Item
1. Condensed Consolidated Financial Statements
CICERO
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
|
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
56
|
$
56
|
|
Trade accounts
receivable
|
48
|
223
|
Prepaid expenses
and other current assets
|
168
|
53
|
|
|
272
|
332
|
|
Property and
equipment, net
|
6
|
7
|
|
Total
assets
|
$
278
|
$
339
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
Liabilities:
|
|
|
|
Current portion of
long term debt
|
$
3,297
|
$
1,220
|
|
Accounts
payable
|
1,015
|
1,102
|
|
Accrued
expenses:
|
|
|
|
Salaries, wages,
and related items
|
1,412
|
1,680
|
|
Accrued
interest
|
351
|
216
|
|
Other
|
569
|
589
|
|
Deferred
revenue
|
575
|
454
|
|
Total
current liabilities
|
7,219
|
5,261
|
|
Long term debt
(Note 3)
|
464
|
890
|
|
Total
liabilities
|
$
7,683
|
$
6,151
|
|
Commitments and
Contingencies (Note 6 and 7)
Stockholders'
deficit:
|
|
|
|
Convertible
preferred stock, $0.001 par value, 10,000,000 shares
authorized
5,083 Series A
shares issued and outstanding at September 30, 2018 and December
31, 2017.
$500 per share
liquidation preference
|
--
|
--
|
|
Common stock,
$0.001 par value, 600,000,000 shares authorized
207,913,541 issued
and outstanding at September 30, 2018 and December 31,
2017
|
208
|
208
|
|
Additional paid-in
capital
|
253,693
|
253,691
|
|
Accumulated
deficit
|
(261,306
)
|
(259,711
)
|
|
Total stockholders'
deficit
|
(7,405
)
|
(5,812
)
|
|
Total liabilities
and stockholders' deficit
|
$
278
|
$
339
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
|
|
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
Software
|
$
12
|
$
49
|
$
34
|
$
525
|
|
Maintenance
|
119
|
135
|
369
|
385
|
|
Services
|
69
|
48
|
205
|
156
|
|
Total operating
revenue
|
200
|
232
|
608
|
1,066
|
|
|
|
|
|
|
|
Cost of
revenue:
|
|
|
|
|
|
Software
|
--
|
4
|
--
|
4
|
|
Maintenance
|
37
|
34
|
118
|
114
|
|
Services
|
99
|
102
|
292
|
295
|
|
Total cost of
revenue
|
136
|
140
|
410
|
413
|
|
|
|
|
|
|
|
Gross
margin
|
64
|
92
|
198
|
653
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Sales and
marketing
|
61
|
95
|
278
|
303
|
|
Research and
product development
|
250
|
261
|
743
|
816
|
|
General and
administrative
|
169
|
226
|
546
|
774
|
|
Total operating
expenses
|
480
|
582
|
1,567
|
1,893
|
|
Loss from
operations
|
(416
)
|
(490
)
|
(1,369
)
|
(1,240
)
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
Interest
expense
|
(89
)
|
(77
)
|
(226
)
|
(317
)
|
|
Total
other expense
|
(89
)
|
(77
)
|
(226
)
|
(317
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
(505
)
|
$
(567
)
|
$
(1,595
)
|
$
(1,557
)
|
|
Loss per share
applicable to common stockholders:
|
|
|
|
|
|
Basic and
Diluted
|
$
(0.00
)
|
$
(0.00
)
|
$
(0.01
)
|
$
(0.01
)
|
|
Weighted average
shares outstanding:
|
|
|
|
|
|
Basic
and Diluted
|
207,913,541
|
207,913,541
|
207,913,541
|
197,587,913
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Nine Months
Ended
September
30,
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$
(1,595
)
|
$
(1,557
)
|
|
Adjustments to
reconcile net loss to net cash used by operating
activities:
|
|
|
|
Depreciation and
amortization
|
3
|
5
|
|
Stock
compensation expense
|
2
|
3
|
|
Bad
debt expense
|
2
|
--
|
|
Changes in assets
and liabilities:
|
|
|
|
Trade accounts
receivable
|
173
|
262
|
|
Prepaid expenses
and other current assets
|
(115
)
|
(60
)
|
|
Accounts payable
and accrued expenses
|
(240
)
|
389
|
|
Deferred
revenue
|
121
|
(418
)
|
|
Net cash used by
operating activities
|
(1,649
)
|
(1,376
)
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases of
equipment
|
(2
)
|
(2
)
|
|
Net
cash used by investing activities
|
(2
)
|
(2
)
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Borrowings under
debt
|
1,776
|
1,375
|
|
Repayments of
debt
|
(125
)
|
(20
)
|
|
Net cash generated
by financing activities
|
1,651
|
1,355
|
|
Net
increase/(decrease) in cash
|
--
|
(23
)
|
|
Cash:
|
|
|
|
Beginning of
period
|
56
|
91
|
|
End of
period
|
$
56
|
$
68
|
Non-Cash Investing and Financing Activities:
During
August 2017, the Company converted $3,544 of debt and $1,539 of
interest to a related party lender by issuing 5,083 shares of its
Series A preferred stock.
