Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark
one)
[X]
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended September 30, 2017.
[
]
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)
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(Zip
Code)
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(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
X NO _
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large accelerated filer
|
☐
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Accelerated filer
|
☐
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|
Non-accelerated
filer
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☐ (Do not check if a smaller reporting
company)
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Smaller reporting company
|
☒
|
|
|
|
Emerging
growth company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and
post such files).
Yes
☒No ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of Exchange Act).
Yes ☐ No ☒
207,913,541 shares
of common stock, $.001 par value, were outstanding as of November
10, 2017.
Cicero Inc.
Index
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PART I. Financial Information
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Page
Number
|
|
|
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Item 1.
Condensed Consolidated Financial Statements
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3
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|
|
|
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Condensed
Consolidated Balance Sheets as of September 30, 2017 (unaudited)
and December 31, 2016
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3
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended September 30, 2017 and 2016 (unaudited)
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4
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|
|
|
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Condensed
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2017 and 2016 (unaudited)
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5
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|
|
|
|
Condensed
Consolidated Statement of Stockholders’ Deficit as of
September 30, 2017 (unaudited)
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6
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|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
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7
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|
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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14
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|
|
|
|
Item 3.
Quantitative and Qualitative Disclosures about Market
Risk
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21
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|
|
|
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Item 4.
Controls and Procedures
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21
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|
|
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PART II. Other Information
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22
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|
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Item 1.
Legal Proceedings
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22
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|
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Item
1A. Risk Factors
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22
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|
|
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
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22
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|
|
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Item 3.
Defaults Upon Senior Securities
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22
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Item 4.
Mine Safety Disclosures
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22
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Item 5.
Other Information
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22
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|
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Item 6.
Exhibits
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22
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SIGNATURE
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23
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Part
I. Financial Information
Item
1. Condensed Consolidated Financial Statements
CICERO
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share amounts)
|
|
September 30,
|
December 31,
|
|
|
2017
|
2016
|
|
ASSETS
|
(unaudited)
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$68
|
$91
|
|
Trade
accounts receivable
|
16
|
278
|
|
Prepaid
expenses and other current assets
|
94
|
34
|
|
Total
current assets
|
178
|
403
|
|
Property
and equipment, net
|
6
|
9
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|
Total
assets
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$184
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$412
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
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|
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Liabilities:
|
|
|
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Short-term
debt
|
$740
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$5,483
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Accounts
payable
|
1,068
|
1,032
|
|
Accrued
expenses:
|
|
|
|
Salaries,
wages, and related items
|
1,662
|
1,529
|
|
Accrued
interest
|
164
|
2,164
|
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Other
|
585
|
589
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|
Deferred
revenue
|
330
|
748
|
|
Total
current liabilities
|
4,549
|
11,545
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|
Long
term debt (Note 2)
|
890
|
--
|
|
Total
liabilities
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5,439
|
11,545
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|
|
|
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Commitments
and Contingencies (Note 6 and 7)
|
|
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Stockholders'
deficit:
|
|
|
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Convertible preferred stock, $0.001 par value, 10,000,000 shares
authorized
|
|
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5,083
Series A shares issued and outstanding at September 30,2017. No
shares issued and
|
--
|
--
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|
