Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - CICERO INC | Financial_Report.xls |
| EX-32.1 - CERTIFICATION - CICERO INC | cicn_ex321.htm |
| EX-31.1 - CERTIFICATION - CICERO INC | cicn_ex311.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2015.
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number 0-26392
CICERO INC.
(Exact name of registrant as specified in its charter)
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Delaware
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11-2920559
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(State or other jurisdiction of incorporation or organization)
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(I.R.S Employer Identification Number)
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8000 Regency Parkway, Suite 542, Cary, North Carolina
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27518
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(Address of principal executive offices)
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(Zip Code)
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(919) 380-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES 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
155,353,377 shares of common stock, $.001 par value, were outstanding as of May 11, 2015.
Cicero Inc.
Index
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Page
Number
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| PART I. Financial Information | ||
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3
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4
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5
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6
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7
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12
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17
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17
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PART II. Other Information
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18
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18
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18
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18
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18
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18
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18
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18
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19
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2
Part I. Financial Information
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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March 31,
2015
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December 31,
2014
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||||||
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ASSETS
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(unaudited)
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|||||||
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Current assets:
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||||||||
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Cash and cash equivalents
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$ | 670 | $ | 20 | ||||
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Trade accounts receivable, net
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50 | 1,035 | ||||||
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Prepaid expenses and other current assets
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310 | 237 | ||||||
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Total current assets
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1,030 | 1,292 | ||||||
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Property and equipment, net
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16 | 14 | ||||||
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Goodwill (Note 2)
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1,658 | 1,658 | ||||||
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Total assets
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$ | 2,704 | $ | 2,964 | ||||
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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||||||||
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Liabilities:
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||||||||
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Debt (Note 3)
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$ | 8,737 | $ | 8,492 | ||||
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Accounts payable
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2,090 | 2,012 | ||||||
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Accrued expenses:
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Salaries, wages, and related items
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1,486 | 1,400 | ||||||
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Accrued interest
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1,905 | 1,674 | ||||||
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Other
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587 | 573 | ||||||
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Deferred revenue
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1,381 | 1,399 | ||||||
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Total liabilities
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16,186 | 15,550 | ||||||
| Commitments and Contingencies (Note 6 and 7) | ||||||||
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Stockholders' deficit:
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||||||||
| Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized | ||||||||
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Series A-1 – 1,499.6 shares issued and outstanding at March 31, 2015 and December 31, 2014
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-- | -- | ||||||
| Series B - 10,400 shares issued and outstanding at March 31, 2015 and at December 31, 2014 | -- | -- | ||||||
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Common stock, $0.001 par value, 215,000,000 shares authorized, 85,848,237 issued and outstanding at March 31, 2015 and at December 31, 2014
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86 | 86 | ||||||
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Additional paid-in capital
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237,206 | 237,206 | ||||||
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Accumulated deficit
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(250,774 | ) | (249,878 | ) | ||||
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Total stockholders' deficit
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(13,482 | ) | (12,586 | ) | ||||
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Total liabilities and stockholders' deficit
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$ | 2,704 | $ | 2,964 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Three Months Ended
March 31,
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2015
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2014
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Revenue:
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Software
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$ | 86 | $ | 116 | ||||
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Maintenance
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367 | 361 | ||||||
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Services
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7 | 62 | ||||||
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Total operating revenue
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460 | 539 | ||||||
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Cost of revenue
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||||||||
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Software
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-- | -- | ||||||
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Maintenance
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30 | 27 | ||||||
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Services
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148 | 223 | ||||||
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Total cost of revenue
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178 | 250 | ||||||
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Gross margin
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282 | 289 | ||||||
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Operating expenses:
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Sales and marketing
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281 | 259 | ||||||
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Research and product development
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341 | 272 | ||||||
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General and administrative
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291 | 302 | ||||||
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Total operating expenses
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913 | 833 | ||||||
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Loss from operations
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(631 | ) | (544 | ) | ||||
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Other income/(expense):
