form10q.htm
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, 2008.
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period
from ___________ to __________
Commission
File Number 0-26392
CICERO
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
11-2920559
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S
Employer Identification
Number)
|
|
8000
Regency Parkway, Suite 542, Cary, North Carolina
|
27518
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(919)
380-5000
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. YES x NO
o.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non accelerated filer, or smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o Accelerated
Filer o Non
accelerated filer o Smaller reporting
company ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of Exchange Act).
Yes o No ý
46,642,396
shares of common stock, $.001 par value, were outstanding as of November 3,
2008.
Index
|
PART
I. Financial
Information
|
Page
Number
|
|
|
|
|
|
|
|
|
|
|
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3
|
|
|
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4
|
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5
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6
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|
7
|
|
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|
14
|
|
|
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|
20
|
|
|
|
|
|
21
|
|
|
|
|
PART
II. Other Information
|
21
|
|
|
21
|
|
|
|
|
|
21
|
|
|
|
|
|
21
|
|
|
|
|
|
22
|
|
|
|
|
|
22
|
|
|
|
|
|
22
|
|
|
|
|
|
22
|
|
|
|
|
|
23
|
Part I. Financial Information
Item
1. Financial Statements
CICERO
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
228 |
|
|
$ |
250 |
|
|
Assets
of discontinued operations
|
|
|
76 |
|
|
|
79 |
|
|
Trade
accounts receivable, net
|
|
|
333 |
|
|
|
692 |
|
|
Prepaid
expenses and other current assets
|
|
|
186 |
|
|
|
208 |
|
|
Total
current assets
|
|
|
823 |
|
|
|
1,229 |
|
|
Property
and equipment, net
|
|
|
48 |
|
|
|
22 |
|
|
Total
assets
|
|
$ |
871 |
|
|
$ |
1,251 |
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
702 |
|
|
$ |
1,235 |
|
|
Accounts
payable
|
|
|
2,127 |
|
|
|
2,489 |
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related items
|
|
|
1,048 |
|
|
|
1,002 |
|
|
Other
|
|
|
2,037 |
|
|
|
2,072 |
|
|
Liabilities
of discontinued operations
|
|
|
446 |
|
|
|
455 |
|
|
Deferred
revenue
|
|
|
502 |
|
|
|
108 |
|
|
Total
current liabilities
|
|
|
6,862 |
|
|
|
7,361 |
|
|
Long-term
debt
|
|
|
971 |
|
|
|
1,323 |
|
|
Total
liabilities
|
|
|
7,833 |
|
|
|
8,684 |
|
|
Stockholders' (deficit):
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-- |
|
|
|
-- |
|
|
Common
stock
|
|
|
47 |
|
|
|
44 |
|
|
Additional
paid-in capital
|
|
|
229,909 |
|
|
|
228,858 |
|
|
Accumulated
deficit
|
|
|
(236,929 |
) |
|
|
(236,320 |
) |
|
Accumulated
other comprehensive income/(loss)
|
|
|
11 |
|
|
|
(15 |
) |
|
Net
stockholders' (deficit)
|
|
|
(6,962 |
) |
|
|
(7,433 |
) |
|
Total
liabilities and stockholders' (deficit)
|
|
$ |
871 |
|
|
$ |
1,251 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(unaudited)
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$ |
72 |
|
|
$ |
1 |
|
|
$ |
1,204 |
|
|
$ |
1 |
|
|
Maintenance
|
|
|
249 |
|
|
|
84 |
|
|
|
596 |
|
|
|
202 |
|
|
Services
|
|
|
257 |
|
|
|
302 |
|
|
|
675 |
|
|
|
732 |
|
|
Total
operating revenue
|
|
|
578 |
|
|
|
387 |
|
|
|
2,475 |
|
|
|
935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
4 |
|
|
|
-- |
|
|
|
40 |
|
|
|
-- |
|
|
Maintenance
|
|
|
55 |
|
|
|
94 |
|
|
|
182 |
|
|
|
201 |
|
|
Services
|
|
|
255 |
|
|
|
211 |
|
|
|
605 |
|
|
|
427 |
|
|
Total
cost of revenue
|
|
|
314 |
|
|
|
305 |
|
|
|
827 |
|
|
|
628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
264 |
|
|
|
82 |
|
|
|
1,648 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
233 |
|
|
|
241 |
|
|
|
678 |
|
|
|
572 |
|
|
Research
and product development
|
|
|
160 |
|
|
|
217 |
|
|
|
474 |
|
|
|
475 |
|
|
General
and administrative
|
|
|
338 |
|
|
|
546 |
|
|
|
959 |
|
|
|
1,069 |
|
|
Total
operating expenses
|
|
|
731 |
|
|
|
1,004 |
|
|
|
2,111 |
|
|
|
2,116 |
|
|
Loss
from operations
|
|
|
(467 |
) |
|
|
(922 |
) |
|
|
(463 |
) |
|
|
(1,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(64 |
) |
|
|
(64 |
) |
|
|
(187 |
) |
|
|
(186 |
) |
|
Other
income/(expense)
|
|
|
(22 |
) |
|
|
21 |
|
|
|
41 |
|
|
|
49 |
|
|
Loss
before provision for income taxes
|
|
|
(553 |
) |
|
|
(965 |
) |
|
|
(609 |
) |
|
|
(1,946 |
) |
|
Income
tax provision
|
|
|
-- |
|
|
|
1 |
|
|
|
-- |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(553 |
) |
|
$ |
(966 |
) |
|
$ |
(609 |
) |
|
$ |
(1,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
|
Diluted
loss per share
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,404 |
|
|
|
39,020 |
|
|
|
45,682 |
|
|
|
34,785 |
|
|
Potential
dilutive common shares
|
|
|
52 |
|
|
|
-- |
|
|
|
24 |
|
|
|
-- |
|
|
Diluted
|
|
|
46,456 |
|
|
|
39,020 |
|
|
|
45,706 |
|
|
|
34,785 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
|
|
|
Nine
Months Ended
September
30
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(609 |
) |
|
$ |
(1,947 |
) |
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
12 |
|
|
|
2 |
|
|
Stock
compensation expense
|
|
|
344 |
|
|
|
582 |
|
|
Stock
issuance
|
|
|
15 |
|
|
|
-- |
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
359 |
|
|
|
(99 |
) |
|
Assets
and liabilities – discontinued operations
|
|
|
(6 |
) |
|
|
18 |
|
|
Prepaid
expenses and other assets
|
|
|
22 |
|
|
|
(42 |
) |
|
Accounts
payable and accrued expenses
|
|
|
(56 |
) |
|
|
(21 |
) |
|
Deferred
revenue
|
|
|
394 |
|
|
|
109 |
|
|
Net
cash provided by (used in) operating activities
|
|
|
475 |
|
|
|
(1,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of equipment
|
|
|
(38 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of common stock
|
|
|
-- |
|
|
|
1,023 |
|
|
Borrowings
under credit facility, term loans and notes payable
|
|
|
935 |
|
|
|
156 |
|
|
Repayments
of term loans, credit facility and notes payable
|
|
|
(1,420 |
) |
|
|
(61 |
) |
|
Net
cash provided by (used in) financing activities
|
|
|
(485 |
) |
|
|
1,118 |
|
|
Effect
of exchange rate changes on cash
|
|
|
26 |
|
|
|
(6 |
) |
|
Net
decrease in cash and cash equivalents
|
|
|
(22 |
) |
|
|
(293 |
) |
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
250 |
|
|
|
310 |
|
|
End
of period
|
|
$ |
228 |
|
|
$ |
17 |
|
Non-Cash Investing and
Financing Activities:
During
July 2008, the Company issued 391,696 shares of common stock in exchange for a
$100,000 principal payment on a promissory note.
