cicn_10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
þ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended March 31, 2010.
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 þ 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 þ |
|
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 o No o
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of Exchange Act). Yes o No o
47,098,185 shares of common stock, $.001 par value, were outstanding as of
May 6, 2010.
Cicero
Inc.
Index
| PART
I. Financial Information |
Page
Number
|
| |
|
|
| Item
1. |
Condensed Consolidated
Financial Statements
|
1 |
| |
|
|
| |
Balance
Sheets as of March 31, 2010 (unaudited) and December 31,
2009
|
1
|
| |
|
|
| |
Statements
of Operations for the three months ended March 31, 2010 and 2009
(unaudited)
|
2
|
| |
|
|
| |
Statements
of Cash Flows for the three months ended March 31, 2010 and 2009
(unaudited)
|
3
|
| |
|
|
| |
Statements
of Comprehensive Income/(loss) for the three months ended March
31, 2010 and 2009 (unaudited)
|
4
|
| |
|
|
| |
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
5
|
| |
|
|
| Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
| |
|
|
| Item
3. |
Quantitative
and Qualitative Disclosures about Market Risk
|
18
|
| |
|
|
| Item
4. |
Controls
and Procedures
|
18
|
| |
|
|
| PART
II. Other Information |
|
| |
|
|
| Item
1. |
Legal
Proceedings
|
|
| |
|
|
| Item
1A. |
Risk
Factors
|
|
| |
|
|
| Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
| |
|
|
| Item
3. |
Defaults
Upon Senior Securities
|
|
| |
|
|
| Item
4. |
[Reserved]
|
|
| |
|
|
| Item
5. |
Other Information
|
|
| |
|
|
| Item
6. |
Exhibits
|
|
| |
|
|
| SIGNATURE |
20
|
PART
I. Financial Information
ITEM
1. FINANCIAL STATEMENTS.
CICERO
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands)
| |
|
March
31,
2010
|
|
|
December
31,
2009
|
|
| |
|
(unaudited) |
|
|
|
|
| ASSETS |
|
|
|
|
|
|
| Current
assets: |
|
|
|
|
|
|
| Cash
and cash equivalents |
|
$ |
4 |
|
|
$ |
12 |
|
| Trade
accounts receivable, net |
|
|
192 |
|
|
|
225 |
|
| Prepaid
expenses and other current assets |
|
|
356 |
|
|
|
342 |
|
|
Total current
assets
|
|
|
552 |
|
|
|
582 |
|
|
Property
and equipment, net
|
|
|
38 |
|
|
|
39 |
|
|
Intangible
asset, net
|
|
|
1,956 |
|
|
|
-- |
|
|
Goodwill
|
|
|
2,832 |
|
|
|
-- |
|
|
Total assets
|
|
$ |
5,378 |
|
|
$ |
621 |
|
|
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
2,051 |
|
|
$ |
1,886 |
|
|
Accounts
payable
|
|
|
2,264 |
|
|
|
2,346 |
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and related items
|
|
|
1,178 |
|
|
|
1,151 |
|
|
Earn-out
contingency
|
|
|
1,915 |
|
|
|
-- |
|
|
Other
|
|
|
1,609 |
|
|
|
1,500 |
|
|
Deferred
revenue
|
|
|
1,215 |
|
|
|
243 |
|
|
Total current
liabilities
|
|
|
10,232 |
|
|
|
7,126 |
|
|
Long-term
debt
|
|
|
2,321 |
|
|
|
1,421 |
|
|
Earn-out
contingency
|
|
|
495 |
|
|
|
|
|
|
Total liabilities
|
|
|
13,048 |
|
|
|
8,547 |
|
|
Stockholders' (deficit):
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par
value, 10,000,000 shares authorized
Series
A-1 – 1,543.6 shares issued and outstanding at March 31, 2010 and December
31, 2009
Series B - 9,067 shares issued and outstanding at March
31, 2010 No shares issued or outstanding at December 31,
2009
|
|
|
-- |
|
|
|
-- |
|
|
Common stock, $0.001 par value,
215,000,000 shares authorized at
March 31, 2010
47,098,185 issued and outstanding at March
31, 2010 and December 31, 2009
|
|
|
47 |
|
|
|
47 |
|
|
Additional paid-in
capital
|
|
|
231,834 |
|
|
|
230,464 |
|
|
Accumulated
deficit
|
|
|
(239,551 |
) |
|
|
(238,437 |
) |
|
Stockholders'
deficit
|
|
|
(7,670 |
) |
|
|
(7,926 |
) |
|
Total liabilities and
stockholders' deficit
|
|
$ |
5,378 |
|
|
$ |
621 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
CICERO
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(unaudited)
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Software
|
|
$ |
149 |
|
|
$ |
109 |
|
|
Maintenance
|
|
|
311 |
|
|
|
288 |
|
|
Services
|
|
|
23 |
|
|
|
372 |
|
|
Total operating
revenue
|
|
|
483 |
|
|
|
769 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
150 |
|
|
|
5 |
|
|
Maintenance
|
|
|
49 |
|
|
|
62 |
|
|
Services
|
|
|
218 |
|
|
|
329 |
|
|
Total cost of
revenue
|
|
|
417 |
|
|
|
396 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
66 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Sales and
marketing
|
|
|
489 |
|
|
|
263 |
|
|
Research and product
development
|
|
|
221 |
|
|
|
155 |
|
|
General and
administrative
|
|
|
338 |
|
|
|
305 |
|
|
Total operating
expenses
|
|
|
1,048 |
|
|
|
723 |
|
|
Loss
from operations before other income/(expense)
|
|
|
(982 |
) |
|
|
(350 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(109 |
) |
|
|
(62 |
) |
|
Other income
|
|
|
-- |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,091 |
) |
|
$ |
(402 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss
per share – basic and diluted