During
June 2017, the Company converted $1,796 of debt and $553 of accrued
interest to a related party lender by issuing 15,660,536 shares of
its common stock.
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
DEFICIT
Nine Months Ended September 30, 2018
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2017
|
207,913,541
|
$
208
|
5,083
|
--
|
$
253,691
|
$
(259,711
)
|
$
(5,812
)
|
|
Restricted stock
issued as compensation
|
|
|
|
|
2
|
|
2
|
|
Net
loss
|
|
|
|
|
|
(1,595
)
|
(1,595
)
|
|
Balance at
September 30, 2018 (unaudited)
|
207,913,541
|
$
208
|
5,083
|
--
|
$
253,693
|
$
(261,306
)
|
$
(7,405
)
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The
accompanying condensed consolidated financial statements for the
three and nine months ended September 30, 2018 and 2017 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 accounting
principles generally accepted in 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 consolidated financial statements and
notes thereto contained in Cicero Inc.'s (the "Company") Annual
Report on Form 10-K for the year ended December 31, 2017, filed
with the SEC on March 30, 2018. 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
presentation of the interim results of operations. All such
adjustments are of a normal, recurring nature.
The
year-end condensed balance sheet data was derived from audited
consolidated 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
accounting principles generally accepted in the United States of
America.
The
accompanying condensed 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
Although
the Company has incurred a net loss of approximately $1,595,000 for
the nine months ended September 30, 2018, and has a history of
operating losses, management believes that the functionality of the
Company’s products resonates in the marketplace as both
“analytics” and “automation” are topics
often discussed and written about. Further, the Company believes
that its repositioned strategy of leading with a no cost, short,
“proof of concept” evaluation of the software’s
capabilities will shorten the sales cycle and allow for value based
selling to our customers and prospects. The Company anticipates
success in this regard based upon current discussions and active
“proof of concepts” with active partners, customers and
prospects. In August 2017, the Company issued 5,083 shares of its
Series A preferred stock and a Warrant to purchase up to 20,333,620
shares of the Company’s Common Stock at an exercise price of
$0.07 per share to its Chairman, John Steffens, as part of a
conversion of debt and interest totaling $5,083,405 reducing its
working capital deficiency. The Company has borrowed approximately
$1,776,000 and $1,873,000 in 2018 and 2017, respectively. Should
the Company be unable to secure customer contracts that will drive
sufficient cash flow to sustain operations, the Company will be
forced to seek additional capital in the form of debt or equity
financing; however, there can be no assurance that such debt or
equity financing will be available on terms acceptable to the
Company or at all. As a result of these factors, the report of our
independent auditors dated March 30, 2018, on our consolidated
financial statements for the period ended December 31, 2017
included an emphasis of matter paragraph indicating that there is a
substantial doubt about the Company’s ability to continue as
a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Use of Accounting 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, stock based compensation, deferred taxes, and
related valuation allowances and valuation of equity
instruments.
Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with
Accounting Standards Codification (“ASC”) 718
“Compensation – Stock Compensation” which
addresses the accounting for stock-based payment transactions in
which an enterprise receives employee services in exchange for (a)
equity instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments. The Company uses the Black-Scholes option-pricing
model to determine the fair-value of stock-based awards under ASC
718. The plan expired in fiscal 2017 and as such no further options
are available to grant. The Company did not recognize any
stock-based compensation expense for the three and nine months
ended September 30, 2018 and $300 and $2,800 for the three and nine
months ended September 30, 2017, respectively, in connection with
outstanding options. The Company has no unrecognized stock-based
compensation expense in connection with outstanding options as of
September 30, 2018.
The
Company recognized approximately $300 and $2,000 in stock-based
compensation in connection with the restricted stock grants for the
three and nine months ended September 30, 2018, respectively, in
connection with restricted stock grants issued in the first quarter
of 2018 to certain employees, and did not recognize any stock-based
compensation for the three and nine months ended September 30,
2017, respectively. The grants vest on the second anniversary of
the grant date. The Company has approximately $1,100 of
unrecognized stock-based compensation expense in connection with
the restricted stock grants
The
following table sets forth certain information as of September 30,
2018 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 and the Outside
Director Stock Option Plan. The Company’s stockholders
approved all of the Company’s stock-based compensation
plans.