During
July 2008, the Company issued 195,848 shares of common stock in exchange for a
$50,000 principal payment on a promissory note.
During
July 2008, the Company issued 80,993 shares of common stock to a vendor in
exchange for the settlement of an accounts payable balance of
$20,678.
During
April 2008, the Company issued 623,214 shares of common stock to a vendor in
exchange for the settlement of an accounts payable balance of
$159,106.
During
March, April and July 2008, the Company issued 1,425,137 shares of common stock
in exchange for the conversion of debt and interest of $363,000 to a group of
investors who had acquired the short term promissory note due to SDS Merchant
Fund.
The
accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(in
thousands)
(unaudited)
|
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net
loss
|
|
$ |
(553 |
) |
|
$ |
(966 |
) |
|
$ |
(609 |
) |
|
$ |
(1,947 |
) |
|
Other
comprehensive income/(loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
32 |
|
|
|
(6 |
) |
|
|
26 |
|
|
|
(6 |
) |
|
Comprehensive
loss
|
|
$ |
(521 |
) |
|
$ |
(967 |
) |
|
$ |
(583 |
) |
|
$ |
(1,953 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1. INTERIM FINANCIAL STATEMENTS
The
accompanying financial statements for the three and nine months ended September
30, 2008 and 2007 are unaudited, and have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission
("SEC"). Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles of the United States of America have been condensed or
omitted pursuant to those rules and regulations. Accordingly, these
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in Cicero Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2007,
filed with the SEC on March 31, 2008. The results of operations for
the interim periods shown in this report are not necessarily indicative of
results to be expected for other interim periods or for the full fiscal
year. In the opinion of management, the information contained herein
reflects all adjustments necessary for a fair statement of the interim results
of operations. All such adjustments are of a normal, recurring
nature. Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
The
year-end condensed balance sheet data was derived from audited financial
statements in accordance with the rules and regulations of the SEC, but does not
include all disclosures required for financial statements prepared in accordance
with generally accepted accounting principles of the United States of
America.
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All of the Company's subsidiaries are
wholly owned for the periods presented.
Liquidity
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has incurred losses of
$1,975,000 and $2,997,000 in 2007 and 2006, respectively, and has experienced
negative cash flows from operations for each of the past three years. For the
nine months ended September 30, 2008, the Company incurred a loss of $609,000
and had a working capital deficiency of $6,039,000. The Company’s future
revenues are entirely dependent on acceptance of Cicero® software, which has had
limited success in commercial markets to date. These factors among others raise
substantial doubt about the Company’s ability to continue as a going concern for
a reasonable period of time.
The
financial statements presented herein do not include any adjustments relating to
the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going
concern. In order to address these issues and to obtain adequate
financing for the Company’s operations for the next twelve months, the Company
is actively promoting and expanding its Cicero®-related product line and
continues to negotiate with significant customers who have expressed interest in
the Cicero® software technology. The Company is experiencing difficulty
increasing sales revenue largely because of the inimitable nature of the product
as well as customer concerns about the financial viability of the Company.
Cicero® software is a new “category defining” product in that most Enterprise
Application Integration (EAI) projects are performed at the server level and
Cicero®’s integration occurs at the desktop without the need to open and modify
the underlying code for those applications being integrated. Many companies are
not aware of this new technology or tend to look toward more traditional and
accepted approaches. The Company is attempting to solve the former problem by
improving the market’s knowledge and understanding of Cicero® software through
increased marketing and leveraging its limited number of reference accounts
while enhancing its list of resellers and system integrators to assist in the
sales and marketing process. Additionally, the Company will seek to
raise additional capital or to enter into other strategic transactions to
continue to fund operations and also expects that increased revenues will reduce
its operating losses in future periods, however, there can be no assurance that
management’s plan will be executed as anticipated.
Use
of Accounting Estimates
The
preparation of financial statements in conformity with accounting principals
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from these
estimates.
Stock-Based
Compensation
During
2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004) (“SFAS No. 123R”), “Share-Based Payment”, which addresses
the accounting for stock-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of such
equity instruments. The Company uses the Black-Scholes option-pricing
model to determine the fair-value of stcok-based awards under SFAS No.
123R.
The
Company issued 275,000 options in the first six months of 2008 of which 83,333
were vested immediately. The Company recognized stock-based
compensation expense of $110,000 and $317,000, respectively, for the three and
nine months ended September 30, 2008. The Company also recognized
stock-based compensation expense of $9,000 and $27,000, respectively, for the
three and nine months ended September 30, 2008, for the 549,360 restricted
shares of stock reserved for Mr. John Broderick, the Company’s CEO, in
accordance with his 2007 employment agreement.