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding – basic and diluted
|
|
|
47,098 |
|
|
|
46,642 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
CICERO
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
|
|
|
Three
Months Ended
March
31
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,091 |
) |
|
$ |
(402 |
) |
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
152
|
|
|
|
5
|
|
| Stock
compensation expense |
|
|
10 |
|
|
|
119 |
|
|
Changes in assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
Trade accounts
receivable
|
|
|
33 |
|
|
|
180 |
|
|
Assets and liabilities –
discontinued operations
|
|
|
-- |
|
|
|
(11 |
) |
|
Prepaid expenses and other
assets
|
|
|
(11 |
) |
|
|
(11 |
) |
|
Accounts payable and accrued
expenses
|
|
|
31 |
|
|
|
(86 |
) |
|
Deferred revenue
|
|
|
972 |
|
|
|
704 |
|
|
Net cash provided by operating
activities
|
|
|
96 |
|
|
|
498 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of
equipment
|
|
|
(4 |
) |
|
|
(4 |
) |
|
Acquisition
of SOAdesk assets
|
|
|
(300 |
) |
|
|
-- |
|
|
Net
cash used by investing activities
|
|
|
(304 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Issuance
of series
B convertible preferred stock
|
|
|
500 |
|
|
|
-- |
|
|
Borrowings under short and
long-term debt
|
|
|
220 |
|
|
|
750 |
|
|
Repayments of short and long-term
debt
|
|
|
(520 |
) |
|
|
(462 |
) |
|
Net cash provided by (used in)
financing activities
|
|
|
200 |
|
|
|
(288 |
) |
|
Effect
of exchange rate changes on cash
|
|
|
-- |
|
|
|
2 |
|
|
Net
decrease in cash and cash equivalents
|
|
|
(8 |
) |
|
|
784 |
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Beginning of
period
|
|
|
12 |
|
|
|
63 |
|
|
End of period
|
|
$ |
4 |
|
|
$ |
847 |
|
Non-Cash Investing and
Financing Activities:
During
January 2010, the Company converted $860,000 of promissory notes into 5,733
shares of its Series B Convertible Preferred B stock.
During
January 2010, the Company paid $300,000, entered into notes payable agreements
of $2,225,000 and accrued $2,410,000 for an earn-out contingency to acquire
substantially all the assets of SOAdesk LLC, which included $2,832,000 of
Goodwill and $1,803,000 of software.
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
CICERO
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(in
thousands)
(unaudited)
|
|
|
Three
months ended
March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net
loss
|
|
$ |
(1,091 |
) |
|
$ |
(402 |
) |
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-- |
|
|
|
2 |
|
|
Comprehensive
loss
|
|
$ |
(1,091 |
) |
|
$ |
(400 |
) |
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
CICERO
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1. INTERIM FINANCIAL STATEMENTS
The
accompanying financial statements for the three months ended March 31, 2010 and
2009 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 financial statements
and notes thereto contained in Cicero Inc.'s (the "Company") Annual Report on
Form 10-K/A for the year ended December 31, 2009, filed with the SEC on April 9,
2010. 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.
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 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 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
$1,280,000 and $823,000 for the years ended December 31, 2009 and 2008,
respectively, and has experienced negative cash flows from operations for each
of the past three years. For the three months ended March 31, 2010,
the Company incurred losses of $1,091,000 and had a working capital deficiency
of $9,680,000 as of March 31, 2010. However, the Company has acquired
substantially all of the assets of SOAdesk LLC effective January 15, 2010 and
launched its new products into the marketplace in late January
2010. The Company now markets to a much larger business segment and
has already seen rapid early adoption and acceptance of its new
products. To date, the Company has secured four new customers for its
new products and extended its network of reseller partners and OEM
partners. The Company has also raised approximately $1,560,000
million, including $700,000 in cash, the cancellation of $710,000 of existing
indebtedness and the cancellation of a note of $150,000 to memorialize an
advance of payment for Series B Stock prior to issuance, through its Series B
Convertible Preferred stock offering. Since March 31, 2010, the
Company has raised an additional $200,000 as part of its Series B offering and
received commitments for an additional $250,000. The Company
anticipates that it will raise additional funds in the next several months
however, there can be no assurance the Company will be able to do
so. Management believes that it can manage certain operating expenses
and working capital requirements if the Company does not perform as anticipated
in order to meet our current cash requirements over the next 12
months.
