Cicero, Inc. (the “Company”) provides desktop activity intelligence and improvement software that helps organizations isolate issues and automates employee tasks in the contact center and back office. The Company provides an innovative and unique combination of application and process integration, automation, and desktop analytics capabilities, all without changes to the underlying applications or requiring costly development expenditures. The Company’s software collects activity and application performance data and tracks business objects across time and multiple users, as well as measures against defined expected business process flow, for either analysis or to feed a third-party application. In addition to software solutions, the Company also provides technical support, training and consulting services as part of its commitment to providing customers with industry-leading solutions.
The Company focuses on the activity intelligence and customer experience management market with emphasis on desktop analytics and automation with its Cicero Discovery™ and Cicero Discovery Automation™ products, respectively.
Cicero Discovery delivers desktop analytics for the enterprise. Leveraging a suite of sensors, Cicero Discovery provides endpoint analytics by collecting activity data and mapping employee effort to highlight areas for improvement in business processes, compliance, training and application utilization. Cicero Discovery is a lightweight and configurable tool to collect activity and application performance data and track business objects across time and across multiple users as well as measure against a defined "expected" business process flow, either for analysis or to feed a third-party application. Cicero Discovery helps customers identify what is actually happening to an object through its life cycle and identify optimal business process and/or critical steps that are missing or holding up the process.
Cicero Discovery includes a Studio environment that enables business analysts and other non-IT staff to configure which applications, processes, and business objects to monitor and how the data should be stored for reporting or shared with another application.
Cicero Discovery Automation delivers all the features of the Cicero Discovery product as well as desktop automation for enterprise contact center and back office employees. Leveraging existing IT investments Cicero Discovery Automation integrates applications, automates workflow, and provides control and adaptability at the end user desktop.
Cicero Discovery Solution includes a Studio environment that enables business analysts and other non-IT staff to configure and enhance desktop integrations, scripts, and workflows without any impact on underlying applications or business logic.
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.
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 termsterm 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 JUNESEPTEMBER 30, 2015 COMPARED WITH THE THREE MONTHS ENDED JUNESEPTEMBER 30, 2014.
Total Revenues. Total revenues decreased $44,000,increased $159,000, or 8.0%41.5%, from $553,000$383,000 to $509,000,$542,000, for the three months ended JuneSeptember 30, 2015 as compared with the three months ended JuneSeptember 30, 2014. The decreaseincrease is due primarily to a decreasean increase in license and services revenue.
Total Cost of Revenue. Total cost of revenue decreased $22,000,increased $6,000, or 11.6%3.6%, from $190,000$165,000 to $168,000$171,000 for the three months ended JuneSeptember 30, 2015, as compared with the three months ended JuneSeptember 30, 2014. The decreaseincrease is primarily due to a decrease in headcount due to a reallocationthe timing of certain personnel and lower travel expenses.costs.
Total Gross Margin. Gross margin was $341,000,$371,000, or 67.0%68.5%, for the three months ended JuneSeptember 30, 2015, as compared to the gross margin of $363,000,$218,000, or 65.6%56.9%, for the three months ended JuneSeptember 30, 2014. The decreaseincrease in gross margin is primarily due to the decreaseincrease in sales partially offset by the lower expenses from a reallocation of personnel.sales.
Total Operating Expenses. Total operating expenses increased $123,000,$179,000, or 14.7%22.0%, from $839,000$814,000 to $962,000$993,000 for the three months ended JuneSeptember 30, 2015, as compared with the three months ended JuneSeptember 30, 2014. The increase is primarily attributable to an increase in headcount and higher outsides consultinglegal and professional services partially offset by a decrease in travel expenses and a decreaseconjunction with the $1,000,000 equity financing in stock option expenses.the third quarter of 2015.
Software Products.
Software Product Revenue. The Company earned $119,000$140,000 in software product revenue for the three months ended JuneSeptember 30, 2015 as compared to $180,000$12,000 in software revenue for the three months ended JuneSeptember 30, 2014, a decreasean increase of $61,000.$128,000. The decreaseincrease is primarily due to the traditional long sales cycles within the enterprise software arena.additional licenses ordered from an existing customer and subscription revenue that began in late fiscal 2014.