The
following table sets forth certain information as of September 30, 2008 about
shares of the Company’s common stock, par value $.001 (the “Common Stock”),
outstanding and available for issuance under the Company’s existing equity
compensation plans: the Cicero Inc. 2007 Employee Stock Option Plan, the Cicero
Inc. (formerly Level 8 Systems, Inc.) 1997 Stock Option Incentive Plan and the
Outside Director Stock Option Plan. The Company’s stockholders
approved all of the Company’s stock-based compensation plans.
|
|
|
Shares
|
|
|
Outstanding
on January 1, 2008
|
|
|
2,529,025 |
|
|
Granted
|
|
|
400,000 |
|
|
Exercised
|
|
|
-- |
|
|
Forfeited
|
|
|
(268,812 |
) |
|
Outstanding
on September 30, 2008
|
|
|
2,660,213 |
|
|
|
|
|
|
|
|
Weighted
average exercise price of outstanding options
|
|
$ |
1.73 |
|
|
Shares
available for future grants on September 30, 2008
|
|
|
1,867,107 |
|
Options
to purchase shares
of common stock are excluded from the
calculation of diluted earnings per share when
their inclusion would have an anti-dilutive effect on the
calculation. No options were included for the three and nine-month
periods ended September 30, 2008 and 2007, respectively. Basic earnings per
common share are computed by dividing net income by the weighted average number
of shares of common stock outstanding during the respective
period. Diluted earnings per common share are computed by dividing
net income by the weighted average number of shares of common stock and dilutive
potential common shares outstanding during the respective period. The weighted
average number of common shares is increased by the number of dilutive potential
common shares issuable on the exercise of options less the number of common
shares assumed to have been purchased with the proceeds from the exercise of the
options pursuant to the treasury stock method; those purchases are assumed to
have been made at the average price of the common stock during the respective
period. The average price of Cicero common stock during the three
months ended September 30, 2008 and 2007 was $0.24 and $0.42,
respectively. The average price of Cicero common stock during the
nine months ended September 30, 2008 and 2007 was $0.20 and $0.72,
respectively.
NOTE
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles”. This Statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy). This
Statement shall be effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The Company believes that the adoption of SFAS No. 162
will not have an effect on the Company’s financial position, results of
operations and cash flows.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133”. This statement requires additional disclosures about the
objectives of the derivative instruments and hedging activities, the method of
accounting for such instruments under SFAS No. 133 and its related
interpretations, and a tabular disclosure of the effects of such instruments and
related hedged items on our financial position, results of operations and cash
flows. SFAS No. 161 is effective for the Company beginning January 1,
2009. The Company is currently assessing the potential impact that
adoption of SFAS No. 161 may have on its financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (SFAS 141R”). SFAS 141R will significantly change the
accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
research and development assets and restructuring costs. In addition,
under SFAS 141R, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income taxes. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. The adoption of the provisions of
SFAS 141R is not expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, An Amendment of ARB No. 51,” SFAS
160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51’s consolidation
procedures for consistency with the requirements of SFAS 141R. SFAS
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The statement shall
be applied prospectively as of the beginning of the fiscal year in which the
statement is initially adopted. The adoption of the provisions of
SFAS 160 is not expected to have a material effect on the Company’s financial
position, results of operations, or cash flows.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – an amendment of FASB Statement 115.”
The statement permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. Most of the
provisions of this statement apply only to entities that elect the fair value
option; however, the amendment to FASB Statement 115, “Accounting for Certain Investments
in Debt and Equity Securities,” applies to all entities with
available-for-sale and trading securities. The Company does not believe adoption
of this statement will have a material impact on its financial
statements.
NOTE
3. SHORT TERM DEBT
Notes
payable, short-term debt, and notes payable to related party consist of the
following (in thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Note
payable, related party (a)
|
|
$ |
94 |
|
|
$ |
49 |
|
|
Notes
payable (b)
|
|
|
608 |
|
|
|
1,186 |
|
|
|
|
$ |
702 |
|
|
$ |
1,235 |
|
|
(a)
|
In
June 2008, the Company entered into a short term note payable with John L.
(Launny) Steffens, the Chairman of the Board of Directors, for various
working capital needs. The Note bears interest at 10% per year and is
unsecured. At September 30, 2008, the Company was indebted to Mr. Steffens
in the amount of $45,000.
|
In
November 2007, the Company entered into a short term note payable with Mr.
Steffens for various working capital needs. The Note bears interest at 6% per
year and is unsecured. At September 30, 2008, the Company was indebted to Mr.
Steffens in the amount of $40,000.
In 2004,
the Company entered into promissory notes with one of the Company’s directors
and the former Chief Information Officer, Anthony Pizi. The notes
bear interest at 12% per annum. At September 30, 2008, the Company was indebted
to Mr. Pizi in the amount of $9,000.
|
(b)
|
The
Company does not have a revolving credit facility and from time to time
has issued a series of short term promissory notes with private lenders,
which provide for short term borrowings, both secured by accounts
receivable and unsecured. In addition, in 2004 the Company
settled certain litigation and agreed to issue a series of promissory
notes to support its obligations in the aggregate principal amount of
$88,000. The notes bear interest between 10% and 36% per
annum.
|
NOTE
4. LONG-TERM DEBT
Long-term
loan and notes payable to related party consist of the following (in
thousands):
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
Term
loan (a)
|
|
$ |
671 |
|
|
$ |
1,021 |
|
|
Note
payable; related party (b)
|
|
|
300 |
|
|
|
300 |
|
|
Other
long-term debt
|
|
|
-- |
|
|
|
2 |
|
|
|
|
$ |
971 |
|
|
$ |
1,323 |
|
|
(a)
|
In
October 2007, the Company, in conjunction with BluePhoenix Solutions,
retired the note payable to Bank Hapoalim and entered into a new note with
BluePhoenix Solutions in the principal amount of $1,021,000 with interest
at LIBOR plus 1% (4.25% at September 30, 2008 and 5.86% at December 31,
2007) maturing in December 2011. Interest is payable
quarterly. Under the terms of the original note, the Company
was to make a principal reduction payment in the amount of $350,000 on
January 30, 2009. The Company and BluePhoenix agreed to accelerate that
principal payment to March and May 2008 in return for a conversion of
$50,000 of principal into 195,848 shares of the Company’s common
stock. In March 2008, the Company paid $200,000 plus accrued
interest. In July 2008, $50,000 of debt was converted into
195,848 shares of the Company’s common stock. The remaining
payment of $100,000 is due January 30,
2009.
|
|
(b)
|
In
October 2007, the Company entered into a long-term note with John L.
(Launny) Steffens, the Chairman of the Board of Directors, as part of the
restructuring of the note payable to Bank Hapoalim. The note
bears interest of 3% and matures in October 2009. At September
30, 2008, the Company was indebted to Mr. Steffens in the amount of
$300,000.
|
NOTE
5. STOCKHOLDER’S EQUITY
In July
2008, the Company issued 80,993 shares of common stock to a vendor for the
settlement of an accounts payable balance of $20,678.
