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 June 30, 2013.
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.
Yex 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 þ 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 þ
85,806,247 shares of common stock, $.001 par value, were outstanding as of August 12, 2013.
Index
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
79 |
|
|
$ |
69 |
|
Trade accounts receivable, net
|
|
|
46 |
|
|
|
1,247 |
|
Prepaid expenses and other current assets
|
|
|
192 |
|
|
|
289 |
|
Total current assets
|
|
|
317 |
|
|
|
1,605 |
|
Property and equipment, net
|
|
|
40 |
|
|
|
47 |
|
Intangible asset, net (Note 3)
|
|
|
-- |
|
|
|
28 |
|
Goodwill (Note 3)
|
|
|
2,832 |
|
|
|
2,832 |
|
Total assets
|
|
$ |
3,189 |
|
|
$ |
4,512 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term debt (Note 4)
|
|
$ |
4,224 |
|
|
$ |
826 |
|
Accounts payable
|
|
|
2,976 |
|
|
|
2,887 |
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Salaries, wages, and related items
|
|
|
1,167 |
|
|
|
1,119 |
|
Other
|
|
|
352 |
|
|
|
271 |
|
Deferred revenue
|
|
|
1,027 |
|
|
|
1,389 |
|
Total current liabilities
|
|
|
9,746 |
|
|
|
6,492 |
|
Long-term debt (Note 5)
|
|
|
700 |
|
|
|
3,509 |
|
Total liabilities
|
|
|
10,446 |
|
|
|
10,001 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit: |
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series A-1 - 1,541.6 shares issued and outstanding at June 30, 2013 and December 31, 2012
|
|
|
-- |
|
|
|
-- |
|
Series B - 10,400 shares issued and outstanding at June 30, 2013 and at December 31, 2012
|
|
|
-- |
|
|
|
-- |
|
Common stock, $0.001 par value, 215,000,000 shares authorized
85,806,247 issued and outstanding at June 30, 2013 and 73,094,286 issued and
outstanding at December 31, 2012
|
|
|
86 |
|
|
|
73 |
|
Common Stock - subscribed
|
|
|
-- |
|
|
|
10 |
|
Additional paid-in capital
|
|
|
237,089 |
|
|
|
236,919 |
|
Accumulated deficit
|
|
|
(244,432 |
) |
|
|
(242,491 |
) |
Total stockholders' deficit
|
|
|
(7,257 |
) |
|
|
(5,489 |
) |
Total liabilities and stockholders' deficit
|
|
$ |
3,189 |
|
|
$ |
4,512 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$ |
33 |
|
|
$ |
651 |
|
|
$ |
43 |
|
|
$ |
3,888 |
|
Maintenance
|
|
|
372 |
|
|
|
323 |
|
|
|
705 |
|
|
|
679 |
|
Services
|
|
|
190 |
|
|
|
71 |
|
|
|
350 |
|
|
|
146 |
|
Total operating revenue
|
|
|
595 |
|
|
|
1,045 |
|
|
|
1,098 |
|
|
|
4,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
-- |
|
|
|
175 |
|
|
|
28 |
|
|
|
351 |
|
Maintenance
|
|
|
10 |
|
|
|
34 |
|
|
|
59 |
|
|
|
69 |
|
Services
|
|
|
204 |
|
|
|
253 |
|
|
|
467 |
|
|
|
522 |
|
Total cost of revenue
|
|
|
214 |
|
|
|
462 |
|
|
|
554 |
|
|
|
942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
381 |
|
|
|
583 |
|
|
|
544 |
|
|
|
3,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
453 |
|
|
|
593 |
|
|
|
835 |
|
|
|
1,105 |
|
Research and product development
|
|
|
390 |
|
|
|
380 |
|
|
|
770 |
|
|
|
755 |
|
General and administrative
|
|
|
290 |
|
|
|
423 |
|
|
|
588 |
|
|
|
771 |
|
Total operating expenses
|
|
|
1,133 |
|
|
|
1,396 |
|
|
|
2,193 |
|
|
|
2,631 |
|
Income/(loss) from operations
|
|
|
(752 |
) |
|
|
(813 |
) |
|
|
(1,649 |
) |
|
|
1,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(113 |
) |
|
|
(96 |
) |
|
|
(228 |
) |
|
|
(306 |
) |
Other income/(expense)
|
|
|
-- |
|
|
|
(91 |
) |
|
|
(1 |
) |
|
|
(91 |
) |
Gain on forgiveness of debt
|
|
|
-- |
|
|
|
184 |
|
|
|
-- |
|
|
|
598 |
|
Total other income/(expense)
|
|
|
(113 |
) |
|
|
(3 |
) |
|
|
(229 |
) |
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Net income/(loss)
|
|
|
(865 |
) |
|
|
(816 |
) |
|
|
(1,878 |
) |
|
|
1,341 |
|
8% preferred stock Series B dividend and deemed dividend on preferred stock
|
|
|
31 |
|
|
|
32 |
|
|
|
63 |
|
|
|
63 |
|
Net income/(loss) applicable to common stockholders
|
|
$ |
(896 |
) |
|
$ |
(848 |
) |
|
$ |
(1,941 |
) |
|
$ |
1,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share applicable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
Diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
85,540 |
|
|
|
73,083 |
|
|
|
84,580 |
|
|
|
60,545 |
|
Diluted
|
|
|
85,540 |
|
|
|
73,083 |
|
|
|
84,580 |
|
|
|
83,373 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income/(loss)
|
|
$ |
(1,878 |
) |
|
$ |
1,341 |
|
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
42 |
|
|
|
360 |
|
Stock compensation expense
|
|
|
46 |
|
|
|
55 |
|
Stock issuance for external consulting fees
|
|
|
35 |
|
|
|
-- |
|
Bad debt expense
|
|
|
-- |
|
|
|
18 |
|
Gain on forgiveness of debt
|
|
|
-- |
|
|
|
(598 |
) |
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
1,201 |
|
|
|
489 |
|
Prepaid expenses and other assets
|
|
|
97 |
|
|
|
65 |
|
Accounts payable and accrued expenses
|
|
|
167 |
|
|
|
(117 |
) |
Deferred revenue
|
|
|
(362 |
) |
|
|
(743 |
) |
Net cash generated by/(used in) operating activities
|
|
|
(652 |
) |
|
|
870 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of equipment
|
|
|
(7 |
) |
|
|
(16 |
) |
Net cash used in investing activities
|
|
|
(7 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
65 |
|
|
|
-- |
|
Borrowings under short and long-term debt
|
|
|
1,020 |
|
|
|
725 |
|
Repayments of short and long-term debt
|
|
|
(416 |
) |
|
|
(1,670 |
) |
Net cash generated by/(used in) financing activities
|
|
|
669 |
|
|
|
(945 |
) |
Net increase/(decrease) in cash
|
|
|
10 |
|
|
|
(91 |
) |
Cash:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
69 |
|
|
|
184 |
|
End of period
|
|
$ |
79 |
|
|
$ |
93 |
|
Non-Cash Investing and Financing Activities:
During February 2013, the Company converted $10 of interest payable to a private lender by issuing 198,000 shares of its common stock.