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.
Financial
Instruments:
The
carrying amount of the Company’s financial instruments, representing accounts
receivable, accounts payable and short-term debt approximate their fair value
due to their short term nature.
The
fair value and carrying amount of long-term debt were as
follows:
|
|
|
|
|
|
|
|
2010
|
|
|
December 31,
2009
|
|
|
Fair
Value
|
|
$ |
2,080,115 |
|
|
$ |
1,338,010 |
|
|
Carrying
Value
|
|
|
2,321,000 |
|
|
|
1,421,000 |
|
Valuations
for long-term debt are determined based on borrowing rates currently available
to the Company for loans with similar terms and
maturities.
Stock-Based
Compensation
The
Company adopted Financial Accounting Standards Board (“FASB”) guidance now
codified as 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 issued 37,500 options in the first three months of 2010 of which 12,500
vested immediately. The Company recognized stock-based compensation
expense of $1,000 for the three months ended March 31, 2010. The
Company also recognized stock-based compensation expense of $9,000 for the three
months ended March 31, 2010 for the 549,360 restricted shares of stock reserved
for Mr. John Broderick, the Company’s CEO, in accordance with his 2007
employment agreement.
The
following table sets forth certain information as of March 31, 2010 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, 2010
|
|
|
2,707,006 |
|
|
Granted
|
|
|
37,500 |
|
|
Exercised
|
|
|
-- |
|
|
Forfeited
|
|
|
(335,959 |
) |
|
Outstanding
on March 31, 2010
|
|
|
2,408,547 |
|
|
|
|
|
|
|
|
Weighted
average exercise price of outstanding options
|
|
$ |
0.90 |
|
|
Shares
available for future grants on March 31, 2010
|
|
|
2,114,607 |
|
NOTE
2. SOAdesk ACQUISITION
On
January 15, 2010, the Company entered into an Asset Purchase Agreement with
SOAdesk, LLC (“SOAdesk”) and Vertical Thought, Inc. (“VTI” and, together with
SOAdesk, the “Sellers”), pursuant to which the Company acquired the Sellers’
“United Desktop” and “United Data Model” software programs, as well as
substantially all of the other assets owned by the Sellers directly or
indirectly used (or intended to be used) in or related to Sellers’ business of
providing customer interaction consulting and technology services for
organizations and contact centers throughout the world (the “Business”). The
Company also assumed certain liabilities of the Sellers related to the Business,
as described in the Asset Purchase Agreement.
The
aggregate consideration payable by the Company to the Sellers consists of the
following:
| ● |
$300,000 paid in
cash to the Sellers on the closing date; |
| |
|
| ● |
an unsecured
convertible note in the aggregate principal amount of $700,000, payable to
SOAdesk, with an annual interest rate of 5%, and secured by
shares of the Company’s Series B Preferred Stock (the “Convertible
Note”); |
| |
|
| ● |
$525,000, payable in
cash to SOAdesk on March 31, 2010 (subsequently extended as stated
below); |
| |
|
| ● |
an unsecured
convertible note in the aggregate principal amount of $1,000,000, payable
to SOAdesk and convertible into shares of the Company’s Common Stock;
and |
| |
|
| ● |
certain earn-out
contingencies of $2,410,000 based on product and enterprise revenue
performance targets being met. |
On March
31, 2010, the maturity date of the unsecured Convertible Note was extended from
March 31, 2010 to September 30, 2010. Furthermore, the terms of the Asset
Purchase Agreement were amended and the Company issued a new $525,000
convertible promissory note to SOAdesk in lieu of the $525,000 payment. This new
note, which carries an annual interest rate of 5%, is secured by shares of the
Company’s Series B Preferred Stock at the holder’s option and matures on June
30, 2010.
The
Company is obligated to make additional payments of up to $2,410,000 million
over a 18 month period based upon the achievement of certain revenue performance
targets. Such payments are payable quarterly during the eighteen month
period over which the performance targets are being measured. The earn-out award
is to be calculated, subject to adjustment, based upon the cumulative effect of
achieved revenue performance targets during the applicable earn-out
period.
We
account for contingent consideration payable to sellers of the acquired asset in
accordance with the provisions of ASC Topic 805 “Business Combinations” to
ensure that we account for any post combination payments made to sellers of
acquired businesses as either additional purchase consideration or compensation
based upon the (i) economic form of the transaction and (i) subsequent
involvement (if any) of the sellers in the business on a post combined
basis.