Software Product Gross Margin. The gross margin on software products for the three months ended JuneSeptember 30, 2015 and JuneSeptember 30, 2014 was 100.0%.
Maintenance.
Maintenance Revenue. Maintenance revenue for the three months ended JuneSeptember 30, 2015 increased by approximately $1,000,$5,000, or 0.3%1.4%, from $367,000 to $368,000$372,000 as compared to the three months ended JuneSeptember 30, 2014. The increase in maintenance revenue is primarily due to the new software product sales in the second half of fiscal 2014 and new sales in fiscal 2015.
Maintenance Gross Margin. Gross margin on maintenance products for the three months ended JuneSeptember 30, 2015 was $341,000$346,000 or 92.7%93.0% compared with $340,000$343,000 or 92.6%93.5% for the three months ended JuneSeptember 30, 2014. Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company’s software products. The increase in gross margin is due to greater maintenance revenue.
Services.
Services Revenue. Services revenue increased $16,000,$26,000, or 266.7%650.0%, from $6,000$4,000 to $22,000$30,000 for the three months ended JuneSeptember 30, 2015 as compared with the three months ended JuneSeptember 30, 2014. The increase in services revenues is primarily attributable to an increase in one significant paid consulting engagementengagements in the secondthird quarter of 2015.
Services Gross Margin Loss. Services gross margin loss was $119,000$115,000 or 540.9%383.3% for the three months ended JuneSeptember 30, 2015 compared with gross margin loss of $157,000$137,000 or 2,616.7%3,425.0% for the three months ended JuneSeptember 30, 2014. The decrease in gross margin loss was primarily attributable to a decrease in personnel costs and an increase in services revenue.
Operating Expenses:
Sales and Marketing. Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses for the three months ended JuneSeptember 30, 2015 increaseddecreased by approximately $38,000,$16,000, or 12.7%6.9%, from $300,000$231,000 to $338,000$215,000 as compared with the three months ended JuneSeptember 30, 2014. The increasedecrease is primarily attributable to higherlower 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 increased by approximately $103,000,$34,000, or 33.8%10.5%, from $305,000$325,000 to $408,000$359,000 for the three months ended JuneSeptember 30, 2015 as compared to the three months ended JuneSeptember 30, 2014. The increase in costs for the quarter is primarily due to an increase in headcount from a reallocation of personnel and outside consulting expense for research development.stock option expense.
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 JuneSeptember 30, 2015 decreasedincreased by approximately $18,000,$161,000, or 7.7%62.4%, from $234,000$258,000 to $216,000$419,000 as compared to the three months ended JuneSeptember 30, 2014. The decreaseincrease is primarily due to a decreasean increase in stock option expense.legal and professional service fees associated with the $1,000,000 equity financing in the third quarter of 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 secondthird quarter of 2015 and 2014. 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 $670,000$664,000 for the three months ended JuneSeptember 30, 2015 as compared to a net loss of $652,000$793,000 for the three months ended JuneSeptember 30, 2014. The increasedecrease in net loss is primarily due to the decreasesincrease in total revenue and increase in operating expenses partially offset by the decreaseincrease of cost of revenue.operating costs and interest expenses.
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2015 COMPARED WITH THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2014.
Total Revenues. Total revenues decreased $124,000,increased $35,000, or 11.4%2.4%, from $1,092,000$1,475,000 to $968,000,$1,510,000, for the sixnine months ended JuneSeptember 30, 2015 as compared with the sixnine months ended JuneSeptember 30, 2014. The decreaseincrease is due primarily due to a decreasean increase in software and consultingmaintenance revenue partially offset by an increasea decrease in maintenanceservices revenue.