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(in thousands)
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount |
|
|
Shares |
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
83,294 |
|
|
$ |
83 |
|
|
|
12 |
|
|
|
-- |
|
|
$ |
236,919 |
|
|
$ |
(242,491 |
) |
|
$ |
(5,489 |
) |
Dividend for preferred B stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
|
(63 |
) |
Issuance of stock
|
|
|
1,640 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
82 |
|
Issuance of stock for payment of debt and interest
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
10 |
|
Issuance of stock for payment of consulting services
|
|
|
674 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
35 |
|
Options issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Restricted shares issued as compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
42 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,878 |
) |
|
|
(1,878 |
) |
Balance at June 30, 2013 (unaudited)
|
|
|
85,806 |
|
|
$ |
86 |
|
|
|
12 |
|
|
|
-- |
|
|
$ |
237,089 |
|
|
$ |
(244,432 |
) |
|
$ |
(7,257 |
) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements for the three and six months ended June 30, 2013 and 2012 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 for the year ended December 31, 2012, filed with the SEC on April 15, 2013. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for other interim periods or for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of the interim results of operations. All such adjustments are of a normal, recurring nature.
The year-end condensed balance sheet data was derived from audited 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 an operating loss of approximately $188,000 for the year ended December 31, 2012, and has a history of operating losses. For the six months ended June 30, 2013, the Company incurred losses of $1,878,000 and had a working capital deficiency of $9,429,000 as of June 30, 2013. Management feels that the Company has repositioned itself in the marketplace. The creation of Cicero Edge as a proven product in the enterprise mobility space has opened new opportunities in the financial services, insurance, healthcare and government industries where workers are becoming un-tethered from their desktops. Enterprise software sales are typically the result of a long sales cycle. The Company anticipates an improvement in this regard based upon current discussions with active customers and prospects. The Company retired approximately $1,900,000 and $416,000 of debt in 2012 and 2013, respectively. Additionally, the Company converted $3,800,000 of debt into common stock and received notification of additional forgiveness of liabilities of $404,000 during 2012. Should the Company be unable to secure customer contracts that will drive sufficient cash flow to sustain operations, the Company will be forced to seek additional capital in the form of debt or equity financing; however, there can be no assurance that such debt or equity financing will be available on terms acceptable to the Company or at all. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Use of Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates. Significant estimates include the recoverability of long-lived assets, valuation and recoverability of goodwill, stock based compensation, deferred taxes and related valuation allowances and valuation of equity instruments.
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:
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$ |
665,258 |
|
|
$ |
3,420,397 |
|
Carrying Value
|
|
|
700,000 |
|
|
|
3,509,000 |
|
Valuations for long-term debt are determined based on borrowing rates currently available to the Company for loans with similar terms and maturities. These loans have been determined to be Level 3 within the fair value hierarchy and use a discounted cash flow model to determine its valuation. There have been no changes to the valuation technique.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 718 “Compensation – Stock Compensation” which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards under ASC 718. The Company issued 25,000 options at an exercise price of $0.05 in the first six months of 2013. The Company recognized stock-based compensation expense of $22,000 and $46,000 for the three and six months ended June 30, 2013, respectively. This is comprised of the following amounts for the three and six months, respectively, as of June 30, 2013; $1,000 and $4,000, in connection with outstanding options, $9,000 and $18,000, for the 549,360 shares of restricted stock reserved for Mr. John Broderick, the Company’s CEO, in accordance with his 2007 employment agreement, and $12,000 and $24,000 for the 1,500,000 shares of restricted stock reserved for Mr. Broderick, in accordance with his 2012 employment agreement.
At June 30, 2013, there was unrecognized compensation cost of $4,000 related to stock options which is expected to be recognized over a weighted-average amortization period of 1 year. In addition, at June 30, 2013, there was $45,000 of unrecognized expense compensation cost related to Mr. Broderick’s 549,360 shares of unvested restricted stock that is expected to be recognized over a weighted-average period of 1.25 years and $68,000 of unrecognized expense compensation cost related to Mr. Broderick’s 1,500,000 shares of unvested restricted stock that is expected to be recognized over a weighted-average period of 1.3 years.
