form10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
|
S
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2008.
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from_______to_______
Commission
File Number 0-26392
CICERO
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
11-2920559
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S
Employer Identification Number)
|
|
8000
Regency Parkway, Suite 542, Cary, North Carolina
|
27518
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(919)
380-5000
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. YES S NO
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non accelerated filer, or smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o
Accelerated Filer o
Non accelerated filer o Smaller reporting
company ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of Exchange Act).
Yes o No ý
45,911,234
shares of common stock, $.001 par value, were outstanding as of May 05,
2008.
Index
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Page
Number
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3
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4
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5
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6
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7
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13
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18
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19
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19
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| |
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19
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19
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20
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20
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20
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20
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20
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21
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Item
1. Financial Statements
CICERO
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
68 |
|
|
$ |
250 |
|
|
Assets
of discontinued operations
|
|
|
83 |
|
|
|
79 |
|
|
Trade
accounts receivable, net
|
|
|
283 |
|
|
|
692 |
|
|
Prepaid
expenses and other current assets
|
|
|
186 |
|
|
|
208 |
|
|
Total
current assets
|
|
|
620 |
|
|
|
1,229 |
|
|
Property
and equipment, net
|
|
|
21 |
|
|
|
22 |
|
|
Total
assets
|
|
$ |
641 |
|
|
$ |
1,251 |
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
558 |
|
|
$ |
1,235 |
|
|
Accounts
payable
|
|
|
2,315 |
|
|
|
2,489 |
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related items
|
|
|
1,007 |
|
|
|
1,002 |
|
|
Other
|
|
|
1,864 |
|
|
|
2,072 |
|
|
Liabilities
of discontinued operations
|
|
|
474 |
|
|
|
455 |
|
|
Deferred
revenue
|
|
|
732 |
|
|
|
108 |
|
|
Total
current liabilities
|
|
|
6,950 |
|
|
|
7,361 |
|
|
Long-term
debt
|
|
|
1,122 |
|
|
|
1,323 |
|
|
Total
liabilities
|
|
|
8,072 |
|
|
|
8,684 |
|
|
Stockholders' (deficit):
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-- |
|
|
|
-- |
|
|
Common
stock
|
|
|
45 |
|
|
|
44 |
|
|
Additional
paid-in capital
|
|
|
229,347 |
|
|
|
228,858 |
|
|
Accumulated
deficit
|
|
|
(236,805 |
) |
|
|
(236,320 |
) |
|
Accumulated
other comprehensive loss
|
|
|
(18 |
) |
|
|
(15 |
) |
|
Net
stockholders' (deficit)
|
|
|
(7,431 |
) |
|
|
(7,433 |
) |
|
Total
liabilities and stockholders' (deficit)
|
|
$ |
641 |
|
|
$ |
1,251 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(unaudited)
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Software
|
|
$ |
200 |
|
|
$ |
-- |
|
|
Maintenance
|
|
|
133 |
|
|
|
41 |
|
|
Services
|
|
|
137 |
|
|
|
191 |
|
|
Total
operating revenue
|
|
|
470 |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
7 |
|
|
|
-- |
|
|
Maintenance
|
|
|
71 |
|
|
|
53 |
|
|
Services
|
|
|
162 |
|
|
|
114 |
|
|
Total
cost of revenue
|
|
|
240 |
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
230 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
253 |
|
|
|
137 |
|
|
Research
and product development
|
|
|
155 |
|
|
|
138 |
|
|
General
and administrative
|
|
|
298 |
|
|
|
258 |
|
|
Total
operating expenses
|
|
|
706 |
|
|
|
533 |
|
|
Loss
from operations
|
|
|
(476 |
) |
|
|
(468 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(78 |
) |
|
|
(62 |
) |
|
Other
income/(expense)
|
|
|
69 |
|
|
|
1 |
|
|
Loss
before provision for income taxes
|
|
|
(485 |
) |
|
|
(529 |
) |
|
Income
tax provision
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(485 |
) |
|
$ |
(529 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share applicable to common stockholders—basic and
diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding -- basic and
diluted
|
|
|
43,879 |
|
|
|
38,930 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(485 |
) |
|
$ |
(529 |
) |
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3 |
|
|
|
2 |
|
|
Stock
compensation expense
|
|
|
129 |
|
|
|
-- |
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
409 |
|
|
|
1 |
|
|
Assets
and liabilities – discontinued operations
|
|
|
15 |
|
|
|
1 |
|
|
Prepaid
expenses and other assets
|
|
|
22 |
|
|
|
(36 |
) |
|
Accounts
payable and accrued expenses
|
|
|
(266 |
) |
|
|
(48 |
) |
|
Deferred
revenue
|
|
|
624 |
|
|
|
224 |
|
|
Net
cash provided by (used in) operating activities
|
|
|
451 |
|
|
|
(385 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment
|
|
|
(2 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of common stock
|
|
|
-- |
|
|
|
500 |
|
|
Borrowings
under credit facility, term loans, notes payable
|
|
|
45 |
|
|
|
-- |
|
|
Repayments
of term loans, credit facility and notes payable
|
|
|
(673 |
) |
|
|
-- |
|
|
Net
cash provided by (used in) financing activities
|
|
|
(628 |
) |
|
|
500 |
|
|
Effect
of exchange rate changes on cash
|
|
|
(3 |
) |
|
|
(1 |
) |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(182 |
) |
|
|
108 |
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
250 |
|
|
|
310 |
|
|
End
of period
|
|
$ |
68 |
|
|
$ |
418 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(in
thousands)
(unaudited)
| |
|
Three
Months Ended
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
loss
|
|
$ |
(485 |
) |
|
$ |
(529 |
) |
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(6 |
) |
|
|
(1 |
) |
|
Comprehensive
loss
|
|
$ |
(491 |
) |
|
$ |
(530 |
) |
Non-Cash Investing and
Financing Activities:
During
March 2008, the Company issued 1,417,264 of common stock for the conversion of
debt and interest of $362,000 to a group of investors who had acquired the short
term promissory note due to SDS Merchant Fund.