Total Cost of Revenue. Total cost of revenue decreased $95,000,$88,000, or 21.6%14.6%, from $440,000$604,000 to $345,000$516,000 for the sixnine months ended JuneSeptember 30, 2015, as compared with the sixnine months ended JuneSeptember 30, 2014. The decrease is primarily due to a decrease in headcount and lower travel expenses.
Total Gross Margin. Gross margin was $623,000,$994,000, or 64.4%65.8%, for the sixnine months ended JuneSeptember 30, 2015, as compared to the gross margin of $652,000,$871,000, or 59.7%59.1%, for the sixnine months ended JuneSeptember 30, 2014. The decreaseincrease in gross margin is primarily due to the decreaseincrease in software and consultingmaintenance revenue partially offset by the decrease in consulting revenue costs. The impact of the lower consulting revenue was offset by the decrease in expenses from a decrease in headcount.
Total Operating Expenses. Total operating expenses increased $203,000,$381,000, or 12.1%15.3%, from $1,672,000$2,488,000 to $1,875,000$2,869,000 for the sixnine months ended JuneSeptember 30, 2015, as compared with the sixnine months ended JuneSeptember 30, 2014. The increase is primarily attributable to an increase in headcount reclass, and higher outside consulting expenses in research and an increasedevelopment, and higher legal and professional services expenses related to the $1,000,000 equity financing in trade show expense.the third quarter of fiscal 2015.
Software Products.
Software Product Revenue. The Company earned $205,000$345,000 in software product revenue for the sixnine months ended JuneSeptember 30, 2015 as compared to $296,000$308,000 in software revenue for the sixnine months ended JuneSeptember 30, 2014, a decreasean increase of $91,000.$37,000. The decreaseincrease is primarily due to the sale of one enterprise license during the first six months ofadditional licenses ordered from an existing customer and subscription revenue that began in late fiscal 2014.
Software Product Gross Margin. The gross margin on software products for the sixnine months ended JuneSeptember 30, 2015 and JuneSeptember 30, 2014 was 100.0%, respectively.
Maintenance.
Maintenance Revenue. Maintenance revenue for the sixnine months ended JuneSeptember 30, 2015 increased by approximately $7,000,$11,000, or 1.0%, from $728,000$1,095,000 to $735,000$1,106,000 as compared to the sixnine months ended JuneSeptember 30, 2014. The increase in maintenance revenue is primarily due to new software sales in the second half of fiscal 2014 and the first sixnine months of 2015.
Maintenance Gross Margin. Gross margin on maintenance products for the sixnine months ended JuneSeptember 30, 2015 was $679,000$1,024,000 or 92.4%92.6% compared with 674,000$1,017,000 or 92.6%92.9% for the sixnine months ended JuneSeptember 30, 2014. 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 percentage is due to the increase in personnel costs.
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 decreased $40,000,$13,000, or 58.8%18.1%, from $68,000$72,000 to $28,000$59,000 for the sixnine months ended JuneSeptember 30, 2015 as compared with the sixnine months ended JuneSeptember 30, 2014. The decrease in services revenues is primarily attributable to a decrease in paid consulting engagements in the first sixnine months of 2015.
Services Gross Margin Loss. Services gross margin loss was $261,000$375,000 or 932.1%635.6% for the sixnine months ended JuneSeptember 30, 2015 compared with gross margin loss of $318,000$454,000 or 467.6%630.6% for the sixnine months ended JuneSeptember 30, 2014. The increasedecrease in gross margin percentage loss was primarily attributable to a decrease in consulting revenueheadcount partially offset by a decrease in headcount.consulting 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 sixnine months ended JuneSeptember 30, 2015 increased by approximately $60,000,$43,000, or 10.7%5.4%, from $559,000$790,000 to $619,000$833,000 as compared with the sixnine months ended JuneSeptember 30, 2014. The increase is primarily attributable to an increase in 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 increased by approximately $172,000,$206,000, or 29.8%22.8%, from $577,000$902,000 to $749,000$1,108,000 for the sixnine months ended JuneSeptember 30, 2015 as compared to the sixnine months ended JuneSeptember 30, 2014. The increase in costs is primarily due to an increase in headcount and higher outside consulting expense.