|
|
|
|
Outstanding on
December 31, 2017
|
1,577,750
|
|
Granted
|
--
|
|
Exercised
|
--
|
|
Forfeited
|
(871,539
)
|
|
Outstanding on
September 30, 2018
|
706,211
|
|
|
|
|
Weighted average
exercise price of outstanding options
|
$
0.08
|
|
A
ggregate Intrinsic
Value
|
$
0
|
|
Shares available
for future grants on September 30, 2018
|
--
|
|
|
|
|
Weighted average of
remaining contractual life
|
2.5
|
Recent Accounting Pronouncements
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments, which clarifies how companies present and classify
certain cash receipts and cash payments in the statement of cash
flows where diversity in practice exists. The new standard was
effective for us in our first quarter of fiscal 2018. This standard
did not have a material impact on our consolidated financial
statements and related disclosures.
The
FASB's new leases standard ASU 2016-02 Leases (Topic 842) was
issued on February 25, 2016. ASU 2016-02 is intended to improve
financial reporting about leasing transactions. The ASU affects all
companies and other organizations that lease assets such as real
estate, airplanes, and manufacturing equipment. The ASU will
require organizations that lease assets, referred to as
“Lessees”, to recognize on the balance sheet the assets
and liabilities for the rights and obligations created by those
leases. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. Under the new guidance, a lessee will be
required to recognize assets and liabilities for leases with lease
terms of more than 12 months. Consistent with current GAAP, the
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike
current GAAP which requires only capital leases to be recognized on
the balance sheet the new ASU will require both types of leases
(i.e. operating and capital) to be recognized on the balance sheet.
The FASB lessee accounting model will continue to account for both
types of leases. The capital lease will be accounted for in
substantially the same manner as capital leases are accounted for
under existing GAAP. The operating lease will be accounted for in a
manner similar to operating leases under existing GAAP, except that
lessees will recognize a lease liability and a lease asset for all
of those leases. Public companies will be required to adopt the new
leasing standard for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is
permitted for all companies and organizations. For calendar
year-end public companies, this means an adoption date of January
1, 2019 and retrospective application to previously issued annual
and interim financial statements for 2018. See Note 5 for the
Company’s current lease commitments. The Company is currently
in the process of evaluating the impact that this new leasing ASU
will have on its financial statements.
NOTE 2. REVENUE
On
January 1, 2018, we adopted ASC 606, Revenue from Contracts with
Customers and all the related amendments (“the new revenue
standard”) and applied it to all contracts using the modified
retrospective method. We completed our review of contracts with our
customers and did not need to record a cumulative effect adjustment
to accumulated deficit upon adoption of the new revenue standard as
of January 1, 2018. Under ASC 606, revenue is recognized when a
company transfers the promised goods or services to a customer in
an amount that reflects consideration that is expected to be
received for those goods and services. Adoption of the standard did
not have a material impact on the Company’s financial
position, results of operations, cash flow, accounting policies,
business processes, internal controls or disclosures.
Contract Balances
Timing
differences among revenue recognition may result in contract assets
or liabilities. Contract liabilities (deferred revenue) totaled
$454,000 and $575,000 as of January 1, 2018 and September 30, 2018,
respectively. Revenue recognized from the contract liabilities for
the nine months ended September 30, 2018 was $310,000. The contract
liability balances reflect the unrecognized transaction
price.
Our net
trade accounts receivables were $223,000 and $48,000 as of January
1, 2018 and September 30, 2018, respectively. Trade accounts
receivable are stated in the amount management expects to collect
from outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to
the allowance of doubtful accounts based on its assessment of the
current status of individual accounts. Balances still outstanding
after management has used reasonable collection efforts are written
off through a charge to the allowance of doubtful accounts and a
credit to trade accounts receivable. Changes in the allowance for
doubtful accounts have not been material to the consolidated
financial statements.
Performance Obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer and is the unit of account
under the new revenue recognition standard. The transaction price
is allocated to each distinct performance obligation and recognized
as revenue when, or as, the performance obligation is satisfied.
Most of our contracts have multiple performance obligations, which
include software, maintenance and professional
services.
Revenue Recognition
Cicero
utilizes point in time method for revenue recognition for its
software license revenue. Our software licenses are distinct and
have standalone functionality as it is fully functional without any
services purchased. Cicero utilizes the output method over time for
revenue recognition as maintenance contracts are invoiced annually
prior to the start of the maintenance period and then recognized
monthly over the length of the maintenance contract. Cicero
utilizes the output method over time for revenue recognition for
its services revenue as service hours/days are logged and billed
subsequently. Cicero has no upfront fees that are billable to
customers.
Cicero
established a standalone selling price for its lines of revenue
based on price list and historical sales.
Practical Expedients and Exemptions
There
are several practical expedients and exemptions allowed under ASC
606 that impact timing of revenue recognition and our disclosures.