outstanding
at December 31, 2016
|
|
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Common
stock, $0.001 par value, 600,000,000 shares
authorized,
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208
|
192
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207,913,541 issued and outstanding at September
30, 2017 and 192,253,005 issued
|
|
|
|
and
outstanding at December 31, 2016
|
|
|
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Additional
paid-in capital
|
253,691
|
246,272
|
|
Accumulated
deficit
|
(259,154)
|
(257,597)
|
|
Total
stockholders' deficit
|
(5,255)
|
(11,133)
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|
Total
liabilities and stockholders' deficit
|
$184
|
$412
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 3
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
|
|
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
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||
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2017
|
2016
|
2017
|
2016
|
|
Revenue:
|
|
|
|
|
|
Software
|
$49
|
$11
|
$525
|
$34
|
|
Maintenance
|
135
|
124
|
385
|
769
|
|
Services
|
48
|
82
|
156
|
167
|
|
Total operating
revenue
|
232
|
217
|
1,066
|
970
|
|
|
|
|
|
|
|
Cost of
revenue:
|
|
|
|
|
|
Software
|
4
|
--
|
4
|
--
|
|
Maintenance
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34
|
46
|
114
|
144
|
|
Services
|
102
|
96
|
295
|
337
|
|
Total cost of
revenue
|
140
|
142
|
413
|
481
|
|
|
|
|
|
|
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Gross
margin
|
92
|
75
|
653
|
489
|
|
|
|
|
|
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Operating
expenses:
|
|
|
|
|
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Sales and
marketing
|
95
|
84
|
303
|
415
|
|
Research and
product development
|
261
|
269
|
816
|
862
|
|
General and
administrative
|
226
|
197
|
774
|
642
|
|
Total operating
expenses
|
582
|
550
|
1,893
|
1,919
|
|
Loss from
operations
|
(490)
|
(475)
|
(1,240)
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(1,430)
|
|
|
|
|
|
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Other
income/(expense):
|
|
|
|
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Interest
expense
|
(77)
|
(114)
|
(317)
|
(329)
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|
Total
other income/(expense)
|
(77)
|
(114)
|
(317)
|
(329)
|
|
|
|
|
|
|
|
|
|
|
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Net
loss
|
$(567)
|
$(589)
|
$(1,557)
|
$(1,759)
|
|
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
|
207,914
|
192,253
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197,588
|
192,253
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 4
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Nine Months
Ended
September
30,
|
|
|
|
2017
|
2016
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$(1,557)
|
$(1,759)
|
|
Adjustments to
reconcile net loss to net cash used by operating
activities:
|
|
|
|
Depreciation and
amortization
|
5
|
5
|
|
Stock
compensation expense
|
3
|
2
|
|
Amortization
of debt discount
|
--
|
200
|
|
Changes in assets
and liabilities:
|
|
|
|
Trade accounts
receivable
|
262
|
213
|
|
Prepaid expenses
and other current assets
|
(60)
|
167
|
|
Accounts payable
and accrued expenses
|
389
|
(328)
|
|
Deferred
revenue
|
(418)
|
58
|
|
Net cash used by
operating activities
|
(1,376)
|
(1,442)
|
|
|
|
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Cash flows from
investing activities:
|
|
|
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Purchases of
equipment
|
(2)
|
(3)
|
|
Net
cash used by investing activities
|
(2)
|
(3)
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Borrowings under
debt
|
1,375
|
833
|
|
Repayments of
debt
|
(20)
|
(4)
|
|
Net cash generated
by financing activities
|
1,355
|
829
|
|
Net decrease in
cash
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(23)
|
(616)
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|
Cash:
|
|
|
|
Beginning of
period
|
91
|
1,009
|
|
End of
period
|
$68
|
$393
|
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
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.
Page 5
CICERO INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
DEFICIT
(in thousands, except share amounts)
|
|
Common
Stock
|
Preferred
Stock
|
|
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Accumulated
(Deficit)
|
Total
|
|
Balance at December
31, 2016
|
192,253,005
|
$192
|
--
|
--
|
$246,272
|
$(257,597)
|
$(11,133)
|
|
Options issued as
compensation
|
|
|
|
|
3
|
|
3
|
|
Common Stock issued
for conversion of debt/interest
|
15,660,536
|
16
|
|
|
2,333
|
|
2,349
|
|
Series A Preferred
Stock issued for conversion of debt/interest
|
|
|
5
|
--
|
5,083
|
|
5,083
|
|
Net
loss
|
|
|
|
|
|
(1,557)
|
(1,557)
|
|
Balance at
September 30, 2017 (unaudited)
|
207,913,541
|
$208
|
5
|
--
|
$253,691
|
$(259,154)
|
$(5,255)
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 6
CICERO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The
accompanying condensed consolidated financial statements for the
three months ended September 30, 2017 and 2016 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 condensed financial statements and notes thereto contained
in Cicero Inc.'s (the "Company") Annual Report on Form 10-K for the
year ended December 31, 2016, filed with the SEC on March 31, 2017.
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
The
accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company incurred an operating loss
of approximately $3,908,000 for the year ended December 31, 2016,
and has a history of operating losses. For the nine months ended
September 30, 2017, the Company incurred a net loss of $1,557,000
and had a working capital deficiency of $4,371,000 as of September
30, 2017. In August 2017, the Company issued 5,083 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 improving its working capital
deficiency. Management
believes that its product’s functionality resonates in the
marketplace as both “analytics” and
“automation” are topics often discussed and written
about. Further, the Company believes that its repositioned strategy
of expanding the indirect channel with more resale and OEM
partners, 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 with active
partners, customers and prospects. The Company has borrowed
$1,375,000 and $833,000 in 2017 and 2016, 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.
Page 7
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 Company did not issue any stock options in the first nine
months of 2017. The Company recognized stock-based compensation
expense of $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 as of September 30, 2017.
