Blueprint
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
one)
[X]
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended September 30, 2016.
[
]
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition
period from
to
Commission
File Number 0-26392
CICERO INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
11-2920559
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S
Employer Identification Number)
|
8000
Regency Parkway, Suite 542, Cary, North Carolina
|
27518
|
(Address of
principal executive offices)
|
(Zip
Code)
|
(919) 380-5000
(Registrant's
telephone number, including area code)
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. YES
X NO _
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 ☐ Accelerated Filer ☐ Non
accelerated filer ☐ Smaller reporting company ☒
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and
post such files).
Yes
☒No ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of Exchange Act).
Yes ☐ No ☒
192,253,005
shares of common stock, $.001 par value, were outstanding as of
November 10, 2016.
Cicero Inc.
Index
PART I. Financial Information
|
Page
Number
|
|
|
Item 1.
Condensed Consolidated Financial Statements
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2016 (unaudited)
and December 31, 2015
|
3
|
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended September 30, 2016 and 2015 (unaudited)
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2016 and 2015 (unaudited)
|
5
|
|
|
Condensed
Consolidated Statement of Stockholders’ Deficit as of
September 30, 2016 (unaudited)
|
6
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
15
|
|
|
Item 3.
Quantitative and Qualitative Disclosures about Market
Risk
|
22
|
|
|
Item 4.
Controls and Procedures
|
22
|
|
|
PART II. Other Information
|
23
|
|
|
Item 1.
Legal Proceedings
|
23
|
|
|
Item
1A. Risk Factors
|
23
|
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
23
|
|
|
Item 3.
Defaults Upon Senior Securities
|
23
|
|
|
Item 4.
Mine Safety Disclosures
|
23
|
|
|
Item 5.
Other Information
|
23
|
|
|
Item 6.
Exhibits
|
23
|
|
|
SIGNATURE
|
24
|
|
|
Part
I. Financial Information
Item
1. Condensed Consolidated Financial Statements
CICERO
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share amounts)
|
|
|
|
|
|
ASSETS
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$393
|
$1,009
|
Trade
accounts receivable
|
43
|
256
|
Prepaid
expenses and other current assets
|
68
|
235
|
Total
current assets
|
504
|
1,500
|
Property
and equipment, net
|
9
|
11
|
Goodwill
(Note 2)
|
1,658
|
1,658
|
Total
assets
|
$2,171
|
$3,169
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
Liabilities:
|
|
|
Short-term
debt less unamortized debt discount of $68 at September 30, 2016
and
|
$5,210
|
$2,098
|
$219 at December 31, 2015 (Note 3)
|
|
Accounts
payable
|
957
|
1,336
|
Accrued
expenses:
|
|
|
Salaries,
wages, and related items
|
1,565
|
1,601
|
Accrued
interest
|
2,113
|
2,021
|
Other
|
648
|
653
|
Deferred
revenue
|
663
|
605
|
Total
current liabilities
|
11,156
|
8,314
|
Long-term
debt (Note 3)
|
--
|
2,132
|
Total
liabilities
|
11,156
|
10,446
|
|
|
|
Commitments and Contingencies (Note 7 and 8)
|
|
|
|
|
Stockholders'
deficit:
|
|
|
Convertible
preferred stock, $0.001 par value, 10,000,000 shares
authorized
|
No
shares issued and outstanding at September 30, 2016 and December
31, 2015
|
--
|
--
|
Common
stock, $0.001 par value, 600,000,000 shares
authorized,
|
192
|
192
|
192,253,005 issued and outstanding at September 30, 2016 and
December 31, 2015 (Note 4)
|
Additional
paid-in capital
|
246,271
|
246,220
|
Accumulated
deficit
|
(255,448)
|
(253,689)
|
Total
stockholders' deficit
|
(8,985)
|
(7,277)
|
Total
liabilities and stockholders' deficit
|
$2,171
|
$3,169
|
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
September
30,
|
Nine Months
Ended
September
30,
|
|
|
|
|
|
Revenue:
|
|
|
|
|
Software
|
$11
|
$140
|
$34
|
$345
|
Maintenance
|
124
|
372
|
769
|
1,106
|
Services
|
82
|
30
|
167
|
59
|
Total operating
revenue
|
217
|
542
|
970
|
1,510
|
|
|
|
|
|
Cost of
revenue:
|
|
|
|
|
Software
|
--
|
--
|
--
|
--
|
Maintenance
|
46
|
26
|
144
|
82
|
Services
|
96
|
145
|
337
|
434
|
Total cost of
revenue
|
142
|
171
|
481
|
516
|
|
|
|
|
|
Gross
margin
|
75
|
371
|
489
|
994
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Sales and
marketing
|
84
|
215
|
415
|
833
|
Research and
product development
|
269
|
359
|
862
|
1,108
|
General and
administrative
|
197
|
419
|
642
|
928
|
Total operating
expenses
|
550
|
993
|
1,919
|
2,869
|
Loss from
operations
|
(475)
|
(622)
|
(1,430)
|
(1,875)
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
Interest
expense
|
(114)
|
(43)
|
(329)
|
(325)
|
Total
other income/(expense)
|
(114)
|
(43)
|
(329)
|
(325)
|
|
|
|
|
|
|
|
|
|
|
Net
loss:
|
(589)
|
(665)
|
(1,759)
|
(2,200)
|
8%
preferred stock Series B dividend
|
--
|
24
|
--
|
86
|
Deemed
dividend applicable to warrant purchase
|
--
|
882
|
--
|
882
|
Net loss applicable
to common stockholders
|
$(589)
|
$(1,571)
|
$(1,759)
|
$(3,168)
|
Loss per share
applicable to common stockholders:
|
|
|
|
|
Basic and
Diluted
|
$(0.00)
|
$(0.01)
|
$(0.01)
|
$(0.02)
|
Weighted average
shares outstanding:
|
|
|
|
|
Basic
and Diluted
|
192,253
|
178,735
|
192,253
|
138,537
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
Nine Months
Ended
September
30,
|
|
|
|
Cash flows from
operating activities:
|
|
|
Net
loss
|
$(1,759)
|
$(2,200)
|
Adjustments to
reconcile net loss to net cash used by operating
activities:
|
|
|
Depreciation and
amortization
|
5
|
10
|
Stock
compensation expense
|
2
|
9
|
Amortization
of debt discount
|
200
|
--
|
Changes in assets
and liabilities:
|
|
|
Trade accounts
receivable
|
213
|
903
|
Prepaid expenses
and other current assets
|
167
|
7
|
Accounts payable
and accrued expenses
|
(328)
|
755
|
Deferred
revenue
|
58
|
(649)
|
Net cash used by
operating activities
|
(1,442)
|
(1,165)
|
|
|
|
Cash flows from
investing activities:
|
|
|
Purchases of
equipment
|
(3)
|
(8)
|
Net
cash used by investing activities
|
(3)
|
(8)
|
|
|
|
Cash flows from
financing activities:
|
|
|
Issuance
of common stock
|
--
|
1,000
|
Borrowings under
debt
|
833
|
1,410
|
Repayments of
debt
|
(4)
|
(210)
|
Net cash generated
by financing activities
|
829
|
2,200
|
Net
increase/(decrease) in cash
|
(616)
|
1,027
|
Cash:
|
|
|
Beginning of
period
|
1,009
|
20
|
End of
period
|
$393
|
$1,047
|
Non-Cash Investing and Financing Activities:
During
April 2015, the Company converted $6,951 of debt to related party
lender by issuing 69,505,140 shares of its common
stock.
