Item
1. Condensed Consolidated Financial Statements
CICERO
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
|
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$242
|
$97
|
|
Trade accounts
receivable
|
84
|
11
|
|
Prepaid expenses
and other current assets
|
270
|
142
|
|
Total current
assets
|
596
|
250
|
|
Property and
equipment, net
|
5
|
6
|
|
Total
assets
|
$601
|
$256
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
Liabilities:
|
|
|
|
Current portion of
long term debt
|
$1,517
|
$411
|
|
Accounts
payable
|
965
|
982
|
|
Accrued
expenses:
|
|
|
|
Salaries, wages,
and related items
|
1,270
|
1,363
|
|
Accrued
interest
|
220
|
456
|
|
Other
|
27
|
36
|
|
Deferred
revenue
|
367
|
460
|
|
Total
current liabilities
|
$4,366
|
3,708
|
|
Long term debt
(Note 3)
|
464
|
3,976
|
|
Total
liabilities
|
4,830
|
$7,684
|
|
Commitments and
Contingencies (Note 7 and 8)
Stockholders'
deficit:
|
|
|
|
Convertible
preferred stock, $0.001 par value, 10,000,000 shares
authorized
9,333
Series A shares issued and outstanding at September 30, 2019 and
5,083 issued and outstanding at
December
31, 2018.
$500
per share liquidation preference
|
--
|
--
|
|
Common stock,
$0.001 par value, 600,000,000 shares authorized
208,019,141
issued and outstanding at September 30, 2019 and 207,913,541 issued
and outstanding
at
December 31, 2018
|
208
|
208
|
|
Additional paid-in
capital
|
257,945
|
253,693
|
|
Accumulated
deficit
|
(262,382)
|
(261,329)
|
|
Total stockholders'
deficit
|
(4,229)
|
(7,428)
|
|
Total liabilities
and stockholders' deficit
|
$601
|
$256
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
|
|
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
Software
|
$650
|
$12
|
$763
|
$34
|
|
Maintenance
|
123
|
119
|
358
|
369
|
|
Services
|
83
|
69
|
187
|
205
|
|
Total operating
revenue
|
856
|
200
|
1,308
|
608
|
|
|
|
|
|
|
|
Cost of
revenue:
|
|
|
|
|
|
Software
|
--
|
--
|
5
|
--
|
|
Maintenance
|
37
|
37
|
118
|
118
|
|
Services
|
114
|
99
|
331
|
292
|
|
Total cost of
revenue
|
151
|
136
|
454
|
410
|
|
|
|
|
|
|
|
Gross
margin
|
705
|
64
|
854
|
198
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Sales and
marketing
|
75
|
61
|
307
|
278
|
|
Research and
product development
|
315
|
250
|
846
|
743
|
|
General and
administrative
|
187
|
169
|
552
|
546
|
|
Total operating
expenses
|
577
|
480
|
1,705
|
1,567
|
|
Gain/(loss) from
operations
|
128
|
(416)
|
(851)
|
(1,369)
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
Interest
expense
|
(53)
|
(89)
|
(202)
|
(226)
|
|
Total
other expense
|
(53)
|
(89)
|
(202)
|
(226)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
$75
|
$(505)
|
$(1,053)
|
$(1,595)
|
|
Income/(loss) per
share applicable to common stockholders:
|
|
|
|
|
|
Basic
and Diluted
|
$0.00
|
$(0.00)
|
$(0.01)
|
$(0.01)
|
|
Weighted average
shares outstanding:
|
|
|
|
|
|
Basic
and Diluted
|
208,019,141
|
207,913,541
|
207,961,119
|
207,913,541
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(in thousands)
(unaudited)
|
|
Nine Months
Ended
September
30,
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$(1,053)
|
$(1,595)
|
|
Adjustments to
reconcile net loss to net cash used by operating
activities:
|
|
|
|
Depreciation and
amortization
|
3
|
3
|
|
Stock
compensation expense
|
1
|
2
|
|
Bad
debt expense
|
--
|
2
|
|
Changes in assets
and liabilities:
|
|
|
|
Trade accounts
receivable
|
(73)
|
173
|
|
Prepaid expenses
and other current assets
|
(128)
|
(115)
|
|
Accounts payable
and accrued expenses
|
4
|
(240)
|
|
Deferred
revenue
|
(93)
|
121
|
|
Net cash used by
operating activities
|
(1,339)
|
(1,649)
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases of
equipment
|
(2)
|
(2)
|
|
Net
cash used by investing activities
|
(2)
|
(2)
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Borrowings under
debt
|
1,545
|
1,776
|
|
Repayments of
debt
|
(59)
|
(125)
|
|
Net cash generated
by financing activities
|
1,486
|
1,651
|
|
Net
increase/(decrease) in cash
|
145
|
--
|
|
Cash:
|
|
|
|
Beginning of
period
|
97
|
56
|
|
End of
period
|
$242
|
$56
|
Non-Cash Investing and Financing Activities:
During
May 2019, the Company converted $1 of account payable to a vendor
by issuing 105,600 shares of its common stock.