The
following table sets forth certain information as of September 30,
2017 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.
|
|
Shares
|
|
Outstanding on
December 31, 2016
|
2,832,212
|
|
Granted
|
--
|
|
Exercised
|
--
|
|
Forfeited
|
(1,115,360)
|
|
Outstanding on
September 30, 2017
|
1,716,852
|
|
|
|
|
Weighted average
exercise price of outstanding options
|
$0.08
|
|
Aggregate Intrinsic
Value
|
$0
|
|
Shares available
for future grants on September 30, 2017
|
2,783,148
|
|
|
|
|
Weighted average of
remaining contractual life
|
4.1
|
Recent Accounting Pronouncements
The
FASB issued ASU 2016-09, Improvements to Employee Share-Based
Payment Accounting, which simplifies several aspects of the
accounting for share-based payment award transactions including (a)
income tax consequences; (b) classification of awards as either
debt or equity liabilities; and (c) classification on the statement
of cash flows. The amendments are effective for public business
entities for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. The Company has
adopted this ASU as of January 1, 2017. The primary amendment
impacting the Company's financial statements is the requirement for
excess tax benefits or shortfalls on the exercise of stock-based
compensation awards to be presented in income tax expense in the
Consolidated Statements of Income during the period the award is
exercised as opposed to being recorded in Additional paid-in
capital on the Consolidated Balance Sheets. The excess tax benefit
or shortfall is calculated as the difference between the fair value
of the award on the date of exercise and the fair value of the
award used to measure the expense to be recognized over the service
period. Changes are required to be applied prospectively to all
excess tax benefits and deficiencies resulting from the exercise of
awards after the date of adoption. The ASU requires a "modified
retrospective" approach application for excess tax benefits that
were not previously recognized in situations where the tax
deduction did not reduce current taxes payable. For the nine-month
period ended September 30, 2017, the amount is immaterial. As the
end result is dependent on the future value of the Company's stock
as well as the timing of employee exercises, the amount of future
impact cannot be quantified at this time.
Page 8
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments, standard that 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
is effective for us in our first quarter of fiscal 2018 and earlier
adoption is permitted. We are currently evaluating the effect that
the updated standard will have 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
will be permitted for all companies and organizations upon issuance
of the standard. 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 7 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.
In
January 2016, the FASB issued ASU 2016-01 Financial Instruments
– Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities, that will enhance the
Company’s reporting through the updating of the recognition,
measurement, presentation, and disclosure of financial instruments.
The new standard is effective for financial statements issued for
annual periods beginning after December 15, 2017, and interim
periods within those annual periods. Earlier adoption for public
companies is permitted for interim and annual reporting periods as
of the beginning of the fiscal year of adoption. The Company does
not believe the adoption of this standard will have a material
impact on its consolidated financial statements.
In May
2014, the FASB issued ASU 2014-09 Revenue from Contracts with
Customers (Topic 606) Section A—Summary and Amendments that
Create Revenue from Contracts with Customers (Topic 606) and Other
Assets and Deferred Costs—Contracts with Customers (Subtopic
340-40) The new guidance will replace most current U.S. GAAP
guidance on this topic and eliminate most industry-specific
guidance. 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.
This guidance will be effective for the Company beginning January
1, 2018 and can be applied either retrospectively to each period
presented or as a cumulative-effect adjustment as of the date of
adoption. The Company has not yet selected a transition method and
is evaluating the impact of adopting this new accounting standard
update on the consolidated financial statements and related
disclosures. We expect to identify similar performance obligations
under ASC 606 as compared with deliverables and separate units of
account previously identified. As a result, we expect timing of our
revenue to be very similar to how we record revenue
currently.
Page 9
NOTE 2. DEBT
Debt
and notes payable to related party consist of the following (in
thousands):
|
|
September
30,
2017
|
December
31,
2016
|
|
Note payable
– asset purchase agreement (a)
|
$421
|
$1,518
|
|
Note payable
– related parties (b)
|
690
|
2,879
|
|
Notes payable
(c)
|
519
|
1,086
|
|
Total
debt
|
1,630
|
5,483
|
|
Less current
portion
|
(740)
|
(5,483)
|
|
Total long term
debt
|
$890
|
$--
|
(a)
In January 2010,
the Company entered into an unsecured convertible promissory note
with SOAdesk for $700,000 with an annual interest rate of 5%. The
note was originally scheduled to mature on March 31, 2010 but was
subsequently amended and through a series of amendments, the
maturity date was extended to June 30, 2015. In June 2015, the note
was amended and the maturity date was extended to June 30, 2017. In
June 2015, the note was amended so that the note is convertible
into shares of the Company’s common stock at the rate of one
share for every $0.15 of principal and interest due under the note.
The note was further amended that should the Company’s
earnings before interest, taxes, depreciation and amortization
(“EBITDA”) exceed $1,000,000 in either 12 month period
beginning June 30, 2015 and June 30, 2016, respectively, then the
Company shall repay, in cash, a portion of the outstanding
principal of the note at the rate of $0.50 for each $1.00 that
exceeds the EBITDA threshold. The note is convertible at the
holder’s option at any time or at maturity. In July 2015, the
Company paid $25,000 toward the principal amount of the note. At
December 31, 2016, the Company was indebted to SOAdesk in the
amount of $675,000 in principal and $242,000 in interest. On June
30, 2017, the Company issued 6,224,178 common shares of its stock
to convert its total obligation of $675,000 of principal and
$258,627 of interest. This is a related party
transaction.