The following table sets forth certain information as of June 30, 2013 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. 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 December 31, 2012
|
|
|
3,921,493 |
|
Granted
|
|
|
25,000 |
|
Exercised
|
|
|
-- |
|
Forfeited
|
|
|
(136,383 |
) |
Outstanding on June 30, 2013
|
|
|
3,810,110 |
|
|
|
|
|
|
Weighted average exercise price of outstanding options
|
|
$ |
0.33 |
|
|
|
|
|
|
Aggregate Intrinsic Value
|
|
$ |
49 |
|
|
|
|
|
|
Shares available for future grants on June 30, 2013
|
|
|
700,690 |
|
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 technology, 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 (the “Convertible Note”) in the aggregate principal amount of $700,000, payable to SOAdesk, with an annual interest rate of 5% and an original maturity date of March 31, 2010. On March 31, 2010, the maturity date of the Convertible Note was extended from March 31, 2010 to September 30, 2010 and was secured by shares of the Company’s Series B Preferred Stock . Through a series of amendments, the maturity date was extended to December 31, 2012. In January 2013, the maturity date was further extended to April 1, 2014;
|
|
●
|
$525,000, payable in cash to SOAdesk on March 31, 2010 (subsequently converted into a convertible promissory note and paid in full 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. In March 2012, SOAdesk elected to convert $300,000 of the outstanding note balance into 2,000,000 shares of Company’s Common Stock. At June 30, 2013 the Company was indebted to SOAdesk under this note in the amount of $700,000; and
|
|
●
|
certain earn-out contingencies of $2,410,000 based on product and enterprise revenue performance targets being met (which the Company has determined will not be met completely as stated below).
|
The terms of the Asset Purchase Agreement were amended on March 31, 2010, and the Company issued a $525,000 convertible promissory note to SOAdesk in lieu of the $525,000 payment. This note, which carried an annual interest rate of 5%, was convertible into shares of the Company’s Series B Preferred Stock at the holder’s option and originally matured on June 30, 2010. The Company paid principal in the amount of $100,000 in April 2010. On June 30, 2010, the convertible note was amended to extend the maturity date from June 30, 2010 to September 30, 2010. Through a series of amendments, the maturity date was extended to March 31, 2012. In April 2012, the Company paid this note in full.
The Company was obligated to make additional payments of up to $2,410,000 over an 18 month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets. Such payments are payable quarterly during the 18 month period over which the performance targets are being measured. The earn-out award was calculated, subject to adjustment, based upon the cumulative effect of achieved revenue performance targets during the applicable earn-out period. The obligation was determined by management after consultation with an independent appraiser using the income approach methodology analyzing the Company’s discounted cash flow and management’s input on probability of attaining the different revenue performance targets. On March 31, 2011, the Company had determined that the earn-out targets originally recorded as part of the acquisition will not be completely met. The Company therefore recorded a gain of $517,000 in the first quarter of 2011, in addition to the $1,050,000 gain recorded in the fourth quarter of 2010, in the statement of operations from the reversal of part of the earn-out accrual. At June 30, 2013 and December 31, 2012 the Company has recorded $843,000 in accounts payable for the earn-out earned through July 31, 2011.
We account for contingent consideration payable to sellers of the acquired assets 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 (ii) 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 ($141,000 is expected to be deductible for tax purposes)
|
|
|
2,832,000 |
|
|
|
$ |
4,935,000 |
|
Simultaneously with the acquisition of the assets of SOAdesk, the Company also closed an initial round of Series B Convertible Preferred Stock of approximately $1,560,000, 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. 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 $1,560,000 raised, the Company’s Chairman, Mr. John Steffens invested $910,000 through a combination of cash and debt retirement. Dividends accrued at December 31, 2011 amounted to $244,000. In March 2012, the Company converted this amount into 1,765,333 shares of common stock of the Company. Dividends accrued at June 30, 2013 and December 31, 2012 amounted to $169,000 and $106,000, respectively.
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company accounts for goodwill in accordance with ASC Topic 350 “Intangibles – Goodwill and Other” which requires that goodwill and intangible assets 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 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 disclosed 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.
Pursuant to recent authoritative accounting guidance, the Company elects to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless the Company determines that it is more likely than not that its fair value is less than its carrying amount. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test is performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step is measuring the fair value of assets and liabilities of the reporting unit to determine the implied fair value of goodwill, which is compared with the carrying amount of that goodwill. Any excess of the goodwill carrying value over the respective implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. Through June 30, 2013, no indicator of impairment of goodwill has been identified.
The Company’s intangible asset, consisting of software acquired from SOAdesk, LLC, in the amount of $2,103,000 was being amortized over its estimated useful life of 3 years ending March 31, 2013. Amortization expense for the three months ended March 31, 2013 was $28,000, resulting in the intangible asset being fully amortized.
NOTE 4. SHORT TERM DEBT
Short-term debt and notes payable to related party consist of the following (in thousands):
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
Note payable asset purchase agreement (a)
|
|
|
700 |
|
|
|
-- |
|
Note payable – related party (b)
|
|
|
2,796 |
|
|
|
3 |
|
Notes payable (c)
|
|
|
728 |
|
|
|
823 |
|
|
|
$ |
4,224 |
|
|
$ |
826 |
|
(a)
|
At June 30, 2013, the Company reclassed to short term debt its unsecured convertible promissory note with SOAdesk that was entered into as part of the Asset Purchase Agreement with SOAdesk for $700,000 with an annual interest rate of 5%. At June 30, 2013, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $121,000 in interest. (See Note 5)
|
(b)
|
From time to time during 2010 and 2013, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year, are unsecured and mature on April 1, 2014. At June 30, 2013, the notes were reclassed to short term debt and the Company was indebted to Mr. Steffens in the approximate amount of $2,778,000 of principal and $270,000 in interest. (See Note 5)
|
During 2012, the Company entered into short term note payable with John Broderick, the Chief Executive Office and Chief Financial Officer, for various working capital needs. The note bears interest at 12% and was unsecured. At June 30, 2013 and December 31, 2012, the Company was indebted to Mr. Broderick in the approximate amount of $3,000. No interest was paid in fiscal 2013 and 2012.