During
March 2019, the Company converted $3,892 of debt and $356 of
interest to a related party lender by issuing 4,250 shares of its
Series A preferred stock.
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDERS' DEFICIT
Three and Nine Months Ended September 30, 2019
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
2018
|
207,913,541
|
$208
|
5,083
|
--
|
$253,692
|
$(260,801)
|
$(6,901)
|
|
Restricted stock
issued as compensation
|
|
|
|
|
1
|
|
1
|
|
Net
loss
|
|
|
|
|
|
(505)
|
(505)
|
|
Balance at
September 30, 2018 (unaudited)
|
207,913,541
|
$208
|
5,083
|
--
|
$253,693
|
$(261,306)
|
$(7,405)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
2019
|
208,019,141
|
$208
|
9,333
|
--
|
$257,945
|
$(262,457)
|
$(4,304)
|
|
Net
income
|
|
|
|
|
|
75
|
75
|
|
Balance at
September 30, 2019 (unaudited)
|
208,019,141
|
$208
|
9,333
|
--
|
$257,945
|
$(262,382)
|
$(4,229)
|
|
Balance at December
31, 2017
|
207,913,541
|
$208
|
5,083
|
--
|
$253,691
|
$(259,711)
|
$(5,812)
|
|
Restricted stock
issued as compensation
|
|
|
|
|
2
|
|
2
|
|
Net
loss
|
|
|
|
|
|
(1,595)
|
(1,595)
|
|
Balance at
September 30, 2018 (unaudited)
|
207,913,541
|
$208
|
5,083
|
--
|
$253,693
|
$(261,306
|
$(7,405)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2018
|
207,913,541
|
$208
|
5,083
|
--
|
$253,693
|
$(261,329)
|
$(7,428)
|
|
Restricted stock
issued as compensation
|
|
|
|
|
1
|
|
1
|
|
Common stock issued
for accounts payable
|
105,600
|
|
|
|
1
|
|
1
|
|
Series A Preferred
Stock issued for conversion of debt/interest
|
|
|
4,250
|
--
|
4,250
|
|
4,250
|
|
Net
loss
|
|
|
|
|
|
(1,053)
|
(1,053)
|
|
Balance at
September 30, 2019 (unaudited)
|
208,019,141
|
$208
|
9,333
|
--
|
$257,945
|
$(262,382)
|
$(4,229)
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The
accompanying condensed consolidated financial statements for the
three and nine months ended September 30, 2019 and 2018 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 consolidated financial statements and
notes thereto contained in Cicero Inc.'s (the "Company") Annual
Report on Form 10-K for the year ended December 31, 2018, filed
with the SEC on March 29, 2019. The results of operations for the
interim periods shown in this report are not necessarily indicative
of results to be expected for other interim periods or for the full
fiscal year. In the opinion of management, the information
contained herein reflects all adjustments necessary for a fair
presentation of the interim results of operations. All such
adjustments are of a normal, recurring nature.
The
year-end condensed balance sheet data was derived from audited
consolidated financial statements in accordance with the rules and
regulations of the SEC, but does not include all disclosures
required for financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America.
The
accompanying condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. All of the
Company's subsidiaries are wholly owned for the periods
presented.
Liquidity
Although
the Company has incurred a net loss of approximately $1,053,000 for
the nine months ended September 30, 2019, and has a history of
operating losses, management believes that the functionality of the
Company’s products resonates in the marketplace as both
“analytics” and “automation” are topics
often discussed and written about. Further, the Company believes
that its repositioned strategy of leading with a no cost, short,
“proof of concept” evaluation of the software’s
capabilities 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 and active
“proof of concepts” with active partners, customers and
prospects. In March 2019, the Company issued 4,250 shares of its
Series A preferred stock and a Warrant to purchase up to 17,000,787
shares of the Company’s Common Stock at an exercise price of
$0.05 per share to its Chairman, John Steffens, as part of a
conversion of debt and interest totaling $4,250,197 reducing its
working capital deficiency. The Company has borrowed approximately
$1,545,000 and $1,776,000 in 2019 and 2018, respectively. 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. As a result of these factors, the report of our
independent auditors dated March 29, 2019, on our consolidated
financial statements for the period ended December 31, 2018
included an emphasis of matter paragraph indicating that there is a
substantial doubt about the Company’s ability to continue as
a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Use of Accounting Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual amounts could differ from these
estimates. Significant estimates include the recoverability of
long-lived assets, stock based compensation, deferred taxes, and
related valuation allowances and valuation of equity
instruments.