In July
2008, the Company issued 195,848 shares of common stock to BluePhoenix Solutions
in lieu of repayment of $50,000 of debt. An additional 60,000 shares
of common stock were issued to BluePhoenix due to a filing deadline
penalty.
In April
2008, the Company issued 623,214 shares of common stock to a vendor for the
settlement of an accounts payable balance of $159,106.
In March
2008, the Company was notified that a group of investors, including two members
of the Board of Directors, acquired a short term promissory note due SDS
Merchant Fund in the principal amount of $250,000. The note is unsecured and
bears interest at 10% per annum. In March, our Board of Directors approved a
resolution to convert this debt plus accrued interest into common stock of the
Company. In March, April and July 2008, the total principal and interest
amounted to $363,167 and was converted into 1,425,137 shares of common stock, of
which Mr. John Steffens, the Company’s Chairman, acquired 475,141 shares and Mr.
Bruce Miller, also a member of our Board of Directors, acquired 474,998
shares.
In
October 2007, the Company completed a private sale of shares of its common stock
to a group of investors, four of which are members of our Board of Directors.
Under the terms of that agreement, the Company sold 2,169,312 shares of its
common stock for $0.2457 per share for a total of $533,000, receiving cash
proceeds of $383,000 and converting a note in the principal amount of $150,000.
Participating in this consortium were Mr. John L. (Launny) Steffens, the
Company’s Chairman, and Messrs. Bruce Miller, Don Peppers, and Bruce Percelay,
members of the Board. Mr. Steffens converted the principal amount of
his short term notes with the Company of $250,000 for 1,017,501 shares of common
stock. Mr. Miller invested $20,000 for 81,400 shares of common stock,
Mr. Peppers acquired 101,750 shares for a $25,000 investment and Mr. Bruce
Percelay acquired 40,700 shares for a $10,000 investment.
In August
2007, the Company issued 2,756,173 options and recognized $650,000 in
stock-based compensation expense for fiscal 2007. The Company also
recognized $36,000 in stock-based compensation expense for the 549,360
restricted shares of stock reserved for Mr. John Broderick, the Company’s CEO,
in accordance with his 2007 employment agreement.
In
February 2007, the Company completed a private sale of shares of its common
stock to a group of investors, three of which are members of our Board of
Directors. Under the terms of that agreement, the Company sold 3,723,008 shares
of its common stock for $0.1343 per share for a total of $500,000. Participating
in this consortium were Mr. Mark Landis, the Company’s former Chairman, and Mr.
Bruce Miller, who is a Board member. Mr. Landis acquired 74,460 shares for a
$10,000 investment and Mr. Miller acquired 148,920 shares for a $20,000
investment. In May 2007, Mr. John L. (Launny) Steffens was elected
Chairman of the Board of Directors. Prior to his election, Mr.
Steffens had participated in the private sale of shares acquiring 1,006,379
shares for an investment of $135,157.
In
December 2006, the Company completed its Plan of Recapitalization, approved by
its stockholders at a Special Stockholders Meeting held on November 16, 2006.
Results of the Plan included a reverse stock split at a ratio of 100:1; change
of the Company’s name from Level 8 Systems, Inc. to Cicero Inc.; increased the
authorized common stock of the Company from 85 million shares to 215 million
shares; converted existing preferred shares into a new Series A-1
Preferred Stock; converted and cancelled senior reorganization debt in the
aggregate principal amount of $2.3 million into 3,438,473 shares of common
stock; converted the aggregate principal amount of $3.9 million of convertible
bridge notes into 30,508,448 shares of common stock; converted each share of
Series A3 Preferred Stock into 4.489 shares of Series A-1 Preferred Stock;
converted each share of Series B3 Preferred Stock into 75 shares of Series A-1
Preferred Stock; converted each share of Series C Preferred Stock into 39.64
shares of Series A-1 Preferred Stock; converted an aggregate principal amount of
$1.1 million of Series D Preferred Stock, recorded as mezzanine financing, into
53 shares of Series A-1 Preferred Stock; and converted an aggregate principal
amount of $1 million of convertible promissory notes into 1,591 shares of Series
A-1 Preferred Stock. As of September 30, 2008 the Company had 1,544
shares of Series A-1 Preferred Stock outstanding.
NOTE
6. INCOME TAXES
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes." The Company's effective tax rate differs from the statutory rate
primarily due to the fact that no income tax benefit was recorded for the net
loss for the first nine months of fiscal year 2008 or 2007. Because
of the Company's recurring losses, the deferred tax assets have been fully
offset by a valuation allowance.
NOTE
7. LOSS PER SHARE
Basic
loss per share is computed based upon the weighted average number of common
shares outstanding. Diluted earnings/(loss) per share is computed
based upon the weighted average number of common shares outstanding and any
potentially dilutive securities. Potentially dilutive securities
outstanding during the periods presented include stock options, warrants and
preferred stock.
The
following reconciles the weighted average shares used for the basic earnings per
share computation to the shares used for the diluted earnings per share
computation (in thousands):
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Basic
shares
|
|
|
46,404 |
|
|
|
39,020 |
|
|
|
45,682 |
|
|
|
34,785 |
|
|
Effect
of dilution
|
|
|
52 |
|
|
|
-- |
|
|
|
24 |
|
|
|
-- |
|
|
Diluted
shares
|
|
|
46,456 |
|
|
|
39,020 |
|
|
|
45,706 |
|
|
|
34,785 |
|
The
following table sets forth the potential shares that are not included in the
diluted loss per share calculation because to do so would be anti-dilutive for
the periods presented (in thousands):
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Stock
options where the exercise price is greater then the average market price
of common shares
|
|
|
2,608 |
|
|
|
2,801 |
|
|
|
2,636 |
|
|
|
2,801 |
|
|
Warrants
where the exercise price is greater than the average market price of
common shares
|
|
|
422 |
|
|
|
300 |
|
|
|
422 |
|
|
|
300 |
|
|
Preferred
stock, common share equivalent
|
|
|
1,544 |
|
|
|
1,604 |
|
|
|
1,544 |
|
|
|
1,604 |
|
NOTE
8. SEGMENT INFORMATION AND GEOGRAPHIC INFORMATION
Based
upon the current business environment in which the Company operates, the
economic characteristics of its operating segments and management’s view of the
business, a revision in terms of aggregation of its segments was appropriate.
Therefore the segment discussion outlined below clarifies the adjusted segment
structure as determined by management under SFAS No. 131. All prior year amounts
have been restated to conform to the new reporting segment
structure.