|
Consideration:
|
|
|
|
|
Cash
paid
|
|
$ |
300,000 |
|
|
Convertible
notes payable
|
|
|
2,225,000 |
|
|
Earn-out
contingency
|
|
|
2,410,000 |
|
|
Total
Consideration
|
|
$ |
4,935,000 |
|
| |
|
|
|
|
|
Allocated
to:
|
|
|
|
|
|
Software
|
|
$ |
2,103,000 |
|
|
Goodwill
|
|
$ |
2,832,000 |
|
|
|
|
$ |
4,935,000 |
|
The
following unaudited consolidated pro forma information gives effect to the
acquisitions of substantially all the assets of SOAdesk LLC as if these
transactions had occurred on January 1, 2009. The following pro-forma
information as of March 31, 2010 and 2009, respectively, is presented for
illustration purposes only and is not necessarily indicative of the results that
would have been attained had the acquisition of these businesses been completed
on January 1, 2009, nor are they indicative of results that may occur in
any future periods. Results
of operations of the acquired business are included in the condensed
consolidated statement of operations from January 15, 2010, the date of
acquisition. (in thousands)
|
|
|
2010
|
|
|
2009
|
|
|
Revenues
|
|
$ |
483 |
|
|
$ |
846 |
|
|
Loss
from operations
|
|
|
(982 |
) |
|
|
(461 |
) |
|
Basic
and diluted loss from operations per share
|
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
Weighted
average shares outstanding – basic and diluted
|
|
|
47,098 |
|
|
|
46,642 |
|
Simultaneously
with the acquisition of the assets of SOAdesk LLC, the Company also closed an
initial round of Series B round of Convertible Preferred Stock, of approximately
$1,360,000 million including $500,000 in cash, the cancellation of $710,000 of
existing indebtedness and the cancellation of a note of $150,000 to memorialize
an advance of payment for Series B Stock prior to issuance,. The
Series B Convertible Preferred Stock bears an annual dividend of 8% and provides
warrants to purchase common stock of the Company at a strike price of $0.25 per
share. The Series B stock may convert into common stock at a
conversion rate of $0.15 per share. Of the $1.36 million raised, the
Company’s Chairman, Mr. John Steffens invested $910,000 through a combination of
cash and debt retirement. Dividend accrued at March 31, 2010 amounted
to $23,000.
NOTE
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The
Company accounts for goodwill in accordance ASC Topic 350 “Intangibles –
Goodwill and Other” which requires that goodwill with indefinite lives be tested
for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of an asset has decreased below its carrying
value.
Goodwill
includes (i) the excess of the purchase price over the fair value of net
assets acquired of
$2,832,000 in connection with the SOAdesk LLC
acquisition in Note
2. The Codification requires that goodwill be tested for impairment
at the reporting unit level. Application of the goodwill impairment test
requires judgment, including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to reporting
units, and determining the fair value. Significant judgment is required to
estimate the fair value of reporting units which includes estimating future cash
flows, determining appropriate discount rates and other assumptions. Changes in
these estimates and assumptions could materially affect the determination of
fair value and/or goodwill impairment.
The
Company reviewed for possible goodwill impairment by comparing the fair value of
the reporting unit to the carrying value of their respective net asset. If
the fair values exceed the carrying values of the net assets, no goodwill
impairment is deemed to exist. If the fair values of the reporting units do not
exceed the carrying values of the net assets, goodwill is tested for impairment
and written down to its implied value if it is determined to be impaired.
Other
intangible assets with finite lives are being amortized over their estimated
useful lives of 3 years for software acquired from SOAdesk LLC.
Amortization expense for the quarter ended March 31, 2010 was $147,000. At March
31, 2010, the estimated future amortization expense for each of the succeeding
years is as follows: $526,000 for fiscal year 2010, $701,000 for fiscal year
2011 and 2012, and $28,000 for fiscal 2013. Actual amortization expense to be
reported in future periods could differ from these estimates as a result of new
intangible asset acquisitions, changes in useful lives or other relevant
factors.
NOTE
4. SHORT TERM DEBT
Short-term
debt, and notes payable to related party consist of the following (in
thousands):
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
Note
payable – Asset Purchase Agreement (a)
|
|
$ |
1,225 |
|
|
$ |
-- |
|
|
Note
payable - related party (b)
|
|
|
9 |
|
|
|
719 |
|
|
Other
notes payable (c)
|
|
|
817 |
|
|
|
1,167 |
|
|
|
|
$ |
2,051 |
|
|
$ |
1,886 |
|
|
(a)
|
In
January 2010, per the Asset Purchase Agreement, the Company entered into
an unsecured convertible promissory note with SOAdesk for $700,000 with an
annual interest rate of 5% and is convertible into shares of the Company’s
Series B Preferred Stock. The note was due on June 30, 2010 but
was subsequently amended and its due date was extended to September 30,
2010 and is now secured by shares of the Company’s Series B Preferred
Stock. The note is convertible at $150 per
share. The Company is obligated to repay any principal of the
loan with fifty percent of any gross proceeds of the Series B Preferred
capital raise through maturity of the note. The note is
convertible at holder’s option at any time or at
maturity.
|
Also, as
part of the Asset Purchase Agreement, the Company was to pay to the shareholders
of SOAdesk LLC the sum of $525,000 on March 31, 2010. In March 2010,
the terms of the Asset Purchase Agreement were amended and the Company issued a
new $525,000 convertible promissory note to SOAdesk in lieu of the $525,000
payment due on March 31, 2010. This new note, which carries an annual interest
rate of 5%, is secured by shares of the Company’s Series B Preferred Stock, at
the holder’s option, and matures on June 30, 2010. The note is
convertible at $150 per share. The Company is obligated to repay any
principal of the loan with fifty percent of any gross proceeds of the Series B
Preferred capital raise through maturity of the note. The note is
convertible at holder’s option at any time or at maturity.