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 plan expired in fiscal 2017 and as such no further options
are available to grant. The Company did not recognize any
stock-based compensation expense for the three and nine months
ended September 30, 2019 and 2018, respectively, in connection with
outstanding options. The Company has no unrecognized stock-based
compensation expense in connection with outstanding options as of
September 30, 2019.
The
Company recognized approximately $300 for the three months ended
September 30, 2019 and 2018, respectively and $1,200 and $2,000 for
the nine months ended September 30, 2019 and 2018, respectively, in
stock-based compensation in connection with the restricted stock
grants issued in fiscal 2018 to certain employees. The grants vest
on the second anniversary of the grant date. The Company has
approximately $200 of unrecognized stock-based compensation expense
in connection with the restricted stock grants
The
following table sets forth certain information as of September 30,
2019 about shares of the
Company’s common stock, par value $.001 (the
“Common Stock”), outstanding and available for issuance
under the Company’s existing equity compensation plans: the
Cicero Inc. 2007 Employee Stock Option Plan and the Outside
Director Stock Option Plan. The Company’s stockholders
approved all of the Company’s stock-based compensation
plans.
|
|
|
|
Outstanding on
December 31, 2018
|
706,211
|
|
Granted
|
--
|
|
Exercised
|
--
|
|
Forfeited
|
(25,000)
|
|
Outstanding on
September 30, 2019
|
681,211
|
|
|
|
|
Weighted average
exercise price of outstanding
options
|
$0.08
|
|
Aggregate Intrinsic
Value
|
$0
|
|
Shares available
for future grants on September 30, 2019
|
--
|
|
|
|
|
Weighted average of
remaining contractual life
|
1.5
|
Recent Accounting Pronouncements
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments, which clarifies how companies present and classify
certain cash receipts and cash payments in the statement of cash
flows where diversity in practice exists. This standard did not
have a material impact on our consolidated financial statements and
related disclosures.
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on-balance sheet and disclose key
information about leasing arrangements. Topic 842 was subsequently
amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.
The new standard establishes a right-of-use model (ROU) that
requires a lessee to recognize a ROU asset and lease liability on
the balance sheet for all leases with a term longer than 12 months.
Leases will be classified as finance or operating, with
classification affecting the pattern and classification of expense
recognition in the income statement.
The new
standard was effective for us on January 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. We adopted the new standard on January 1, 2019 and use the
effective date as our date of initial application. Consequently,
financial information will not be updated and the disclosures
required under the new standard will not be provided for dates and
periods before January 1, 2019.
The new
standard provides a number of optional practical expedients in
transition. We elected the ‘package of practical
expedients’, which permits us not to reassess under the new
standard our prior conclusions about lease identification, lease
classification and initial direct costs. We did not elect the
use-of-hindsight or the practical expedient pertaining to land
easements; the latter not being applicable to us. We elected all of
the new standard’s available transition practical
expedients.
This
standard did not have a material effect on our financial
statements. We believe the most significant future effects relate
to (1) the recognition of new ROU assets and lease liabilities on
our balance sheet for our real estate operating lease and (2)
providing significant new disclosures about our leasing
activities.
The new
standard also provides practical expedients for an entity’s
ongoing accounting. We elected the short-term lease recognition
exemption for our real estate lease that is currently on a month to
month lease. This means, for those leases that qualify, we will not
recognize ROU assets or lease liabilities, and this includes not
recognizing ROU assets or lease liabilities for existing short-term
leases of those assets in transition. As our real estate lease is a
short term lease, the adoption of this standard did not result in
the Company recognizing any right of use asset or
liability.
NOTE 2. REVENUE
On
January 1, 2018, we adopted ASC 606, Revenue from Contracts with
Customers and all the related amendments (“the new revenue
standard”) and applied it to all contracts using the modified
retrospective method. We completed our review of contracts with our
customers and did not need to record a cumulative effect adjustment
to accumulated deficit upon adoption of the new revenue standard as
of January 1, 2018. Under ASC 606, revenue is recognized when a
company transfers the promised goods or services to a customer in
an amount that reflects consideration that is expected to be
received for those goods and services. Adoption of the standard did
not have a material impact on the Company’s financial
position, results of operations, cash flow, accounting policies,
business processes, internal controls or disclosures.
Contract Balances
Timing
differences among revenue recognition may result in contract assets
or liabilities. Contract liabilities (deferred revenue) totaled
$460,000 and $367,000 as of December 31, 2018 and September 30,
2019, respectively. Revenue recognized from the contract
liabilities for the nine months ended September 30, 2019 was
$313,000. The contract liability balances reflect the unrecognized
transaction price.
Our net
trade accounts receivables were $11,000 and $84,000 as of December
31, 2018 and September 30, 2019, respectively. Trade accounts
receivable are stated in the amount management expects to collect
from outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to
the allowance of doubtful accounts based on its assessment of the
current status of individual accounts. Balances still outstanding
after management has used reasonable collection efforts are written
off through a charge to the allowance of doubtful accounts and a
credit to trade accounts receivable. Changes in the allowance for
doubtful accounts have not been material to the consolidated
financial statements.