Management
makes operating decisions and assesses performance of the Company’s operations
based on one reportable segment, the Software product segment. Prior
to this change the Company had segregated into two separate segments: Desktop
Integration and Messaging. The Messaging business has always been an immaterial
part of the Company’s overall business and generally all its sales efforts are
focused on the Cicero product. As such, the Company has elected to combine the
two products into one reportable segment.
The
Software product segment is comprised of the Cicero® product and the Ensuredmail
product. Cicero® is a business integration software product that
maximizes end-user productivity, streamlines business operations and integrates
disparate systems and applications, while renovating or rejuvenating older
legacy systems by making them usable in the business
processes. Ensuredmail is an encrypted email technology that can
reside on either the server or the desktop.
The table
below presents information about the reported segment for the three and nine
months ended September 30, 2008 and 2007 (in thousands):
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Total
revenue
|
|
$ |
578 |
|
|
$ |
387 |
|
|
$ |
2,475 |
|
|
$ |
935 |
|
|
Total
cost of revenue
|
|
|
314 |
|
|
|
305 |
|
|
|
827 |
|
|
|
628 |
|
|
Gross
margin
|
|
|
264 |
|
|
|
82 |
|
|
|
1,648 |
|
|
|
307 |
|
|
Total
operating expenses
|
|
|
731 |
|
|
|
1,004 |
|
|
|
2,111 |
|
|
|
2,116 |
|
|
Segment
loss
|
|
$ |
(467 |
) |
|
$ |
(922 |
) |
|
$ |
(463 |
) |
|
$ |
(1,809 |
) |
A
reconciliation of total segment loss to loss before provision for income taxes
for the three and nine months ended September 30, 2008 and 2007 (in
thousands):
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Total
segment income/(loss)
|
|
$ |
(467 |
) |
|
$ |
(922 |
) |
|
$ |
(463 |
) |
|
$ |
(1,809 |
) |
|
Interest
and other income/(expense), net
|
|
|
(86 |
) |
|
|
(43 |
) |
|
|
(146 |
) |
|
|
(137 |
) |
|
Total
income/(loss) before income taxes
|
|
$ |
(553 |
) |
|
$ |
(965 |
) |
|
$ |
(609 |
) |
|
$ |
(1,946 |
) |
NOTE
9. CONTINGENCIES
Various
lawsuits and claims have been brought against us in the normal course of our
business.
In
October 2003, we were served with a summons and complaint in Superior Court of
North Carolina regarding unpaid invoices for services rendered by one of our
subcontractors. The amount in dispute was approximately $200,000 and
is included in accounts payable. Subsequent to March 31, 2004, we settled this
litigation. Under the terms of the settlement agreement, we agreed to
pay a total of $189,000 plus interest over a 19-month period ending November 15,
2005. The Company has not made any additional payment and has a remaining
liability of approximately $88,000.
Under the
indemnification clause of the Company’s standard reseller agreements and
software license agreements, the Company agrees to defend the reseller/licensee
against third party claims asserting infringement by the Company’s products of
certain intellectual property rights, which may include patents, copyrights,
trademarks or trade secrets, and to pay any judgments entered on such claims
against the reseller/licensee.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Cicero
Inc. (“we” or the “Company”) is a provider of business integration software that
enables organizations to integrate new and existing information and processes at
the desktop with our Cicero® software product. Business integration
software addresses the emerging need for a company's information systems to
deliver enterprise-wide views of the company's business information processes.
The Company also provides email encryption products that address information and
security compliance from the individual to the enterprise.
In
addition to software products, the Company also provides technical support,
training and consulting services as part of its commitment to providing its
customers industry-leading integration solutions. The Company’s
consulting team has in-depth experience in developing successful
enterprise-class solutions as well as valuable insight into the business
information needs of customers in the Global 5000. We offer services
around our integration and encryption software products.
This
Quarterly Report on Form 10-Q contains forward-looking statements relating to
such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities,
liquidity and capital resources and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause its actual results to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. These risk and uncertainties
include, among others, the following:
|
|
·
|
There
is substantial doubt as to whether we can continue as a going
concern;
|
|
|
·
|
We
have a history of losses and expect that we will continue to experience
losses at least through the fiscal year end of
2008;
|
|
|
·
|
We
develop new and unproven technology and
products;
|
|
|
·
|
We
depend on an unproven strategy for ongoing
revenue;
|
|
|
·
|
Economic
conditions could adversely affect our revenue growth and cause us not to
achieve desired revenue;
|
|
|
·
|
The
so-called “penny stock rule” could make it cumbersome for brokers and
dealers to trade in our common stock, making the market for our common
stock less liquid which could cause the price of our stock to
decline;
|
|
|
·
|
Because
we cannot accurately predict the amount and timing of individual sales,
our quarterly operating results may vary significantly, which could
adversely impact our stock price;
|
|
|
·
|
Loss
of key personnel associated with Cicero® development could adversely
affect our business;
|
|
|
·
|
Different
competitive approaches or internally developed solutions to the same
business problem could delay or prevent adoption of
Cicero®;
|
|
|
·
|
Our
ability to compete may be subject to factors outside our
control;
|
|
|
·
|
The
markets for our products are characterized by rapidly changing
technologies, evolving industry standards, and frequent new product
introductions;
|
|
|
·
|
We
may face damage to the reputation of our software and a loss of revenue if
our software products fail to perform as intended or contain significant
defects;
|
|
|
·
|
We
may be unable to enforce or defend our ownership and use of proprietary
and licensed technology;
|
|
|
·
|
Our
business may be adversely impacted if we do not provide professional
services to implement our
solutions;
|
|
|
·
|
Because
our software could interfere with the operations of customers, we may be
subject to potential product liability and warranty claims by these
customers;
|
|
|
·
|
We
have not paid any cash dividends on our common stock and it is likely that
no cash dividends will be paid in the future;
and
|
|
|
·
|
Provisions
of our charter and bylaws and Delaware law could deter takeover
attempts.
|
Reference
should be made to such factors and all forward-looking statements are qualified
in their entirety by the above cautionary statements. Although we
believe that these forward-looking statements are based upon reasonable
assumptions, we can give no assurance that our goals will be
achieved. Given these uncertainties, readers of 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.
The
Company's results of operations include the operations of the Company and its
subsidiaries.