The
accompanying notes are an integral part of the consolidated financial
statements.
CICERO
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1. INTERIM FINANCIAL STATEMENTS
The
accompanying financial statements for the three months ending March 31, 2008 and
2007 are unaudited, and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
of the United States of America have been condensed or omitted pursuant to those
rules and regulations. Accordingly, these interim financial
statements should be read in conjunction with the audited financial statements
and notes thereto contained in Cicero Inc.'s (the "Company") Annual Report on
Form 10-K for the year ended December 31, 2007, filed with the SEC on March 31,
2008. The results of operations for the interim periods shown in this
report are not necessarily indicative of results to be expected for other
interim periods or for the full fiscal year. In the opinion of
management, the information contained herein reflects all adjustments necessary
for a fair statement of the interim results of operations. All such
adjustments are of a normal, recurring nature. Certain reclassifications have
been made to the prior year amounts to conform to the current year
presentation.
The
year-end condensed balance sheet data was derived from audited financial
statements in accordance with the rules and regulations of the SEC, but does not
include all disclosures required for financial statements prepared in accordance
with generally accepted accounting principles of the United States of
America.
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.
Liquidity
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 losses of
$1,975,000 and $2,997,000 in 2007 and 2006, respectively, and has experienced
negative cash flows from operations for each of the past three years. For the
three months ended March 31, 2008, the Company incurred a loss of $485,000 and
had a working capital deficiency of $6,330,000. The Company’s future revenues
are entirely dependent on acceptance of Cicero® software, which has had limited
success in commercial markets to date. These factors among others raise
substantial doubt about the Company’s ability to continue as a going concern for
a reasonable period of time.
The
financial statements presented herein do not include any adjustments relating to
the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going
concern. In order to address these issues and to obtain adequate
financing for the Company’s operations for the next twelve months, the Company
is actively promoting and expanding its Cicero®-related product line and
continues to negotiate with significant customers who have expressed interest in
the Cicero® software technology. The Company is experiencing difficulty
increasing sales revenue largely because of the inimitable nature of the product
as well as customer concerns about the financial viability of the Company.
Cicero® software is a new “category defining” product in that most Enterprise
Application Integration (EAI) projects are performed at the server level and
Cicero®’s integration occurs at the desktop without the need to open and modify
the underlying code for those applications being integrated. Many companies are
not aware of this new technology or tend to look toward more traditional and
accepted approaches. The Company is attempting to solve the former problem by
improving the market’s knowledge and understanding of Cicero® software through
increased marketing and leveraging its limited number of reference accounts
while enhancing its list of resellers and system integrators to assist in the
sales and marketing process. Additionally, the Company plans to raise
additional capital or enter into other strategic transactions to continue to
fund operations and also expects that increased revenues will reduce its
operating losses in future periods, however, there can be no assurance that
management’s plan will be executed as anticipated.
Use
of Accounting Estimates
The
preparation of financial statements in conformity with accounting principals
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.
Stock-Based
Compensation
During
2006, the Company adopted SFAS No. 123 (revised 2004) (“SFAS No. 123R”),
“Share-Based Payment”, 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. In January 2005, the SEC
issued Staff Accounting Bulletin 107, which provides supplemental implementation
guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to
account for stock-based compensation transactions using the intrinsic value
method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees”, and instead generally requires that such
transactions be accounted for using a fair-value-based method. The
Company uses the Black-Scholes option-pricing model to determine the fair-value
of stock-based awards under SFAS No. 123R, consistent with that used for pro
forma disclosures under SFAS No. 123, “Accounting for Stock-Based
Compensation”. The Company has elected to use the modified
prospective transition method as permitted by SFAS No. 123R and, accordingly,
prior periods have not been restated to reflect the impact of SFAS No.
123R. The modified prospective transition method requires that
stock-based compensation expense be recorded for all new and unvested stock
options that are ultimately expected to vest as the requisite service is
rendered beginning on the first day of the Company’s year ended December 31,
2006. Stock-based compensation expense for awards granted prior to
2006 is based on the grant-date fair-value as determined under the pro forma
provisions of SFAS No. 123. The Company issued 150,000 options in the
first quarter of 2008 of which 50,000 were vested immediately. The
Company recognized $120,000 in stock-based compensation expense for the three
months ended March 31, 2008. The Company also recognized $9,000 in
stock-based compensation expense for the 549,360 restricted shares of stock
reserved for Mr. John Broderick, the Company’s CEO, in accordance with his 2007
employment agreement.