Performance Obligations
A
performance obligation is a promise in a contract to transfer a
distinct good or service to the customer and is the unit of account
under the new revenue recognition standard. The transaction price
is allocated to each distinct performance obligation and recognized
as revenue when, or as, the performance obligation is satisfied.
Most of our contracts have multiple performance obligations, which
include software, maintenance and professional
services.
Revenue Recognition
Cicero
utilizes point in time method for revenue recognition for its
software license revenue. Our software licenses are distinct and
have standalone functionality as it is fully functional without any
services purchased. Cicero utilizes the output method over time for
revenue recognition as maintenance contracts are invoiced annually
prior to the start of the maintenance period and then recognized
monthly over the length of the maintenance contract. Cicero
utilizes the output method over time for revenue recognition for
its services revenue as service hours/days are logged and billed
subsequently. Cicero has no upfront fees that are billable to
customers. Cicero established a standalone selling price for its
lines of revenue based on price list and historical
sales.
NOTE 3. DEBT
Debt
and notes payable to related party consist of the following (in
thousands):
|
|
|
|
|
Note payable
– asset purchase agreement (a)
|
$302
|
$361
|
|
Note payable
– related party (b)
|
1,165
|
3,512
|
|
Notes payable
(c)
|
514
|
514
|
|
Total
debt
|
1,981
|
4,387
|
|
Less current
portion
|
(1,517)
|
(411)
|
|
Total long term
debt
|
$464
|
$3,976
|
(a)
As part of a prior
acquisition, the Company was subject to certain earn-out obligation
payments of up to $2,410,000 over an 18-month period from January
15, 2010 through July 31, 2011, based upon the achievement of
certain revenue performance targets. The earn-out was payable fifty
percent in cash and fifty percent in common stock of the Company at
the rate of one share for every $0.15 earn-out payable. The Company
had recorded $842,606 in its accounts payable as of December 31,
2014 due to a portion of earn-out obligations being met. In June
2015, the Company entered into a promissory note with SOAdesk for
fifty percent of the earn-out payable ($421,303) to SOAdesk. The
maturity date of the note was December 31, 2015 with an annual
interest rate of 10%. Through a series of amendments, the maturity
date was extended to January 31, 2020 and two milestone payments of
$62,500, to be applied to outstanding interest and then principal,
payable on June 1, 2018 and December 1, 2018, respectively, were
added. At December 31, 2018, the Company was indebted to SOAdesk
for $360,580 in principal and approximately $17,000 in interest. At
September 30, 2019, the Company was indebted to SOAdesk for
$301,282 in principal and approximately $4,000 in interest and the
principal has been reclassed to short term debt.
(b)
From time to time
during 2017 through 2019, the Company entered into several short
term notes payable with John Steffens, the Company’s Chairman
of the Board, for various working capital needs. The notes bear an
interest rate of 10% with a maturity date of June 30, 2018. In June
2018, all outstanding notes were amended to a new maturity date of
December 31, 2018. In December 2018, all outstanding notes were
amended to a new maturity date of June 30, 2020 and as such were
reclassed to long term debt. The Company is obligated to repay the
notes with the collection of any accounts receivable. At December
31, 2018, the Company was indebted to Mr. Steffens in the
approximate amount of $3,511,500 of principal and $299,000 of
interest. In March 2019, the Company issued 4,250 shares of its
Series A preferred stock and warrants to purchase up to 17,007,787
shares of the Company’s common stock at an excise price of
$0.05 per share to convert the total obligation of $3,891,500 of
principal and $358,697 of interest. At September 30, 2019, the
Company was indebted to Mr. Steffens in the approximate amount of
$1,165,000 of principal and $64,000 of interest.
(c)
The Company has
issued a series of short-term unsecured promissory notes with
private lenders, which provide for short term borrowings. The
notes, in the aggregate amount of $50,000 of principal and $88,000
of interest and $50,000 of principal and $96,000 of interest, as of
December 31, 2018 and September 30, 2019, respectively, bear
interest between 10% and 36% per annum.
In
March 2012 the Company entered into an unsecured promissory note
with a private lender for $336,000 at an interest rate of 12% and a
maturity date of March 31, 2013. Through a series of amendments,
the note was amended to extend the maturity date to January 31,
2021 and a new principal balance of $498,500. Simultaneously a
$30,000 principal payment was made to the lender. A new repayment
schedule of quarterly principal and interest payments was added
beginning in January 31, 2018 with a payment of $30,000. $25,000
quarterly principal and interest payments are required to be made
beginning on April 30, 2018 through January 31, 2019. $40,000
principal and interest payments are required to be made on
beginning on April 30, 2019 through October 31, 2020. Final payment
of remaining principal and interest is due on January 31, 2021. The
lender agreed to waive certain quarterly payments in fiscal 2018 as
business conditions so warrant without triggering any default and
that any deferred payments would be added to the next quarterly
payment. At December 31, 2018, the Company was indebted to this
private lender in the amount of $464,350 in principal and $51,000
in interest and has been reclassified as long term debt due to its
maturity date of January 31, 2021. At September 30, 2019, the
Company was indebted to this private lender in the amount of
$464,350 in principal and $55,000 in interest.