Below is a list of practical expedients we applied in the adoption
and application of ASC 606:
Application
●
The Company is
making the election not to disclose variable consideration
allocated to performance obligations related to either: (1) sales-
or usage-based royalties on licenses of intellectual property or
(2) variable consideration allocated entirely to a wholly
unsatisfied performance obligation or to a wholly unsatisfied
promise to transfer a distinct good or service that forms part of a
single performance obligation when certain criteria are
met.
●
The Company is
making an election to treat sales tax on a net basis, which would
not include it in the transaction price to allocate across
performance obligations.
●
The Company elects
to treat similar contracts among the business units as part of a
portfolio of contracts, primarily software license and maintenance
contracts. These contracts have the same provision terms, and
management has the expectation the result will not be materially
different from the consideration of each individual
contract.
●
The Company does
not evaluate a contract for a significant financing component if
payment is expected within one year or less from the transfer of
the promised items to the customer.
●
The Company
generally expenses sales commissions when incurred when the
amortization period would have been one year or less. These costs
are recorded within selling, general and administrative
expenses.
NOTE 3. DEBT
Debt
and notes payable to related party consist of the following (in
thousands):
|
|
|
|
|
Note payable
– asset purchase agreement (a)
|
$
360
|
$
421
|
|
Note payable
– related party (b)
|
2,886
|
1,170
|
|
Notes payable
(c)
|
515
|
519
|
|
Total
debt
|
3,761
|
2,110
|
|
Less current
portion
|
(3,297
)
|
(1,220
)
|
|
Total long term
debt
|
$
464
|
$
890
|
(
a)
As part of a prior
acquisition, the Company was subject to certain earn-out obligation
payments of up to $2,410,000 over an 18-month period from January
15, 2010 through July 31, 2011, based upon the achievement of
certain revenue performance targets. The earn-out was payable fifty
percent in cash and fifty percent in common stock of the Company at
the rate of one share for every $0.15 earn-out payable. The Company
had recorded $842,606 in its accounts payable as of December 31,
2014 due to a portion of earn-out obligations being met. In June
2015, the Company entered into a promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) to SOAdesk. The
maturity date of the note was December 31, 2015 with an annual
interest rate of 10%. Through a series of amendments, the maturity
date was extended to December 31, 2017 and two milestone payments
of $62,500, to be applied to outstanding interest and then
principal, payable on June 1, 2017 and December 1, 2017,
respectively, were added. In April 2017, the maturity date was
extended to January 1, 2019 and two milestone payments of $62,500,
to be applied to outstanding interest and then principal, payable
on June 1, 2018 and December 1, 2018, respectively, were added. As
such, the Company has reclassed this debt to long term debt as of
December 31, 2017. At December 31, 2017, the Company was indebted
to SOAdesk for $421,303 in principal and approximately $43,000 in
interest. At September 30, 2018, the Company was indebted to
SOAdesk for $360,580 in principal and approximately $8,000 in
interest and the principal has been reclassed to short term
debt.
(b)
From time to time
during 2017 through 2018, the Company entered into several short
term notes payable with John Steffens, the Company’s Chairman
of the Board, for various working capital needs. The notes bear an
interest rate of 10% with a maturity date of June 30, 2018. In June
2018, all outstanding notes were amended to a new maturity date of
December 31, 2018. The Company is obligated to repay the notes with
the collection of any accounts receivable. At December 31, 2017,
the Company was indebted to Mr. Steffens in the approximate amount
of $1,170,000 of principal and $75,000 of interest. At September
30, 2018, the Company was indebted to Mr. Steffens in the
approximate amount of $2,886,000 of principal and $220,000 of
interest.
(c)
The Company has
issued a series of short-term unsecured promissory notes with
private lenders, which provide for short term borrowings. The
notes, in the aggregate amount of $50,000 of principal and $76,000
of interest and $50,000 of principal and $85,000 of interest, as of
December 31, 2017 and September 30, 2018, respectively, bear
interest between 10% and 36% per annum.
In March 2012
the Company entered into an unsecured promissory note with a
private lender for $336,000 at an interest rate of 12% and a
maturity date of March 31, 2013. Through a series of amendments,
the note was amended to extend the maturity date to January 31,
2021 and a new principal balance of $498,500. Simultaneously a
$30,000 principal payment was made to the lender. A new repayment
schedule of quarterly principal and interest payments was added
beginning in January 31, 2018 with a payment of $30,000. $25,000
quarterly principal and interest payments are required to be made
beginning on April 30, 2018 through January 31, 2019. $40,000
principal and interest payments are required to be made on
beginning on April 30, 2019 through October 31, 2020. Final payment
of remaining principal and interest is due on January 31, 2021. The
lender agreed to waive certain quarterly payments in fiscal 2018 as
business conditions so warrant without triggering any default and
that any deferred payments would be added to the next quarterly
payment. At December 31, 2017, the Company was indebted to this
private lender in the amount of $468,500 in principal and $21,000
in interest and has been reclassified as long term debt due to its
maturity date of January 31, 2021. At September 30, 2018, the
Company was indebted to this private lender in the amount of
$464,350 in principal and $37,000 in interest.