|
(b)
|
In
October 2007, the Company entered into a long-term note in the amount of
$300,000 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 was to mature in
October 2009. In March 2009, the Company and Mr. Steffens
agreed to extend the maturity on the above Note until October
2010. In April 2009, the Company awarded Mr. Steffens, in
consideration for the extended maturity, 250,000 warrants to purchase the
Company’s common stock at a price of $0.20 per share. These warrants
expire in five years. The Company utilized the Black-Scholes formula to
calculate the value of these warrants which amounted to $12,000 and were
included in general and administrative expenses in 2009. At
December 31, 2009, the Company was indebted to Mr. Steffens in the amount
of $300,000.
|
In
December 2009, 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 12% per year and is unsecured. At
December 31, 2009, the Company was indebted to Mr. Steffens in the amount of
$100,000.
In
October 2009, 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 12% per year and is unsecured. At
December 31, 2009, the Company was indebted to Mr. Steffens in the amount of
$75,000.
In
September 2009, 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
December 31, 2009, the Company was indebted to Mr. Steffens in the amount of
$150,000.
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 December 31,
2009, 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 John L.
(Launny) Steffens, the Chairman of the Board of Directors, for various working
capital needs. The Note bears interest at 6% per year and is unsecured. At
December 31, 2009, the Company was indebted to Mr. Steffens in the amount of
$40,000.
All these
notes were converted into 4,733 shares of Series B Convertible Preferred Shares
at $150 per share in January 2010 as part of the Company’s issuance of Series B
Convertible Preferred Stock. The Series B Convertible Preferred Stock
bears an annual interest of 8% and provides warrants to purchase common stock of
the Company at a strike price of $0.25 per share. The Series B stock
may convert into common stock at a conversion rate of $0.15 per
share. The total principal converted was $710,000.
From time
to time the Company entered into promissory notes with one of the Company’s
directors and the former Chief Information Officer, Anthony Pizi. The
notes bear interest at 12% per annum. As of March 31, 2010 and 2009, the Company
was indebted to Anthony Pizi in the amount of $9,000.
|
(c)
|
The
Company does not have a revolving credit facility and from time to time
has issued a series of short term promissory notes with private lenders,
which provide for short term borrowings, both secured by accounts
receivable and unsecured. In addition, the Company has settled
certain litigation and agreed to issue a series of promissory notes to
support its obligations in the aggregate principal amount of $88,000. The
notes bear interest between 10% and 36% per
annum.
|
NOTE
5. LONG-TERM DEBT
Long-term
loan and notes payable to related party consist of the following (in
thousands):
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
Term
loan (a)
|
|
$ |
671 |
|
|
$ |
671 |
|
|
Other
long-term debt (b)
|
|
|
1,650 |
|
|
|
750 |
|
|
|
|
$ |
2,321 |
|
|
$ |
1,421 |
|
|
(a)
|
In
October 2007, the Company, in conjunction with Blue Phoenix Solutions,
retired the note payable to Bank Hapoalim and entered into a new note with
Blue Phoenix Solutions in the principal amount of $1,021,000 with interest
at LIBOR plus 1% (approximately 1.846% at March 31, 2010) maturing in
December 2011. Interest is payable quarterly. During 2008, the Company
paid $200,000 against the principal and BluePhoenix converted $50,000 of
principal into 195,848 shares of Cicero common stock. In January 2009, the
Company paid $100,000 against the
principal.
|
|
(b)
|
In
March 2009, the Company entered into several secured Promissory Notes with
certain investors in the aggregate amount of $750,000. The Notes bear
interest at 15% and mature on January 31, 2012. In addition, each investor
was issued a warrant to purchase common stock of the Company. Under the
terms of the warrant, which expires in five years, each Note holder is
entitled to purchase 1,000 shares of Cicero common stock for every $1,000
of principal due under the Note. The exercise price on the warrant is
$0.20 per share. The shares of common stock underlying the warrants have
registration rights and a cashless exercise provision in the event no
registration statement is effective for resales, if
required. The Company has allocated the proceeds received from
the Note and Warrant Offering to determine the fair value of the warrants
issued and is amortizing such amount under the terms of the notes as
additional interest expense in the amount of $50,349. In
February 2010, the Company reduced the principal indebtedness by
$100,000.
|
In
January 2010, as part of the Asset Purchase Agreement, the Company entered into
an unsecured Convertible Promissory Note with SOAdesk in the amount of
$1,000,000. The note bears interest at 5% and is due November 14,
2015. The note is convertible into the Company’s common stock at
$0.15 per share. The note is convertible at the option of the holder
with one-third convertible in January 2011, two-thirds convertible in January
2012, and the entire note convertible in January 2013 or at
maturity.