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 three and nine
months ended on September 30, 2019 and 2018. As a result of the
Company's recurring losses, the deferred tax assets have been fully
offset by a valuation allowance.
NOTE 5. CONVERSION OF DEBT TO EQUITY
On
March 26, 2019, the Company entered into agreement with John L.
Steffens, the Chairman of the Board of Directors, to convert
$3,891,500 of principal amount of debt and $358,697 of interest
into 4,250 shares of the Company’s Series A Preferred Stock.
Per the Certificate of Designation, the initial conversion of
preferred stock to common equaled 85,003,934 shares of common stock
of the Company at a price of $0.05 per share, subject to adjustment
for stock dividends, stock splits and similar events. Additionally,
Mr. Steffens was granted a warrant for 17,000,787 of the
Company’s common shares at a price of $0.05 per share. The
Company accounted for the transaction pursuant to Topic ASC 470-50,
Modification and Extinguishment of Debt. Due to the fact that the
transaction was with Mr. Steffens, the Company’s Chairman of
the Board, the Company determined that this was not an arm’s
length agreement and as such has recorded the entire transaction
through additional paid in capital.
The
Series A Preferred Stock ranks senior in preference and priority to
the Company’s common stock with respect to dividend and
liquidation rights and, except as provided in the Certificate of
Designation or otherwise required by law, will vote with the common
stock on an as converted basis on all matters presented for a vote
of the holders of common stock, including directors. The Series A
Preferred Stock is convertible at any time at the option of the
holder at an initial conversion ratio of 20,000 shares of Common
Stock for each share of Series A Preferred Stock. The initial
conversion ratio shall be adjusted in the event of any stock
splits, stock dividends and other recapitalizations. The holders of
the Series A Preferred Stock are entitled to a liquidation
preference of $1,000 per share of Series A Preferred Stock plus any
declared but unpaid dividends upon the liquidation of the Company.
The Series A Preferred Stock may be redeemed by the Company at any
time and must be redeemed by the Company, upon the written request
of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock, after the occurrence of one of
the following events: (x) the Company’s trailing 12 month
EBITDA exceeds $5,000,000, (y) the sale of all, or substantially
all of the assets of the Company, or (z) the sale of all or
substantially all the intellectual property of the Company, which
in the case of “y” or “z” result in net
proceeds to the Company in excess of $6,000,000, at a redemption
price equal to $1,000 plus all declared but unpaid dividends, which
amount will be paid in three annual installments. The approval of
at least two thirds of the holders of Series A Preferred Stock,
voting together as a separate class, is required for: (i) the
merger, sale of all, or substantially all of the assets or
intellectual property, recapitalization, or reorganization of the
Company, unless such action (x) results in net proceeds to the
stockholders of the Company in excess of $5,000,000, and (y) has
received the prior approval of the Board of Directors. (ii) the
authorization or issuance of any equity security having any right,
preference or priority superior to or on parity with the Series A
Preferred Stock. (iii) the redemption, repurchase or acquisition,
directly or indirectly, through subsidiaries or otherwise, of any
equity securities (other than the redemption of the Series A
Preferred Stock) or the payment of dividends or other distributions
on equity securities by the Company (other than on the Series A
Preferred Stock). (iv) any amendment or repeal of any provision of
the Company’s Certificate of Incorporation or Bylaws that
would adversely affect the rights, preferences, or privileges of
the Series A Preferred Stock. and (v) the liquidation, dissolution
or winding up of the business and affairs of the Company, the
effectuation of any Liquidation Event (as defined in Certificate of
Designation), or the consent to any of the foregoing, unless such
action (x) results in net proceeds to the stockholders of the
Company in excess of $5,000,000, and (y) has received the prior
approval of the Board of Directors.
NOTE 6. EARNINGS/LOSS PER SHARE
Basic
earnings/loss per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings/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, and
convertible preferred stock.
The
weighted average number of common shares is increased by the number
of dilutive potential common shares issuable on the exercise of
options less the number of common shares assumed to have been
purchased with the proceeds from the exercise of the options
pursuant to the treasury stock method; those purchases are assumed
to have been made at the average price of the common stock during
the respective period. Options, warrants or convertible preferred
stock 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,
warrants or convertible preferred stock were included in the
calculation of loss per share for the three and nine months ended
September 30, 2019 and 2018.