As part
of a prior acquisition, the Company was obligated 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%. In December 2015, the maturity
date was extended to December 31, 2016. In December 2016, 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. At
December 31, 2016, the Company was indebted to SOAdesk for $421,303
in principal and approximately $63,000 in interest. At September
30, 2017, the Company was indebted to SOAdesk for $421,303 in
principal and approximately $32,000 in interest.
The
Company also entered into a convertible promissory note with
SOAdesk for fifty percent of the earn-out payable ($421,303) with a
maturity date of June 30, 2017 that was non-interest bearing. The
note is only convertible into shares of the Company’s common
stock at the rate of one share for every $0.15 of principal due
under the note. The note is convertible at the holder’s
option at any time or at maturity. At December 31, 2016, the
Company was indebted to SOAdesk for $421,303 in principal. On June
30, 2017, the Company issued 2,808,687 common shares of its stock
to convert its total obligation of $421,303 of
principal.
Page
10
(b)
From time to time
during 2015 through 2017, 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 vary
from non-interest bearing to interest rate of 12% with a maturity
date of December 31, 2015. The Company is obligated to repay the
notes with the collection of any accounts receivables. The Company
had repaid $170,000 in principal as of December 31, 2015. In
December 2015, the maturity dates were extended to December 31,
2016. At December 31, 2016, the Company was indebted to Mr.
Steffens in the approximate amount of $2,879,000 of principal and
$1,380,000 of interest. In December 2016, the maturity dates were
extended to June 30, 2017. Additionally, notes totaling $2,269,000
that were previously non-interest bearing were amended to an annual
interest rate of 10%. In August 2017, the Company issued 5,083
shares of its Series A preferred stock and warrants to purchase up
to 20,333,620 shares of the Company’s common stock at an
excise price of $0.07 per share to convert the total obligation of
$3,544,500 of principal and $1,538,905 of interest. At September
30, 2017, the Company was indebted to Mr. Steffens in the
approximate amount of $690,500 of principal and $51,000 of
interest.
In July
and August 2017, the Company entered into short-term notes payable
totaling $20,000 with John Broderick, the Chief Executive Officer,
for various working capital needs. The notes bore interest at 10%.
The total principal and interest of $20,000 was paid in full in
July and August 2017, respectively.
(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 $64,000
of interest and $50,000 of principal and $73,000 of interest,
respectively, as of December 31, 2016 and September 30, 2017, bear
interest between 10% and 36% per annum.
In
March 2014, the Company reclassified to short-term debt its
unsecured convertible promissory note with SOAdesk that was entered
into as part of the Asset Purchase Agreement with SOAdesk for
$1,000,000 with an annual interest rate of 5% and a maturity date
of January 14, 2015. In March 2012, SOAdesk elected to convert
$300,000 of the outstanding note balance into 2,000,000 shares of
the Company’s common stock. Through a series of amendments,
the note was amended to extend the maturity date until June 30,
2015. In June 2015, the note was amended to extend the maturity
date until June 30, 2017. The note was further amended that should
the Company’s earnings before interest, taxes, depreciation
and amortization (“EBITDA”) exceed $1,000,000 in either
12 month period beginning June 30, 2015 and June 30, 2016,
respectively, then the Company shall repay, in cash, a portion of
the outstanding principal of the note at the rate of $0.50 for each
$1.00 that exceeds the EBITDA threshold. At December 31, 2016, the
Company was indebted to SOAdesk in the amount of $700,000 in
principal and $277,000 in interest. The note is only convertible
into shares of the Company’s common stock at the rate of one
share for every $0.15 of principal and interest due under the note.
On June 30, 2017, the Company issued 6,627,671 common shares of its
stock to convert its total obligation of $700,000 of
principal and $294,151 of interest.
In June
2014, the Company reclassified to short-term debt its unsecured
promissory note with a private lender that was originally entered
into in March 2012 for $336,000 at an interest rate of 12% and a
maturity date of March 31, 2013. In March 2013, the maturity date
of the note was extended to June 30, 2015. In June 2015, the
maturity date of the note was extended to June 30, 2017, a
repayment schedule of quarterly principal and interest payments of
$12,000 beginning on September 30, 2015 and two milestone payments
of $125,000 on February 28, 2016 and 2017, respectively were added.
In February 2016, the note was amended that the first milestone
payment due on February 29, 2016, was now payable quarterly
beginning February 29, 2016 through November 29, 2016. At December
31, 2016, the Company was indebted to this private lender in the
amount of $336,000 in principal and $137,000 in interest. In August
2017, the note was amended to extend the maturity date to January
31, 2021 and a new principal balance of $468,500. Simultaneously a
$30,000 interest 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 will be made beginning on
April 30, 2017 through January 31, 2019. $40,000 principal and
interest payments will 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. At September 30, 2017, the
Company was indebted to this private lender in the amount of
$468,500 in principal and $7,000 in interest and has been
reclassified as long term debt due to its maturity date of January
31, 2021.