RESULTS OF
OPERATIONS
The table
below presents information for the three and nine months ended September 30,
2008 and 2007 (in thousands):
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Total
revenue
|
|
$ |
578 |
|
|
$ |
387 |
|
|
$ |
2,475 |
|
|
$ |
935 |
|
|
Total
cost of revenue
|
|
|
314 |
|
|
|
305 |
|
|
|
827 |
|
|
|
628 |
|
|
Gross
margin
|
|
|
264 |
|
|
|
82 |
|
|
|
1,648 |
|
|
|
307 |
|
|
Total
operating expenses
|
|
|
731 |
|
|
|
1,004 |
|
|
|
2,111 |
|
|
|
2,116 |
|
|
Operating
loss
|
|
$ |
(467 |
) |
|
$ |
(922 |
) |
|
$ |
(463 |
) |
|
$ |
(1,809 |
) |
THREE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER
30, 2007.
Total
Revenues. Total revenues increased $191,000, or 49%, from
$387,000 to $578,000, for the three months ended September 30, 2008 as compared
with the three months ended September 30, 2007. This increase is primarily due
to an increase in additional software license revenue and the amortized
maintenance revenue from the addition of a large customer during the second
quarter of 2008.
Total Cost of
Revenue. Total cost of revenue increased $9,000, or 3%, from
$305,000 to $314,000, for the three months ended September 30, 2008 as compared
with the three months ended September 30, 2007. The increase is
primarily attributable to increased professional service headcount and travel
resulting from consulting engagements partially offset by a decrease in employee
stock option expense that was recorded in the third quarter of
2007.
Total Gross
Margin. Gross margin was $264,000, or 45.7%, for the three
months ended September 30, 2008 as compared to the gross margin of $82,000, or
21.2% for the three months ended September 30, 2007. The increase in gross
margin is due to the increase of software license and maintenance revenue for
the quarter ended September 30, 2008.
Total Operating
Expenses. Total operating expenses decreased $273,000, or 27%
from $1,004,000 to $731,000 for the three months ended September 30, 2008, as
compared with the three months ended September 30, 2007. The decrease
in total operating expenses is primarily attributable to a reduction
in stock option expense for 2008 of approximately
$238,000.
Revenue. The
Company has three categories of revenue: software products, maintenance, and
services. Software products revenue is comprised primarily of fees from
licensing the Company's proprietary software products. Maintenance revenue is
comprised of fees for maintaining, supporting, and providing periodic upgrades
to the Company's software products. Services revenue is comprised of fees for
consulting and training services related to the Company's software
products.
The
Company's revenues vary from quarter to quarter, due to market conditions, the
budgeting and purchasing cycles of customers and the effectiveness of the
Company’s sales force. The Company typically does not have any
material backlog of unfilled software orders and product revenue in any quarter
is substantially dependent upon orders received in that quarter. Because the
Company's operating expenses are based on revenue levels that are relatively
fixed over the short term, variations in the timing of the recognition of
revenue can cause significant variations in operating results from quarter to
quarter.
We
generally recognize revenue from software license fees when our obligations to
the customer are fulfilled, which is typically upon delivery or
installation. Revenue related to software maintenance contracts is
recognized ratably over the terms of the contracts. Revenues from
services are recognized on a time and materials basis as the services are
performed and amounts due from customers are deemed collectible and
non-refundable. The revenue recognition rules pertaining to software
arrangements are complicated and certain assumptions are made in determining
whether the fee is fixed and determinable and whether collectability is
probable. Should our actual experience with respect to collections
differ from our initial assessment, there could be adjustments to future
results.
Software
Products.
Software Product
Revenue. Software product revenue for the three months ended
September 30, 2008 increased by approximately $71,000 from $1,000 to $72,000 as
compared to the three months ended September 30, 2007 primarily due to
additional revenues from a large customer added in second quarter
2008.
Software Product Gross
Margins. Gross margin on software products for the three
months ended September 30, 2008 was 94.4% compared with 100% for the three
months ended September 30, 2007. It reflects the accrual of
royalty payments offset by revenues. Cost of software is composed of
royalties to third parties, and to a lesser extent, production and distribution
costs.
Maintenance.
Maintenance
Revenue. Maintenance revenue for the three months ended
September 30, 2008 increased by approximately $165,000, or 196%, from $84,000 to
$249,000 as compared to the three months ended September 30, 2007.
Maintenance Gross
Margin. Gross margin on maintenance products for the three
months ended September 30, 2008 was 77.9% compared with a gross margin loss of
11.9% for the three months ended September 30, 2007. Cost of
maintenance is comprised of personnel costs and related overhead for the
maintenance and support of the Company’s software products. The
increase of gross margin is due to the increase in maintenance revenue and a
reduction in stock compensation expense for 2008.
Services.
Services
Revenue. Services revenue decreased $45,000, or 15%, from
$302,000 to $257,000 for the three months ended September 30, 2008 as compared
with the three months ended September 30, 2007. The decrease in services
revenues is due to the timing of certain consulting services
engagements.
Services Gross
Margin. Services gross margin was 0.8% for the three months
ended September 30, 2008 compared with gross margin of 30.1% for the three
months ended September 30, 2007. The decrease in gross margin was
primarily attributable to the decrease in revenues compounded by 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, 2008 decreased
by approximately $8,000, or 3%, from $241,000 to $233,000 as compared with the
three months ended September 30, 2007. The decrease is primarily
attributable to the reduction in stock option expense for quarter ended
September 30, 2008 compared with the same quarter in 2007.
Research and
Development. Research and product development expenses
primarily include personnel costs for product authors, product developers and
product documentation and related overhead. Research and development expense
decreased by approximately $57,000, or 26%, from $217,000 to $160,000 for the
three months ended September 30, 2008 as compared to the three months ended
September 30, 2007. The decrease in costs for the quarter is primarily due to
the reduction in stock option expense for the quarter ended September 30, 2008
compared with the same quarter in 2007.
General and Administrative.
General and administrative expenses consist of personnel costs for the
legal, financial, human resources, and administrative staff, related overhead,
and all non-allocable corporate costs of operating the Company. Our office is
located in Cary, North Carolina. General and administrative expenses
for the three months ended September 30, 2008 decreased by approximately
$208,000, or 38%, from $546,000 to $338,000 over the same period in the prior
year. The decrease is primarily attributable to a reduction of
$246,000 in stock option expense for the quarter ended September 30, 2008
compared with the same quarter in 2007.
Provision for Taxes. The
Company’s effective income tax rate for continuing operations differs from the
statutory rate primarily because an income tax expense/benefit was not recorded
for the income/loss incurred in the third quarter of 2008 or 2007. Because of
the Company’s recurring losses, the deferred tax assets have been fully offset
by a valuation allowance.