The
following table sets forth certain information as of March 31, 2008 about shares
of the Company’s common stock, par value $.001 (the “Common Stock”), outstanding
and available for issuance under the Company’s existing equity compensation
plans: the Cicero Inc. 2007 Employee Stock Option Plan, the Cicero Inc.
(formerly Level 8 Systems, Inc.) 1997 Stock Option Incentive Plan and the
Outside Director Stock Option Plan. The Company’s stockholders
approved all of the Company’s stock-based compensation plans.
|
|
|
Shares
|
|
|
Outstanding
on January 1, 2008
|
|
|
2,529,025 |
|
|
Granted
|
|
|
150,000 |
|
|
Exercised
|
|
|
-- |
|
|
Forfeited
|
|
|
(68,812 |
) |
|
Outstanding
on March 31, 2008
|
|
|
2,610,213 |
|
|
|
|
|
|
|
|
Weighted
average exercise price of outstanding options
|
|
$ |
1.28 |
|
|
Shares
available for future grants on March 31, 2008
|
|
|
1,917,107 |
|
Options
to purchase shares
of common stock are excluded from the
calculation of diluted earnings per share when
their inclusion would have an anti-dilutive effect on the
calculation. No options were included for the three month period
ended March 31, 2008 and 2007. Basic earnings per common share are computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the respective period. Diluted earnings per common
share are computed by dividing net income by the weighted average number of
shares of common stock and dilutive potential common shares outstanding during
the respective period. The weighted average number of common shares is increased
by the number of dilutive potential common shares issuable on the exercise of
options less the number of common shares assumed to have been purchased with the
proceeds from the exercise of the options pursuant to the treasury stock method;
those purchases are assumed to have been made at the average price of the common
stock during the respective period. The average price of Cicero
common stock during the three months ending March 31, 2008 and March 31, 2007
was $0.20 and $1.09, respectively.
NOTE
2. RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (SFAS 141R”). SFAS 141R will significantly change the
accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
research and development assets and restructuring costs. In addition,
under SFAS 141R, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income taxes. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. The adoption of the provisions of
SFAS 141R is not expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, An Amendment of ARB No. 51,” SFAS
160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51’s consolidation
procedures for consistency with the requirements of SFAS 141R. SFAS
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The statement shall
be applied prospectively as of the beginning of the fiscal year in which the
statement is initially adopted. The adoption of the provisions of
SFAS 160 is not expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – an amendment of FASB Statement 115.
The statement permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. Most of the
provisions of this statement apply only to entities that elect the fair value
option; however, the amendment to FASB Statement 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. The Company does not believe adoption
of this statement will have a material impact on its financial
statements.
In
September 2006, the SEC issued the Staff Accounting Bulletin 108 (“SAB 108”), to
address diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that the Company quantify
misstatements based on their impact on each of its financial statements and
related disclosures. SAB 108 is effective for fiscal years ending
after November 15, 2006. The Company has adopted SAB 108 effective as
of December 31, 2006. The adoption of this bulletin did not have a
material impact on our financial position, results of operations, or cash
flows.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities. It also responds to investors’
requests for expanded information about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. SFAS
No. 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, and does not expand the use of fair
value in any new circumstances. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and is required to be adopted by the Company in the first quarter of
2008. The Company is currently evaluating the effect that the
adoption of SFAS No. 157 will have on its financial position, results of
operations, or cash flows.
NOTE
3. SHORT TERM DEBT
Notes
payable, short-term debt, and notes payable to related party consist of the
following (in thousands):
|
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
Note
payable, related party (a)
|
|
$ |
94 |
|
|
$ |
49 |
|
|
Notes
payable (b)
|
|
|
464 |
|
|
|
1,186 |
|
|
|
|
$ |
558 |
|
|
$ |
1,235 |
|
|
(a)
|
In
February 2008, the Company entered into a short term note payable with
John L. (Launny) Steffens, the Chairman of the Board of Directors, for
various working capital needs. The note bears interest at 10% per year and
is unsecured. At March 31, 2008, the Company was indebted to Mr. Steffens
in the amount of $45,000.
|
In
November 2007, the Company entered into a short term note payable with Mr.
Steffens for various working capital needs. The Note bears interest at 6% per
year and is unsecured. At March 31, 2008, the Company was indebted to Mr.
Steffens in the amount of $40,000.
From time
to time the Company entered into promissory notes with one of the Company’s
directors and the former Chief Information Officer, Anthony Pizi. The
notes bear interest at 12% per annum. The Company was indebted to Anthony Pizi
in the amount of $9,000 at both dates.
|
(b)
|
The
Company does not have a revolving credit facility and from time to time
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. In addition, the Company has settled
certain litigation and agreed to issue a series of promissory notes to
support its obligations in the aggregate principal amount of $88,000. The
notes bear interest between 10% and 36% per
annum.
|
NOTE
4. LONG-TERM DEBT
Long-term
loan and notes payable to related party consist of the following (in
thousands):
|
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
Term
loan (a)
|
|
$ |
821 |
|
|
$ |
1,021 |
|
|
Note
payable; related party (b)
|
|
|
300 |
|
|
|
300 |
|
|
Other
long-term debt
|
|
|
1 |
|
|
|
2 |
|
|
|
|
$ |
1,122 |
|
|
$ |
1,323 |
|
|
(a)
|
In
October 2007, the Company, in conjunction with Blue Phoenix Solutions,
retired the note payable to Bank Hapoalim and entered into a new note with
Blue Phoenix Solutions in the principal amount of $1,021,000 with interest
at LIBOR plus 1% (approximately 5.86% at December 31, 2007) maturing in
December 2011. Interest is payable
quarterly.
|
|
(b)
|
In
October 2007, the Company entered into a long-term note with John L.