Page
11
NOTE 3. 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, 2017 and 2016, respectively. As a
result of the Company's recurring losses, the deferred tax assets
have been fully offset by a valuation allowance.
NOTE 4. CONVERSION OF DEBT TO EQUITY
On
August 14, 2017, the Company entered into agreement with John L.
Steffens, the Chairman of the Board of Directors, to convert
$3,544,500 of principal amount of debt and $1,538,905 of interest
into 5,083 shares of the Company’s Series A Preferred Stock.
Per the Certificate of Designation, the initial conversion of
preferred stock to common equaled 101,668,101 of common stock of
the Company at a price of $0.05 per share, subject to adjustment
for stock dividends, stock splits and similar events. Additionally,
Mr. Steffens was granted a warrant for 20,333,620 of the
Company’s common shares at a price of $0.07 per share. (See
Note 2). The Company accounted for the transaction pursuant to
Topic ASC 470-50, Modification and Extinguishment of Debt. Due to
the fact that the transaction was with Mr. Steffens, the
Company’s Chairman of the Board, the Company determined that
this was not an arm’s length agreement and as such has
recorded the entire transaction through additional paid in
capital.
The
Series A Preferred Stock ranks senior in preference and priority to
the Company’s common stock with respect to dividend and
liquidation rights and, except as provided in the Certificate of
Designation or otherwise required by law, will vote with the common
stock on an as converted basis on all matters presented for a vote
of the holders of common stock, including directors. The Series A
Preferred Stock is convertible at any time at the option of the
holder at an initial conversion ratio of 20,000 shares of Common
Stock for each share of Series A Preferred Stock. The initial
conversion ratio shall be adjusted in the event of any stock
splits, stock dividends and other recapitalizations. The holders of
the Series A Preferred Stock are entitled to a liquidation
preference of $1,000 per share of Series A Preferred Stock plus any
declared but unpaid dividends upon the liquidation of the Company.
The Series A Preferred Stock may be redeemed by the Company at any
time and must be redeemed by the Company, upon the written request
of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock, after the occurrence of one of
the following events: (x) the Company’s trailing 12 month
EBITDA exceeds $5,000,000, (y) the sale of all, or substantially
all of the assets of the Company, or (z) the sale of all or
substantially all the intellectual property of the Company, which
in the case of “y” or “z” result in net
proceeds to the Company in excess of $6,000,000, at a redemption
price equal to $1,000 plus all declared but unpaid dividends, which
amount will be paid in three annual installments. The approval of
at least two thirds of the holders of Series A Preferred Stock,
voting together as a separate class, is required for: (i) the
merger, sale of all, or substantially all of the assets or
intellectual property, recapitalization, or reorganization of the
Company, unless such action (x) results in net proceeds to the
stockholders of the Company in excess of $5,000,000, and (y) has
received the prior approval of the Board of Directors. (ii) the
authorization or issuance of any equity security having any right,
preference or priority superior to or on parity with the Series A
Preferred Stock. (iii) the redemption, repurchase or acquisition,
directly or indirectly, through subsidiaries or otherwise, of any
equity securities (other than the redemption of the Series A
Preferred Stock) or the payment of dividends or other distributions
on equity securities by the Company (other than on the Series A
Preferred Stock). (iv) any amendment or repeal of any provision of
the Company’s Certificate of Incorporation or Bylaws that
would adversely affect the rights, preferences, or privileges of
the Series A Preferred Stock. and (v) the liquidation, dissolution
or winding up of the business and affairs of the Company, the
effectuation of any Liquidation Event (as defined in Certificate of
Designation), or the consent to any of the foregoing, unless such
action (x) results in net proceeds to the stockholders of the
Company in excess of $5,000,000, and (y) has received the prior
approval of the Board of Directors.
Page
12
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, 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 or warrants 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 or warrants were included in the
calculation of loss per share for the three and nine months ended
September 30, 2017 and 2016.
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, 2017 consisted of only one lease as follows (in
thousands):
|
|
Lease
Commitments
|
|
|
|
|
2017
|
$16
|
|
2018
|
55
|
|
|
$71
|
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.
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, 2017.
NOTE 7. SUBSEQUENT EVENTS
In
October 2017, the Company entered into notes payable totaling
$210,000 with Mr. Steffens. The notes bear interest at 10% per
annum. The notes are unsecured and mature on June 30, 2018. The
Company is obligated to repay the note with the collection of any
accounts receivables.
In
October 2017, the Company entered into short-term notes payable
totaling $18,000 with John Broderick, the Chief Executive Officer,
for various working capital needs. The notes bore interest at 10%.
The total principal and interest of $20,000 was paid in full in
October 2017.
Page
13
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 provide Single Sign-On (SSO) and stay signed on
capability. The software maintains a secure credential store that
facilitates single sign-on. Passwords can be reset but are
non-retrievable. Stored interactions can be selectively encrypted
based on the needs of the enterprise. All network communications
are compressed and encrypted for transmission.