Impact of
Inflation. Inflation has not had a significant effect on the
Company’s operating results during the periods presented.
NINE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER
30, 2007.
Total
Revenues. Total revenues increased $1,540,000, or 165%, from
$935,000 to $2,475,000, for the nine months ended September 30, 2008 as compared
with the nine months ended September 30, 2007. This increase is due to an
increase in software license revenue from a large customer added in the second
quarter 2008 and associated maintenance revenue for the first nine months of
2008 offset by a slight decrease in consulting revenue for the same
period.
Total Cost of
Revenue. Total cost of revenue increased $199,000, or 32%,
from $628,000 to $827,000, for the nine months ended September 30, 2008 as
compared with the nine months ended September 30, 2007. The increase
is primarily attributable to increased headcount and travel resulting from
consulting engagements.
Total Gross
Margin. Gross margin was $1,648,000, or 66.6%, for the nine
months ended September 30, 2008 as compared to the gross margin of $307,000, or
32.8% for the nine months ended September 30, 2007. The increase in gross margin
is due to the increase of software license revenue and associated maintenance
revenue for the nine months ended September 30, 2008.
Total Operating
Expenses. Total operating expenses decreased $5,000, or 0.2%
from $2,116,000 to $2,111,000 for the nine months ended September 30, 2008, as
compared with the nine months ended September 30, 2007. The decrease
in total operating expenses is primarily attributable to a reduction in employee
stock option expense partially offset by additional sales and marketing costs
due to increased headcount and participation at trade shows.
Software
Products.
Software Product
Revenue. Software product revenue for the nine months ended
September 30, 2008 increased by approximately $1,203,000 from $1,000 to
$1,204,000 as compared to the nine months ended September 30, 2007 primarily due
to additional revenues from a large customer added in second quarter
2008.
Software Product Gross
Margins. Gross margin on software products for the nine months
ended September 30, 2008 was 96.7% compared with 100% for the nine months ended
September 30, 2007. Cost of software is composed of royalties
to third parties, and to a lesser extent, production and distribution
costs.
Maintenance.
Maintenance
Revenue. Maintenance revenue for the nine months ended
September 30, 2008 increased by approximately $394,000, or 195%, from $202,000
to $596,000 as compared to the nine months ended
September
30, 2007 primarily due to deferred revenue being recognized from a customer
added in first quarter 2008.
Maintenance Gross
Margin. Gross margin on maintenance products for the nine
months ended September 30, 2008 was 69.5% compared with 0.5% for the nine months
ended September 30, 2007. The increase of gross margin is due to the
increase in maintenance revenue.
Services.
Services
Revenue. Services revenue decreased $57,000, or 8%, from
$732,000 to $675,000 for the nine months ended September 30, 2008 as compared
with the nine months ended September 30, 2007. The decrease in services revenues
is due to the timing of integration projects.
Services Gross
Margin. Services gross margin was 10.4% for the nine months
ended September 30, 2008 compared with gross margin of 41.7% for the nine months
ended September 30, 2007. The decrease in gross margin was primarily
attributable to the decrease in service billings noted above and an increase in
headcount and commissions.
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, 2008 increased by
approximately $106,000, or 19%, from $572,000 to $678,000 as compared with the
nine months ended September 30, 2007. The increase is primarily
attributable to an increase in headcount, increased travel, and greater trade
show participation, offset by a reduction in stock compensation
expense.
Research and
Development. Research and product development expenses
primarily include personnel costs for product authors, product developers and
product documentation and related overhead. Research and development expense
decreased by approximately $1,000, or 0.2%, from $475,000 to $474,000 for the
nine months ended September 30, 2008 as compared to the nine months ended
September 30, 2007.
General and Administrative.
General and administrative expenses consist of personnel costs for the
legal, financial, human resources, and administrative staff, related overhead,
and all non-allocable corporate costs of operating the Company. Our office is
located in Cary, North Carolina. General and administrative expenses
for the nine months ended September 30, 2008 decreased by approximately
$110,000, or 10%, from $1,069,000 to $959,000 over the same period in the prior
year. The decrease is primarily attributable to a decrease in
employee stock option expense.
Provision for Taxes. The
Company’s effective income tax rate for continuing operations differs from the
statutory rate primarily because an income tax benefit was not recorded for the
loss incurred for the nine months ended September 30, 2008 or September 30,
2007. Because of the Company’s recurring losses, the deferred tax assets have
been fully offset by a valuation allowance.
Impact of
Inflation. Inflation has not had a significant effect on the
Company’s operating results during the periods presented.
LIQUIDITY AND CAPITAL
RESOURCES
Cash
Cash and
cash equivalents decreased to $228,000 at September 30, 2008 from $250,000 at
December 31, 2007. The Company used $22,000 of cash for the nine
months ended September 30, 2008.
Net cash provided by (used in)
Operating Activities. Cash provided by operations for the nine
months ended September 30, 2008 was $475,000 compared with $1,398,000 used by
operations for the nine months ended September 30, 2007. Cash
provided by operations for the nine months ended September 30, 2008 was
primarily driven by non-cash charges for stock compensation of approximately
$344,000; the decrease of approximately $359,000 in accounts receivable; and the
increase of deferred revenues from maintenance contracts of
$394,000. These cash inflows were offset by the loss from operations
of approximately $609,000.
Net cash used for Investing
Activities. The Company bought $38,000 worth of equipment during the nine
months ended September 30, 2008.
Net cash provided by (used in)
Financing Activities. Net cash used by financing activities
for the nine months ended September 30, 2008 was approximately $485,000 as
compared with approximately $1,118,000 of net cash provided by financing
activities for the nine months ended September 30, 2007. Cash used by
financing activities for the nine months ended September 30, 2008 was comprised
primarily of repayment of short and long term debt.
Liquidity
The
Company funded its cash needs during the nine months ended September 30, 2008
with cash on hand from December 31, 2007 and from revenues received during the
period.
