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:
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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.
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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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A 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.
Reference should be made to such factors and all forward-looking statements are qualified in their entirety by the above cautionary statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Given these uncertainties, readers of this Quarterly Report on Form 10-Q
are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this quarterly report. We assume no obligation to update or revise them or provide reasons why actual results may differ.
RESULTS OF OPERATIONS
The table below presents information for the three and six months ended June 30, 2016 and 2015 (in thousands):
|
Three months ended June 30,
|
Six months ended June 30,
|
|
|
|
|
|
Total revenue
|
$
346
|
$
509
|
$
753
|
$
968
|
Total cost of revenue
|
146
|
168
|
339
|
345
|
Gross margin
|
200
|
341
|
414
|
623
|
Total operating expenses
|
659
|
962
|
1,370
|
1,875
|
Income/(loss) from operations
|
$
(459
)
|
$
(621
)
|
$
(956
)
|
$
(1,252
)
|
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 JUNE 30, 2016 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2015.
Total Revenues
. Total revenues decreased $163,000, or 32.0%, from $509,000 to $346,000, for the three months ended June 30, 2016 as compared with the three months ended June 30, 2015. The decrease is due primarily to a decrease in license and maintenance revenue.
Total Cost of Revenue
. Total cost of revenue decreased $22,000, or 13.1%, from $168,000 to $146,000 for the three months ended June 30, 2016, as compared with the three months ended June 30, 2015. The decrease is primarily due to a decrease in headcount.
Total Gross Margin.
Gross margin was $200,000, or 57.8%, for the three months ended June 30, 2016, as compared to the gross margin of $341,000, or 67.0%, for the three months ended June 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 $303,000, or 31.5%, from $962,000 to $659,000 for the three months ended June 30, 2016, as compared with the three months ended June 30, 2015. The decrease is primarily attributable to a decrease in headcount and lower outside consulting and trade show expenses.
Software Products:
Software Product Revenue.
The Company earned $12,000 in software product revenue for the three months ended June 30, 2016 as compared to $119,000 in software revenue for the three months ended June 30, 2015, a decrease of $107,000. 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 June 30, 2016 and June 30, 2015 was 100.0%.
Maintenance:
Maintenance Revenue.
Maintenance revenue for the three months ended June 30, 2016 decreased by approximately $112,000, or 30.4%, from $368,000 to $256,000 as compared to the three months ended June 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 June 30, 2016 was $208,000 or 81.3% compared with $341,000 or 92.7% for the three months ended June 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 June 30, 2016 increased by approximately $56,000, or 254.5%, from $22,000 to $78,000 as compared with the three months ended June 30, 2015. The increase is primarily due to new paid engagements.
Services Gross Margin Loss.
Services gross margin loss was $20,000 or 25.6% for the three months ended June 30, 2016 compared with gross margin loss of $119,000 or 540.9% for the three months ended June 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 June 30, 2016 decreased by approximately $156,000, or 46.2%, from
$338,000 to $182,000 as compared with the three months ended June 30, 2015. The decrease is primarily attributable to a decrease in headcount and lower trade show 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 $118,000, or 28.9%, from $408,000 to $290,000 for the three months ended June 30, 2016 as compared
to the three months ended June 30, 2015. The decrease in 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 June 30, 2016 decreased by
approximately $29,000, or 13.4%, from $216,000 to $187,000 as compared to the three months ended June 30, 2015. The decrease is primarily due to a decrease in personnel 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 second 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 $568,000 for the three months ended June 30, 2016 as compared to a net loss of $670,000 for the three months ended June 30, 2015. The decrease in net loss is primarily due to the decrease in operating expenses partially offset by the decrease in total revenue.
SIX MONTHS ENDED JUNE 30, 2016 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2015.
Total Revenues
. Total revenues decreased $215,000, or 22.2%, from $968,000 to $753,000, for the six months ended June 30, 2016 as compared with the six months ended June 30, 2015. The decrease is due primarily to a decrease in license and maintenance revenue.
Total Cost of Revenue
. Total cost of revenue decreased $6,000, or 1.7%, from $345,000 to $339,000 for the six months ended June 30, 2016, as compared with the six months ended June 30, 2015. The decrease is primarily due to a decrease in headcount.
Total Gross Margin.