(Launny) Steffens, the Chairman of the Board of Directors, as part of the
restructuring of the note payable to Bank Hapoalim. The note
bears interest of 3% and matures in October 2009. The Company
was indebted to Mr. Steffens in the amount of $300,000 at both
dates.
|
NOTE
5. STOCKHOLDER’S EQUITY
In March
2008, the Company was notified that a group of investors including two members
of the Board of Directors, acquired a short term promissory note due SDS
Merchant Fund in the principal amount of $250,000. The note is unsecured and
bears interest at 10% per annum. In March, our Board of Directors approved a
resolution to convert this debt plus accrued interest into common stock of the
Company. The total principal and interest amounted to $361,827 and was converted
into 1,417,264 shares of common stock. Mr. John Steffens, the Company’s
Chairman, acquired 472,516 shares and Mr. Bruce Miller, also a member of our
Board of Directors, acquired 472,374 shares.
In
October 2007, the Company completed a private sale of shares of its common stock
to a group of investors, four of which are members of our Board of Directors.
Under the terms of that agreement, the Company sold 2,169,312 shares of its
common stock for $0.2457 per share for a total of $533,000, receiving cash
proceeds of $383,000 and converting a note in principal amount of $150,000.
Participating in this consortium were Mr. John L. (Launny) Steffens, the
Company’s Chairman, and Messrs. Bruce Miller, Don Peppers, and Bruce Percelay,
members of the Board. Mr. Steffens converted the principal amount of
his short term notes with the Company of $250,000 for 1,017,501 shares of common
stock. Mr. Miller invested $20,000 for 81,400 shares of common stock,
Mr. Peppers acquired 101,750 shares for a $25,000 investment and Mr. Bruce
Percelay acquired 40,700 shares for a $10,000 investment.
In August
2007, the Company issued 2,756,173 options and recognized $650,000 in
stock-based compensation expense for fiscal 2007. The Company also
recognized $36,000 in stock-based compensation expense for the 549,360
restricted shares of stock reserved for Mr. John Broderick, the Company’s CEO,
in accordance with his 2007 employment agreement.
In
February 2007, the Company completed a private sale of shares of its common
stock to a group of investors, three of which are members of our Board of
Directors. Under the terms of that agreement, the Company sold 3,723,008 shares
of its common stock for $0.1343 per share for a total of $500,000. Participating
in this consortium were Mr. Mark Landis, the Company’s former Chairman, and Mr.
Bruce Miller, who is a Board member. Mr. Landis acquired 74,460 shares for a
$10,000 investment and Mr. Miller acquired 148,920 shares for a $20,000
investment. In May 2007, Mr. John L. (Launny) Steffens was elected
Chairman of the Board of Directors. Prior to his election, Mr.
Steffens had participated in the private sale of shares acquiring 1,006,379
shares for an investment of $135,157.
In
December 2006, the Company completed its Plan of Recapitalization, approved by
its stockholders at a Special Stockholders Meeting held on November 16, 2006.
Results of the Plan included a reverse stock split at a ratio of 100:1; change
of the Company’s name from Level 8 Systems, Inc. to Cicero Inc.; increased the
authorized common stock of the Company from 85 million shares to 215 million
shares; converted existing preferred shares into a new Series A-1
Preferred Stock; converted and cancelled senior reorganization debt in the
aggregate principal amount of $2.3 million into 3,438,473 shares of common
stock; converted the aggregate principal amount of $3.9 million of convertible
bridge notes into 30,508,448 shares of common stock; converted each share of
Series A3 Preferred Stock into 4.489 shares of Series A-1 Preferred Stock;
converted each share of Series B3 Preferred Stock into 75 shares of Series A-1
Preferred Stock; converted each share of Series C Preferred Stock into 39.64
shares of Series A-1 Preferred Stock; converted an aggregate principal amount of
$1.1 million of Series D Preferred Stock, recorded as mezzanine financing, into
53 shares of Series A-1 Preferred Stock; and converted an aggregate principal
amount of $1 million of convertible promissory notes into 1,591 shares of Series
A-1 Preferred Stock. As of March 31, 2008 the Company had 1,544
shares of Series A-1 Preferred Stock outstanding.
NOTE
6. INCOME TAXES
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes." The Company's effective tax rate differs from the statutory rate
primarily due to the fact that no income tax benefit was recorded for the net
loss for the first three months of fiscal year 2008 or 2007. Because
of the Company's recurring losses, the deferred tax assets have been fully
offset by a valuation allowance.
