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.