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Interest expense
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(234 | ) | (179 | ) | ||||
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Total other income/(expense)
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(234 | ) | (179 | ) | ||||
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Net loss
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(865 | ) | (723 | ) | ||||
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8% preferred stock Series B dividend
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31 | 31 | ||||||
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Net loss applicable to common stockholders
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$ | (896 | ) | $ | (754 | ) | ||
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Loss per share applicable to common stockholders:
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Basic and Diluted
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$ | (0.01 | ) | $ | (0.01 | ) | ||
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Weighted average shares outstanding:
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Basic and Diluted
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85,848 | 85,806 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three months Ended
March 31,
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2015
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2014
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Cash flows from operating activities:
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Net loss
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$ | (865 | ) | $ | (723 | ) | ||
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Adjustments to reconcile net loss to net cash generated by operating activities:
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Depreciation and amortization
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4 | 5 | ||||||
| Stock compensation expense | -- | 22 | ||||||
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Changes in assets and liabilities:
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Trade accounts receivable
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985 | 935 | ||||||
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Prepaid expenses and other current assets
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(73 | ) | 26 | |||||
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Accounts payable and accrued expenses
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378 | 20 | ||||||
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Deferred revenue
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(18 | ) | (19 | ) | ||||
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Net cash generated by operating activities
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411 | 266 | ||||||
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Cash flows from investing activities:
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Purchases of equipment
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(6 | ) | -- | |||||
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Net cash used by investing activities
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(6 | ) | -- | |||||
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Cash flows from financing activities:
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Borrowings under debt
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260 | 135 | ||||||
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Repayments of debt
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(15 | ) | (391 | ) | ||||
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Net cash generated/(used by) financing activities
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245 | (256 | ) | |||||
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Net increase in cash
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650 | 10 | ||||||
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Cash:
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Beginning of period
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20 | 5 | ||||||
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End of period
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$ | 670 | $ | 15 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(in thousands, except share amounts)
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Common Stock
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Preferred Stock
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Additional
Paid-in
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Accumulated
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| Shares | Amount | Shares | Amount |
Capital
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(Deficit)
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Total | ||||||||||||||||||||||
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Balance at December 31, 2014
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85,848,237 | $ | 86 | 11,899 | -- | $ | 237,206 | $ | (249,878 | ) | $ | (12,586 | ) | |||||||||||||||
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Dividend for preferred B stock
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(31 | ) | (31 | ) | ||||||||||||||||||||||||
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Net loss
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(865 | ) | (865 | ) | ||||||||||||||||||||||||
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Balance at March 31, 2015 (unaudited)
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85,848,237 | $ | 86 | 11,899 | -- | $ | 237,206 | $ | (250,774 | ) | $ | (13,482 | ) | |||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying financial statements for the three months ended March 31, 2015 and 2014 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, 2014, filed with the SEC on March 31, 2015. 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 $3,927,000 for the year ended December 31, 2014, and has a history of operating losses. For the three months ended March 31, 2015, the Company incurred losses of $865,000 and had a working capital deficiency of $15,156,000 as of March 31, 2015. Management believes that its repositioned strategy of leading with its Discovery product to use analytics to measure and then manage how work happens 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 customers and prospects. The Company has borrowed $260,000 and $2,296,000 in 2015 and 2014, respectively. The Company has also repaid approximately $15,000 and $394,000 of debt in 2015 and 2014, 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. 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.
7
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 option in the first three months of 2015. The Company recognized stock-based compensation expense of $38 for the three months ended March 31, 2015 in connection with outstanding options.
The following table sets forth certain information as of March 31, 2015 about shares of the Company’s common stock, par value $.001 (the “Common Stock”), outstanding and available for issuance under the Company’s existing equity compensation plans: the Cicero Inc. 2007 Employee Stock Option Plan and the Outside Director Stock Option Plan. The Company’s stockholders approved all of the Company’s stock-based compensation plans.
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Shares
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Outstanding on December 31, 2014
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3,150,110 | |||
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Granted
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-- | |||
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Exercised
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-- | |||
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Forfeited
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-- | |||
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Outstanding on March 31, 2015
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3,150,110 | |||
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Weighted average exercise price of outstanding options
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$ | 0.24 | ||
| Aggregate Intrinsic Value | $ | 0.00 | ||
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Shares available for future grants on March 31, 2015
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1,351,090 | |||
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Weighted average of remaining contractual life
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4.44 | |||
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is evaluating the impact of adopting this new accounting standard update on the financial statements and related disclosures.
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, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is not permitted. 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.
8
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.
Upon completion of the fiscal year 2014 test, the goodwill of our SOAdesk LLC acquisition was determined to be impaired. The impairment was the result of slower than projected growth in revenue. This goodwill impairment charge of $1,174,000 also represented our accumulated goodwill impairment as of December 31, 2014. Through March 31, 2015, no indicator of impairment of goodwill has been identified.