In the first quarter of 2013, the Company entered into a short term note payable with Antony Castagno, the Chief Technology Officer, for various working capital needs. The note is non-interest bearing and was unsecured. At June 30, 2013, the Company was indebted to Mr. Castagno in the amount of $15,000.
(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 and employees, which provide for short term borrowings, both secured by accounts receivable and unsecured. Of the total outstanding at June 30, 2013 of $392,000, approximately $45,000 is secured by accounts receivable and $347,000 is unsecured. The notes bear interest ranging from 10% to 36% and mature at various times during the year.
|
In March 2012, certain private lenders agreed to refinance $83,000 of debt and $253,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. In March 2013, the same private lenders agreed to extend the maturity date to April 4, 2014. As such this amount has been classified as long term debt as of December 31, 2012. At June 30, 2013, the Company has reclassed the debt to short term debt. (See Note 5).
In July 2012, the Company entered into a restructuring settlement with a private lender whereby the lender agreed to accept $495,000 in full satisfaction of all principal and interest due under the Note agreements, as of June 1, 2012, plus interest in the amount of approximately $21,000 for the period from June 1, 2012 to July 31, 2012. In addition, the Company agreed to pay interest for the period after July 31, 2012 in the aggregate amount of approximately $67,000. This interest was paid in seven monthly installments of approximately $9,750 each from August 2012 through February 2013. The notes were paid in full in February 2013.
NOTE 5. LONG-TERM DEBT
Long-term loan and notes payable to related party consist of the following (in thousands):
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
Note payable asset purchase agreement (a)
|
|
$ |
-- |
|
|
$ |
700 |
|
Note payable – related party (b)
|
|
|
-- |
|
|
|
1,773 |
|
Other long-term debt (c)
|
|
|
700 |
|
|
|
1,036 |
|
|
|
$ |
700 |
|
|
$ |
3,509 |
|
(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%. The note was originally scheduled to mature on March 31, 2010 but was subsequently amended to extend the maturity date to September 30, 2010 and was secured with shares of the Company’s Series B Preferred Stock. As of September 30, 2010, the maturity date was extended to March 31, 2011. Through a series of amendments, the maturity date was extended to December 31, 2012. In January 2013, the Company and SOAdesk LLC agreed to extend the maturity on the note to April 1, 2014 and as such the Company has reclassed the debt to long term as of December 31, 2012. At June 30, 2013, the Company has reclassed the debt to short term debt. (See Note 4).
|
The note is convertible into shares of Series B Convertible Preferred Stock at the rate of one share per every $150 of principal and interest due under the note. The Company is obligated to repay any principal of the loan with fifty percent of any gross proceeds of any Series B Preferred capital raise through maturity of the note. The note is convertible at the holder’s option at any time or at maturity.
(b)
|
From time to time during 2010 and 2013, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. In March 2012, Mr. Steffens converted $3,000,000 of his debt, which included $350,000 which was lent to the Company in the first quarter of 2012, into 20,000,000 shares of common stock of the Company at a price of $0.15 per share. In March 2012, Mr. Steffens agreed to refinance $465,000 of debt and $417,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. In December 2012, Mr. Steffens converted $300,000 of his debt into a subscription of 6,000,000 shares of the Company’s common stock at a price of $0.05 per share as part of a private investment in the Company’s stock, which was subsequently converted into shares of common stock of the Company in the first quarter of 2013. At December 31, 2012, the Company was indebted to Mr. Steffens in the approximate amount of $1,773,000 of principal and $168,000 in interest. In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until April 1, 2014. As such this amount has been reclassified to long-term debt as of December 31, 2012. At June 30, 2013, the Company has reclassed the debt to short term debt. (See Note 4)
|
(c)
|
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 only convertible into shares of the Company’s common stock at the rate of one share for every $0.15 of principal and interest due under the note. 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. In March 2012, SOAdesk elected to convert $300,000 of the outstanding note balance into 2,000,000 shares of Company’s Common Stock. At June 30, 2013 and December 31, 2012 the Company was indebted to SOAdesk in the amount of $700,000.
|
In March 2012, certain private lenders agreed to refinance $83,000 of debt and $253,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. In March 2013, the same private lenders agreed to extend the maturity date to April 4, 2014. As such this amount has been classified as long term debt as of December 31, 2012. At June 30, 2013, the Company has reclassed the debt to short term debt. (See Note 4)
NOTE 6. CONVERSION OF DEBT TO EQUITY
On March 30, 2012, the Company entered into agreements with private lenders, including John L. Steffens, the Chairman of the Board of Directors, to convert $3,243,502 of debt and $33,013 of interest into 21,843,429 common shares of the Company’s stock. (See Note 5) The Company accounted for the transaction pursuant to Topic ASC 470-50, Modification and Extinguishment of Debt. Pursuant to ASC 470-50, when debt is extinguished by delivering noncash assets owned by the debtor, the gain or loss on the extinguishment should be measured by the difference between the net carrying amount of the debt and the fair value of the noncash assets. Any difference between the fair value and the carrying amount of the noncash assets should be recognized as a gain or loss on transfer. As part of management’s analysis in determining the fair market value, the Company engaged an independent expert to assist the Company in determining the fair market value of the Company stock and whether a discount to the price of the stock needed to be applied. In analysis of historical studies of discounts attributable to trading restrictions as well as analysis from an option pricing model of protective puts of the Company’s stock, the Company determined that a 25% discount to the closing stock price on the day of the transaction would be necessitated to establish fair market value. The Company calculated an approximately $246,000 gain on the extinguishment of the debt, however, due to the fact that 20,000,000 shares of the transaction were being issued to Mr. Steffens, the Company determined that this was not an arm’s length agreement and as such has recorded the gain through additional paid in capital.