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
DEFICIT
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2015
|
192,253,005
|
$192
|
--
|
--
|
$246,220
|
$(253,689)
|
$(7,277)
|
Imputed interest on
debt discount
|
|
|
|
|
49
|
|
49
|
Options issued as
compensation
|
|
|
|
|
2
|
|
2
|
Net
loss
|
|
|
|
|
|
(1,759)
|
(1,759)
|
Balance at
September 30, 2016 (unaudited)
|
192,253,005
|
$192
|
--
|
--
|
$246,271
|
$(255,448)
|
$(8,985)
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The
accompanying condensed consolidated financial statements for the
three and nine months ended September 30, 2016 and 2015 are
unaudited, and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC").
Certain information and note disclosures normally included in
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have
been condensed or omitted pursuant to those rules and regulations.
Accordingly, these interim financial statements should be read in
conjunction with the audited condensed financial statements and
notes thereto contained in Cicero Inc.'s (the "Company") Annual
Report on Form 10-K for the year ended December 31, 2015, filed
with the SEC on March 30, 2016. The results of operations for the
interim periods shown in this report are not necessarily indicative
of results to be expected for other interim periods or for the full
fiscal year. In the opinion of management, the information
contained herein reflects all adjustments necessary for a fair
presentation of the interim results of operations. All such
adjustments are of a normal, recurring nature.
The
year-end condensed balance sheet data was derived from audited
consolidated financial statements in accordance with the rules and
regulations of the SEC, but does not include all disclosures
required for financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America.
The
accompanying condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. All of the
Company's subsidiaries are wholly owned for the periods
presented.
Liquidity
The
accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has incurred an operating
loss of approximately $2,843,000 for the year ended December 31,
2015, and has a history of operating losses. For the nine months
ended September 30, 2016, the Company incurred losses of $1,759,000
and had a working capital deficiency of $10,652,000 as of September
30, 2016. Management believes that its repositioned dual strategy
of leading with its Discovery product to use analytics to measure
and then manage how work happens as well as concentrating on
expanding the indirect channel with more resale and OEM partners,
will shorten the sales cycle and allow for value based selling to
our customers and prospects. The Company anticipates success in
this regard based upon current discussions with active partners,
customers and prospects. The Company has borrowed $833,000 and
$2,275,000 in 2016 and 2015, respectively. The Company has also
repaid approximately $4,000 and $210,000 of debt in 2016 and 2015,
respectively. Additionally, in April 2015, the Company’s
Chairman, Mr. Launny Steffens, converted $6,950,514 of debt into
69,505,140 shares of common stock of the Company. In July 2015, the
Company completed a sale of 25 million shares of its common stock
and warrants to purchase up to 205,277,778 shares of its common
stock to a group of nine investors, led by the Company’s
Chairman of the Board, John (Launny) Steffens and the Privet Group,
LLC, for $1,000,000. Should the investors exercise the warrants,
which have exercise prices ranging from $0.04 to $0.05 per share,
the Company would receive an additional $9,000,000 in proceeds. The
warrants expire in three years. Should the Company be unable to
secure customer contracts that will drive sufficient cash flow to
sustain operations, the Company will be forced to seek additional
capital in the form of debt or equity financing; however, there can
be no assurance that such debt or equity financing will be
available on terms acceptable to the Company or at all. These
factors raise substantial doubt about the Company’s ability
to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going
concern.
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.
Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with
Accounting Standards Codification (“ASC”) 718
“Compensation – Stock Compensation” which
addresses the accounting for stock-based payment transactions in
which an enterprise receives employee services in exchange for (a)
equity instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity
instruments. The Company uses the Black-Scholes option-pricing
model to determine the fair-value of stock-based awards under ASC
718. The Company did not issue any stock options in the first nine
months of 2016. The Company recognized stock-based compensation
expense of $800 and $2,000 for the three and nine months ended
September 30, 2016 in connection with outstanding options. The
Company has $4,075 in unrecognized stock-based compensation expense
as of September 30, 2016.
The
following table sets forth certain information as of September 30,
2016 about shares of the
Company’s common stock, par value $.001 (the
“Common Stock”), outstanding and available for issuance
under the Company’s existing equity compensation plans: the
Cicero Inc. 2007 Employee Stock Option Plan and the Outside
Director Stock Option Plan. The Company’s stockholders
approved all of the Company’s stock-based compensation
plans.
|
|
Outstanding on
December 31, 2015
|
3,657,110
|
Granted
|
--
|
Exercised
|
--
|
Forfeited
|
(824,898)
|
Outstanding on
September 30, 2016
|
2,832,212
|
|
|
Weighted average
exercise price of outstanding options
|
$0.24
|
Aggregate Intrinsic
Value
|
$0
|
Shares available
for future grants on September 30, 2016
|
1,667,788
|
|
|
Weighted average of
remaining contractual life
|
3.48
|
Recent Accounting Pronouncements
In
March 2016, the FASB issued a new accounting standard intended to
simplify various aspects related to how share-based payments are
accounted for and presented in the financial statements. The new
guidance includes provisions to reduce the complexity related to
income taxes, statement of cash flows, and forfeitures when
accounting for share-based payment transactions. The new standard
is effective for annual periods beginning after December 15, 2016,
and interim periods within annual periods beginning after December
15, 2017. Early adoption is permitted. The Company is currently
evaluating the impact that this new standard will have on its
condensed consolidated financial statements and related
disclosures.
The
FASB's new leases standard ASU 2016-02 Leases (Topic 842) was
issued on February 25, 2016. ASU 2016-02 is intended to improve
financial reporting about leasing transactions. The ASU affects all
companies and other organizations that lease assets such as real
estate, airplanes, and manufacturing equipment. The ASU will
require organizations that lease assets referred to as
“Lessees” to recognize on the balance sheet the assets
and liabilities for the rights and obligations created by those
leases. An organization is to provide disclosures designed to
enable users of financial statements to understand the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements
concerning additional information about the amounts recorded in the
financial statements. Under the new guidance, a lessee will be
required to recognize assets and liabilities for leases with lease
terms of more than 12 months. Consistent with current GAAP, the
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as a finance or operating lease. However, unlike
current GAAP which requires only capital leases to be recognized on
the balance sheet the new ASU will require both types of leases
(i.e. operating and capital) to be recognized on the balance sheet.