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Goodwill
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||||
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Balance at December 31, 2014
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$ | 1,658,000 | ||
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Additions
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-- | |||
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Impairment
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-- | |||
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Balance at March 31, 2015
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$ | 1,658,000 | ||
NOTE 3. SHORT TERM DEBT
Debt and notes payable to related party consist of the following (in thousands):
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March 31,
2015
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December 31,
2014
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|||||||
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Note payable – asset purchase agreement (a)
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$ | 700 | $ | 700 | ||||
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Note payable – related party (b)
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6,951 | 6,706 | ||||||
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Notes payable (c)
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1,086 | 1,086 | ||||||
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Total short term debt
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$ | 8,737 | $ | 8,492 | ||||
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(a)
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In January 2010, the Company entered into an unsecured convertible promissory note with SOAdesk for $700,000 with an annual interest rate of 5% as per the Asset Purchase Agreement. 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. At December 31, 2014, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $175,000 in interest. At March 31, 2015, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $183,000 in interest.
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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 50% of any gross proceeds of any Series B Preferred capital raised through maturity of the note. The note is convertible at the holder’s option at any time or at maturity.
9
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(b)
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During 2013, the Company entered into a short-term note payable with Antony Castagno, the Chief Technology Officer, for various working capital needs. The note was non-interest bearing and unsecured. In March 2014, Mr. Castagno amended the note extending the term date till December 31, 2014 and the note bore interest at 10%. At December 31, 2014, the Company was indebted to Mr. Castagno in the approximate amount of $15,000 and approximately $1,400 in interest. No interest was paid in fiscal 2014. In March 2015, the debt of $15,000 and approximate interest of $1,700 was paid in full.
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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 bear interest at 12% per year, are unsecured and 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. At March 31, 2015, the Company was indebted to Mr. Steffens in the approximate amount of $6,950,514 of principal and $1,343,000 of interest. In April 2015, Mr. Steffens converted all of his principal of $6,950,514 into 69,505,140 shares of common stock of the Company.
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(c)
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The Company has issued a series of short-term promissory notes with private lenders, which provide for short term borrowings, both secured by accounts receivable and unsecured. The notes in the aggregate principal amount of $50,000 of principal and $41,000 of interest and $50,000 of principal and $44,000 of interest, respectively, as of December 31, 2014 and March 31, 2015, bear interest between 10% and 36% per annum.
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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 Company’s Common Stock and the note was amended to extend the maturity date till March 28, 2015. In March 2015, the note was amended to extend the maturity date till June 30, 2015. At December 31, 2014, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $207,000 in interest. At March 31, 2015, the Company was indebted to SOAdesk in the amount of $700,000 in principal and $215,000 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. At December 31, 2014, the Company was indebted to this private lender in the amount of $336,000 in principal and $112,000 in interest. At March 31, 2015, the Company was indebted to this private lender in the amount of $336,000 in principal and $121,000 in interest.
10
NOTE 4. 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 three months of fiscal year 2015 or 2014. Because of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance.
NOTE 5. LOSS PER SHARE
Basic loss per share is computed based upon the weighted average number of common shares outstanding. Diluted loss per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities. Potentially dilutive securities outstanding during the periods presented include stock options, warrants, restricted stock, preferred stock and convertible debt.
Options to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation. No options were included for the three months ended March 31, 2015 and 2014. 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.
NOTE 6. COMMITMENTS
In June 2014, the Company entered into an amendment with its landlord and renewed its lease through 2018. Future minimum lease commitments on operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2015 consisted of only one lease as follows (in thousands):
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Lease
Commitments
|
||||
|
2015
|
$ | 77 | ||
|
2016
|
103 | |||
|
2017
|
106 | |||
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2018
|
89 | |||
| $ | 375 | |||
NOTE 7. CONTINGENCIES
The Company, from time to time, is involved in legal matters arising in the ordinary course of its business including matters involving proprietary technology. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.
Under the indemnification clause of the Company’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee. There were no claims against the Company as of March 31, 2015.
NOTE 8. SUBSEQUENT EVENTS
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. The debt was represented by various promissory notes issued by the Company to Mr. Steffens between March 2012 and January 2015.