Gross margin was $414,000, or 55.0%, for the six months ended June 30, 2016, as compared to the gross margin of $623,000, or 64.4%, for the six months ended June 30, 2015. The decrease in gross margin is primarily due to the decrease in sales.
Total Operating Expenses
. Total operating expenses decreased $505,000, or 26.9%, from $1,875,000 to $1,370,000 for the six months ended June 30, 2016, as compared with the six months ended June 30, 2015. The decrease is primarily attributable to a decrease in headcount and lower outside consulting and trade show expenses.
Software Products:
Software Product Revenue.
The Company earned $23,000 in software product revenue for the six months ended June 30, 2016 as compared to $205,000 in software revenue for the six months ended June 30, 2015, a decrease of $182,000. 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 six months ended June 30, 2016 and June 30, 2015 was 100.0%.
Maintenance:
Maintenance Revenue.
Maintenance revenue for the six months ended June 30, 2016 decreased by approximately $90,000, or 12.2%, from $735,000 to $645,000 as compared to the six months ended June 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 six months ended June 30, 2016 was $548,000 or 85.0% compared with $678,000 or 92.4% for the six months ended June 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 six months ended June 30, 2016 increased by approximately $57,000, or 203.6%, from $28,000 to $85,000 as compared to the six months ended June 30, 2015. The increase in services revenue is due to an increase in paid engagements.
Services Gross Margin Loss.
Services gross margin loss was $157,000 or 184.7% for the six months ended June 30, 2016 compared with gross margin loss of $261,000 or 932.1% for the six months ended June 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 six months ended June 30, 2016 decreased by approximately $288,000, or 46.5%, from
$619,000 to $331,000 as compared with the six months ended June 30, 2015. The decrease is primarily attributable to a decrease in headcount and lower trade show 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 $155,000, or 20.7%, from $749,000 to $594,000 for the six months ended June 30, 2016 as compared to
the six months ended June 30, 2015. The decrease in 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 six months ended June 30, 2016 decreased by approximately
$62,000, or 12.2%, from $507,000 to $445,000 as compared to the six months ended June 30, 2015. The decrease is primarily due to a decrease in personnel 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 six 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 $1,170,000 for the six months ended June 30, 2016 as compared to a net loss of $1,535,000 for the six months ended June 30, 2015. The decrease in net loss is primarily due to the decrease in operating expenses and interest expense partially offset by the decrease in total revenue.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Cash and cash equivalents decreased to $657,000 at June 30, 2016 from $1,009,000 at December 31, 2015, a decrease of $352,000. The decrease is primarily attributable to expenses in the first six months of 2016 and a reduction of accounts payable partially offset by collections of accounts receivable from year end, revenue generated in the first six months of 2016 and short
term borrowings.
Net cash used by Operating Activities.
Cash used by operations for the six months ended June 30, 2016 was $799,000 compared to $515,000 for the six months ended June 30, 2015. Cash used by operations for the six months ended June 30, 2016 was primarily due to the loss from operations of $1,170,000 and a decrease in accounts payable
and accrued expenses of $363,000 partially offset by depreciation expense of $2,000, amortization of debt discount of $131,000, a decrease in accounts receivable of $219,000, a decrease in prepaid expenses of $167,000 and an increase of deferred revenue of $215,000.
Net cash used in Investing Activities.
The Company had purchases of equipment totaling $2,000 for the six months ended June 30, 2016 as compared to $8,000 for the six months ended June 30, 2015.
Net cash generated by Financing Activities.
Net cash generated by financing activities for the six months ended June 30, 2016 was approximately $449,000, and $560,000 for the six months ended June 30, 2015. Cash generated by financing activities for the six months ended June 30, 2016 was comprised primarily from short term borrowings
of $453,000 offset by the repayment of $4,000 of short term debt.
Liquidity
The Company funded its cash needs during the six months ended June 30, 2016 with cash on hand from December 31, 2015, the revenue generated in the first six 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 June 30, 2016, the Company was indebted to Mr. Steffens in the approximate amount of $2,294,000 of principal and $1,364,000 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 $131,000 of amortization of the debt discount in interest
expense through June 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 six months ended June 30, 2016, the Company incurred losses of $1,170,000 and had a working capital deficiency of $10,067,000 as of June 30, 2016. 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 $453,000 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.