The FASB lessee accounting model will continue to account for both
types of leases. The capital lease will be accounted for in
substantially the same manner as capital leases are accounted for
under existing GAAP. The operating lease will be accounted for in a
manner similar to operating leases under existing GAAP, except that
lessees will recognize a lease liability and a lease asset for all
of those leases. The leasing standard will be effective for
calendar year-end public companies beginning after December 15,
2018. Public companies will be required to adopt the new leasing
standard for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. Early adoption will be
permitted for all companies and organizations upon issuance of the
standard. For calendar year-end public companies, this means an
adoption date of January 1, 2019 and retrospective application to
previously issued annual and interim financial statements for 2018.
See Note 7 for the Company’s current lease commitments. The
Company is currently in the process of evaluating the impact that
this new leasing ASU will have on its financial
statements.
In
January 2016, the FASB issued a new accounting standard that will
enhance the Company’s reporting through the updating of the
recognition, measurement, presentation, and disclosure of financial
instruments. The new standard is effective for financial statements
issued for annual periods beginning after December 15, 2017, and
interim periods within those annual periods. Earlier adoption is
permitted for interim and annual reporting periods as of the
beginning of the fiscal year of adoption. The Company does not
believe the adoption of this standard will have a material impact
on its consolidated financial statements.
In May
2014, the FASB issued a new accounting standard update on revenue
recognition from contracts with customers. The new guidance will
replace most current U.S. GAAP guidance on this topic and eliminate
most industry-specific guidance. According to the new guidance,
revenue is recognized when promised goods or services are
transferred to customers in an amount that reflects the
consideration for which the Company expects to be entitled in
exchange for those goods or services. This guidance will be
effective for the Company beginning January 1, 2018 and can be
applied either retrospectively to each period presented or as a
cumulative-effect adjustment as of the date of adoption. The
Company has not yet selected a transition method and is evaluating
the impact of adopting this new accounting standard update on the
consolidated financial statements and related
disclosures.
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
The
Company accounts for goodwill in accordance with ASC Topic 350
“Intangibles – Goodwill and Other Intangible
Assets” 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 in fiscal 2010. 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 September 30, 2016, there was a negative indicator but no
impairment of goodwill has been identified.
|
|
Balance at December
31, 2015
|
$1,658,000
|
Additions
|
--
|
Impairment
|
--
|
Balance at
September 30, 2016
|
$1,658,000
|
NOTE 3. DEBT
Debt
and notes payable to related party consist of the following (in
thousands):
|
|
|
Note payable
– asset purchase agreement (a)
|
$1,518
|
$1,518
|
Note payable
– related parties (b)
|
2,674
|
1,845
|
Notes payable
(c)
|
1,086
|
1,086
|
Unamortized debt
discount (b)
|
(68)
|
(219)
|
Total
debt
|
5,210
|
4,230
|
Less current
portion
|
(5,210)
|
(2,098)
|
Total long-term
debt
|
$--
|
$2,132
|
(a)
In January 2010,
the Company entered into an unsecured convertible promissory note
with SOAdesk for $700,000 with an annual interest rate of 5%. The
note was originally scheduled to mature on March 31, 2010 but was
subsequently amended and through a series of amendments, the
maturity date was extended to June 30, 2015. In June 2015, the note
was amended and the maturity date was extended to June 30, 2017. In
July 2015, the Company paid $25,000 toward the principal amount of
the note. At December 31, 2015, the Company was indebted to SOAdesk
in the amount of $675,000 in principal and $208,000 in interest. At
September 30, 2016, the Company was indebted to SOAdesk in the
amount of $675,000 in principal and $233,000 in
interest.
In June
2015, the note was amended so that the note is convertible into
shares of the Company’s common stock at the rate of one share
for every $0.15 of principal and interest due under the note from
the original conversion to 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 note was further amended that
should the Company’s earnings before interest, taxes,
depreciation and amortization (“EBITDA”) exceed
$1,000,000 in either 12 month period beginning June 30, 2015 and
June 30, 2016, respectively, then the Company shall repay, in cash,
a portion of the outstanding principal of the note at the rate of
$0.50 for each $1.00 that exceeds the EBITDA threshold. The note is
convertible at the holder’s option at any time or at
maturity.
As part
of a prior acquisition, the Company was obligated to certain
earn-out obligation payments of up to $2,410,000 over an 18 month
period from January 15, 2010 through July 31, 2011, based upon the
achievement of certain revenue performance targets. The earn-out
was payable fifty percent in cash and fifty percent in common stock
of the Company at the rate of one share for every $0.15 earn-out
payable. The Company had recorded $842,606 in its accounts payable
as of December 31, 2014 due to a portion of earn-out obligations
being met. In June 2015, the Company entered into a promissory note
with SOAdesk for fifty percent of the earn-out payable ($421,303)
to SOAdesk. The maturity date of the note was December 31, 2015
with an annual interest rate of 10%. In December 2015, the maturity
date was extended to December 31, 2016. At December 31, 2015, the
Company was indebted to SOAdesk for $421,303 in principal and
approximately $21,000 in interest. At September 30, 2016, the
Company was indebted to SOAdesk for $421,303 in principal and
approximately $53,000 in interest. The Company also entered into a
convertible promissory note with SOAdesk for fifty percent of the
earn-out payable ($421,303) with a maturity date of June 30, 2017
that was non-interest bearing. The note is only convertible into
shares of the Company’s common stock at the rate of one share
for every $0.15 of principal due under the note. The note is
convertible at the holder’s option at any time or at
maturity. At December 31, 2015 and September 30, 2016, the Company
was indebted to SOAdesk for $421,303 in principal.
(b)
In January 2016,
the Company entered into a $3,500 short-term note payable with Antony Castagno, the
Chief Technology Officer, for various working capital needs. The
note bore interest at 10%. In February 2016, the debt of $3,500 and
interest was paid in full.
From
time to time during 2012 through 2015, 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 bore interest at 12% per year, were unsecured and
had maturity dates on June 30, 2015. At December 31, 2014, the
Company was indebted to Mr. Steffens in the approximate amount of
$6,691,000 of principal and $1,139,000 in interest. On April 8,
2015, the Company entered into an Exchange Agreement with Mr.
Steffens to convert an aggregate of $6,950,514 of principal amount
of debt into 69,505,140 shares of the Company’s common stock
at a conversion rate of $0.10 per share.
Subsequent to the
exchange agreement, the Company entered into several short term
notes payable with Mr. Steffens for various working capital needs.
The notes vary from non-interest bearing to interest rate of 12%
with a maturity date of December 31, 2015. The Company is obligated
to repay the notes with the collection of any accounts receivables.