NOTE
6. STOCKHOLDER’S EQUITY
In
January 2010, the Company issued to certain accredited investors 9,067 shares of
Series B Convertible Preferred Stock at $150 per share for a total of
$1,360,000, including $500,000 in cash, the cancellation of $710,000 of existing
indebtedness and the cancellation of a note of $150,000 to memorialize an
advance of payment for Series B Stock prior to issuance. The Series B
Convertible Preferred Stock bears an annual dividend of 8%. The
Series B stock may convert into common stock at a conversion rate of $0.15 per
share. Additionally, the Series B stock provides warrants to purchase
common stock of the Company at a strike price of $0.25 per share. The
warrants expire in five years. 2,266,667 warrants were issued to
these investors.
NOTE
7. INCOME TAXES
The
Company accounts for income taxes in accordance with FASB guidance now codified
as 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 was recorded
for the net loss for the first three months of fiscal year 2010 or
2009. Because of the Company's recurring losses, the deferred tax
assets have been fully offset by a valuation allowance.
NOTE
8. 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 and preferred
stock.
The
following table sets forth the potential shares that are not included in the
diluted earnings/(loss) per share calculation because to do so would be
anti-dilutive for the periods presented (in thousands):
|
|
|
Three
months ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Stock
options
|
|
|
2,408 |
|
|
|
2,950 |
|
|
Warrants
|
|
|
3,656 |
|
|
|
1,140 |
|
|
Preferred
stock, common share equivalent
|
|
|
10,611 |
|
|
|
1,544 |
|
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 months ended
March 31, 2010 and 2009, 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 ending March 31, 2010 and March 31, 2009 was $0.11 and $0.13,
respectively.
NOTE
9. CONTINGENCIES
Various
lawsuits and claims have been brought against us in the normal course of our
business.
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
March 31, 2010.
NOTE
10. SUBSEQUENT EVENTS
In April
2010, the Company issued to certain accredited investor 1,333 shares of Series B
Convertible Preferred Stock at $150 per share for a total of
$200,000. The Series B Convertible Preferred Stock bears an annual
dividend of 8%. The Series B stock may convert into common stock at a
conversion rate of $0.15 per share. Additionally, the Series B stock
provides warrants to purchase common stock of the Company at a strike price of
$0.25 per share. The warrants expire in five
years. 333,333 warrants were issued to these investors.
The
Company evaluates events that have occurred after the balance sheet date but
before the financial statements are issued. Based upon the
evaluation, the Company did not identify any recognized or non-recognized
subsequent events that would have required adjustment or disclosure in the
consolidated financial statements.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Cicero,
Inc. (the “Company”) provides businesses the ability to maximize every
interaction from intra-company back office applications to those that take place
between employees, customers and vendors while extending the value of the best
of breed applications in which businesses have already invested. The Company
provides an innovative and unique combination of application and process
integration, automation, presentation and real-time analysis, all without
changes to the underlying applications or requiring costly development
expenditures. The Company’s business integration software addresses the emerging
need for companies' information systems to deliver enterprise-wide views of
their business information processes. 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 customer experience management market with emphasis on
desktop integration and business process automation with its Cicero XM™
products. Cicero XM enables businesses to transform human interaction across the
enterprise. Cicero XM enables the flow of data between different applications,
regardless of the type and source of the application, eliminating redundant
entry and costly mistakes. Cicero XM automates up and down-stream process flows,
enforcing compliance and optimizing handle time and provides a task-oriented
desktop, reducing training time and enabling delivery of best in class service.
Cicero XM captures real-time information about each interaction, guiding the
business user through an activity and capturing usage data to spot trends and
forecast problems before they occur.
Cicero XM
software offers a proven, innovative departure from traditional, costly and
labor-intensive enterprise application integration solutions. The Company
provides non-invasive application integration, reduces enterprise integration
implementation cost and time, and extends companies' Service-Oriented
Architecture (“SOA”) to the desktop. Cicero XM also enables customers to
transform applications, business processes and human expertise into a seamless,
cost effective business solution that provides a cohesive, task-oriented and
role-centric interface that works the way people think.
By using
Cicero XM technology, companies can decrease their customer management costs,
improve their customer service, maximize the lifetime value of existing
customers, and more efficiently cross-sell the full range of their products and
services resulting in an overall increase in return on their information
technology investments. In addition, the Company’s software enables
organizations to reduce the business risks inherent in replacement or
re-engineering of mission-critical applications and extend the productive life
and functional reach of their application portfolio.
The
Company provides an integrated toolkit called Cicero XM Studio that provides an
intuitive integration and development environment, which simplifies the
integration of complex multi-platform applications. Cicero XM provides a unique
approach that allows companies to organize components 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 by
providing a single, seamless user interface for simple access to multiple
systems or be configured to display one or more composite applications to
enhance productivity. Our technology enables automatic information sharing among
line-of-business applications and tools. It is ideal for deployment in contact
centers where its highly productive, task-oriented user interface promotes
business user efficiency. By integrating diverse applications across multiple
operating systems, Cicero is ideal for the financial services, insurance,
telecommunications, intelligence, security, law enforcement, governmental and
other industries requiring a cost-effective, proven application integration
solution.