NOTE 7. COMMITMENTS
In June
2014, the Company entered into an amendment with its landlord and
renewed its lease through 2018. In October 2016, the Company
entered into an amendment reducing the square footage being leased
for the remaining term of the lease. The lease expired in October
2018 and the Company is currently on a month to month lease. The
Company is exploring relocation options in the remainder of
2019.
NOTE 8. CONTINGENCIES
The
Company, from time to time, is involved in legal matters arising in
the ordinary course of its business including matters involving
proprietary technology. While management believes that such matters
are currently not material, there can be no assurance that matters
arising in the ordinary course of business for which the Company is
or could become involved in litigation, will not have a material
adverse effect on its business, financial condition or results of
operations. There was no active litigation against the Company as
of September 30, 2019.
Under
the indemnification clause of the Company’s standard reseller
agreements and software license agreements, the Company agrees to
defend the reseller/licensee against third party claims asserting
infringement by the Company’s products of certain
intellectual property rights, which may include patents,
copyrights, trademarks or trade secrets, and to pay any judgments
entered on such claims against the reseller/licensee. There were no
claims against the Company as of September 30, 2019.
NOTE 9. SUBSEQUENT EVENTS
In
October 2019, the Company entered into a note payable totaling
$50,000 with Mr. Steffens. The note bears interest at 10% per
annum. The note is unsecured and mature on June 30, 2020. The
Company is obligated to repay the notes with the collection of any
accounts receivables.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.
Cicero,
Inc. (the “Company”) provides desktop activity
intelligence and automation 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 provides 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, 2019 and 2018 (in thousands):
|
|
Three months
ended September 30,
|
Nine months
ended September 30,
|
|
|
|
|
|
|
|
Total
revenue
|
$856
|
$200
|
$1,308
|
$608
|
|
Total cost of
revenue
|
151
|
136
|
454
|
410
|
|
Gross
margin
|
705
|
64
|
854
|
198
|
|
Total operating
expenses
|
577
|
480
|
1,705
|
1,567
|
|
Income/(loss) from
operations
|
$128
|
$(416)
|
$(851)
|
$(1,369)
|
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.
On
January 1, 2018, we adopted the new accounting standard Accounting
Standards Codification ("ASC") 606, Revenue from Contracts with
Customers and all the related amendments (“the new revenue
standard”) and applied it to all contracts using the modified
retrospective method. 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. We completed our review of contracts with our customers
and did not need to record a cumulative effect adjustment to
accumulated deficit upon adoption of the new revenue standard as of
January 1, 2018. Based on the evaluation the Company performed on
its customer contracts, the adoption has not and will not have a
material impact on the Company’s financial position, results
of operations, cash flow, accounting policies, business processes,
internal controls or disclosures.
THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED WITH THE THREE
MONTHS ENDED SEPTEMBER 30, 2018.
Total Revenues. Total revenues increased $656,000, or
328.0%, from $200,000 to $856,000, for the three months ended
September 30, 2019 as compared with the three months ended
September 30, 2018. The increase is primarily due to an increase in
software revenue.
Total Cost of Revenue. Total cost of revenue increased
$15,000 or 11.0%, from $136,000 for the three months ended
September 30, 3018 to $151,000 for the three months ended September
30, 2019. The increase in cost of revenue is primarily due to an
increase in outside consulting expenses.
Total Gross Margin. Gross margin was $705,000, or 82.4%, for
the three months ended September 30, 2019, as compared to the gross
margin of $64,000, or 32.0%, for the three months ended September
30, 2018. The increase in gross margin is primarily due to the
increase in sales.
Total Operating Expenses. Total operating expenses increased
$97,000, or 20.2%, from $480,000 to $577,000 for the three months
ended September 30, 2019, as compared with the three months ended
September 30, 2018. The increase is primarily attributable to an
increase in personnel costs and outside consulting expenses
partially offset by lower corporate insurance expense.
Software Products:
Software Product Revenue. The Company had $650,000 software
product revenue for the three months ended September 30, 2019 as
compared to $12,000 in software revenue for the three months ended
September 30, 2018, an increase of $638,000. The increase is
primarily due to additional software sales to an existing
customer.
Software Product Gross Margin. The Company had 100% gross
margin on software products for the three months ended September
30, 2019 and September 30, 2018, respectively.
Maintenance:
Maintenance Revenue. Maintenance revenue for the three
months ended September 30, 2019 increased by approximately $4,000,
or 3.4%, from $119,000 to $123,000 as compared to the three months
ended September 30, 2018. The increase in maintenance revenue is
primarily due to the addition of new sales to customers in fiscal
2019.