The
Company provides an intuitive configuration toolkit for each
product, which simplifies the process of deploying and managing the
solutions in the enterprise. The Company provides a unique way of
capturing untapped desktop activity data using sensors, combining
it with other data sources, and making it readily available for
analysis and action to the business community. The Company also
provides a unique approach that allows companies to organize
functionality of their existing applications to better align them
with tasks and operational processes. In addition, the
Company’s software solutions can streamline end-user tasks
and enable automatic information sharing among line-of-business
siloed applications and tools. It is ideal for deployment in
organizations that need to provide access to enterprise
applications on desktops to iteratively improve business
performance, the user experience, and customer satisfaction. By
leveraging desktop activity data, integrating disparate
applications, automating business processes and delivering a better
user experience, the Company’s products are ideal for the
financial services, insurance, healthcare, governmental and other
industries requiring a cost-effective, proven business performance
and user experience management solution for enterprise
desktops.
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.
Page
14
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.
Page
15
RESULTS OF OPERATIONS
The
table below presents information for the three and nine months
ended September 30, 2017 and 2016 (in thousands):
|
|
Three months
ended
September
30,
|
Nine months
ended
September
30,
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
Total
revenue
|
$232
|
$217
|
$1,066
|
$970
|
|
Total cost of
revenue
|
140
|
142
|
413
|
481
|
|
Gross
margin
|
92
|
75
|
653
|
489
|
|
Total operating
expenses
|
582
|
550
|
1,893
|
1,919
|
|
Income/(loss) from
operations
|
$(490)
|
$(475)
|
$(1,240)
|
$(1,430)
|
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.
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 term 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. We apply the provisions of
Accounting Standards Codification, or ASC 985-605, Software Revenue
Recognition, to all transactions involving the licensing of
software products. In the event of a multiple element arrangement
for a license transaction, we evaluate the transaction as if each
element represents a separate unit of accounting taking into
account all factors following the accounting standards. When such
estimates are not available, the completed contract method is
utilized. Under the completed contract method, revenue is
recognized only when a contract is completed or substantially
complete. Within the revenue recognition rules pertaining to
software arrangements, 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.
THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED WITH THE THREE
MONTHS ENDED SEPTEMBER 30, 2016.
Total Revenues. Total revenues increased $15,000, or 6.9%,
from $217,000 to $232,000, for the three months ended September 30,
2017 as compared with the three months ended September 30, 2016.
The increase is due primarily to an increase in software and
maintenance revenue partially offset by lower services
revenue.
Total Cost of Revenue. Total cost of revenue decreased
$2,000, or 1.4%, from $142,000 to $140,000 for the three months
ended September 30, 2017, as compared with the three months ended
September 30, 2016. The decrease is primarily due to a decrease in
headcount partially offset by an increase in outside
consulting.
Page
16
Total Gross Margin. Gross margin was $92,000, or 39.7%, for
the three months ended September 30, 2017, as compared to the gross
margin of $75,000, or 34.6%, for the three months ended September
30, 2016. The increase in gross margin is primarily due to the
increase in sales.
Total Operating Expenses. Total operating expenses increased
$32,000, or 5.8%, from $550,000 to $582,000 for the three months
ended September 30, 2017, as compared with the three months ended
September 30, 2016. The increase is primarily attributable to an
increase in headcount and legal fees.
Software Products:
Software Product Revenue. The Company earned $49,000 in
software product revenue for the three months ended September 30,
2017 as compared to $11,000 in software revenue for the three
months ended September 30, 2016, an increase of $38,000. The
increase 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, 2017 and
September 30, 2016 was 91.8 and 100.0%, respectively. The decrease
is due to a new royalty expense on certain software
sales.
Maintenance:
Maintenance Revenue. Maintenance revenue for the three
months ended September 30, 2017 increases by approximately $11,000,
or 8.9%, from $124,000 to $135,000 as compared to the three months
ended September 30, 2016. The increase in maintenance revenue is
primarily due to new software sales in 2017.
Maintenance Gross Margin. Gross margin on maintenance
products for the three months ended September 30, 2017 was $101,000
or 74.8% compared with $78,000 or 62.9% for the three months ended
September 30, 2016. Cost of maintenance is comprised of personnel
costs and related overhead for the maintenance and support of the
Company’s software products. The increase in gross margin is
due to the increase in maintenance revenue and the decrease in cost
of revenue for maintenance services due to a decrease in
headcount.
Services:
Services Revenue. Services revenue for the three months
ended September 30, 2017 decreased by approximately $34,000, or
41.5%, from $82,000 to $48,000 as compared with the three months
ended September 30, 2016. The decrease is primarily due to a
decrease in paid engagements.