NOTE
7. LOSS PER SHARE
Basic
loss per share is computed based upon the weighted average number of common
shares outstanding. Diluted earnings/(loss) per share is computed
based upon the weighted average number of common shares outstanding and any
potentially dilutive securities. Potentially dilutive securities
outstanding during the periods presented include stock options, warrants 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:
|
|
|
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Stock
options, common share equivalent
|
|
|
2,610,213 |
|
|
|
45,315 |
|
|
Warrants,
common share equivalent
|
|
|
422,456 |
|
|
|
309,285 |
|
|
Preferred
stock, common share equivalent
|
|
|
1,543,618 |
|
|
|
1,763,482 |
|
|
|
|
|
4,576,287 |
|
|
|
2,118,082 |
|
NOTE
8. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION
Based
upon the current business environment in which the Company operates, the
economic characteristics of its operating segments and management’s view of the
business, a revision in terms of aggregation of its segments was appropriate.
Therefore the segment discussion outlined below clarifies the adjusted segment
structure as determined by management under SFAS No. 131. All prior year amounts
have been restated to conform to the new reporting segment
structure.
Management
makes operating decisions and assesses performance of the Company’s operations
based on one reportable segment, the Software product segment. Prior
to this change the Company had segregated into two separate segments: Desktop
Integration and Messaging. The Messaging business has always been an immaterial
part of the Company’s overall business and generally all its sales efforts are
focused on the Cicero product. As such, the Company has elected to combine the
two products into one reportable segment.
The
Software product segment is comprised of the Cicero® product and the Ensuredmail
product. Cicero® is a business integration software product that
maximizes end-user productivity, streamlines business operations and integrates
disparate systems and applications, while renovating or rejuvenating older
legacy systems by making them usable in the business
processes. Ensuredmail is an encrypted email technology that can
reside on either the server or the desktop.
The table
below presents information about the reported segment for the three months ended
March 31, 2008 and 2007 (in thousands):
|
|
|
Three
months ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total
revenue
|
|
$ |
470 |
|
|
$ |
232 |
|
|
Total
cost of revenue
|
|
|
240 |
|
|
|
167 |
|
|
Gross
margin
|
|
|
230 |
|
|
|
65 |
|
|
Total
operating expenses
|
|
|
706 |
|
|
|
533 |
|
|
Segment
loss
|
|
$ |
(476 |
) |
|
$ |
(468 |
) |
A
reconciliation of total segment profitability (loss) to loss before provision
for income taxes for the three months ended March 31 (in
thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total
segment profitability (loss)
|
|
$ |
(476 |
) |
|
$ |
(468 |
) |
|
Interest
and other income/(expense), net
|
|
|
(9 |
) |
|
|
(61 |
) |
|
Total
loss before income taxes
|
|
$ |
(485 |
) |
|
$ |
(529 |
) |
NOTE
9. CONTINGENCIES
Various
lawsuits and claims have been brought against us in the normal course of our
business.
In
October 2003, we were served with a summons and complaint in Superior Court of
North Carolina regarding unpaid invoices for services rendered by one of our
subcontractors. The amount in dispute was approximately $200,000 and
is included in accounts payable. Subsequent to March 31, 2004, we settled this
litigation. Under the terms of the settlement agreement, we agreed to
pay a total of $189,000 plus interest over a 19-month period ending November 15,
2005. The Company is in the process of negotiating a series of payments for the
remaining liability of approximately $80,000.
Under the
indemnification clause of the Company’s standard reseller agreements and
software license agreements, the Company agrees to defend the reseller/licensee
against third party claims asserting infringement by the Company’s products of
certain intellectual property rights, which may include patents, copyrights,
trademarks or trade secrets, and to pay any judgments entered on such claims
against the reseller/licensee.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Cicero
Inc. (“we” or the “Company”) is a provider of business integration software that
enables organizations to integrate new and existing information and processes at
the desktop with our Cicero® software product. 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.
The Company also provides email encryption products that address information and
security compliance from the individual to the enterprise.
In
addition to software products, the Company also provides technical support,
training and consulting services as part of its commitment to providing its
customers industry-leading integration solutions. The Company’s
consulting team has in-depth experience in developing successful
enterprise-class solutions as well as valuable insight into the business
information needs of customers in the Global 5000. We offer services
around our integration and encryption software products.
