convertible Preferred Stock bears an annual dividend of 8%. The Series B stock may convert into common stock at a conversion rate of $0.15 per share. Additionally, the Series B stock investors were issued warrants to purchase common stock of the Company at a strike price of $0.25 per share. The warrants expire in five years. 2,266,667 warrants were issued to these investors.
Common Stock
:
In December 2012, the Company had stock subscription of 10,200,000 shares of their common stock at a price of $0.05 per share. This was part of an offering in a private investment in the Company’s common stock. The stock subscription was made up of $186,132 of cash from private investors, the extinguishment of $23,868 of interest on a note with one of the private investors, and the exchange of $300,000 of short term debt with Mr. John Steffens, the Company’s Chairman. Additionally, the investors were issued warrants to purchase common stock of the Company at a strike price of $0.20 per share. The warrants expire in five years. 2,040,000 warrants were issued to these investors. In March 2013, the offering was officially closed and the Company issued 11,840,241 common shares in exchange for $592,012.
In April 2012, the Company converted approximately $6,000 of accounts payable to a vendor by issuing 40,000 shares of its common stock.
In March 2012, the Company converted approximately $265,000 of accrued Series B Preferred Stock dividends by issuing 1,765,333 shares of its common stock.
In March 2012, the Company converted approximately $3,544,000 of debt and $33,000 of interest payable to certain directors and significant shareholders of the Company and other private lenders by issuing 23,843,429 shares of its common stock.
In May 2011, the Company issued 200,000 shares of common stock for the conversion of debt of $17,000 to an investor who had entered into a short term promissory note with the Company in August 2010.
In March 2011, the Company issued 145,339 shares of common stock for the conversion of interest payable of $9,000 to an investor who had a short term promissory with the Company.
Stock Grants
:
In November 2012, the Company issued Mr. John P. Broderick, our Chief Executive Officer, a restricted stock award in the amount of 1,500,000 shares which will vest to him upon his termination, or change in control. The Company valued the award at the fair market value of the date of the award and is amortizing the total expense of $75,000 over the implicit service period of 2 years. The Company recorded expense of approximately $6,000 in fiscal 2012.
In August 2007, the Company issued Mr. John P. Broderick, our Chief Executive Officer, a restricted stock award in the amount of 549,360 shares which will vest to him upon his resignation or termination. The Company used the Black-Scholes method to value these shares and assumed a life of 7 years. The Company recorded compensation expense of approximately $36,000 for fiscal 2012 and 2011.
Stock Options
:
In 2007, the Board of Directors approved the 2007 Cicero Employee Stock Option Plan which permits the issuance of incentive and nonqualified stock options, stock appreciation rights, performance shares, and restricted and unrestricted stock to employees, officers, directors, consultants, and advisors. The aggregate number of shares of common stock which may be issued under this Plan shall not exceed 4,500,000 shares upon the exercise of awards and provide that the term of each award be determined by the Board of Directors. The Company also has a stock incentive plan for outside directors and the Company has set aside 1,200 shares of common stock for issuance under this plan.
Under the terms of the Plans, the exercise price of the incentive stock options may not be less than the fair market value of the stock on the date of the award and the options are exercisable for a period not to exceed ten years from date of grant. Stock appreciation rights entitle the recipients to receive the excess of the fair market value of the Company's stock on the exercise date, as determined by the Board of Directors, over the fair market value on the date of grant. Performance shares entitle recipients to acquire Company stock upon the attainment of specific performance goals set by the Board of Directors. Restricted stock entitles recipients to acquire Company stock subject to the right of the Company to repurchase the shares in the event conditions specified by the Board are not satisfied prior to the end of the restriction period. The Board may also grant unrestricted stock to participants at a cost not less than 85% of fair market value on the date of sale. Options granted vest at varying periods up to five years and expire in ten years.