NOTE 7. STOCKHOLDER’S EQUITY
In December 2012, the Company had stock subscription of 10,200,000 shares of its common stock at a price of $0.05 per share. This was part of an offering in a private investment in the Company’s common stock. The stock subscription was made up of $186,132 of cash from private investors, the extinguishment of $23,868 of interest on a note with one of the private investors, and the exchange of $300,000 of short term debt with Mr. John Steffens, the Company’s Chairman. Additionally, the investors were issued warrants to purchase common stock of the Company at a strike price of $0.20 per share. The warrants expire in five years. 2,040,000 warrants were issued to these investors. In March 2013, the offering was officially closed and the Company issued 11,840,241 common shares, of which 10,200,000 were attributable to the stock subscription at December 31, 2012, in exchange for $592,012.
NOTE 8. INCOME TAXES
The Company accounts for income taxes in accordance with FASB guidance ASC 740 “Income Taxes”. The Company's effective tax rate differs from the statutory rate primarily due to the fact that no income tax benefit or expense was recorded for the first six months of fiscal year 2013 or 2012. Because of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance.
NOTE 9. EARNINGS/LOSS PER SHARE
Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities. Potentially dilutive securities outstanding during the periods presented include stock options, warrants, restricted stock, preferred stock and convertible debt.
Options and warrants to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation. No options and warrants were included for the three and six months ended June 30, 2013. 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 following table sets forth the components of basic and diluted earnings per share calculation for the six months ending June 30, 2012 (in thousands, except per share amount):
|
|
For the six months ended
June 30, 2012
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per-Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,341 |
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(63 |
) |
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stockholders
|
|
|
1,278 |
|
|
|
60,545 |
|
|
$ |
0.02 |
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
19 |
|
|
|
957 |
|
|
|
|
|
Warrants
|
|
|
-- |
|
|
|
47 |
|
|
|
|
|
Restricted stock
|
|
|
-- |
|
|
|
549 |
|
|
|
|
|
Convertible preferred stock
|
|
|
62 |
|
|
|
11,942 |
|
|
|
|
|
5% Convertible debentures
|
|
|
44 |
|
|
|
9,333 |
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income available to common stockholders + assumed conversions
|
|
$ |
1,403 |
|
|
|
83,373 |
|
|
$ |
0.02 |
|
NOTE 10. CONTINGENCIES
The Company, from time to time, is involved in legal matters arising in the ordinary course of its business including matters involving proprietary technology. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.
The Company is currently in discussions with the state of Delaware regarding the potential underpayment of its annual franchise tax dating back to 2002. The Company expects that its explanation regarding the amount in dispute will be accepted by Delaware but, should a negotiated resolution not arise in favor of the Company, it may be exposed to a franchise tax liability of approximately $1.6 million.
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. There were no claims against the Company as of June 30, 2013.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cicero, Inc. (the “Company”) provides business performance software that enables companies to monitor and improve their existing technologies to deliver smart, integrated, and secure solutions at employees’ desktops and mobile devices. The Company provides an innovative and unique combination of application and process integration, automation, presentation and real-time analytics, all without changes to the underlying applications or requiring costly development expenditures. The Company’s software addresses the emerging need for companies' information systems by securely presenting relevant information in an intuitive manner for mobile devices and desktops. 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 business performance and user experience management market with emphasis on the unified desktop and business process automation with its Cicero XM® products and enterprise mobility with its Cicero EDGE™ product.
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 for each product that provides an intuitive integration and development environment, which simplifies the process of configuring and deploying solutions to the enterprise. The Company 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 either on the desktop or mobile devices. Our technology enables automatic information sharing among line-of-business applications and tools. It is ideal for deployment in organizations that need to provide access to enterprise applications on desktops or mobile devices to improve business performance, the user experience, and customer satisfaction. By integrating diverse applications across multiple operating systems, automating business processes and delivering a better user experience, the Company’s products are ideal for the financial services, insurance, healthcare, governmental and other industries requiring a cost-effective, proven business performance and user experience management solution for enterprise desktops and mobile devices.
We believe Cicero EDGE is a proven, game-changing technology solution that addresses the enterprise mobility challenges of security, compatibility and usability, allowing companies to deliver true mobile solutions in a fraction of the time and cost compared to other approaches such as developing new mobile or web apps. Cicero EDGE allows companies to integrate, automate, and present information from existing desktop applications and back-end systems, delivering enterprise content, applications, and business processes to growing mobile workforces.
Cicero EDGE maintains two significant advantages over alternative mobility enablement. First, Cicero EDGE enables enterprises to deploy mobile solutions quicker than previously possible. By leveraging existing content, applications and business processes, enterprises avoid having to invest in totally new technologies that may not have the full functionality needed. While vendors like Citrix have tried to show this as their differentiator, companies implementing that approach have not had significant success due to the mismatch of mobile/windows form factors. Cicero EDGE uniquely bridges the impedance mismatch between the two form factors, by translating gesturing from the device to the Virtual Desktop Infrastructure (“VDI”) and relaying feedback from the VDI back to the device.
Secondly, Cicero EDGE’s security model allows sensitive data to remain behind the firewall and never reside on the device. The security advantage enables enterprises to not have to go through time consuming encryption caching and wipe scenarios with their new mobile applications.
In addition to software products, the Company also provides technical support, training and consulting services as part of its commitment to providing its customers industry-leading integration solutions. The Company’s consulting team has in-depth experience in developing successful enterprise-class solutions as well as valuable insight into the business information needs of customers in the Global 5000. We offer services around our integration software products.