This
Quarterly Report on Form 10-Q contains forward-looking statements relating to
such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities,
liquidity and capital resources and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause its actual results to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. These risk and uncertainties
include, among others, the following:
|
|
·
|
There
is substantial doubt as to whether we can continue as a going
concern;
|
|
|
·
|
We
have a history of losses and expect that we will continue to experience
losses at least through the third quarter of
2008;
|
|
|
·
|
We
develop new and unproven technology and
products;
|
|
|
·
|
We
depend on an unproven strategy for ongoing
revenue;
|
|
|
·
|
Economic
conditions could adversely affect our revenue growth and cause us not to
achieve desired revenue;
|
|
|
·
|
The
so-called “penny stock rule” could make it cumbersome for brokers and
dealers to trade in our common stock, making the market for our common
stock less liquid which could cause the price of our stock to
decline;
|
|
|
·
|
Because
we cannot accurately predict the amount and timing of individual sales,
our quarterly operating results may vary significantly, which could
adversely impact our stock price;
|
|
|
·
|
Loss
of key personnel associated with Cicero® development could adversely
affect our business;
|
|
|
·
|
Different
competitive approaches or internally developed solutions to the same
business problem could delay or prevent adoption of
Cicero®;
|
|
|
·
|
Our
ability to compete may be subject to factors outside our
control;
|
|
|
·
|
The
markets for our products are characterized by rapidly changing
technologies, evolving industry standards, and frequent new product
introductions;
|
|
|
·
|
We
may face damage to the reputation of our software and a loss of revenue if
our software products fail to perform as intended or contain significant
defects;
|
|
|
·
|
We
may be unable to enforce or defend our ownership and use of proprietary
and licensed technology;
|
|
|
·
|
Our
business may be adversely impacted if we do not provide professional
services to implement our
solutions;
|
|
|
·
|
Because
our software could interfere with the operations of customers, we may be
subject to potential product liability and warranty claims by these
customers;
|
|
|
·
|
We
have not paid any cash dividends on our common stock and it is likely that
no cash dividends will be paid in the future;
and
|
|
|
·
|
Provisions
of our charter and bylaws and Delaware law could deter takeover
attempts.
|
Reference
should be made to such factors and all forward-looking statements are qualified
in their entirety by the above cautionary statements. Although we
believe that these forward-looking statements are based upon reasonable
assumptions, we can give no assurance that our goals will be
achieved. Given these uncertainties, readers of the Quarterly Report
on Form 10-Q are cautioned not to place undue reliance on these forward-looking
statements. These forward-looking statements are made as of the date
of this quarterly report. We assume no obligation to update or revise
them or provide reasons why actual results may differ.
The
Company's results of operations include the operations of the Company and its
subsidiaries.
RESULTS OF
OPERATIONS
The table
below presents information about reported segments for the three months ended
March 31, 2008 and 2007 (in thousands):
|
|
|
Three
months ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Total
revenue
|
|
$ |
470 |
|
|
$ |
232 |
|
|
Total
cost of revenue
|
|
|
240 |
|
|
|
167 |
|
|
Gross
margin
|
|
|
230 |
|
|
|
65 |
|
|
Total
operating expenses
|
|
|
706 |
|
|
|
533 |
|
|
Segment
loss
|
|
$ |
(476 |
) |
|
$ |
(468 |
) |
THREE
MONTHS ENDED MARCH 31, 2008 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2007.
Total
Revenues. Total revenues increased $238,000, or
102.6%, from $232,000 to $470,000, for the three months ended March 31, 2008 as
compared with the three months ended March 31, 2007. This increase is due to an
increase in software license revenue and maintenance revenue for the first
quarter of 2008 offset by a decrease in consulting revenue for the same
period.
Total Cost of
Revenue. Total cost of revenue increased $73,000, or 43.7%,
from $167,000 to $240,000, for the three months ended March 31, 2008 as compared
with the three months ended March 31, 2007. The increase is primarily
attributable to the expensing of employee stock options and the use of outside
professional services.
Total Gross
Margin. Gross margin was $230,000, or 48.9%, for the three
months ended March 31, 2008 as compared to the gross margin of $65,000, or 28%
for the three months ended March 31, 2007. The increase in gross margin is due
to the increase of software license revenue for the quarter ended March 31,
2008.
Total Operating
Expenses. Total operating expenses increased $173,000, or
32.5% from $533,000 to $706,000 for the three months ended March 31, 2008, as
compared with the three months ended March 31, 2007. The increase in
total operating expenses is primarily attributable due to the recording of stock
option expense that was initiated in the third quarter of 2007 as well as
additional sales and marketing costs due to increased headcount and
participation at trade shows.
Revenue. The
Company has three categories of revenue: software products, maintenance, and
services. Software products revenue is comprised primarily of fees from
licensing the Company's proprietary software products. Maintenance revenue is
comprised of fees for maintaining, supporting, and providing periodic upgrades
to the Company's software products. Services revenue is comprised of fees for
consulting and training services related to the Company's software
products.
The
Company's revenues vary from quarter to quarter, due to market conditions, the
budgeting and purchasing cycles of customers and the effectiveness of the
Company’s sales force. The Company typically does not have any
material backlog of unfilled software orders and product revenue in any quarter
is substantially dependent upon orders received in that quarter. Because the
Company's operating expenses are based on revenue levels that are relatively
fixed over the short term, variations in the timing of the recognition of
revenue can cause significant variations in operating results from quarter to
quarter.
We
generally recognize revenue from software license fees when our obligations to
the customer are fulfilled, which is typically upon delivery or
installation. Revenue related to software maintenance contracts is
recognized ratably over the terms of the contracts. Revenues from
services are recognized on a time and materials basis as the services are
performed and amounts due from customers are deemed collectible and
non-refundable. The revenue recognition rules pertaining to software
arrangements are complicated and certain assumptions are made in determining
whether the fee is fixed and determinable and whether collectability is
probable. Should our actual experience with respect to collections
differ from our initial assessment, there could be adjustments to future
results.
Software
Products.
Software Product
Revenue. The Company earned $200,000 for software product
revenue for the three months ended March 31, 2008 as compared to no software
revenue for the three months ended March 31, 2007.