The Company had repaid $170,000 in principal as of December 31,
2015. In December 2015, the maturity dates were extended to
December 31, 2016. At December 31, 2015, the Company was indebted
to Mr. Steffens in the approximate amount of $1,845,000 of
principal and $1,362,000 of interest. At September 30, 2016, the
Company was indebted to Mr. Steffens in the approximate amount of
$2,674,000 of principal and $1,368,000 of interest. At December 31,
2015, the Company recorded $275,000 of unamortized discount on debt
on the non-interest bearing notes with Mr. Steffens. Imputed
interest was calculated based on a 12% interest rate based on
historical notes with Mr. Steffens and comparative non-related
party loans with the Company. The Company has recorded $56,000 of
amortization of the debt discount in interest expense through
December 31, 2015. At March 31, 2016, the Company recorded an
additional $49,000 of unamortized discount on debt for the debt
issued in fiscal 2016. The Company has recorded $200,000 of
amortization of the debt discount in interest expense through
September 30, 2016.
(c)
The Company has
issued a series of short-term unsecured promissory notes with
private lenders, which provide for short term borrowings. The notes
in the aggregate amount of $50,000 of principal and $53,000 of
interest and $50,000 of principal and $61,000 of interest,
respectively, as of December 31, 2015 and September 30, 2016, bear
interest between 10% and 36% per annum.
In
March 2014, the Company reclassified to short-term debt its
unsecured convertible promissory note with SOAdesk that was entered
into as part of the Asset Purchase Agreement with SOAdesk for
$1,000,000 with an annual interest rate of 5% and a maturity date
of January 14, 2015. In March 2012, SOAdesk elected to convert
$300,000 of the outstanding note balance into 2,000,000 shares of
the Company’s Common Stock. Through a series of amendments,
the note was amended to extend the maturity date until June 30,
2015. In June 2015, the note was amended to extend the maturity
date until June 30, 2017. The note was further amended that should
the Company’s earnings before interest, taxes, depreciation
and amortization (“EBITDA”) exceed $1,000,000 in either
12 month period beginning June 30, 2015 and June 30, 2016,
respectively, then the Company shall repay, in cash, a portion of
the outstanding principal of the note at the rate of $0.50 for each
$1.00 that exceeds the EBITDA threshold. At December 31, 2015, the
Company was indebted to SOAdesk in the amount of $700,000 in
principal and $242,000 in interest. At September 30, 2016, the
Company was indebted to SOAdesk in the amount of $700,000 in
principal and $268,000 in interest. The note is only convertible
into shares of the Company’s common stock at the rate of one
share for every $0.15 of principal and interest due under the
note.
In June
2014, the Company reclassified to short-term debt its unsecured
promissory note with a private lender that was originally entered
into in March 2012 for $336,000 at an interest rate of 12% and a
maturity date of March 31, 2013. In March 2013, the maturity date
of the note was extended to June 30, 2015. In June 2015, the
maturity date of the note was extended to June 30, 2017, a
repayment schedule of quarterly principal and interest payments of
$12,000 beginning on September 30, 2015 and two milestone payments
of $125,000 on February 28, 2016 and 2017, respectively were added.
In February 2016, the note was amended that the first milestone
payment due on February 29, 2016, was now payable quarterly
beginning February 29, 2016 through November 29, 2016. At December
31, 2015, the Company was indebted to this private lender in the
amount of $336,000 in principal and $134,000 in interest. At
September 30, 2016, the Company was indebted to this private lender
in the amount of $336,000 in principal and $128,000 in
interest.
NOTE 4. STOCKHOLDER’S EQUITY
At
the Company’s Annual Meeting held on September 11, 2015, the
shareholders approved the following proposals:
1.
An
amendment to the Company’s Amended and Restated Certificate
of Incorporation (“Charter”) to increase the number of
authorized shares of common stock, par value $0.001 per share, from
215,000,000 to 600,000,000;
2.
An
amendment to the Company’s Charter to allow stockholders to
be able to act by written consent only while Privet Fund LP and its
affiliates (a “Privet Stockholder”) own an aggregate of
at least 30% of the Company’s outstanding voting
stock;
3.
An
amendment to the Company’s Charter to provide that only the
Board of Directors may call a special meeting of stockholders of
the Company;
4.
An
amendment to the Company’s Charter to renounce the
Company’s expectancy regarding certain corporate
opportunities presented to a Privet Stockholder;
5.
An
amendment to the Company’s Charter to not be governed by the
provisions of Section 203 of the Delaware General Corporation
Law;
6.
An
amendment to the Company’s Charter establishing the courts
located within the State of Delaware as the exclusive forum for the
adjudication of certain legal actions by the stockholders;
and
7.
An
amendment to the Company’s Charter to authorize 10,000,000
shares of “blank check” preferred stock, par value
$0.001 per share.
Also
at the Annual Meeting, the holders of the Company’s Series
A-1 Convertible Preferred Stock approved an amendment to Article IV
(Conversion) of the Series A-1 Convertible Preferred Stock
Certificate of Designations to the effect that the Series A-1
Preferred Stock will automatically convert into common stock upon
the Company consummating an equity financing for at least
$1,000,000; and the holders of the Company’s Series B
Convertible Preferred Stock approved an amendment to Section 6
(Automatic Conversion) of the Series B Convertible Preferred Stock
Certificate of Designations to the effect that the Series B
Preferred Stock will automatically convert into common stock upon
the Company consummating an equity financing for at least
$1,000,000.
On
July 15, 2015, the Company entered into a Stock and Warrant
Purchase Agreement (the “Purchase Agreement”) with
investors named therein, including Privet Fund LP
(“Privet”), five directors of the Company, including
John L. Steffens, Donald Peppers, Bruce D. Miller, Mark Landis, and
Thomas Avery, and three other persons (collectively the nine
investors are referred to as the “Purchasers”),
pursuant to which the Purchasers severally purchased, in the
aggregate, 25,000,000 shares of the Company’s common stock
and warrants to purchase up to an aggregate of 205,277,778 shares
of the Company’s common stock (“Warrants”) for an
aggregate consideration of $1,000,000.
The
Warrants are exercisable for a period of three years beginning at
any time after 60 days of issuance. The exercise prices of the
Warrants are as follows: (i) Warrants to purchase up to 87,500,000
shares of the Company’s common stock are exercisable at a
price of $0.04 per share (“Tranche I”); (ii) Warrants
to purchase up to 77,777,778 shares of the Company’s common
stock are exercisable at a price of $0.045 per share
(“Tranche II”); and (iii) Warrants to purchase up to
40,000,000 shares of the Company’s common stock are
exercisable at a price of $0.05 per share (“Tranche
III”). The Warrants are exercisable only for cash, as the
exercise price paid is intended to increase the funding of the
Company. All the exercise prices and numbers of shares are subject
to customary anti-dilution provisions. The Warrants contain an
exercise limitation provision that prohibits exercise of the
Warrants to the extent that the exercise would result in the
issuance of shares of the Company’s common stock that would
cause either (a) the Company to be deemed an investment company
under the Investment Company Act of 1940, as amended, or (b) an
ownership change within the meaning of Internal Revenue Code
Section 382 (and applicable U.S. Treasury regulations pursuant to
such section) limiting the use of the Company’s net operating
losses, carryforwards and other tax attributes. The Company is
obligated to reserve a sufficient number of shares of the
Company’s common stock to enable the exercise of the
Warrants.