Activity for stock options issued under these plans for the years ending December 31, 2012 and 2011 was as follows:
|
|
Number of Options
|
|
|
Option Price
Per Share
|
|
|
Weighted Average
Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
Balance at December 31, 2010
|
|
|
3,503,157
|
|
|
|
0.09-581.00
|
|
|
$
|
0.60
|
|
|
|
|
Granted
|
|
|
880,000
|
|
|
|
0.06-0.10
|
|
|
$
|
0.07
|
|
|
|
|
Forfeited
|
|
|
(85,000
|
)
|
|
|
0.09-0.10
|
|
|
$
|
0.10
|
|
|
|
|
Expired
|
|
|
(1,964
|
)
|
|
|
174.00-581.00
|
|
|
$
|
234.78
|
|
|
|
|
Balance at December 31, 2011
|
|
|
4,296,193
|
|
|
|
0.06-39.00
|
|
|
$
|
0.39
|
|
|
|
|
Granted
|
|
|
70,000
|
|
|
|
0.05-0.19
|
|
|
$
|
0.14
|
|
|
|
|
Forfeited
|
|
|
(440,000
|
)
|
|
|
0.06-31.00
|
|
|
$
|
0.35
|
|
|
|
|
Expired
|
|
|
(4,700
|
)
|
|
|
34.00-39.00
|
|
|
$
|
36.39
|
|
|
|
|
Balance at December 31, 2012
|
|
|
3,921,493
|
|
|
|
0.06-46.00
|
|
|
$
|
0.36
|
|
|
$0.00
|
|
Activity for non-vested stock options under these plans for the fiscal year ending December 31, 2012 and 2011 was as follows:
|
|
Number of Options
|
|
|
Option Price
Per Share
|
|
|
Weighted Average
Exercise Price
|
|
Balance at December 31, 2010
|
|
|
1,021,503
|
|
|
|
0.09
|
|
|
$
|
0.09
|
|
Granted
|
|
|
880,000
|
|
|
|
0.06-0.10
|
|
|
$
|
0.07
|
|
Vested
|
|
|
(945,756
|
)
|
|
|
0.06-0.15
|
|
|
$
|
0.08
|
|
Forfeited
|
|
|
(3,333
|
)
|
|
|
0.09
|
|
|
$
|
0.09
|
|
Balance at December 31, 2011
|
|
|
952,414
|
|
|
|
0.06-0.10
|
|
|
$
|
0.08
|
|
Granted
|
|
|
70,000
|
|
|
|
0.05-0.19
|
|
|
$
|
0.14
|
|
Vested
|
|
|
(805,747
|
)
|
|
|
0.05-0.09
|
|
|
$
|
0.08
|
|
Forfeited
|
|
|
(75,000
|
)
|
|
|
0.08-0.09
|
|
|
$
|
0.08
|
|
Balance at December 31, 2012
|
|
|
141,667
|
|
|
|
0.05-0.19
|
|
|
$
|
0.10
|
|
There were 70,000 options granted during 2012 and 880,000 options granted during 2011. The weighted average grant date fair value of options issued during the years ended December 31, 2012 and 2011 was equal to $0.14 and $0.07 per share, respectively. There were no option grants issued below fair market value during 2012 and 2011.
At December 31, 2012, there was unrecognized compensation cost of $9,000 related to stock options which is expected to be recognized over a weighted-average amortization period of 2 years.
At December 31, 2012 and 2011, options to purchase 3,779,826 and 3,343,779 shares of common stock were exercisable, respectively, pursuant to the plans at prices ranging from $0.05 to $46.00. The following table summarizes information about stock options outstanding at December 31, 2012:
Exercise Price
|
|
|
Number Outstanding
|
|
|
Remaining Contractual Life for Options Oustanding
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05-0.08
|
|
|
|
817,500
|
|
|
|
8.6
|
|
|
|
717,500
|
|
|
$
|
0.07
|
|
|
0.09
|
|
|
|
1,234,750
|
|
|
|
7.6
|
|
|
|
1,234,750
|
|
|
|
0.09
|
|
|
0.10-0.37
|
|
|
|
420,000
|
|
|
|
6.5
|
|
|
|
378,333
|
|
|
|
0.15
|
|
|
0.38-46.00
|
|
|
|
1,449,243
|
|
|
|
4.58
|
|
|
|
1,449,243
|
|
|
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,921,493
|
|
|
|
6.6
|
|
|
|
3,779,826
|
|
|
$
|
0.37
|
|
Preferred Stock
:
The holders of the Series A-1 preferred stock shall have the rights and preferences set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware upon the approval of the Recapitalization. The rights and interests of the Series A-1 preferred stock of the Company will be substantially similar to the rights and interests of each of the series of the former Level 8 preferred stock other than for (i) anti-dilution protections that have been permanently waived and (ii) certain voting, redemption and other rights that holders of Series A-1 preferred stock will not be entitled to. All shares of Series A-1 preferred stock will have a liquidation preference
pari passu
with all other Series A-1 preferred stock.