Software Product Gross
Margins. The gross margin on software products for the three
months ended March 31, 2008 was 96.5 % and reflects the accrual of royalty
payments offset by revenues. Cost of software is composed of
royalties to third parties, and to a lesser extent, production and distribution
costs.
Maintenance.
Maintenance
Revenue. Maintenance revenue for the three months ended March
31, 2008 increased by approximately $92,000, or 224.4%, from $41,000 to $133,000
as compared to the three months ended March 31, 2007.
Maintenance Gross
Margin. Gross margin (loss) on maintenance products for the
three months ended March 31, 2008 was 46.6% compared with (29.3%) for the three
months ended March 31, 2007. Cost of maintenance is comprised of
personnel costs and related overhead for the maintenance and support of the
Company’s software products and the increase of gross margin is due to the
increase in maintenance revenue partially offset by increase in expenses due to
the expensing of employee stock options.
Services.
Services
Revenue. Services revenue decreased $54,000, or 28.3%, from
$191,000 to $137,000 for the three months ended March 31, 2008 as compared with
the three months ended March 31, 2007. The decrease in services revenues is due
to a smaller integration project relating to Cicero® software.
Services Gross
Margin. Services gross margin (loss) was (18.2%) for the three
months ended March 31, 2008 compared with gross margin of 40.3% for the three
months ended March 31, 2007. The decrease in gross margin was
primarily attributable to the increase in service billings noted
above.
Operating
Expenses:
Sales and
Marketing. Sales and marketing expenses primarily include
personnel costs for salespeople, marketing personnel, travel and related
overhead, as well as trade show participation and promotional expenses. Sales
and marketing expenses for the three months ended March 31, 2008 increased by
approximately $116,000, or 84.7%, from $137,000 to $253,000 as compared with the
three months ended March 31, 2007. The increase is primarily
attributable the recording of employee stock option expense, increased travel,
and greater trade show participation.
Research and
Development. Research and product development expenses
primarily include personnel costs for product authors, product developers and
product documentation and related overhead. Research and development expense
increased by approximately $17,000, or 12.3%, from $138,000 to $155,000 for the
three months ended March 31, 2008 as compared to the three months ended March
31, 2007. The increase in costs for the quarter is primarily due to the
recording of employee stock option expense.
General and Administrative.
General and administrative expenses consist of personnel costs for the
legal, financial, human resources, and administrative staff, related overhead,
and all non-allocable corporate costs of operating the Company. Our office is
located in Cary, North Carolina. General and administrative expenses
for the three months ended March 31, 2008 increased by approximately $40,000, or
15.5%, from $258,000 to $298,000 over the same period in the prior
year. The increase is primarily attributable to an increase in costs
in the finance area due to employee turnover and the recording of employee stock
option expense.
Provision for Taxes. The
Company’s effective income tax rate for continuing operations differs from the
statutory rate primarily because an income tax benefit was not recorded for the
net loss incurred in the first quarter of 2008 or 2007. Because of the Company’s
recurring losses, the deferred tax assets have been fully offset by a valuation
allowance.
Impact of
Inflation. Inflation has not had a significant effect on the
Company’s operating results during the periods presented.
LIQUIDITY AND CAPITAL
RESOURCES
Cash
Cash and
cash equivalents decreased to $68,000 at March 31, 2008 from $250,000 at
December 31, 2007. The
Company used $182,000 of cash for the three months ended March 31,
2008.
Net cash provided by (used in)
Operating Activities. Cash provided by operations for the
three months ended March 31, 2008 was $451,000 compared with $385,000 used by
operations for the three months ended March 31, 2007. Cash provided
by operations for the three months ended March 31, 2008 was primarily comprised
of non-cash charges for depreciation and stock compensation of approximately
$3,000 and $129,000, respectively. Additionally, the Company’s cash
increased due to a decrease in accounts receivable of $409,000 and an increase
in deferred revenues from maintenance contracts of $624,000. These
cash inflows were offset by the loss from operations of approximately $485,000
and the decrease of approximately $266,000 in accounts payable and accrued
expenses from vendors for services rendered.
Net cash used for Investing
Activities. The Company bought $2,000 worth of equipment for the quarter
ended March 31, 2008.
Net cash provided by (used in)
Financing Activities. Cash used by financing activities for
the three months ended March 31, 2008 was approximately $628,000 as compared
with approximately $500,000 provided by financing activities for the three
months ended March 31, 2007. Cash used by financing activities for
the three months ended March 31, 2008 was comprised primarily of repayment of
short and long term debt.
Liquidity
The
Company funded its cash needs during the quarter ended March 31, 2008 with cash
on hand from December 31, 2007.
In
October 2007, the Company agreed to restructure a promissory 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 promissory 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 our common stock in exchange for $650,000 paid to
Bank Hapoalim to retire that indebtedness. In March 2008, the
Company amended the terms of its note payable to BluePhoenix Solutions. Under
the terms of the original note, the Company was to make a principal reduction
payment in the amount of $350,000 on January 30, 2009. The Company and
BluePhoenix agreed to accelerate that principal payment to March and May 2008 in
return for a conversion of $50,000 into 195,848 shares of the Company’s common
stock. In March, the Company paid $200,000 plus accrued interest and in May, the
Company will pay $100,000 plus accrued interest.