Services Gross Margin Loss. Services gross margin loss was
$54,000 or 112.5% for the three months ended September 30, 2017
compared with gross margin loss of $14,000 or 17.1% for the three
months ended June 30, 2016. The increase in gross margin loss was
primarily attributable to a decrease in services revenue and an
increase in cost of services from an increase in
headcount.
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, 2017 increased by approximately
$11,000, or 13.1%, from $84,000 to $95,000 as compared with the
three months ended September 30, 2016. The increase is primarily
attributable to an increase in 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 $8,000, or 3.0%,
from $269,000 to $261,000 for the three months ended September 30,
2017 as compared to the three months ended September 30, 2016. The
decrease in research and development costs for the quarter is
primarily due to a decrease in headcount and a decrease in 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,
2017 increased by approximately $29,000, or 14.7%, from $197,000 to
$226,000 as compared to the three months ended September 30, 2016.
The increase is primarily due to an increase in legal fees and
corporate insurance partially offset by a decrease in rent
expense.
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17
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 2017 and 2016. 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 $567,000 for
the three months ended September 30, 2017 as compared to a net loss
of $589,000 for the three months ended September 30, 2016. The
decrease in net loss is primarily due to the increase in total
revenue partially offset by the increase in operating
expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2016.
Total Revenues. Total revenues increased $96,000, or 9.9%,
from $970,000 to $1,066,000, for the nine months ended September
30, 2017 as compared with the nine months ended September 30, 2016.
The increase is due primarily to an increase in software revenue
partially offset by lower maintenance and services
revenue.
Total Cost of Revenue. Total cost of revenue decreased
$68,000, or 14.1%, from $481,000 to $413,000 for the nine months
ended September 30, 2017, as compared with the nine months ended
September 30, 2016. The decrease is primarily due to a decrease in
headcount, rent and travel expenses partially offset by an increase
in outside consulting expenses.
Total Gross Margin. Gross margin was $653,000, or 61.3%, for
the nine months ended September 30, 2017, as compared to the gross
margin of $489,000, or 50.4%, for the nine months ended September
30, 2016. The increase in gross margin is primarily due to the
increase in sales and decrease in cost of revenue.
Total Operating Expenses. Total operating expenses decreased
$26,000, or 1.4%, from $1,919,000 to $1,893,000 for the nine months
ended September 30, 2017, as compared with the nine months ended
September 30, 2016. The decrease is primarily attributable to a
decrease in headcount, rent and trade show expenses partially
offset by an increase in outside consulting and legal
fees.
Software Products:
Software Product Revenue. The Company earned $525,000 in
software product revenue for the nine months ended September 30,
2017 as compared to $34,000 in software revenue for the nine months
ended September 30, 2016, an increase of $491,000. The increase is
primarily due to additional licenses ordered from a current
customer.
Software Product Gross Margin. The gross margin on software
products for the nine months ended September 30, 2017 and September
30, 2016 was 99.2% and 100.0%, respectively.
Maintenance:
Maintenance Revenue. Maintenance revenue for the nine months
ended September 30, 2017 decreased by approximately $384,000, or
49.9%, from $769,000 to $385,000 as compared to the nine months
ended September 30, 2016. The decrease in maintenance revenue is
primarily due to the cancellation of a maintenance contract in
second quarter 2016.
Maintenance Gross Margin. Gross margin on maintenance
products for the nine months ended September 30, 2017 was $271,000
or 70.4% compared with $625,000 or 81.3% for the nine months ended
September 30, 2016. 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 partially offset by the
decrease in cost of revenue for maintenance services.
Services:
Services Revenue. Services revenue for the nine months ended
September 30, 2017 decreased by approximately $11,000, or 6.6%,
from $167,000 to $156,000 as compared with the nine months ended
September 30, 2016. The decrease is primarily due to a decrease in
paid engagements.
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Services Gross Margin Loss. Services gross margin loss was
$139,000 or 89.1% for the nine months ended September 30, 2017
compared with gross margin loss of $171,000 or 101.8% for the nine
months ended September 30, 2016. The decrease in gross margin loss
was primarily attributable to a decrease in cost of services from a
decrease in headcount partially offset by a decrease 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, 2017 decreased by approximately
$112,000, or 27.0%, from $415,000 to $303,000 as compared with the
nine months ended September 30, 2016. The decrease is primarily
attributable to a decrease in headcount and trade show expenses
partially offset by higher 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 $46,000, or 5.3%,
from $862,000 to $816,000 for the nine months ended September 30,
2017 as compared to the nine months ended September 30, 2016. The
decrease in research and development costs is primarily due to a
decrease in headcount partially offset by an increase in 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,
2017 increased by approximately $132,000, or 20.6%, from $642,000
to $774,000 as compared to the nine months ended September 30,
2016. The increase is primarily due to an increase in 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 2017 and 2016. 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 $1,557,000 for
the nine months ended September 30, 2017 as compared to a net loss
of $1,759,000 for the nine months ended September 30, 2016. The
decrease in net loss is primarily due to the increase in total
revenue and the decrease in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Cash
and cash equivalents decreased to $68,000 at September 30, 2017
from $91,000 at December 31, 2016, a decrease of $23,000. The
decrease is primarily attributable to expenses in the first nine
months of 2017 partially offset by collections of accounts
receivable from year end, revenue generated in the first nine
months of 2017 and short term borrowings.