11
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 changes to the underlying applications or requiring costly development expenditures. The Company’s software collects activity and application performance data and tracks business objects across time and multiple users, as well as measures against defined expected business process flow, 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 focuses on the activity intelligence and customer experience management market with emphasis on desktop analytics and automation with its Cicero Discovery™ and Cicero Discovery Automation™ products, respectively.
Cicero Discovery delivers desktop analytics for the enterprise. Leveraging a suite of sensors, Cicero Discovery provides endpoint analytics by collecting activity data and mapping employee effort to highlight areas for improvement in business processes, compliance, training and application utilization. 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 Discovery helps customers identify what is actually happening to an object through its life cycle and identify optimal business process and/or critical steps that are missing or holding up the process.
Cicero Discovery includes a Studio environment that enables business analysts and other non-IT staff to configure which applications, processes, and business objects to monitor and how the data should be stored for reporting or shared with another application.
Cicero Discovery 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 Discovery Automation integrates applications, automates workflow, and provides control and adaptability at the end user desktop.
Cicero Discovery Solution includes a Studio environment that enables business analysts and other non-IT staff to configure and enhance desktop integrations, scripts, and workflows without any impact on underlying applications or business logic.
The Cicero Discovery and Cicero Discovery Automation 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.
Cicero Discovery Automation enables the abstraction and separation of the department’s existing technical environment from its business logic. This physical separation empowers IT and the operations managers to build and change the business logic at their discretion. The abstraction capability converts the contact center and other departments into a flexible and agile operating environment that can rapidly and cost effectively respond to the dynamic needs of the enterprise.
The Company provides an intuitive configuration toolkit for each product, which simplifies the process of deploying solutions to the enterprise. The Company 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 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.
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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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Our 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.
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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 Discovery and Cicero Discovery Automation 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 Discovery and Cicero Discovery Automation;
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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 months ended March 31, 2015 and 2014 (in thousands):
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Three months ended March 31,
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2015
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2014
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Total revenue
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$ | 460 | $ | 539 | ||||
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Total cost of revenue
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178 | 250 | ||||||
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Gross margin
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282 | 289 | ||||||
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Total operating expenses
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913 | 833 | ||||||
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Loss from operations
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$ | (631 | ) | $ | (544 | ) | ||
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 MARCH 31, 2015 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2014.
Total Revenues. Total revenues decreased $79,000, or 14.7%, from $539,000 to $460,000, for the three months ended March 31, 2015 as compared with the three months ended March 31, 2014. The decrease is due primarily to a decrease in license and consulting revenue.
Total Cost of Revenue. Total cost of revenue decreased $72,000, or 28.8%, from $250,000 to $178,000 for the three months ended March 31, 2015, as compared with the three months ended March 31, 2014. The decrease is primarily due to a decrease in headcount due to a reallocation of personnel and lower travel expenses.
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Total Gross Margin. Gross margin was $282,000, or 61.3%, for the three months ended March 31, 2015, as compared to the gross margin of $289,000, or 53.6%, for the three months ended March 31, 2014. The decrease in gross margin is primarily due to the decrease in sales partially offset by the lower expenses from a reallocation of personnel.
Total Operating Expenses. Total operating expenses increased $80,000, or 9.6%, from $833,000 to $913,000 for the three months ended March 31, 2015, as compared with the three months ended March 31, 2014. The increase is primarily attributable to an increase in headcount and higher outsides consulting services partially offset by a decrease in travel expenses and a decrease in stock option expenses.
Software Products.
Software Product Revenue. The Company earned $86,000 in software product revenue for the three months ended March 31, 2015 as compared to $116,000 in software revenue for the three months ended March 31, 2014, a decrease of $30,000. The decrease is primarily due to the traditional long sales cycles within the enterprise software arena.
Software Product Gross Margin. The gross margin on software products for the three months ended March 31, 2015 and March 31, 2014 was 100.0%.
Maintenance.
Maintenance Revenue. Maintenance revenue for the three months ended March 31, 2015 increased by approximately $6,000, or 1.7%, from $361,000 to $367,000 as compared to the three months ended March 31, 2014. The increase in maintenance revenue is primarily due to the new software product sales in the second half of fiscal 2014.
Maintenance Gross Margin. Gross margin on maintenance products for the three months ended March 31, 2015 was $337,000 or 91.8% compared with $334,000 or 92.5% for the three months ended March 31, 2014. 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 greater maintenance revenue.