From time
to time the Company entered into promissory notes with Anthony Pizi, a director
of the Company and its former Chief Information Officer. As of March
31, 2008, the Company is indebted to Mr. Pizi in the amount of
$9,000. The notes bear interest at 12% per annum.
The
Company has incurred losses of approximately $1,975,000 and $2,997,000 in the
past two years and has experienced negative cash flows from operations for each
of the past three years. For the three months ended March 31, 2008,
the Company incurred an additional loss of approximately $485,000 and has a
working capital deficiency of approximately $6,330,000. The Company’s
future revenues are largely dependent on acceptance of a newly developed and
marketed product – Cicero®. Accordingly, there is substantial doubt
that the Company can continue as a going concern. In order to address these
issues and to obtain adequate financing for the Company’s operations for the
next twelve months, the Company is actively promoting and expanding its product
line and continues to negotiate with significant customers that have
demonstrated interest in the Cicero® technology. The Company is experiencing
difficulty increasing sales revenue largely because of the inimitable nature of
the product as well as customer concerns about the financial viability of the
Company. The Company is attempting to solve this problem by improving
the market’s knowledge and understanding of Cicero® through increased marketing
and leveraging its limited number of reference accounts. The Company
is attempting to address the financial concerns of potential customers by
pursuing strategic partnerships with companies that have significant financial
resources although the Company has not experienced significant success to date
with this approach. Additionally, the Company is seeking additional
equity capital or other strategic transactions in the near term to provide
additional liquidity. There can be no assurance that management will
be successful in executing these strategies as anticipated or in a timely manner
or that increased revenues will reduce further operating losses. If the Company
is unable to significantly increase cash flow or obtain additional financing, it
will likely be unable to generate sufficient capital to fund operations for the
next twelve months and may be required to pursue other means of financing that
may not be on terms favorable to the Company or its stockholders. These factors
among others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
We do not
believe that we currently have sufficient cash on hand to finance operations for
the next twelve months. At our current rates of expense and assuming
the Company will generate revenues in the next twelve months at the annualized
rate of revenue generated in the first three months of 2008, we will be able to
fund planned operations with existing capital resources for a minimum of four
months and experience negative cash flow of approximately $1,000,000 during the
next twelve months to maintain planned operations. The accompanying consolidated
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The financial statements presented herein do not
include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
OFF-BALANCE SHEET
ARRANGEMENTS
The
Company does not have any off balance sheet arrangements. We have no
unconsolidated subsidiaries or other unconsolidated limited purpose entities,
and we have not guaranteed or otherwise supported the obligations of any other
entity.
Not
applicable.
(a)
Disclosure Controls and Procedures
Our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of March 31, 2008. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files and submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Based on the evaluation of our disclosure controls and procedures as
of March 31, 2008, our Chief Executive Officer and Chief Financial Officer
concluded that, as of such date, our disclosure controls and procedures were
effective.
(b)
Changes in Internal Control over Financial Reporting
During
the period covered by this Quarterly Report on Form 10-Q, there has been no
significant change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Part
II. Other Information
Item
1. Legal Proceedings
Various
lawsuits and claims have been brought against us in the normal course of our
business.
In
October 2003, we were served with a summons and complaint in Superior Court of
North Carolina regarding unpaid invoices for services rendered by one of our
subcontractors. The amount in dispute was approximately $200,000 and
is included in accounts payable. Subsequent to March 31, 2004, we settled this
litigation. Under the terms of the settlement agreement, we agreed to
pay a total of $189,000 plus interest over a 19-month period ending November 15,
2005. The Company has not made any additional payments and is in the process of
negotiating a series of payments for the remaining liability of approximately
$80,000.
Under the
indemnification clause of the Company’s standard reseller agreements and
software license agreements, the Company agrees to defend the reseller/licensee
against third party claims asserting infringement by the Company’s products of
certain intellectual property rights, which may include patents, copyrights,
trademarks or trade secrets, and to pay any judgments entered on such claims
against the reseller/licensee.
Not
Applicable.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
In March
2008, the Company was notified that a group of investors including two members
of the Board of Directors acquired a short term promissory note due SDS Merchant
Fund in the principal amount of $250,000. The note was unsecured and bore
interest at 10% per annum. In March, our Board of Directors approved a
resolution to convert this debt plus accrued interest into common stock of the
Company. The total principal and interest amounted to $361,827 and was converted
into 1,417,264 shares of common stock. Mr. John Steffens, the Company’s
Chairman, acquired 472,516 shares and Mr. Bruce Miller, also a member of our
Board of Directors, acquired 472,374 shares. The Company did not receive any
proceeds from this transaction.
These
shares were issued in reliance upon the exemption from registration provided by
Section 3(a)(9) of the Securities Act of 1933.
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security
Holders
None
None
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Exhibit
No.
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Description
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Certification
of Chief Executive Officer/Chief Financial Officer pursuant to Rule
13a-14(a) (filed herewith).
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Certification
of John P. Broderick pursuant to 18 USC § 1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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CICERO
INC.
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By:
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/s/ John P.
Broderick
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John
P. Broderick
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Chief
Executive Officer and Chief Financial Officer
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Date:
May 15, 2008
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