The
use of proceeds from this transaction are for general corporate
purposes, as approved from time to time by the Board of Directors
(the “Board”), which approval must include approval by
a majority of the directors that have been designated by
Privet.
In
connection with the execution of the Purchase Agreement, the
Company entered into an Investor Rights Agreement with Privet and
Mr. Steffens (the “Investors”), granting the Investors
the right to require the Company to file with the Securities and
Exchange Commission up to four requested registration statements to
register for resale the Investors’ shares of common stock
purchased under the Purchase Agreement and purchased upon exercise
of any of the Warrants (the “Registrable Securities”).
The Investors also are granted unlimited “piggy-back”
registration rights with respect to the Registrable Securities. The
obligation to register the Registrable Securities continues until
those securities have been sold or transferred by the holders of
the registration rights or may be sold without limitation under
Rule 144 or otherwise may be sold without restriction.
As
a result of the transaction, (i) Privet became the record holder of
approximately 10.1% of the outstanding and issued shares of common
stock at that time, and has the right to purchase under the
Warrants an additional 149,852,778 shares of common stock which
would correspondingly increase its percentage of ownership and it
has the right to appoint directors, and (ii) Mr. Steffens decreased
his then 65.5% ownership of the common stock of the Company to
59.3% at that time, while retaining his current control position in
the common stock. Together Privet and Mr. Steffens, excluding the
exercise of the Warrants, have a majority of the voting control of
the Company.
NOTE 5. INCOME TAXES
The
Company accounts for income taxes in accordance with Financial
Accounting Standards Board (“FASB”) guidance ASC 740
“Income Taxes”. The Company's effective tax rate
differs from the statutory rate primarily due to the fact that no
income tax benefit or expense was recorded for the first nine
months of fiscal year 2016 or 2015. As a result of the Company's
recurring losses, the deferred tax assets have been fully offset by
a valuation allowance.
NOTE 6. LOSS PER SHARE
Basic
loss per share is computed based upon the weighted average number
of common shares outstanding. Diluted loss per share is computed
based upon the weighted average number of common shares outstanding
and any potentially dilutive securities. Potentially dilutive
securities outstanding during the periods presented include stock
options, warrants, restricted stock, preferred stock and
convertible debt.
The
weighted average number of common shares is increased by the number
of dilutive potential common shares issuable on the exercise of
options less the number of common shares assumed to have been
purchased with the proceeds from the exercise of the options
pursuant to the treasury stock method; those purchases are assumed
to have been made at the average price of the common stock during
the respective period. Options or warrants to purchase shares of
common stock are excluded from the calculation of diluted earnings
per share when their inclusion would have an anti-dilutive effect
on the calculation. No options or warrants were included in the
calculation of loss per share for the three and nine months ended
September 30, 2016 and 2015.
NOTE 7. COMMITMENTS
In June
2014, the Company entered into an amendment with its landlord and
renewed its lease through 2018. In October 2016, the Company
entered into an amendment reducing the square footage being leased
for the remaining term of the lease. Future minimum lease
commitments on operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of September
30, 2016 consisted of only one lease as follows (in
thousands):
|
|
|
|
2016
|
$19
|
2017
|
64
|
2018
|
55
|
|
$138
|
NOTE 8. CONTINGENCIES
The
Company, from time to time, is involved in legal matters arising in
the ordinary course of its business including matters involving
proprietary technology. While management believes that such matters
are currently not material, there can be no assurance that matters
arising in the ordinary course of business for which the Company is
or could become involved in litigation, will not have a material
adverse effect on its business, financial condition or results of
operations.
Under
the indemnification clause of the Company’s standard reseller
agreements and software license agreements, the Company agrees to
defend the reseller/licensee against third party claims asserting
infringement by the Company’s products of certain
intellectual property rights, which may include patents,
copyrights, trademarks or trade secrets, and to pay any judgments
entered on such claims against the reseller/licensee. There were no
claims against the Company as of September 30, 2016.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Cicero,
Inc. (the “Company”) provides desktop activity
intelligence and improvement software that helps organizations
isolate issues and automates employee tasks in the contact center
and back office. The Company provides an innovative and unique
combination of application and process integration, automation, and
desktop analytics capabilities, all without changing the underlying
applications or requiring costly application development. The
Company’s software collects desktop activity and application
performance data and tracks business objects across time and
multiple users, as well as measures against defined expected
business process flows, for either analysis or to feed a
third-party application. In addition to software solutions, the
Company also provides technical support, training and consulting
services as part of its commitment to providing customers with
industry-leading solutions. The Company’s consulting team has
in-depth experience in developing successful enterprise-class
solutions as well as valuable insight into the business information
needs of customers in the largest Fortune 500 corporations
worldwide.
The
Company focuses on the activity intelligence and customer
experience management market with emphasis on desktop analytics and
automation with its Cicero Discovery™, Cicero Insight™
and Cicero Automation™ products.
Cicero
Discovery collects desktop activity leveraging a suite of sensors.
Cicero Discovery is a lightweight and configurable tool to collect
activity and application performance data and track business
objects across time and across multiple users as well as measure
against a defined "expected" business process flow, either for
analysis or to feed a third-party application.
Cicero
Insight is a measurement and analytics solution that collects and
presents high value information about quality, productivity,
compliance, and revenue from frontline activity to target areas for
improvement. Powered by Cicero Discovery sensors, Cicero Insight
collects activity data about the applications, when and how they
are used and makes it readily available for analysis and action to
the business community.
Cicero
Automation delivers all the features of the Cicero Discovery
product as well as desktop automation for enterprise contact center
and back office employees. Leveraging existing IT investments
Cicero Automation integrates applications, automates workflow, and
provides control and adaptability at the end user
desktop.
Cicero
Automation also provide Single Sign-On (SSO) and stay signed on
capability. The software maintains a secure credential store that
facilitates single sign-on. Passwords can be reset but are
non-retrievable. Stored interactions can be selectively encrypted
based on the needs of the enterprise. All network communications
are compressed and encrypted for transmission.
The
Company provides an intuitive configuration toolkit for each
product, which simplifies the process of deploying and managing the
solutions in the enterprise. The Company provides a unique way of
capturing untapped desktop activity data using sensors, combining
it with other data sources, and making it readily available for
analysis and action to the business community. The Company also
provides a unique approach that allows companies to organize
functionality of their existing applications to better align them
with tasks and operational processes. In addition, the
Company’s software solutions can streamline end-user tasks
and enable automatic information sharing among line-of-business
siloed applications and tools. It is ideal for deployment in
organizations that need to provide access to enterprise
applications on desktops to iteratively improve business
performance, the user experience, and customer satisfaction. By
leveraging desktop activity data, integrating disparate
applications, automating business processes and delivering a better
user experience, the Company’s products are ideal for the
financial services, insurance, healthcare, governmental and other
industries requiring a cost-effective, proven business performance
and user experience management solution for enterprise
desktops.