NOTE 4. INCOME TAXES
The
Company accounts for income taxes in accordance with Financial
Accounting Standards Board (“FASB”) guidance ASC 740
“Income Taxes”. The Company's effective tax rate
differs from the statutory rate primarily due to the fact that no
income tax benefit or expense was recorded for the three and nine
months ended on September 30, 2018 and 2017. As a result of the
Company's recurring losses, the deferred tax assets have been fully
offset by a valuation allowance.
NOTE 5. 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. Potentially dilutive
securities outstanding during the periods presented include stock
options, warrants, restricted stock, convertible preferred stock
and convertible debt.
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. Options, warrants or convertible preferred
stock 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,
warrants or convertible preferred stock were included in the
calculation of loss per share for the three and nine months ended
September 30, 2018 and 2017.
NOTE 6. COMMITMENTS
In June
2014, the Company entered into an amendment with its landlord and
renewed its lease through 2018. In October 2016, the Company
entered into an amendment reducing the square footage being leased
for the remaining term of the lease. Future minimum lease
commitments on operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of September
30, 2018 consisted of only one lease as follows (in
thousands):
NOTE 7. 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. There was no active litigation against the Company as
of September 30, 2018.
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 September 30, 2018.
NOTE 8. SUBSEQUENT EVENTS
In
October 2018, the Company entered into notes payable totaling
$200,000 with Mr. Steffens. The notes bear interest at 10% per
annum. The notes are unsecured and mature on December 31, 2018. The
Company is obligated to repay the notes with the collection of any
accounts receivables.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Cicero,
Inc. (the “Company”) provides desktop activity
intelligence and automation software that helps organizations
isolate issues and automates employee tasks in the contact center
and back office. The Company provides an innovative and unique
combination of application and process integration, automation, and
desktop analytics capabilities, all without changing the underlying
applications or requiring costly application development. The
Company’s software collects desktop activity and application
performance data and tracks business objects across time and
multiple users, as well as measures against defined expected
business process flows, for either analysis or to feed a
third-party application. In addition to software solutions, the
Company also provides technical support, training and consulting
services as part of its commitment to providing customers with
industry-leading solutions. The Company’s consulting team has
in-depth experience in developing successful enterprise-class
solutions as well as valuable insight into the business information
needs of customers in the largest Fortune 500 corporations
worldwide.
The
Company focuses on the activity intelligence and customer
experience management market with emphasis on desktop analytics and
automation with its Cicero Discovery™, Cicero Insight™
and Cicero Automation™ products.
Cicero
Discovery collects desktop activity leveraging a suite of sensors.
Cicero Discovery is a lightweight and configurable tool to collect
activity and application performance data and track business
objects across time and across multiple users as well as measure
against a defined "expected" business process flow, either for
analysis or to feed a third-party application.
Cicero
Insight is a measurement and analytics solution that collects and
presents high value information about quality, productivity,
compliance, and revenue from frontline activity to target areas for
improvement. Powered by Cicero Discovery sensors, Cicero Insight
collects activity data about the applications, when and how they
are used and makes it readily available for analysis and action to
the business community.
Cicero
Automation delivers all the features of the Cicero Discovery
product as well as desktop automation for enterprise contact center
and back office employees. Leveraging existing IT investments
Cicero Automation integrates applications, automates workflow, and
provides control and adaptability at the end user
desktop.
Cicero
Automation also provides Single Sign-On (SSO) and stay signed on
capability. The software maintains a secure credential store that
facilitates single sign-on. Passwords can be reset but are
non-retrievable. Stored interactions can be selectively encrypted
based on the needs of the enterprise. All network communications
are compressed and encrypted for transmission.
The
Company provides an intuitive configuration toolkit for each
product, which simplifies the process of deploying and managing the
solutions in the enterprise. The Company provides a unique way of
capturing untapped desktop activity data using sensors, combining
it with other data sources, and making it readily available for
analysis and action to the business community. The Company also
provides a unique approach that allows companies to organize
functionality of their existing applications to better align them
with tasks and operational processes. In addition, the
Company’s software solutions can streamline end-user tasks
and enable automatic information sharing among line-of-business
siloed applications and tools. It is ideal for deployment in
organizations that need to provide access to enterprise
applications on desktops to iteratively improve business
performance, the user experience, and customer satisfaction. By
leveraging desktop activity data, integrating disparate
applications, automating business processes and delivering a better
user experience, the Company’s products are ideal for the
financial services, insurance, healthcare, governmental and other
industries requiring a cost-effective, proven business performance
and user experience management solution for enterprise
desktops.