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:
|
●
|
We
have a history of losses and expect that we will continue to experience
losses through the second quarter of
2010;
|
|
●
|
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 XM 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
XM;
|
|
●
|
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;
|
|
●
|
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 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 months ended March 31, 2010 and 2009
(in thousands):
|
|
|
Three
months ended
March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Total
revenue
|
|
$ |
483 |
|
|
$ |
769 |
|
|
Total
cost of revenue
|
|
|
417 |
|
|
|
396 |
|
|
Gross
margin
|
|
|
66 |
|
|
|
373 |
|
|
Total
operating expenses
|
|
|
1,048 |
|
|
|
723 |
|
|
Loss
from operations
|
|
$ |
(982 |
) |
|
$ |
(350 |
) |
THREE
MONTHS ENDED MARCH 31, 2010 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2009.
Total
Revenues. Total revenues decreased $286,000, or 37.2%, from
$769,000 to $483,000, for the three months ended March 31, 2010 as compared with
the three months ended March 31, 2009. The decrease is primarily due to a
decrease in consulting revenue partially offset by an increase in license and
maintenance revenue.
Total Cost of
Revenue. Total cost of revenue increased $21,000, or 5.3%,
from $396,000 to $417,000, for the three months ended March 31, 2010 as compared
with the three months ended March 31, 2009. The increase is primarily
attributable to the amortization of the acquired asset of SOAdesk partially
offset by lower consulting expenses due to decreased headcount.
Total Gross
Margin. Gross margin was $66,000, or 13.7%, for the three
months ended March 31, 2010 as compared to the gross margin of $373,000, or
48.5% for the three months ended March 31, 2009. The decrease in gross margin is
due to the decrease of consulting revenue and increase of cost of software due
to amortization expense of acquired asset of SOAdesk for the quarter ended March
31, 2010.
Total Operating
Expenses. Total operating expenses increased $325,000, or
45.0%, from $723,000 to $1,048,000 for the three months ended March 31, 2010, as
compared with the three months ended March 31, 2009. The increase in
total operating expenses is primarily attributable to increase headcount with
the addition of employees in conjunction with the acquisition of assets from
SOAdesk LLC.
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. 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.
Software
Products.
Software Product
Revenue. The Company earned $149,000 in software product
revenue for the three months ended March 31, 2010 as compared to $109,000 in
software revenue for the three months ended March 31, 2009.
Software Product Gross
Margins. The gross margin (loss) on software products for the
three months ended March 31, 2010 was (0.7%) compared with 95.4% for the three
month ended March 31, 2009. Cost of software reflects the accrual of
royalties to a third party and the amortization of the acquired software from
SOAdesk LLC offset by revenues.
Maintenance.
Maintenance
Revenue. Maintenance revenue for the three months ended March
31, 2010 increased by approximately $23,000, or 8.0%, from $288,000 to $311,000
as compared to the three months ended March 31, 2009.
Maintenance Gross
Margin. Gross margin on maintenance products for the three
months ended March 31, 2010 was 84.2% compared with 78.5% for the three months
ended March 31, 2009. 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 decrease in stock option expense due to
large grant of options from fiscal 2007 being fully expensed.
Services.
Services
Revenue. Services revenue decreased $349,000, or 93.8%, from
$372,000 to $23,000 for the three months ended March 31, 2010 as compared with
the three months ended March 31, 2009. The decrease in services revenues is
primarily attributable two significant consulting contracts that expired in
2009.
Services Gross
Margin/(Loss). Services gross margin (loss) was (847.8%) for
the three months ended March 31, 2010 compared with gross margin of 11.6% for
the three months ended March 31, 2009. The decrease in gross margin
was primarily attributable to the 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 three months ended March 31, 2010 increased by
approximately $226,000, or 85.9%, from $263,000 to $489,000 as compared with the
three months ended March 31, 2009. The increase is primarily
attributable to increase in advertising and trade shows related to the launch of
the new products and an increase in headcount due to the acquisition of the
asset of SOAdesk LLC.
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 increased
by approximately $66,000, or 42.6%, from $155,000 to $221,000 for the three
months ended March 31, 2010 as compared to the three months ended March 31,
2009. The increase in costs for the quarter is primarily due to an increase in
headcount due to the acquisition of the asset of SOAdesk partially offset by
decreased stock option expense due to large grant of options from fiscal 2007
being fully amortized.
General and Administrative.
General and administrative expenses consist of personnel costs for the
legal, financial, human resources, and administrative staff, related overhead,
and all non-allocable corporate costs of operating the Company. Our office is
located in Cary, North Carolina. General and administrative expenses
for the three months ended March 31, 2010 increased by approximately $33,000, or
10.8%, from $305,000 to $338,000 over the same period in the prior
year. The increase is primarily attributable to expenses incurred in
relation to the acquisition of assets of SOAdesk LLC partially offset by a
decreased stock option expense due to large grant of options from fiscal 2007
being fully expensed.
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 for the loss incurred in
the first quarter of 2010 or 2009. 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 $4,000 at March 31, 2010 from $12,000 at December
31, 2009.
The
Company used $8,000 of cash for the three months ended March 31,
2010.