Services.
Services Revenue. Services revenue decreased $55,000, or 88.7%, from $62,000 to $7,000 for the three months ended March 31, 2015 as compared with the three months ended March 31, 2014. The decrease in services revenues is primarily attributable to a decrease in one significant paid consulting engagement in the first quarter of 2015.
Services Gross Margin Loss. Services gross margin loss was $141,000 or 2,014.3% for the three months ended March 31, 2015 compared with gross margin loss of $161,000 or 259.7% for the three months ended March 31, 2014. The decrease in gross margin loss was primarily attributable to a decrease in personnel costs partially offset by a decrease in services revenue.
Operating Expenses:
Sales and Marketing. Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses for the three months ended March 31, 2015 increased by approximately $22,000, or 8.5%, from $259,000 to $281,000 as compared with the three months ended March 31, 2014. The increase is primarily attributable to higher trade show expenses partially offset by a decrease in travel expenses and 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 $69,000, or 25.4%, from $272,000 to $341,000 for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014. The increase in costs for the quarter is primarily due to an increase in headcount from a reallocation of personnel and outside consulting expense for research development.
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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 March 31, 2015 decreased by approximately $11,000, or 3.6%, from $302,000 to $291,000 as compared to the three months ended March 31, 2014. The decrease is primarily due to a decrease in stock option expense and lower travel costs.
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 quarter of 2015 and 2014. 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 March 31, 2015 as compared to a net loss of $723,000 for the three months ended March 31, 2014. The increase in net loss is primarily due to the decreases in total revenue partially offset by the decrease of cost of revenue.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Cash and cash equivalents increased to $670,000 at March 31, 2015 from $20,000 at December 31, 2014, an increase of $650,000. The increase is primarily attributable to the collections of accounts receivable from year end and revenue generated in the first quarter of 2015.
Net cash generated by Operating Activities. Cash generated by operations for the three months ended March 31, 2015 was $411,000 compared to cash generated by operations of $266,000 for the three months ended March 31, 2014. Cash generated by operations for the three months ended March 31, 2015 was primarily due to an increase in depreciation of $4,000, a decrease in accounts receivable of $985,000 and an increase in accounts payable and accrued expenses of $378,000 partially offset by the loss from operations of $865,000, an increase in prepaid expenses of $73,000 and a decrease in deferred revenue of $18,000.
Net cash used in Investing Activities. The Company had purchases of equipment totaling $6,000 for the three months ended March 31, 2015. The Company had no purchases for the three months ended March 31, 2014.
Net cash generated by/(used in) Financing Activities. Net cash generated by financing activities for the three months ended March 31, 2015 was approximately $245,000 as compared with net cash used in financing activities of approximately $256,000 for the three months ended March 31, 2014. Cash generated by financing activities for the three months ended March 31, 2015 was comprised primarily from the cash received from short term borrowings of $260,000 offset by the repayment of $15,000 of short term debt.
Liquidity
The Company funded its cash needs during the three months ended March 31, 2015 with cash on hand from December 31, 2014, the revenue generated in the first three months of 2015, 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 bear interest at 12% per year and are unsecured. In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until April 1, 2014. In March 2014, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until June 30, 2015. At December 31, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $6,690,000 of principal and $1,139,000 in interest. At March 31, 2015, the Company was indebted to Mr. Steffens in the approximate amount of $6,950,514 of principal and $1,343,000 in interest.
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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.
The Company has incurred an operating loss of approximately $3,927,000 for the year ended December 31, 2014, and has a history of operating losses. For the three months ended March 31, 2015, the Company incurred losses of $865,000 and had a working capital deficiency of $15,156,000 as of March 31, 2015. Management believes that its repositioned strategy of leading with its Discovery product to use analytics to measure and then manage how work happens 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 customers and prospects. The Company has borrowed $260,000 and $2,296,000 in 2015 and 2014, respectively. The Company has also repaid approximately $15,000 and $394,000 of debt in 2015 and 2014, 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. 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 March 31, 2015.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of March 31, 2015, 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 March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Not Applicable.
Not Applicable.
None.
None.
None.
None
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Exhibit No.
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Description
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Certification of Chief Executive Officer/Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
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Certification of 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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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CICERO INC.
By: /s/ John P. Broderick
John P. Broderick
Chief Executive Officer and Chief Financial Officer
Date: May 15, 2015
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