In
October 2007, the Company agreed to restructure a promissory note payable to
Bank Hapoalim and guaranty by BluePhoenix Solutions. Under a new agreement with
BluePhoenix, the Company made a principal reduction payment to Bank Hapoalim in
the amount of $300,000. Simultaneously, BluePhoenix paid $1,671,000 to Bank
Hapoalim, thereby discharging that indebtedness. The Company and BluePhoenix
entered into a new promissory note in the amount of $1,021,000, bearing interest
at LIBOR plus 1.0% and maturing on December 31, 2011. In addition, BluePhoenix
acquired 2,546,149 shares of our common stock in exchange for $650,000 paid to
Bank Hapoalim to retire that indebtedness. In March 2008, the
Company amended the terms of its note payable to BluePhoenix Solutions. Under
the terms of the original note, the Company was to make a principal reduction
payment in the amount of $350,000 on January 30, 2009. The Company and
BluePhoenix agreed to accelerate that principal payment to March and May 2008 in
return for a conversion of $50,000 of principal into 195,848 shares of the
Company’s common stock. In March, the Company paid $200,000 plus accrued
interest and in July 2008, the $50,000 of debt was converted into 195,848 shares
of the Company’s common stock. The remaining payment of $100,000 is
due January 30, 2009.
From time
to time, the Company entered into promissory notes with John L. (Launny)
Steffens, the Chairman of the Board of Directors. As of September 30,
2008, the Company is indebted to Mr. Steffens in the amount of
$385,000. The notes bear interest between 3% and 10% per
annum.
In 2004
the Company entered into promissory notes with Anthony Pizi, a director of the
Company and its former Chief Information Officer. As of September 30,
2008, the Company is indebted to Mr. Pizi in the amount of
$9,000. The notes bear interest at 12% per annum.
The
Company has incurred aggregate losses of approximately $4,972,000 in the past
two years and has experienced negative cash flows from operations for each of
the past three years. For the nine months ended September 30, 2008,
the Company incurred an additional loss of approximately $609,000 and has a
working capital deficiency of approximately $6,039,000. The Company’s
future revenues are largely dependent on acceptance of a newly developed and
marketed product – Cicero®. Accordingly, there is substantial doubt
that the Company can continue as a going concern. In order to address these
issues and to obtain adequate financing for the Company’s operations for the
next twelve months, the Company is actively promoting and expanding its product
line and continues to negotiate with significant customers that have
demonstrated interest in the Cicero® technology. The Company is experiencing
difficulty increasing sales revenue largely because of the inimitable nature of
the product as well as customer concerns about the financial viability of the
Company. The Company is attempting to solve this problem by improving
the market’s knowledge and understanding of Cicero® through increased marketing
and leveraging its limited number of reference accounts. The Company
is attempting to address the financial concerns of potential customers by
pursuing strategic partnerships with companies that have significant financial
resources although the Company has not experienced significant success to date
with this approach. Additionally, the Company hopes to obtain
additional equity capital or other strategic transactions in the near term to
provide additional liquidity. There can be no assurance that
management will be successful in executing these strategies as anticipated or in
a timely manner or that increased revenues will reduce further operating losses.
If the Company is unable to significantly increase cash flow or obtain
additional financing, it will likely be unable to generate sufficient capital to
fund operations for the next twelve months and may be required to pursue other
means of financing that may not be on terms favorable to the Company or its
stockholders. These factors among others may indicate that the Company will be
unable to continue as a going concern for a reasonable period of
time.
We do not
believe that we currently have sufficient cash on hand to finance operations for
the next twelve months. At our current rates of expense and assuming
the Company will generate revenues in the next twelve months at the annualized
rate of revenue generated in the first nine months of 2008, we will be able to
fund planned operations with existing capital resources for a minimum of four
months and experience negative cash flow of approximately $600,000 during the
next twelve months to maintain planned operations. The accompanying consolidated
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The financial statements presented herein do not
include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
OFF-BALANCE SHEET
ARRANGEMENTS
The
Company does not have any off balance sheet arrangements. We have no
unconsolidated subsidiaries or other unconsolidated limited purpose entities,
and we have not guaranteed or otherwise supported the obligations of any other
entity.
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
Not
applicable.
Item 4. Controls and Procedures
(a)
Disclosure Controls and Procedures
Our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of September 30, 2008. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files and submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Based on the evaluation of our disclosure controls and procedures as
of September 30, 2008, our Chief Executive Officer and Chief Financial Officer
concluded that, as of such date, our disclosure controls and procedures were
effective.
(b)
Changes in Internal Control over Financial Reporting
During
the period covered by this Quarterly Report on Form 10-Q, there has been no
change in our internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Part
II. Other Information
Item 1. Legal Proceedings
Various
lawsuits and claims have been brought against us in the normal course of our
business.
In
October 2003, we were served with a summons and complaint in Superior Court of
North Carolina regarding unpaid invoices for services rendered by one of our
subcontractors. The amount in dispute was approximately $200,000 and
is included in accounts payable. Subsequent to March 31, 2004, we settled this
litigation. Under the terms of the settlement agreement, we agreed to
pay a total of $189,000 plus interest over a 19-month period ending November 15,
2005. The Company has not made any additional payments and has a remaining
liability of approximately $88,000.
Under the
indemnification clause of the Company’s standard reseller agreements and
software license agreements, the Company agrees to defend the reseller/licensee
against third party claims asserting infringement by the Company’s products of
certain intellectual property rights, which may include patents, copyrights,
trademarks or trade secrets, and to pay any judgments entered on such claims
against the reseller/licensee.
Not
Applicable.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
In July
2008, the Company issued 391,696 shares of common stock for a $100,000 principal
payment on a promissory note.
In July
2008, the Company issued 195,848 shares of common stock for a $50,000 principal
payment on a promissory note.
In July
2008, the Company issued 80,993 shares of common stock to a vendor for the
settlement of an accounts payable balance of $20,678.
These
shares were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
In July
2008, the Company issued 2,625 shares of common stock to the Company’s Chairman,
Mr. John L. Steffens, for the conversion of interest of $670 as part of the
acquisition of the short term promissory note due to SDS Merchant
Fund.
These
shares were issued in reliance upon the exemption from registration provided by
Section 3(a)(9) of the Securities Act of 1933.
Item 3. Defaults Upon Senior
Securities
None
Item 4. Submission of Matters to a Vote of
Security Holders
None
Item 5. Other Information
None
|
Exhibit
No.
|
Description
|
|
|
|
|
|
Certification
of Chief Executive Officer/Chief Financial Officer pursuant to Rule
13a-14(a) (filed herewith).
|
|
|
|
|
|
Certification
of John P. Broderick pursuant to 18 USC § 1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
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.
|
|
|
|
|
|
|
|
|
By:
/s/ John P.
Broderick
|
|
|
John
P. Broderick
|
|
|
Chief
Executive Officer and Chief Financial Officer
|
|
|
Date:
November 14, 2008
|