Net cash provided by Operating
Activities. Cash provided by operations for the three months
ended March 31, 2010 was $96,000 compared with $498,000 for the three months
ended March 31, 2009. Cash provided by operations for the three
months ended March 31, 2010 was primarily due to depreciation and amortization
of $152,000, stock compensation of $10,000, a decrease in accounts receivable of
$33,000, an increase in accounts payable and accrued expenses of $31,000 and an
increase in deferred revenue from maintenance contracts of
$972,000. This was partially offset by the loss from operations of
approximately $1,091,000 and an increase in prepaid expenses of
$11,000.
Net cash used for Investing
Activities. The Company bought $4,000 worth of equipment during the three
months ended March 31, 2010. Additionally, the Company acquired the
assets of SOAdesk which included a $300,000 payment.
Net cash provided by (used in)
Financing Activities. Net cash provided by financing
activities for the three months ended March 31, 2010 was approximately $200,000
as compared with approximately $288,000 of net cash used by financing activities
for the three months ended March 31, 2009. Cash generated by
financing activities for the three months ended March 31, 2010 was comprised
primarily from the cash received from issuance of Preferred B Convertible Stock
of $500,000 and short term borrowings of $220,000, offset by repayment of
$520,000 of short and long term debt.
Liquidity
The
Company funded its cash needs during the three months ended March 31, 2010 with
cash on hand from December 31, 2009, the revenue generated in the first three
months of 2010 and the Preferred B Stock offering in January 2010.
In
January 2010, the Company issued to certain accredited investors 9,067 shares of
Series B Convertible Preferred Stock at $150 per share for a total of $1,360,000
including $500,000 in cash, the cancellation of $710,000 of existing
indebtedness and the cancellation of a note of $150,000 to memorialize an
advance of payment for Series B Stock prior to issuance. The Series B
Convertible Preferred Stock bears an annual dividend of 8%. The
Series B stock may convert into common stock at a conversion rate of $0.15 per
share. Additionally, the Series B stock provides warrants to purchase
common stock of the Company at a strike price of $0.25 per
share. 2,266,667 warrants were issued to these
investors. Of the $1,360,000 raised, the Company’s
Chairman, Mr. John Steffens invested $910,000 through a combination of cash and
conversion of debt.
In March
2009, the Company entered into several secured Promissory Notes with certain
investors in the aggregate amount of $750,000. The Notes bear interest at 15%
and mature on January 31, 2012. In addition, each investor was issued a warrant
to purchase common stock of the Company. Under the terms of the warrant, which
expires in five years, each Note holder is entitled to purchase 1,000 shares of
Cicero common stock for every $1,000 of principal due under the Note. The
exercise price on the warrant is $0.20 per share. The shares of common stock
underlying the warrants have registration rights and a cashless exercise
provision in the event no registration statement is effective for resales, if
required.
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 was
paid in
January
2009.
From time
to time the Company entered into promissory notes with Anthony Pizi, a director
of the Company and its former Chief Information Officer. As of March
31, 2010 the Company is indebted to Mr. Pizi in the amount of
$9,000. The notes bear interest at 12% per annum.
The
Company has incurred losses of approximately $1,280,000 and $823,000 in the past
two years and has experienced negative cash flows from operations for each of
the past three years. For the three months ended March 31, 2010, the
Company incurred an additional loss of approximately $1,091,000 and has a
working capital deficiency of approximately $9,680,000. However, the
Company has acquired substantially all of the assets of SOAdesk LLC effective
January 15, 2010 and launched its new products into the marketplace in late
January 2010. The Company now markets to a much larger business
segment and has already seen rapid early adoption and acceptance of its new
products. To date, the Company has secured four new customers for its
new products and extended its network of reseller partners and OEM
partners. The Company has also raised approximately $1,560,000
million, including $700,000 in cash, the cancellation of $710,000 of existing
indebtedness and the cancellation of a note of $150,000 to memorialize an
advance of payment for Series B Stock prior to issuance, through its Series B
Convertible Preferred stock offering. Since March 31, 2010, the
Company has raised an additional $200,000 as part of its Series B offering and
received commitments for an additional $250,000. The Company
anticipates that it will raise additional funds in the next several months
however, there can be no assurance the Company will be able to do
so. Management believes that it can manage certain operating
expenses and working capital requirements if the Company does not
perform as anticipated in order to meet our current cash requirements over the
next 12 months.
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 March 31, 2010. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files and submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Based on the evaluation of our disclosure controls and procedures as
of March 31, 2010, 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
Not
Applicable.
ITEM
1A. RISK FACTORS
Not
Applicable.
ITEM
2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
Not
Applicable.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM
4. [RESERVED]
None
ITEM
5. OTHER INFORMATION
None
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Exhibit
No.
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Description
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Certification
of Chief Executive Officer/Chief Financial Officer pursuant to Rule
13a-14(a) (filed herewith).
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Certification
of John P. Broderick pursuant to 18 USC § 1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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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.
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CICERO
INC. |
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By:
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/s/
John P. Broderick |
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John
P. Broderick |
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Chief
Executive Officer and Chief Financial Officer
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Date:
May 17, 2010 |
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20