Maintenance Gross Margin. Gross margin on maintenance
products for the three months ended September 30, 2019 was $86,000
or 69.9% compared with $82,000 or 68.9% for the three months ended
September 30, 2018. Cost of maintenance is comprised of personnel
costs and related overhead for the maintenance and support of the
Company’s software products. The increase in gross margin is
due to the increase in maintenance revenue.
Services:
Services Revenue. Services revenue for the three months
ended September 30, 2019 increased by approximately $14,000, or
20.3%, from $69,000 to $83,000 as compared with the three months
ended September 30, 2018. The increase is primarily due to an
increase from new services performed on existing
customers.
Services Gross Margin Loss. Services gross margin loss was
$31,000 or 37.3% for the three months ended September 30, 2019
compared with gross margin loss of $30,000 or 43.5% for the three
months ended September 30, 2018. The increase in gross margin loss
was primarily attributable to an increase in outside consulting
expenses partially offset by an increase in service
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 September 30, 2019 increased by approximately
$14,000, or 23.0%, from $61,000 to $75,000 as compared with the
three months ended September 30, 2018. The increase is primarily
attributable to an increase in headcount and 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 increased by approximately $65,000, or 26.0%,
from $250,000 to $315,000 for the three months ended September 30,
2019 as compared to the three months ended September 30, 2018. The
increase in research and development costs for the quarter is
primarily due higher outside consulting expenses partially offset
by a decrease in headcount.
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,
2019 increased by approximately $18,000, or 10.7%, from $169,000 to
$187,000 as compared to the three months ended September 30, 2018.
The increase is primarily due to higher personnel costs partially
offset by lower corporate insurance expenses.
Provision for Taxes. The Company’s effective income
tax rate differs from the statutory rate primarily because an
income tax expense/benefit was not recorded as a result of the
income or losses in the third quarter of 2019 and 2018,
respectively. As a result of the Company’s recurring losses,
the deferred tax assets have been fully offset by a valuation
allowance.
Net Income/(Loss). The Company recorded net income of
$75,000 for the three months ended September 30, 2019 as compared
to a net loss of $505,000 for the three months ended September 30,
2018. The net income is primarily due to the increase in total
revenue and a decrease in interest expenses partially offset by an
increase in operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2018.
Total Revenues. Total revenues increased $700,000, or
115.1%, from $608,000 to $1,308,000, for the nine months ended
September 30, 2019 as compared with the nine months ended September
30, 2018. The increase is due primarily to an increase in software
revenue partially offset by lower maintenance and services
revenue.
Total Cost of Revenue. Total cost of revenue increased by
$44,000, or 10.7%, from $410,000 to $454,000 for the nine months
ended September 30, 2019, as compared with the nine months ended
September 30, 2018. The increase is due primarily to outside
consulting expenses.
Total Gross Margin. Gross margin was $854,000, or 65.3%, for
the nine months ended September 30, 2019, as compared to the gross
margin of $198,000, or 32.6%, for the nine months ended September
30, 2018. The increase in gross margin is primarily due to the
increase in sales.
Total Operating Expenses. Total operating expenses increased
$138,000, or 8.8%, from $1,567,000 to $1,705,000 for the nine
months ended September 30, 2019, as compared with the nine months
ended September 30, 2018. The increase is primarily attributable to
an increase in personnel costs and outside consulting expenses
partially offset by lower corporate insurance expense.
Software Products:
Software Product Revenue. The Company earned $763,000 in
software product revenue for the nine months ended September 30,
2019 as compared to $34,000 in software revenue for the nine months
ended September 30, 2018, an increase of $729,000. The increase is
primarily due to the sale of additional licenses to a current
customer in the third quarter of 2019.
Software Product Gross Margin. The gross margin on software
products for the nine months ended September 30, 2019 was 99.3% as
compared with 100.0% for the nine months ended September 30, 2018.
The decrease was due to royalty expense in 2019.
Maintenance:
Maintenance Revenue. Maintenance revenue for the nine months
ended September 30, 2019 decreased by approximately $11,000, or
3.0%, from $369,000 to $358,000 as compared to the nine months
ended September 30, 2018. The decrease in maintenance revenue is
primarily due to the decrease in maintenance renewals partially
offset by the addition of new sales to customers in fiscal
2019.
Maintenance Gross Margin. Gross margin on maintenance
products for the nine months ended September 30, 2019 was $240,000
or 67.0% compared with $251,000 or 68.0% for the nine months ended
September 30, 2018. 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 nine months ended
September 30, 2019 decreased by approximately $18,000, or 8.8%,
from $205,000 to $187,000 as compared with the nine months ended
September 30, 2018. The decrease is primarily due to a decrease
from new services performed on existing customers.
Services Gross Margin Loss. Services gross margin loss was
$144,000 or 77.0% for the nine months ended September 30, 2019
compared with gross margin loss of $87,000 or 42.4% for the nine
months ended September 30, 2018. The increase in gross margin loss
was primarily attributable to a decrease in services revenue and an
increase in outside consulting expenses.