Net cash used by Operating Activities. Cash used by
operations for the nine months ended September 30, 2017 was
$1,376,000 compared to $1,442,000 for the nine months ended
September 30, 2016. Cash used by operations for the nine months
ended September 30, 2017 was primarily due to the loss from
operations of $1,557,000; an increase in prepaid expenses of
$60,000 and a decrease of deferred revenue of $418,000, partially
offset by depreciation expense of $5,000, stock option expense of
$3,000, a decrease in accounts receivable of $262,000, and an
increase in accounts payable and accrued expenses of
$389,000.
Net cash used in Investing Activities. The Company had
$2,000 in purchases of equipment in the nine months ended September
30, 2017 as compared to $3,000 for the nine months ended September
30, 2016.
Net cash generated by Financing Activities. Net cash
generated by financing activities for the nine months ended
September 30, 2017 was approximately $1,355,000, compared to
$829,000 for the nine months ended September 30, 2016. Cash
generated by financing activities for the nine months ended
September 30, 2017 was comprised primarily from short term
borrowings of $1,375,000 partially offset by repayments of
$20,000.
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19
Liquidity
The
Company funded its cash needs during the nine months ended
September 30, 2017 with cash on hand from December 31, 2016; the
revenue generated in the first nine months of 2017 and short term
borrowings.
From
time to time during 2015 through 2017, the Company entered into
several short term notes payable with Mr. Steffens for various
working capital needs. The notes vary from non-interest bearing to
interest rate of 12% with a maturity date of December 31, 2015. The
Company is obligated to repay the notes with the collection of any
accounts receivables. The Company had repaid $170,000 in principal
as of December 31, 2015. In December 2015, the maturity dates were
extended to December 31, 2016. At December 31, 2016, the Company
was indebted to Mr. Steffens in the approximate amount of
$2,879,000 of principal and $1,380,000 of interest. In December
2016, the maturity dates were extended to June 30, 2017.
Additionally, notes totaling $2,269,000 that were previously
non-interest bearing were amended to an annual interest rate of
10%. In August 2017, the Company issued 5,083 shares of its Series
A preferred stock to convert its total obligation of $3,544,500 of
principal and $1,538,905 of interest. (See Note 4). At September
30, 2017, the Company was indebted to Mr. Steffens in the
approximate amount of $690,500 of principal and $51,000 of
interest.
In
October 2017, the Company entered into notes payable totaling
$210,000 with Mr. Steffens. The notes bear interest at 10% per
annum. The notes are unsecured and mature on June 30, 2018. The
Company is obligated to repay the note with the collection of any
accounts receivables.
The
Company incurred an operating loss of approximately $3,908,000 for
the year ended December 31, 2016, and has a history of operating
losses. For the nine months ended September 30, 2017, the Company
incurred a net loss of $1,557,000 and had a working capital
deficiency of $4,371,000 as of September 30, 2017. 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 improving its working capital
deficiency. Management believes that its product’s
functionality resonates in the marketplace as both
“analytics” and “automation” are topics
often discussed and written about. Further, the Company believes
that its repositioned strategy of expanding the indirect channel
with more resale and OEM partners, 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 with active partners, customers and prospects. The
Company has borrowed $1,375,000 and $833,000 in 2017 and 2016,
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.
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20
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Not
applicable.
Item 4. Controls and Procedures
a)
Evaluation of Disclosure Controls and Procedures.
We
maintain “disclosure controls and procedures,” as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, or the Exchange Act, that are designed to ensure that
information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Our disclosure controls
and procedures have been designed to meet reasonable assurance
standards. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Our
management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of September 30,
2017.
Based
on that evaluation, our Chief Executive Officer and Chief Financial
Officer has concluded that as of September 30, 2017, our disclosure
controls and procedures were effective.
(b) Changes in Internal Controls.
There were
no changes in our internal control over financial reporting that
occurred during the fiscal quarter ended September 30, 2017 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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21
Part II. Other Information
Item 1. Legal Proceedings
Not
Applicable.
Item 1A. Risk Factors
Not
Applicable.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
None.
Item
5. Other Information
None
Item 6. Exhibits
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Exhibit No.
|
|
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 Chief Executive Officer/Chief Financial Officer pursuant to 18
USC § 1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
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22
SIGNATURE
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.
|
|
CICERO
INC.
|
|
|
|
|
|
|
|
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Date: November 14,
2017
|
By:
|
/s/
John P.
Broderick
|
|
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|
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John P.
Broderick
|
|
|
|
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Chief Executive
Officer and Chief Financial Officer
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23