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
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:
●
An inability to
obtain sufficient capital either through internally generated cash
or through the use of equity or debt offerings could impair the
growth of our business;
●
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;
●
A loss of key
personnel associated with Cicero Discovery and Cicero Discovery
Automation 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
Discovery and Cicero Discovery Automation;
●
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; and
●
Our business may be
adversely impacted if we do not provide professional services to
implement our solutions.
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 this
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.
RESULTS OF OPERATIONS
The
table below presents information for the three and nine months
ended September 30, 2018 and 2017 (in thousands):
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
Total
revenue
|
$
200
|
$
232
|
$
608
|
$
1,066
|
|
Total cost of
revenue
|
136
|
140
|
410
|
413
|
|
Gross
margin
|
64
|
92
|
198
|
653
|
|
Total operating
expenses
|
480
|
582
|
1,567
|
1,893
|
|
Loss from
operations
|
$
(416
)
|
$
(490
)
|
$
(1,369
)
|
$
(1,240
)
|
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 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.
On
January 1, 2018, we adopted the new accounting standard Accounting
Standards Codification ("ASC") 606, Revenue from Contracts with
Customers and all the related amendments (“the new revenue
standard”) and applied it to all contracts using the modified
retrospective method. According to the new guidance, revenue is
recognized when promised goods or services are transferred to
customers in an amount that reflects the consideration for which
the Company expects to be entitled in exchange for those goods or
services. We completed our review of contracts with our customers
and did not need to record a cumulative effect adjustment to
accumulated deficit upon adoption of the new revenue standard as of
January 1, 2018. Based on the evaluation the Company performed on
its customer contracts, the adoption has not and will not have a
material impact on the Company’s financial position, results
of operations, cash flow, accounting policies, business processes,
internal controls or disclosures.
THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED WITH THE THREE
MONTHS ENDED SEPTEMBER 30, 2017.
Total Revenues
. Total revenues decreased $32,000, or 13.8%,
from $232,000 to $200,000, for the three months ended September 30,
2018 as compared with the three months ended September 30, 2017.
The decrease is due primarily to a decrease in software and
maintenance revenue partially offset by higher services
revenue.
Total Cost of Revenue
. Total cost of revenue decreased by
$4,000, or 2.9%, from $140,000 to $136,000 for the three months
ended September 30, 2018, as compared with the three months ended
September 30, 2017.
Total Gross Margin.
Gross margin was $64,000, or 32.0%, for
the three months ended September 30, 2018, as compared to the gross
margin of $92,000, or 39.7%, for the three months ended September
30, 2017. The decrease in gross margin is primarily due to the
decrease in sales.
Total Operating Expenses
. Total operating expenses decreased
$102,000, or 17.5%, from $582,000 to $480,000 for the three months
ended September 30, 2018, as compared with the three months ended
September 30, 2017. The decrease is primarily attributable to a
decrease in headcount, outside consulting expenses and legal
fees.
Software Products:
Software Product Revenue.
The Company earned $12,000 in
software product revenue for the three months ended September 30,
2018 as compared to $49,000 in software revenue for the three
months ended September 30, 2017, a decrease of $37,000. The
decrease is primarily due to timing of software sales.
Software Product Gross Margin.
The gross margin on software
products for the three months ended September 30, 2018 was 100.0%
as compared with 91.8% for the three months ended September 30,
2017. The increase was due to royalty expense in 2017.
Maintenance:
Maintenance Revenue.
Maintenance revenue for the three
months ended September 30, 2018 decreased by approximately $16,000,
or 11.9%, from $135,000 to $119,000 as compared to the three months
ended September 30, 2017. The decrease in maintenance revenue is
primarily due to the decrease in new software sales in
2018.
Maintenance Gross Margin.
Gross margin on maintenance
products for the three months ended September 30, 2018 was $82,000
or 68.9% compared with $101,000 or 74.8% for the three months ended
September 30, 2017. Cost of maintenance is comprised of personnel
costs and related overhead for the maintenance and support of the
Company’s software products. The decrease in gross margin is
due to the decrease in maintenance revenue.
Services:
Services Revenue.
Services revenue for the three months
ended September 30, 2018 increased by approximately $21,000, or
43.8%, from $48,000 to $69,000 as compared with the three months
ended September 30, 2017. The increase is primarily due to an
increase from new services performed on existing
customers.
Services Gross Margin Loss.
Services gross margin loss was
$30,000 or 43.5% for the three months ended September 30, 2018
compared with gross margin loss of $54,000 or 112.5% for the three
months ended September 30, 2017. The decrease in gross margin loss
was primarily attributable to an increase in services
revenue.