This Quarterly Report on Form 10-Q contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, liquidity and capital resources and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause its actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risk and uncertainties include, among others, the following:
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We develop new and unproven technology and products;
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We depend on an unproven strategy for ongoing revenue;
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Economic conditions could adversely affect our revenue growth and cause us not to achieve desired revenue;
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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;
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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;
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Loss of key personnel associated with Cicero XM and EDGE development could adversely affect our business;
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Different competitive approaches or internally developed solutions to the same business problem could delay or prevent adoption of Cicero XM and EDGE;
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Our ability to compete may be subject to factors outside our control;
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The markets for our products are characterized by rapidly changing technologies, evolving industry standards, and frequent new product introductions;
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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;
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We may be unable to enforce or defend our ownership and use of proprietary and licensed technology; and
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Our business may be adversely impacted if we do not provide professional services to implement our solutions.
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Reference should be made to such factors and all forward-looking statements are qualified in their entirety by the above cautionary statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Given these uncertainties, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this quarterly report. We assume no obligation to update or revise them or provide reasons why actual results may differ.
RESULTS OF OPERATIONS
The table below presents information for the three and six months ended June 30, 2013 and 2012 (in thousands):
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Three months ended June 30, |
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Six months ended June 30, |
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2013
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2012
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2013
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2012
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Total revenue
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$ |
595 |
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$ |
1,045 |
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$ |
1,098 |
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$ |
4,713 |
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Total cost of revenue
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214 |
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462 |
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554 |
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942 |
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Gross margin
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381 |
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583 |
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544 |
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3,771 |
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Total operating expenses
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1,133 |
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1,396 |
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2,193 |
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2,631 |
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Income/(loss) from operations
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$ |
(752 |
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$ |
(813 |
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$ |
(1,649 |
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$ |
1,140 |
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Revenue. The Company has three categories of revenue: software products, maintenance, and services. Software products revenue is comprised primarily of fees from licensing the Company's proprietary software products. Maintenance revenue is comprised of fees for maintaining, supporting, and providing periodic upgrades to the Company's software products. Services revenue is comprised of fees for consulting and training services related to the Company's software products.
The Company's revenues vary from quarter to quarter, due to market conditions, the budgeting and purchasing cycles of customers and the effectiveness of the Company’s sales force. The Company typically does not have any material backlog of unfilled software orders and product revenue in any quarter is substantially dependent upon orders received in that quarter. Because the Company's operating expenses are relatively fixed over the short term, variations in the timing of the recognition of revenue can cause significant variations in operating results from quarter to quarter.
We generally recognize revenue from software license fees when our obligations to the customer are fulfilled, which is typically upon delivery or installation. Revenue related to software maintenance contracts is recognized ratably over the 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.
THREE MONTHS ENDED JUNE 30, 2013 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2012.
Total Revenues. Total revenues decreased $450,000, or 43.1%, from $1,045,000 to $595,000, for the three months ended June 30, 2013 as compared with the three months ended June 30, 2012. The decrease is due primarily to a decrease in software revenue partially offset by an increase in maintenance and consulting revenue.
Total Cost of Revenue. Total cost of revenue decreased $248,000, or 53.7%, from $462,000 to $214,000 for the three months ended June 30, 2013, as compared with the three months ended June 30, 2012. The decrease is primarily due to the intangible assets from the SOAdesk acquisition being fully amortized as of the first quarter 2013.
Total Gross Margin. Gross margin was $381,000, or 64.0%, for the three months ended June 30, 2013, as compared to the gross margin of $583,000, or 55.8%, for the three months ended June 30, 2012. The decrease in gross margin is primarily due to the decrease in total sales partially offset by the lower expenses from the intangible asset being fully amortized.
Total Operating Expenses. Total operating expenses decreased $263,000, or 18.8%, from $1,396,000 to $1,133,000 for the three months ended June 30, 2013, as compared with the three months ended June 30, 2012. The decrease is primarily attributable to a decrease in personnel costs of $40,000, a decrease in commissions of $98,000, and a decrease in the use of outside professional services of $71,000.
Software Products.
Software Product Revenue. The Company earned $33,000 in software product revenue for the three months ended June 30, 2013 as compared to $651,000 in software revenue for the three months ended June 30, 2012, a decrease of $618,000. The decrease is primarily due to the somewhat traditional long sales cycles within the enterprise software arena. In 2012, the Company recognized $600,000 of software licenses from one customer.
Software Product Gross Margin. The gross margin on software products for the three months ended June 30, 2013 was 100.0% compared with a gross margin of 73.1% for the three months ended June 30, 2012. The increase in gross margin is primarily due to the amortization costs of the acquired SOAdesk software being fully amortized as of the first quarter of 2013 partially offset by the decrease in software sales.
Maintenance.
Maintenance Revenue. Maintenance revenue for the three months ended June 30, 2013 increased by approximately $49,000, or 15.2%, from $323,000 to $372,000 as compared to the three months ended June 30, 2012 due to the initial annual maintenance contract with a major financial services company partially offset by the cancellation of two maintenance contracts.
Maintenance Gross Margin. Gross margin on maintenance products for the three months ended June 30, 2013 was 97.3% compared with 89.5% for the three months ended June 30, 2012. Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company’s software products. The increase in gross margin is due to the increase in maintenance revenue.
Services.
Services Revenue. Services revenue increased $119,000, or 167.6%, from $71,000 to $190,000 for the three months ended June 30, 2013 as compared with the three months ended June 30, 2012. The increase in services revenues is primarily attributable to an increase in paid consulting engagements in the second quarter of 2013.