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, 2019 increased by approximately $29,000,
or 10.4%, from $278,000 to $307,000 as compared with the nine
months ended September 30, 2018. The increase is primarily
attributable to an adjustment of certain accruals in fiscal 2018
for personnel costs and higher outside consulting expenses in
fiscal 2019.
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 $103,000, or 13.9%,
from $743,000 to $846,000 for the nine months ended September 30,
2019 as compared to the nine months ended September 30, 2018. The
increase in research and development costs is primarily due to an
adjustment of certain accruals in fiscal 2018 for personnel costs
and higher outside consulting expenses in fiscal 2019.
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,
2019 increased by approximately $6,000, or 1.1%, from $546,000 to
$552,000 as compared to the nine months ended September 30, 2018.
The increase is primarily due to higher personnel costs partially
offset by lower corporate insurance and outside consulting
expenses.
Provision for Taxes. The Company’s effective income
tax rate differs from the statutory rate primarily because an
income tax expense/benefit was not recorded as a result of the
losses in the first nine months of 2019 and 2018. 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 $1,053,000 for
the nine months ended September 30, 2019 as compared to a net loss
of $1,595,000 for the nine months ended September 30, 2018. The
decrease in net loss is primarily due to the increase in total
revenue and a decrease in interest expenses partially offset by an
increase in cost of revenue and operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Cash
and cash equivalents increased $145,000 to $242,000 at September
30, 2019 from $97,000 at December 31, 2018. The increase is
primarily attributable to the revenue generated in the first nine
months of 2019 and short term borrowings partially offset by the
expenses in the first nine months of 2019.
Net cash used by Operating Activities. Cash used by
operations for the nine months ended September 30, 2019 was
$1,339,000 compared to $1,649,000 for the nine months ended
September 30, 2018. Cash used by operations for the nine months
ended September 30, 2019 was primarily due to the net loss from
operations of $1,053,000, an increase in accounts receivable of
$73,000, and increase of prepaid expenses of $128,000 and a
decrease in deferred revenue of $93,000 partially offset by
depreciation expense of $3,000, stock compensation expense of
$1,000, and an increase of accounts payable and accrued expenses of
$4,000.
Net cash used in Investing Activities. The Company had
$2,000 in purchases of equipment in the nine months ended September
30, 2019 and September 30, 2018, respectively.
Net cash generated by Financing Activities. Net cash
generated by financing activities for the nine months ended
September 30, 2019 was approximately $1,486,000, compared to
$1,651,000 for the nine months ended September 30, 2018. Cash
generated by financing activities for the nine months ended
September 30, 2019 was comprised primarily from short term
borrowings of $1,545,000 partially offset by repayments of debt of
$59,000.
Liquidity
The
Company funded its cash needs during the three months ended
September 30, 2019 with cash on hand from December 31, 2018, the
revenue generated in the first nine months of 2019, and short term
borrowings.
From
time to time during 2017 through 2019, the Company entered into
several short term notes payable with John Steffens, the
Company’s Chairman of the Board, for various working capital
needs. The notes bear an interest rate of 10% with a maturity date
of June 30, 2018. In June 2018, all outstanding notes were amended
to a new maturity date of December 31, 2018. In December 2018, all
outstanding notes were amended to a new maturity date of June 30,
2020 and as such were reclassed to long term debt. The Company is obligated to repay
the notes with the collection of any accounts receivable. At
December 31, 2018, the Company was indebted to Mr. Steffens in the
approximate amount of $3,511,500 of principal and $299,000 of
interest. In March 2019, the Company issued 4,250 shares of its
Series A preferred stock and warrants to purchase up to 17,007,787
shares of the Company’s common stock at an excise price of
$0.05 per share to convert the total obligation of $3,891,500 of
principal and $358,697 of interest. At September 30, 2019, the
Company was indebted to Mr. Steffens in the approximate amount of
$1,165,000 of principal and $64,000 of interest.
Although
the Company has incurred a net loss of approximately $1,053,000 for
the nine months ended September 30, 2019, and has a history of
operating losses, management believes that the functionality of the
Company’s products resonates in the marketplace as both
“analytics” and “automation” are topics
often discussed and written about. Further, the Company believes
that its repositioned strategy of leading with a no cost, short,
“proof of concept” evaluation of the software’s
capabilities 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 and active
“proof of concepts” with active partners, customers and
prospects. In March 2019, the Company issued 4,250 shares of its
Series A preferred stock and a Warrant to purchase up to 17,000,787
shares of the Company’s Common Stock, at an exercise price of
$0.05 per share, to its Chairman, John Steffens as part of a
conversion of debt and interest totaling $4,250,197 reducing its
then working capital deficiency. The Company has borrowed
approximately $1,545,000 and $1,776,000 in 2019 and 2018,
respectively. 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.