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 September 30, 2018 decreased by approximately
$34,000, or 35.8%, from $95,000 to $61,000 as compared with the
three months ended September 30, 2017. The decrease is primarily
attributable to a decrease in headcount and lower outside
consulting expenses.
Research and Development.
Research and product development
expenses primarily include personnel costs for product developers
and product documentation and related overhead. Research and
development expense decreased by approximately $11,000, or 4.2%,
from $261,000 to $250,000 for the three months ended September 30,
2018 as compared to the three months ended September 30, 2017. The
decrease in research and development costs for the quarter is
primarily due to a decrease in headcount and lower outside
consulting expenses.
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. General and
administrative expenses for the three months ended September 30,
2018 decreased by approximately $57,000, or 25.2%, from $226,000 to
$169,000 as compared to the three months ended September 30, 2017.
The decrease is primarily due to a decrease in headcount and lower
corporate insurance and legal expenses.
Provision for Taxes.
The Company’s effective income
tax rate differs from the statutory rate primarily because an
income tax expense/benefit was not recorded as a result of the
losses in the third quarter of 2018 and 2017. As a result of the
Company’s recurring losses, the deferred tax assets have been
fully offset by a valuation allowance.
Net Loss
. The Company recorded a net loss of $505,000 for
the three months ended September 30, 2018 as compared to a net loss
of $567,000 for the three months ended September 30, 2017. The
decrease in net loss is primarily due to the decrease operating
expenses partially offset by the decrease in total
revenue.
NINE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2017.
Total Revenues
. Total revenues decreased $458,000, or 43.0%,
from $1,066,000 to $608,000, for the nine months ended September
30, 2018 as compared with the nine months ended September 30, 2017.
The decrease is due primarily to a decrease in software revenue
partially offset by higher services revenue.
Total Cost of Revenue
. Total cost of revenue decreased
$3,000, or 0.7%, from $413,000 to $410,000 for the nine months
ended September 30, 2018, as compared with the nine months ended
September 30, 2017. The decrease is primarily due to a decrease in
outside consulting expenses.
Total Gross Margin.
Gross margin was $198,000, or 32.6%, for
the nine months ended September 30, 2018, as compared to the gross
margin of $653,000, or 61.3%, for the nine months ended September
30, 2017. The decrease in gross margin is primarily due to the
decrease in sales.
Total Operating Expenses
. Total operating expenses decreased
$326,000, or 17.2%, from $1,893,000 to $1,567,000 for the nine
months ended September 30, 2018, as compared with the nine months
ended September 30, 2017. The decrease is primarily attributable to
a decrease in headcount, outside consulting expenses, corporate
insurance and legal fees.
Software Products:
Software Product Revenue.
The Company earned $34,000 in
software product revenue for the nine months ended September 30,
2018 as compared to $525,000 in software revenue for the nine
months ended September 30, 2017, a decrease of $491,000. The
decrease is primarily due to a large license sale in first quarter
2017 and the absence of a similar license sale in first quarter
2018.
Software Product Gross Margin.
The gross margin on software
products for the nine months ended September 30, 2018 was 100% as
compared to 99% for the three months ended September 30,
2017.
Maintenance:
Maintenance Revenue.
Maintenance revenue decreased $16,000,
or 4.2%, from $385,000 to $369,000 for the nine months ended
September 30, 2018, as compared with the nine months ended
September 30, 2017. The decrease is primarily due to lower license
sales in fiscal 2018.
Maintenance Gross Margin.
Gross margin on maintenance was
$251,000 or 68.0% for the nine months ended September 30, 2018 as
compared with $271,000 or 70.4% for the nine months ended September
30, 2017. Cost of maintenance is comprised of personnel costs and
related overhead for the maintenance and support of the
Company’s software products. The decrease in gross margin
percentage is due to the decrease in maintenance
revenue.
Services:
Services Revenue.
Services revenue for the nine months ended
September 30, 2018 increased by approximately $49,000, or 31.4%,
from $156,000 to $205,000 as compared with the nine months ended
September 30, 2017. The increase is primarily due to an increase
from new services performed on existing customers.
Services Gross Margin Loss.
Services gross margin loss was
$87,000 or 42.4% for the nine months ended September 30, 2018
compared with gross margin loss of $139,000 or 89.1% for the nine
months ended September 30, 2017. The decrease in gross margin loss
was primarily attributable to an increase in services
revenue.
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 nine
months ended September 30, 2018 decreased by approximately $25,000,
or 8.3%, from $303,000 to $278,000 as compared with the nine months
ended September 30, 2017. The decrease is primarily attributable to
a decrease in commissions and lower outside consulting
expenses.
Research and Development.