The Series A-1 preferred stock is convertible at any time at the option of the holder into an initial conversion ratio of 1,000 shares of common stock for each share of Series A-1 preferred stock. The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations. The Series A-1 preferred stock is also convertible on an automatic basis in the event that (i) the Company closes on an additional $5,000,000 equity financing from strategic or institutional investors, or (ii) the Company has four consecutive quarters of positive cash flow as reflected on the Company’s financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) and filed with the Commission. The holders of Series A-1 preferred stock are entitled to receive equivalent dividends on an as-converted basis whenever the Company declares a dividend on its common stock, other than dividends payable in shares of common stock. The holders of the Series A-1 preferred stock are entitled to a liquidation preference of $500 per share of Series A-1 preferred stock upon the liquidation of the Company. The Series A-1 preferred stock is not redeemable.
The holders of Series A-1 preferred stock also possess the following voting rights. Each share of Series A-1 preferred stock shall represent that number of votes equal to the number of shares of common stock issuable upon conversion of a share of Series A-1 preferred stock. The holders of Series A-1 preferred stock and the holders of common stock shall vote together as a class on all matters except: (i) regarding the election of the Board of Directors of the Company (as set forth below); (ii) as required by law; or (iii) regarding certain corporate actions to be taken by the Company (as set forth below).
The approval of at least two-thirds of the holders of Series A-1 preferred stock voting together as a class, shall be required in order for the Company to: (i) merge or sell all or substantially all of its assets or to recapitalize or reorganize; (ii) authorize the issuance of any equity security having any right, preference or priority superior to or on parity with the Series A-1 preferred stock; (iii) redeem, repurchase or acquire indirectly or directly any of its equity securities, or to pay any dividends on the Company’s equity securities; (iv) amend or repeal any provisions of its certificate of incorporation or bylaws that would adversely affect the rights, preferences or privileges of the Series A-1 preferred stock; (v) effectuate a significant change in the principal business of the Company as conducted at the effective time of the Recapitalization; (vi) make any loan or advance to any entity other than in the ordinary course of business unless such entity is wholly owned by the Company; (vii) make any loan or advance to any person, including any employees or directors of the Company or any subsidiary, except in the ordinary course of business or pursuant to an approved employee stock or option plan; and (viii) guarantee, directly or indirectly any indebtedness or obligations, except for trade accounts of any subsidiary arising in the ordinary course of business. In addition, the unanimous vote of the Board of Directors is required for any liquidation, dissolution, recapitalization or reorganization of the Company. The voting rights of the holders of Series A-1 preferred stock set forth in this paragraph shall be terminated immediately upon the closing by the Company of at least an additional $5,000,000 equity financing from strategic or institutional investors.
In addition to the voting rights described above, the holders of a majority of the shares of Series A-1 preferred stock are entitled to appoint two observers to the Company’s Board of Directors who shall be entitled to receive all information received by members of the Board of Directors, and shall attend and participate without a vote at all meetings of the Company’s Board of Directors and any committees thereof. At the option of a majority of the holders of Series A-1 preferred stock, such holders may elect to temporarily or permanently exchange their board observer rights for two seats on the Company’s Board of Directors, each having all voting and other rights attendant to any member of the Company’s Board of Directors. There are two current members of the Board of Directors that are holders of the Series A-1 preferred stock. As part of the Recapitalization, the right of the holders of Series A-1 preferred stock to elect a majority of the voting members of the Company’s Board of Directors shall be terminated.