Services Gross Margin Loss. Services gross margin loss was 7.4% for the three months ended June 30, 2013 compared with gross margin loss of 256.3% for the three months ended June 30, 2012. The decrease in gross margin loss was primarily attributable to the increase in consulting revenue and the decrease in consulting expenses from a decrease in headcount in 2013.
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 June 30, 2013 decreased by approximately $140,000, or 23.6%, from $593,000 to $453,000 as compared with the three months ended June 30, 2012. The decrease is primarily attributable to decrease in headcount in the second half of 2012 and lower commissions.
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 $10,000, or 2.6%, from $380,000 to $390,000 for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. The increase in costs for the quarter is primarily due to an increase in outside professional services partially offset by a decrease in personnel expenses and travel.
General and Administrative. General and administrative expenses consist of personnel costs for the legal, financial, human resources, and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses for the three months ended June 30, 2013 decreased by approximately $133,000, or 31.4%, from $423,000 to $290,000 as compared to the three months ended June 30, 2012. The decrease is primarily attributable to a decrease in professional service expenses and annual audit fees.
Provision for Taxes. The Company’s effective income tax rate differs from the statutory rate primarily because an income tax expense/benefit was not recorded as a result of the losses in the second quarter of 2013 and 2012. Because of the Company’s recurring losses, the deferred tax assets have been fully offset by a valuation allowance.
Net Loss. The Company recorded a net loss of $865,000 for the three months ended June 30, 2013 as compared to a net loss of $816,000 for the three months ended June 30, 2012. The increase is primarily due to the decrease in software revenue, offset by decreases in operating expenses and the elimination of software amortization.
SIX MONTHS ENDED JUNE 30, 2013 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2012.
Total Revenues. Total revenues decreased $3,615,000, or 76.7%, from $4,713,000 to $1,098,000, for the six months ended June 30, 2013 as compared with the six months ended June 30, 2012. The decrease is due primarily to the decrease in revenue in software sales due to two significant enterprise license sales in fiscal 2012 partially offset by an increase in maintenance and consulting revenue.
Total Cost of Revenue. Total cost of revenue decreased $388,000, or 41.2%, from $942,000 to $554,000, for the six months ended June 30, 2013 as compared with the six months ended June 30, 2012. The decrease is primarily attributable to a decrease in cost of software as a result of the intangible asset being fully amortized.
Total Gross Margin. Gross margin was $544,000, or 49.5%, for the six months ended June 30, 2013 as compared to the gross margin of $3,771,000, or 80.0% for the six months ended June 30, 2012. The decrease in gross margin is primarily due to the decrease in total sales.
Total Operating Expenses. Total operating expenses decreased $438,000, or 16.6%, from $2,631,000 to $2,193,000 for the six months ended June 30, 2013, as compared with the six months ended June 30, 2012. The decrease is primarily attributable to a decrease in personnel costs of $98,000, a decrease in commissions of $118,000, a decrease in travel expenses of $76,000 and a decrease in the use of outside professional services of $108,000.
Software Products.
Software Product Revenue. The Company earned $43,000 in software product revenue for the six months ended June 30, 2013 as compared to $3,888,000 in software revenue for the six months ended June 30, 2012, a decrease of $3,845,000. The decrease is primarily due to two enterprise license sales in fiscal 2012.
Software Product Gross Margin. The gross margin on software products for the six months ended June 30, 2013 was 34.9% compared with a gross margin of 91.0% for the six months ended June 30, 2012. The decrease in gross margin is primarily due to the decrease in software revenue partially offset by the lower expenses due to the amortization costs of the acquired SOAdesk software being fully amortized as of the first quarter of 2013.
Maintenance.
Maintenance Revenue. Maintenance revenue for the six months ended June 30, 2013 increased by approximately $26,000, or 3.8%, from $679,000 to $705,000 as compared to the six months ended June 30, 2012 due to the initial annual maintenance contract with a major financial services company partially offset by the cancellation of two maintenance contracts.
Maintenance Gross Margin. Gross margin on maintenance products for the six months ended June 30, 2013 was 91.6% compared with 89.8% for the six months ended June 30, 2012. 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.
Services.
Services Revenue. Services revenue increased $204,000, or 139.7%, from $146,000 to $350,000 for the six months ended June 30, 2013 as compared with the six months ended June 30, 2012. The increase in services revenues is primarily attributable to an increase in paid consulting engagements in the first six months of 2013.
Services Gross Margin Loss. Services gross margin loss was 33.4% for the six months ended June 30, 2013 compared with gross margin loss of 257.5% for the six months ended June 30, 2012. The decrease in gross margin loss was primarily attributable to the increase in consulting revenue and a decrease in consulting expenses from a decrease in headcount and reduced travel expense.
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 six months ended June 30, 2013 decreased by approximately $270,000, or 24.4%, from $1,105,000 to $835,000 as compared with the six months ended June 30, 2012. The decrease is primarily attributable to lower headcount and a decrease in commissions from lower sales.
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 $15,000, or 2.0%, from $755,000 to $770,000 for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. The increase in costs is primarily due to an increase in outside professional services partially offset by a decrease in travel related expenses.
General and Administrative. General and administrative expenses consist of personnel costs for the legal, financial, human resources, and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses for the six months ended June 30, 2013 decreased by approximately $183,000, or 23.7%, from $771,000 to $588,000 as compared to the six months ended June 30, 2012. The decrease is primarily attributable to a decrease in professional service expenses.
Provision for Taxes. The Company’s effective income tax rate differs from the statutory rate primarily because an income tax expense/benefit was not recorded as a result of the loss in the first six months of 2013 and gain in the first six months of 2012. Because of the Company’s recurring losses, the deferred tax assets have been fully offset by a valuation allowance.