In
addition to software products, the Company also provides technical
support, training and consulting services as part of its commitment
to providing its customers industry-leading integration solutions.
The Company’s consulting team has in-depth experience in
developing successful enterprise-class solutions as well as
valuable insight into the business information needs of customers
in the Global 5000. We offer services around our integration
software products.
This
Quarterly Report on Form 10-Q contains forward-looking statements
relating to such matters as anticipated financial performance,
business prospects, technological developments, new products,
research and development activities, liquidity and capital
resources and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor,
the Company notes that a variety of factors could cause its actual
results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements.
These risk and uncertainties include, among others, the
following:
●
An inability to
obtain sufficient capital either through internally generated cash
or through the use of equity or debt offerings could impair the
growth of our business;
●
Economic conditions
could adversely affect our revenue growth and cause us not to
achieve desired revenue;
●
The so-called
“penny stock rule” could make it cumbersome for brokers
and dealers to trade in our common stock, making the market for our
common stock less liquid which could cause the price of our stock
to decline;
●
Because we cannot
accurately predict the amount and timing of individual sales, our
quarterly operating results may vary significantly, which could
adversely impact our stock price;
●
A loss of key
personnel associated with Cicero Discovery and Cicero Discovery
Automation development could adversely affect our
business;
●
Different
competitive approaches or internally developed solutions to the
same business problem could delay or prevent adoption of Cicero
Discovery and Cicero Discovery Automation;
●
Our ability to
compete may be subject to factors outside our control;
●
The markets for our
products are characterized by rapidly changing technologies,
evolving industry standards, and frequent new product
introductions;
●
We may face damage
to the reputation of our software and a loss of revenue if our
software products fail to perform as intended or contain
significant defects;
●
We may be unable to
enforce or defend our ownership and use of proprietary and licensed
technology; and
●
Our business may be
adversely impacted if we do not provide professional services to
implement our solutions.
Reference
should be made to such factors and all forward-looking statements
are qualified in their entirety by the above cautionary statements.
Although we believe that these forward-looking statements are based
upon reasonable assumptions, we can give no assurance that our
goals will be achieved. Given these uncertainties, readers of this
Quarterly Report on Form 10-Q are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking
statements are made as of the date of this quarterly report. We
assume no obligation to update or revise them or provide reasons
why actual results may differ.
RESULTS OF OPERATIONS
The
table below presents information for the three and nine months
ended September 30, 2016 and 2015 (in thousands):
|
Three months
ended September 30,
|
Nine months
ended September 30,
|
|
|
|
|
|
Total
revenue
|
$217
|
$542
|
$970
|
$1,510
|
Total cost of
revenue
|
142
|
171
|
481
|
516
|
Gross
margin
|
75
|
371
|
489
|
994
|
Total operating
expenses
|
550
|
993
|
1,919
|
2,869
|
Income/(loss) from
operations
|
$(475)
|
$(622)
|
$(1,430)
|
$(1,875)
|
Revenue. The Company has three categories of revenue:
software products, maintenance, and services. Software products
revenue is comprised primarily of fees from licensing the Company's
proprietary software products. Maintenance revenue is comprised of
fees for maintaining, supporting, and providing periodic upgrades
to the Company's software products. Services revenue is comprised
of fees for consulting and training services related to the
Company's software products.
The
Company's revenues vary from quarter to quarter, due to market
conditions, the budgeting and purchasing cycles of customers and
the effectiveness of the Company’s sales force. The Company
typically does not have any material backlog of unfilled software
orders and product revenue in any quarter is substantially
dependent upon orders received in that quarter. Because the
Company's operating expenses are relatively fixed over the short
term, variations in the timing of the recognition of revenue can
cause significant variations in operating results from quarter to
quarter.
We
generally recognize revenue from software license fees when our
obligations to the customer are fulfilled, which is typically upon
delivery or installation. Revenue related to software maintenance
contracts is recognized ratably over the term of the contracts.
Revenues from services are recognized on a time and materials basis
as the services are performed and amounts due from customers are
deemed collectible and non-refundable. Within the revenue
recognition rules pertaining to software arrangements, certain
assumptions are made in determining whether the fee is fixed and
determinable and whether collectability is probable. Should our
actual experience with respect to collections differ from our
initial assessment, there could be adjustments to future
results.
THREE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED WITH THE THREE
MONTHS ENDED SEPTEMBER 30, 2015.
Total Revenues. Total revenues decreased $325,000, or 60.0%,
from $542,000 to $217,000, for the three months ended September 30,
2016 as compared with the three months ended September 30, 2015.
The decrease is due primarily to a decrease in license and
maintenance revenue.
Total Cost of Revenue. Total cost of revenue decreased
$29,000, or 17.0%, from $171,000 to $142,000 for the three months
ended September 30, 2016, as compared with the three months ended
September 30, 2015. The decrease is primarily due to a decrease in
headcount and travel expenses.
Total Gross Margin. Gross margin was $75,000, or 34.6%, for
the three months ended September 30, 2016, as compared to the gross
margin of $371,000, or 68.5%, for the three months ended September
30, 2015. The decrease in gross margin is primarily due to the
decrease in sales offset by the decrease in cost of
revenue.
Total Operating Expenses. Total operating expenses decreased
$443,000, or 44.6%, from $993,000 to $550,000 for the three months
ended September 30, 2016, as compared with the three months ended
September 30, 2015. The decrease is primarily attributable to a
decrease in headcount and lower legal and regulatory filing fees
associated with the equity financing in fiscal 2015.
Software Products:
Software Product Revenue. The Company earned $11,000 in
software product revenue for the three months ended September 30,
2016 as compared to $140,000 in software revenue for the three
months ended September 30, 2015, a decrease of $129,000. The
decrease is primarily due to a reduction in monthly subscription
software revenue from an existing customer.
Software Product Gross Margin. The gross margin on software
products for the three months ended September 30, 2016 and
September 30, 2015 was 100.0%.
Maintenance:
Maintenance Revenue. Maintenance revenue for the three
months ended September 30, 2016 decreased by approximately
$248,000, or 66.7%, from $372,000 to $124,000 as compared to the
three months ended September 30, 2015. The decrease in maintenance
revenue is primarily due to the cancellation of a maintenance
contract in second quarter 2016.
Maintenance Gross Margin. Gross margin on maintenance
products for the three months ended September 30, 2016 was $78,000
or 62.9% compared with $346,000 or 93.0% for the three months ended
September 30, 2015. Cost of maintenance is comprised of personnel
costs and related overhead for the maintenance and support of the
Company’s software products. The decrease in gross margin is
due to the decrease in maintenance revenue.