Series B
The Series B Preferred Stock ranks senior to the Common Stock and on parity with the Company’s outstanding Series A-1 Preferred Stock. As required by the Certificate of Designations applicable to the Series A-1 Preferred Stock, the Company obtained the consent of a holder representing in excess of two thirds of the outstanding shares of Series A-1 Preferred Stock to authorize and issue the shares of Series B Preferred Stock.
Dividends will accrue on each share of Series B Preferred Stock at the rate per annum of eight percent (8%). Dividends will accrue from the date on which a share of Series B Preferred Stock was issued by the Company until paid, whether or not declared, and shall be cumulative;
provided
,
however
, that except as set forth in the Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (the “
Series B Certificate
”), such dividends will be payable only when, as, and if declared by the Board of Directors, and the Company will be under no obligation to pay such dividends.
Each share of Series B Preferred Stock is convertible, at the option of the holder, into that number of shares of common stock equal to $150.00 (the “
Series B Original Issue Price
”) divided by the conversion price of the Series B Preferred Stock then in effect, which is initially $0.15, subject to adjustment under certain circumstances as set forth in the Series B Certificate.
In the event of certain specified liquidation events, the holders of Series B Preferred Stock will be entitled to receive an amount per share equal to the Series B Original Issue Price plus any dividends accrued or declared but unpaid thereon before the payment of any amount to the holders of Common Stock and other junior securities.
The holders of Series B Preferred Stock will be entitled to vote, on an as-converted basis, on all matters submitted to a vote of the stockholders of the Company, and the holders of Series B Preferred Stock, Series A-1 Preferred Stock and common stock will vote together as a single class. In addition, until such time as the Company consummates at least an additional $5,000,000 equity financing from institutional or strategic investors, the approval of the holders of at least 2/3 of the outstanding shares of the Series B Preferred Stock voting together separately as a class will be required for the Company to take certain specified actions set forth in the Series B Certificate.
Stock Warrants:
The Company values warrants based on the Black-Scholes pricing model.
NOTE 12. 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 2012 and 2011.
NOTE 13. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
In 2012, three customers accounted for 43%, 21% and 19% of operating revenues and two customers accounted for 80% and 10% of accounts receivable at December 31, 2012. In 2011, four customers accounted for 38%, 17% 11% and 12% of operating revenues and two customers accounted for 70% and 14% of accounts receivable at December 31, 2011.
NOTE 14. RELATED PARTY INFORMATION
From time to time since 2010 the Company has entered into multiple short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. At December 31, 2011, the Company was indebted to Mr. Steffens in the amount of $3,065,000. The loans mature at various dates through December 31, 2012. In March 2012, Mr. Steffens converted $3,000,000 of principal amount due under these notes into 20,000,000 shares of common stock of the Company. In March 2012, Mr. Steffens agreed to refinance $465,000 of debt and $417,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. As such this amount has been reclassified to long-term debt (See Note 8)
Antony Castagno, the Company’s Chief Technology Officer, is part-owner of SOAdesk LLC. For a description of the transactions between the Company and SOAdesk. (See Note 3).
NOTE 15. LEASE COMMITMENTS AND EMPLOYMENT AGREEMENTS
The Company leases certain facilities and equipment under various operating leases. Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2012 consisted of only one lease as follows (in thousands):
|
|
Lease
Commitments
|
|
|
|
|
|
2013
|
|
$
|
98
|
|
2014
|
|
|
59
|
|
|
|
$
|
157
|
|
Rent expense was $96,000 for each year ended December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, the Company had no sublease arrangements.
Under the employment agreement between the Company and Mr. Broderick effective January 1, 2013, we agreed to pay Mr. Broderick an annual base salary of $175,000 and performance bonuses in cash of up to $275,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion. Upon termination of Mr. Broderick’s employment by the Company without cause, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within 30 days of termination and any unpaid deferred salaries and bonuses. In the event there occurs a substantial change in Mr. Broderick’s job duties, there is a decrease in or failure to provide the compensation or vested benefits under the employment agreement or there is a change in control of the Company, we agreed to pay Mr. Broderick a lump sum payment of one year of Mr. Broderick’s then current base salary within thirty (30) days of termination. Additionally, 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 for with or without cause or in the event of a change of control (as that term is defined in the Employment Agreement) of the Company. Mr. Broderick will have thirty (30) days from the date written notice is given about either a change in his duties or the announcement and closing of a transaction resulting in a change in control of the Company to resign and execute his rights under this agreement. If Mr. Broderick’s employment is terminated for any reason, Mr. Broderick has agreed that, for two (2) year after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so.