Research and product development
expenses primarily include personnel costs for product developers
and product documentation and related overhead. Research and
development expense decreased by approximately $73,000, or 8.9%,
from $816,000 to $743,000 for the nine months ended September 30,
2018 as compared to the nine months ended September 30, 2017. The
decrease in research and development costs is primarily due to a
decrease in headcount and lower outside consulting
expenses.
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. General and
administrative expenses for the nine months ended September 30,
2018 decreased by approximately $228,000, or 29.5%, from $774,000
to $546,000 as compared to the nine months ended September 30,
2017. The decrease is primarily due to a decrease in headcount and
lower outside consulting, corporate insurance and legal
fees.
Provision for Taxes.
The Company’s effective income
tax rate differs from the statutory rate primarily because an
income tax expense/benefit was not recorded as a result of the
losses in the first nine months of 2018 and 2017. As a result of
the Company’s recurring losses, the deferred tax assets have
been fully offset by a valuation allowance.
Net Loss
. The Company recorded a net loss of $1,595,000 for
the nine months ended September 30, 2018 as compared to a net loss
of $1,557,000 for the nine months ended September 30, 2017. The
increase in net loss is primarily due to the decrease in total
revenue partially offset by the decrease in operating expenses and
lower interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Cash
and cash equivalents remained constant at $56,000 at September 30,
2018 and December 31, 2017, respectively. The collections of
accounts receivable from year end, revenue generated in the first
nine months of 2018 and short term borrowings were offset by
expenses in the first nine months of 2018.
Net cash used by Operating Activities.
Cash used by
operations for the nine months ended September 30, 2018 was
$1,649,000 compared to $1,376,000 for the nine months ended
September 30, 2017. Cash used by operations for the nine months
ended September 30, 2018 was primarily due to the net loss from
operations of $1,595,000; an increase in prepaid expenses of
$115,000 and a decrease of accounts payable and accrued expenses of
$240,000 partially offset by depreciation expense of $3,000, stock
option expense of $2,000, bad debt expense of $2,000, a decrease in
accounts receivable of $173,000, and an increase in deferred
revenue of $121,000.
Net cash used in Investing Activities.
The Company had
$2,000 in purchases of equipment in the nine months ended September
30, 2018 and September 30, 2017, respectively.
Net cash generated by Financing Activities.
Net cash
generated by financing activities for the nine months ended
September 30, 2018 was approximately $1,651,000, compared to
$1,355,000 for the nine months ended September 30, 2017. Cash
generated by financing activities for the nine months ended
September 30, 2018 was comprised primarily from short term
borrowings of $1,776,000 partially offset by repayments of
$125,000.
Liquidity
The
Company funded its cash needs during the nine months ended
September 30, 2018 with cash on hand from December 31, 2017, the
revenue generated in the first nine months of 2018, and short term
borrowings.
From
time to time during 2017 through 2018, the Company entered into
several short term notes payable with John Steffens, the
Company’s Chairman of the Board, for various working capital
needs. The notes bear an interest rate of 10% with a maturity date
of June 30, 2018. In June 2018, all outstanding notes were amended
to a maturity date of December 31, 2018. The Company is obligated
to repay the notes with the collection of any accounts receivables.
At December 31, 2017, the Company was indebted to Mr. Steffens in
the approximate amount of $1,170,000 of principal and $75,000 of
interest. At September 30, 2018, the Company was indebted to Mr.
Steffens in the approximate amount of $2,886,000 of principal and
$220,000 of interest.
Although
the Company has incurred a net loss of approximately $1,595,000 for
the nine months ended September 30, 2018, and has a history of
operating losses, management believes that the functionality of the
Company’s products resonates in the marketplace as both
“analytics” and “automation” are topics
often discussed and written about. Further, the Company believes
that its repositioned strategy of leading with a no cost, short,
“proof of concept” evaluation of the software’s
capabilities will shorten the sales cycle and allow for value based
selling to our customers and prospects. The Company anticipates
success in this regard based upon current discussions and active
“proof of concepts” with active partners, customers and
prospects. In August 2017, the Company issued 5,083 shares of its
Series A preferred stock and a Warrant to purchase up to 20,333,620
shares of the Company’s Common Stock, at an exercise price of
$0.07 per share, to its Chairman, John Steffens as part of a
conversion of debt and interest totaling $5,083,405 reducing its
then working capital deficiency. The Company has borrowed
approximately $1,776,000 and $1,873,000 in 2018 and 2017,
respectively. Should the Company be unable to secure customer
contracts that will drive sufficient cash flow to sustain
operations, the Company will be forced to seek additional capital
in the form of debt or equity financing; however, there can be no
assurance that such debt or equity financing will be available on
terms acceptable to the Company or at all. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern. The condensed consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the
Company be unable to continue 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.