Net Income (Loss). The Company recorded net loss of $1,878,000 for the six months ended June 30, 2013 as compared to net income of $1,341,000 for the six months ended June 30, 2012. The decrease is primarily due to a $3,845,000 decrease in software product revenue over the prior period primarily as a result of two enterprise license sales in fiscal 2012.
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 increased to $79,000 at June 30, 2013 from $69,000 at December 31, 2012, an increase of $10,000.
Net cash generated/used in Operating Activities. Cash used in operations for the six months ended June 30, 2013 was $652,000 compared to cash generated by operations of $870,000 for the six months ended June 30, 2012. Cash used in operations for the six months ended June 30, 2013 was primarily due to the loss from operations of $1,878,000 and a decrease in deferred revenue of $362,000, partially offset by depreciation and amortization of $42,000, stock compensation of $46,000, stock issuance for consulting services of $35,000, a decrease in accounts receivable of $1,201,000, a decrease in prepaid expenses of $97,000, and an increase in accounts payable and accrued expenses of $167,000.
Net cash used in Investing Activities. The Company purchased $7,000 worth of equipment during the six months ended June 30, 2013 versus $16,000 during the six months ended June 30, 2012.
Net cash generated/used in Financing Activities. Net cash generated by financing activities for the six months ended June 30, 2013 was approximately $669,000 as compared with net cash used by financing activities of approximately $945,000 for the six months ended June 30, 2012. Cash generated by financing activities for the six months ended June 30, 2013 was comprised primarily from cash received from short term borrowings of $1,020,000 and a capital infusion of $65,000 offset by the repayment of $416,000 of short term debt.
Liquidity
The Company funded its cash needs during the six months ended June 30, 2013 with cash on hand from December 31, 2012, the revenue generated in the first six months of 2013, short term borrowings and a capital infusion.
In December 2012, the Company had stock subscription of 10,200,000 shares of its common stock at a price of $0.05 per share. This was part of an offering in a private investment in the Company’s common stock. The stock subscription was made up of $186,132 of cash from private investors, the extinguishment of $23,868 of interest on a note with one of the private investors, and the exchange of $300,000 of short term debt with Mr. John Steffens, the Company’s Chairman. Additionally, the investors were issued warrants to purchase common stock of the Company at a strike price of $0.20 per share. The warrants expire in five years. 2,040,000 warrants were issued to these investors. In March 2013, the offering was officially closed and the Company issued 11,840,241 common shares, of which 10,200,000 were attributable to the stock subscription at December 31, 2012, in exchange for $592,012.
From time to time during 2012 and 2013, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. In December 2012, Mr. Steffens converted $300,000 of his debt into a subscription of 6,000,000 shares of the Company’s common stock at a price of $0.05 per share as part of a private investment in the Company’s stock. At December 31, 2012, the Company was indebted to Mr. Steffens in the approximate amount of $1,773,000 of principal and $168,000 in interest. In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until April 1, 2014. At June 30, 2013, the Company was indebted to Mr. Steffens in the approximate amount of $2,778,000 of principal and $270,000 in interest.
The Company maintained several Note agreements with an individual investor. The borrowings from time to time were both secured and unsecured. Several notes in the aggregate of $250,000 were due and outstanding under the Note agreements. The loans bore interest at 36% per annum. In July 2012, the Company entered into a restructuring settlement with the lender whereby the lender agreed to accept $495,000 in full satisfaction of all principal and interest due under the Note agreements, as of June 1, 2012, plus interest in the amount of approximately $21,000 for the period from June 1, 2012 to July 31, 2012. In addition, the Company agreed to pay interest for the period after July 31, 2012 in the aggregate amount of approximately $67,000. This interest was paid in seven monthly installments of approximately $9,750 each from August 2012 through February 2013. The note and all outstanding interest were paid in full in February 2013.
During March 2012, the Company converted $3,576,515 in principal and interest on debt held by certain lenders of short and long term notes, including certain directors and significant shareholders of the Company, into 23,843,429 shares of the Company’s common stock at a price of $0.15 per share.
The Company has incurred an operating loss of approximately $188,000 for the year ended December 31, 2012, and has a history of operating losses. For the six months ended June 30, 2013, the Company incurred losses of $1,878,000 and had a working capital deficiency of $9,429,000 as of June 30, 2013. The creation of Cicero Edge as a proven product in the enterprise mobility space has opened new opportunities in the financial services, insurance, healthcare and government industries where workers are becoming un-tethered from their desktops. Enterprise software sales are typically the result of a long sales cycle. The Company anticipates an improvement in this regard based upon current discussions with active customers and prospects. The Company has also retired approximately $1,900,000 and $416,000 of debt in 2012 and 2013, respectively. Additionally, the Company converted $3,800,000 of debt into common stock and has received notification of additional forgiveness of liabilities of $404,000 during 2012. Should the Company be unable to secure customer contracts that will drive sufficient cash flow to sustain operations, the Company will be forced to seek additional capital in the form of debt or equity financing; however, there can be no assurance that such debt or equity financing will be available on terms acceptable to the Company or at all. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off balance sheet arrangements. We have no unconsolidated subsidiaries or other unconsolidated limited purpose entities, and we have not guaranteed or otherwise supported the obligations of any other entity.
Not applicable.
a) Evaluation of Disclosure Controls and Procedures.
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2013.
Based in that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2013, our disclosure controls and procedures were effective.
(b) Changes in Internal Controls.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not Applicable.
Not Applicable.
During May 2013, the Company issued 673,720 shares of its common stock, at a price of $0.05 per share, for $34,966 earned in accordance with a consulting agreement with a vendor. The securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act.
None.
None.
None.
Exhibit No.
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Description
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Certification of Chief Executive Officer/Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
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Certification of John P. Broderick pursuant to 18 USC § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CICERO INC.
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Date: August 14, 2013
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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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