Services:
Services Revenue. Services revenue for the three months
ended September 30, 2016 increased by approximately $52,000, or
173.3%, from $30,000 to $82,000 as compared with the three months
ended September 30, 2015. The increase is primarily due to new paid
engagements.
Services Gross Margin Loss. Services gross margin loss was
$14,000 or 17.1% for the three months ended September 30, 2016
compared with gross margin loss of $115,000 or 383.3% for the three
months ended September 30, 2015. The decrease in gross margin loss
was primarily attributable to an increase in services revenue and a
decrease in cost of services from a reallocation of
personnel.
Operating Expenses:
Sales and Marketing. Sales and marketing expenses primarily
include personnel costs for salespeople, marketing personnel,
travel and related overhead, as well as trade show participation
and promotional expenses. Sales and marketing expenses for the
three months ended September 30, 2016 decreased by approximately
$131,000, or 60.9%, from $215,000 to $84,000 as compared with the
three months ended September 30, 2015. The decrease is primarily
attributable to a decrease in headcount partially offset by an
increase in outside consulting expenses.
Research and Development. Research and product development
expenses primarily include personnel costs for product developers
and product documentation and related overhead. Research and
development expense decreased by approximately $90,000, or 25.1%,
from $359,000 to $269,000 for the three months ended September 30,
2016 as compared to the three months ended September 30, 2015. The
decrease in research and development costs for the quarter is
primarily due to a decrease in headcount and a decrease in outside
consulting.
General and Administrative. General and administrative
expenses consist of personnel costs for the legal, financial, human
resources, and administrative staff, related overhead, and all
non-allocable corporate costs of operating the Company. General and
administrative expenses for the three months ended September 30,
2016 decreased by approximately $222,000, or 53.0%, from $419,000
to $197,000 as compared to the three months ended September 30,
2015. The decrease is primarily due to a decrease in legal and
regulatory reporting fees associated with the equity financing in
fiscal 2015.
Provision for Taxes. The Company’s effective income
tax rate differs from the statutory rate primarily because an
income tax expense/benefit was not recorded as a result of the
losses in the third quarter of 2016 and 2015. As a result of the
Company’s recurring losses, the deferred tax assets have been
fully offset by a valuation allowance.
Net Loss. The Company recorded a net loss of $589,000 for
the three months ended September 30, 2016 as compared to a net loss
of $665,000 for the three months ended September 30, 2015. The
decrease in net loss is primarily due to the decrease in operating
expenses partially offset by the decrease in total
revenue.
NINE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2015.
Total Revenues. Total revenues decreased $540,000, or 35.8%,
from $1,510,000 to $970,000, for the nine months ended September
30, 2016 as compared with the nine months ended September 30, 2015.
The decrease is due primarily to a decrease in license and
maintenance revenue.
Total Cost of Revenue. Total cost of revenue decreased
$35,000, or 6.8%, from $516,000 to $481,000 for the nine months
ended September 30, 2016, as compared with the nine months ended
September 30, 2015. The decrease is primarily due to a decrease in
headcount.
Total Gross Margin. Gross margin was $489,000, or 50.4%, for
the nine months ended September 30, 2016, as compared to the gross
margin of $994,000, or 65.8%, for the nine months ended September
30, 2015. The decrease in gross margin is primarily due to the
decrease in sales.
Total Operating Expenses. Total operating expenses decreased
$950,000, or 33.1%, from $2,869,000 to $1,919,000 for the nine
months ended September 30, 2016, as compared with the nine months
ended September 30, 2015. The decrease is primarily attributable to
a decrease in headcount, lower outside consulting and trade show
expenses and a decrease in legal and regulatory reporting fees
associated with the equity financing in fiscal 2015.
Software Products:
Software Product Revenue. The Company earned $34,000 in
software product revenue for the nine months ended September 30,
2016 as compared to $345,000 in software revenue for the nine
months ended September 30, 2015, a decrease of $311,000. The
decrease is primarily due to a reduction in monthly subscription
software revenue from an existing customer.
Software Product Gross Margin. The gross margin on software
products for the nine months ended September 30, 2016 and September
30, 2015 was 100.0%.
Maintenance:
Maintenance Revenue. Maintenance revenue for the nine months
ended September 30, 2016 decreased by approximately $337,000, or
30.5%, from $1,106,000 to $769,000 as compared to the nine months
ended September 30, 2015. The decrease in maintenance revenue is
primarily due to the cancellation of a maintenance
contract.
Maintenance Gross Margin. Gross margin on maintenance
products for the nine months ended September 30, 2016 was $625,000
or 81.3% compared with $1,024,000 or 92.6% for the nine months
ended September 30, 2015. Cost of maintenance is comprised of
personnel costs and related overhead for the maintenance and
support of the Company’s software products. The decrease in
gross margin is due to decrease in maintenance revenue offset by
the decrease in cost of revenue.
Services:
Services Revenue. Services revenue for the nine months ended
September 30, 2016 increased by approximately $108,000, or 183.1%,
from $59,000 to $167,000 as compared to the nine months ended
September 30, 2015. The increase in services revenue is due to an
increase in paid engagements.
Services Gross Margin Loss. Services gross margin loss was
$170,000 or 101.8% for the nine months ended September 30, 2016
compared with gross margin loss of $375,000 or 635.6% for the nine
months ended September 30, 2015. The decrease in gross margin loss
was primarily attributable to an increase in services revenue and a
decrease in cost of services from a reallocation of
personnel.
Operating Expenses:
Sales and Marketing. Sales and marketing expenses primarily
include personnel costs for salespeople, marketing personnel,
travel and related overhead, as well as trade show participation
and promotional expenses. Sales and marketing expenses for the nine
months ended September 30, 2016 decreased by approximately
$418,000, or 50.2%, from $833,000 to $415,000 as compared with the
nine months ended September 30, 2015. The decrease is primarily
attributable to a decrease in headcount and lower trade show
expenses partially offset by higher outside consulting
expenses.
Research and Development. Research and product development
expenses primarily include personnel costs for product developers
and product documentation and related overhead. Research and
development expense decreased by approximately $246,000, or 22.2%,
from $1,108,000 to $862,000 for the nine months ended September 30,
2016 as compared to the nine months ended September 30, 2015. The
decrease in research and development costs for the quarter is
primarily due to a decrease in headcount and a decrease in outside
consulting.
General and Administrative. General and administrative
expenses consist of personnel costs for the legal, financial, human
resources, and administrative staff, related overhead, and all
non-allocable corporate costs of operating the Company. General and
administrative expenses for the nine months ended September 30,
2016 decreased by approximately $286,000, or 30.8%, from $928,000
to $642,000 as compared to the nine months ended September 30,
2015. The decrease is primarily due to a decrease in legal and
regulatory filing fees from the equity financing in fiscal
2015.