Under the employment agreement between the Company and Mr. Castagno effective January 1, 2013, we agreed to pay Mr. Castagno an annual base salary of $150,000 and performance bonuses in cash of up to $250,000 per annum based upon exceeding certain revenue goals and operating metrics, as determined by the Compensation Committee, in its discretion. Upon termination of Mr. Castagno’s employment by the Company without cause, we agreed to pay Mr. Castagno an amount of $75,000 which is equivalent to six (6) months of Mr. Castagno’s then current base salary in equal semi-monthly installments over the six (6) month period following the termination. If Mr. Castagno’s employment is terminated for any reason, Mr. Castagno has agreed that, for two (2) year after such termination, he will not directly or indirectly solicit or divert business from us or assist any business in attempting to do so or solicit or hire any person who was our employee during the term of his employment agreement or assist any business in attempting to do so.
NOTE 16. CONTINGENCIES
The Company, from time to time, is involved in legal matters arising in the ordinary course of its business including matters involving proprietary technology. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.
In October 2003, we were served with a summons and complaint in Superior Court of North Carolina regarding unpaid invoices for services rendered by one of our subcontractors. The amount in dispute was approximately $200,000 and is included in accounts payable. Subsequent to March 31, 2004, we settled this litigation. Under the terms of the settlement agreement, we agreed to pay a total of $189,000 plus interest over a 19-month period ending November 15, 2005. The Company has not made any additional payments and has a remaining liability of approximately $88,000.
During fiscal 2011, the Company was served with a writ of summons by a creditor who holds several short- term notes. Several notes in the aggregate of $250,000 were due and outstanding under the Note agreements. The loans bore interest at 36% per annum. In July 2012, the Company entered into a restructuring settlement with the lender whereby the lender agreed to accept $495,000 in full satisfaction of all principal and interest due under the Note agreements, as of June 1, 2012, plus interest in the amount of approximately $21,000 for the period from June 1, 2012 to July 31, 2012. In addition, the Company agreed to pay interest for the period after July 31, 2012 in the aggregate amount of approximately $67,000. This interest was paid in seven monthly installments of approximately $9,750 each from August 2012 through February 2013. The final payment of the remaining principal of approximately $416,000 was paid in February 2013.
Under the indemnification clause of the Company’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee. There were no claims against the Company as of December 31, 2012 and 2011.
NOTE 17. SUBSEQUENT EVENTS
In March 2013, the Company closed an offering in a private investment in the Company’s common stock and the Company issued 11,840,241 shares of common stock at a price of $0.05 per share in exchange for $592,012. Of the total common shares issued, 7,500,000 shares were issued to members of the Board of Directors who invested in the private investment. The investment was made up of $251,131 of cash from private investors, the exchange of $25,881 of interest on notes with two of the private investors, the exchange of $15,000 of short term debt with one of the private investors, and the exchange of $300,000 of short term debt to Mr. John Steffens, the Company’s Chairman. Additionally, the investors were issued warrants to purchase common stock of the Company at a strike price of $0.20 per share. The warrants expire in five years. 2,368,048 warrants were issued to these investors, of this amount, 1,500,000 warrants were issued to members of the Board of Directors who invested in the private investment. As of December 31, 2012, the Company has reported a stock subscription for 10,200,000 shares of their common stock at a price of $0.05 per share in exchange for $510,000 (part of the $592,012 described above). The stock subscription was comprised of $186,132 of cash from private investors, the exchange of $23,868 of interest on a note with one of the private investors, and the exchange of $300,000 of short term debt with Mr. John Steffens, the Company’s Chairman.