Provision for Taxes. The Company’s effective income
tax rate differs from the statutory rate primarily because an
income tax expense/benefit was not recorded as a result of the
losses in the first nine months of 2016 and 2015. As a result of
the Company’s recurring losses, the deferred tax assets have
been fully offset by a valuation allowance.
Net Loss. The Company recorded a net loss of $1,759,000 for
the nine months ended September 30, 2016 as compared to a net loss
of $2,200,000 for the nine months ended September 30, 2015. The
decrease in net loss is primarily due to the decrease in operating
expenses partially offset by the decrease in total
revenue.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Cash
and cash equivalents decreased to $393,000 at September 30, 2016
from $1,009,000 at December 31, 2015, a decrease of $616,000. The
decrease is primarily attributable to expenses in the first nine
months of 2016 and a reduction of accounts payable partially offset
by collections of accounts receivable from year end, revenue
generated in the first nine months of 2016 and short term
borrowings.
Net cash used by Operating Activities. Cash used by
operations for the nine months ended September 30, 2016 was
$1,442,000 compared to $1,165,000 for the nine months ended
September 30, 2015. Cash used by operations for the nine months
ended September 30, 2016 was primarily due to the loss from
operations of $1,759,000 and a decrease in accounts payable and
accrued expenses of $328,000 partially offset by depreciation
expense of $5,000, stock option expense of $2,000 amortization of
debt discount of $200,000, a decrease in accounts receivable of
$213,000, a decrease in prepaid expenses of $167,000 and an
increase of deferred revenue of $58,000.
Net cash used in Investing Activities. The Company had
purchases of equipment totaling $3,000 for the nine months ended
September 30, 2016 as compared to $8,000 for the nine months ended
September 30, 2015.
Net cash generated by Financing Activities. Net cash
generated by financing activities for the nine months ended
September 30, 2016 was approximately $829,000, compared to
$2,200,000 for the nine months ended September 30, 2015. Cash
generated by financing activities for the nine months ended
September 30, 2016 was comprised primarily from short term
borrowings of $833,000 offset by the repayment of $4,000 of short
term debt.
Liquidity
The
Company funded its cash needs during the nine months ended
September 30, 2016 with cash on hand from December 31, 2015, the
revenue generated in the first nine months of 2016 and short term
borrowings.
From
time to time during 2012 through 2015, 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 bore interest at 12% per year, are unsecured and
were to mature on June 30, 2015. At December 31, 2014, the Company
was indebted to Mr. Steffens in the approximate amount of
$6,691,000 of principal and $1,139,000 in interest. On April 8,
2015, the Company entered into an Exchange Agreement with Mr.
Steffens to convert an aggregate of $6,950,514 of principal amount
of debt into 69,505,140 shares of the Company’s common stock
at a conversion rate of $0.10 per share.
Subsequent
to the exchange agreement, the Company entered into several short
term notes payable with Mr. Steffens for various working capital
needs. The notes vary from non-interest bearing to interest rate of
12% with a maturity date of December 31, 2015. The Company is
obligated to repay the notes with the collection of any accounts
receivables. The Company had repaid $170,000 in principal as of
December 31, 2015. In December 2015, the maturity dates were
extended to December 31, 2016. At December 31, 2015, the Company
was indebted to Mr. Steffens in the approximate amount of
$1,845,000 of principal and $1,362,000 of interest. At September
30, 2016, the Company was indebted to Mr. Steffens in the
approximate amount of $2,674,000 of principal and $1,368,000 of
interest. At December 31, 2015, the Company recorded $275,000 of
unamortized discount on debt on the non-interest bearing notes with
Mr. Steffens. Imputed interest was calculated based on a 12%
interest rate based on historical notes with Mr. Steffens and
comparative non-related party loans with the Company. The Company
has recorded $56,000 of amortization of the debt discount in
interest expense through December 31, 2015. At March 31, 2016, the
Company recorded an additional $49,000 of unamortized discount on
debt for the debt issued in fiscal 2016. The Company has recorded
$200,000 of amortization of the debt discount in interest expense
through September 30, 2016.
The
Company has incurred an operating loss of approximately $2,843,000
for the year ended December 31, 2015, and has a history of
operating losses. For the nine months ended September 30, 2016, the
Company incurred losses of $1,759,000 and had a working capital
deficiency of $10,652,000 as of September 30, 2016. Management
believes that its repositioned dual strategy of leading with its
Discovery product to use analytics to measure and then manage how
work happens as well as concentrating on expanding the indirect
channel with more resale and OEM partners, will shorten the sales
cycle and allow for value based selling to our customers and
prospects. The Company anticipates success in this regard based
upon current discussions with active partner, customers and
prospects. The Company has borrowed $833,000 and $2,275,000 in 2016
and 2015, respectively. The Company has also repaid approximately
$4,000 and $210,000 of debt in 2016 and 2015, respectively.
Additionally, in April 2015, the Company’s Chairman, Mr.
Launny Steffens, converted $6,950,514 of debt into 69,505,140
shares of common stock of the Company. In July 2015, the Company
completed a sale of 25 million shares of its common stock and
warrants to purchase up to 205,277,778 shares of its common stock
to a group of nine investors, led by the Company’s Chairman
of the Board, John (Launny) Steffens and the Privet Group, LLC, for
$1,000,000. Should the investors exercise the warrants, which have
exercise prices ranging from $0.04 to $0.05 per share, the Company
would receive an additional $9,000,000 in proceeds. The warrants
expire in three years.
Should
the Company be unable to secure customer contracts that will drive
sufficient cash flow to sustain operations, the Company will be
forced to seek additional capital in the form of debt or equity
financing; however, there can be no assurance that such debt or
equity financing will be available on terms acceptable to the
Company or at all. These factors raise substantial doubt about the
Company’s ability to continue as a going concern. The
condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue as
a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
The
Company does not have any off-balance sheet arrangements. We have
no unconsolidated subsidiaries or other unconsolidated limited
purpose entities, and we have not guaranteed or otherwise supported
the obligations of any other entity.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Not
applicable.
Item 4. Controls and Procedures
a)
Evaluation of Disclosure Controls and Procedures.
We
maintain “disclosure controls and procedures,” as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, or the Exchange Act, that are designed to ensure that
information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Our disclosure controls
and procedures have been designed to meet reasonable assurance
standards. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Our
management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of September 30,
2016.
Based
on that evaluation, our Chief Executive Officer and Chief Financial
Officer has concluded that as of September 30, 2016, our disclosure
controls and procedures were effective.
(b) Changes in Internal Controls.
There were
no changes in our internal control over financial reporting that
occurred during the fiscal quarter ended September 30, 2016 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
None.
Item 3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
None.
Item
5. Other Information
None
Item 6. Exhibits
Exhibit No.
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Description
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31.1
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Certification
of Chief Executive Officer/Chief Financial Officer pursuant to Rule
13a-14(a) (filed herewith).
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32.1
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Certification
of Chief Executive Officer/Chief Financial Officer pursuant to 18
USC § 1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
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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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Date:
November 14, 2016 |
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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