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 sixnine months ended JuneSeptember 30, 2015 decreasedincreased by approximately $29,000,$132,000, or 5.4%16.6%, from $536,000$796,000 to $507,000$928,000 as compared to the sixnine months ended JuneSeptember 30, 2014. The decreaseincrease is primarily attributable to an increase in legal and professional services expenses related to the $1,000,000 equity financing in the third quarter of fiscal 2015 partially offset by a decrease in stock option expense.
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 sixnine months of 2015 and 2014. 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 $1,535,000$2,200,000 for the sixnine months ended JuneSeptember 30, 2015 as compared to a net loss of $1,375,000$2,168,000 for the sixnine months ended JuneSeptember 30, 2014. The increase in net loss is primarily due to the decreaseshigher operating expenses partially offset by an increase in revenue and higher operating expenses.lower cost of revenue.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Cash and cash equivalents increased to $57,000$1,047,000 at JuneSeptember 30, 2015 from $20,000 at December 31, 2014, an increase of $37,000.$1,027,000. The increase is primarily attributable to the equity issuance related to the $1,000,000 equity financing in July 2015, collections of accounts receivable from year end, revenue generated in the first sixnine months of 2015 and short term borrowings.
Net cash used by Operating Activities. Cash used by operations for the sixnine months ended JuneSeptember 30, 2015 was $515,000$1,165,000 compared to cash used by operations of $307,000$1,089,000 for the sixnine months ended June
September 30, 2014. Cash used by operations for the sixnine months ended JuneSeptember 30, 2015 was primarily due to the loss from operations of $1,535,000$2,200,000 and a decrease in deferred revenue of $358,000$649,000 partially offset by an increase in depreciation of $7,000,$10,000, stock option expense of $9,000, a decrease in accounts receivable of $929,000 and$903,000, an increase in accounts payable and accrued expenses of $436,000$755,000 and a decrease in prepaid expenses of $6,000.
$7,000.Net cash used in Investing Activities. The Company had purchases of equipment totaling $8,000 for the sixnine months ended JuneSeptember 30, 2015 as compared to $5,000$7,000 for the sixnine months ended JuneSeptember 30, 2014.
Net cash generated by Financing Activities. Net cash generated by financing activities for the sixnine months ended JuneSeptember 30, 2015 was approximately $560,000,$2,200,000, and $357,000$1,142,000 for the sixnine months ended JuneSeptember 30, 2014. Cash generated by financing activities for the sixnine months ended JuneSeptember 30, 2015 was comprised primarily from the cash received from the equity financing of $1,000,000 and short term borrowings of $575,000$1,410,000 offset by the repayment of $15,000$210,000 of short term debt.
Liquidity
The Company funded its cash needs during the sixnine months ended JuneSeptember 30, 2015 with cash on hand from December 31, 2014, the revenue generated in the first sixnine months of 2015, and short term borrowings.borrowings and an equity financing of $1,000,000 from the sale of common stock and warrants.
From time to time during 2012 through 2015, the Company entered into several short term notes payable with John L. (Launny) Steffens, the Chairman of the Board of Directors, for various working capital needs. The notes bear interest at 12% per year and are unsecured. In March 2013, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until April 1, 2014. In March 2014, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until June 30, 2015. 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 are non-interest bearing with a maturity date of December 31, 2015. The Company is obligated to repay the notes with the collection of any accounts receivables. At December 31, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $6,690,000$6,691,000 of principal and $1,139,000 in interest. At JuneSeptember 30, 2015, the Company was indebted to Mr. Steffens in the approximate amount of $315,000$980,000 of principal and $1,361,000$1,362,000 in interest.
The Company has incurred an operating loss of approximately $3,927,000 for the year ended December 31, 2014, and has a history of operating losses. For the sixnine months ended JuneSeptember 30, 2015, the Company incurred losses of $1,535,000$2,200,000 and had a working capital deficiency of $6,748,000$6,450,000 as of JuneSeptember 30, 2015. Management believes that its repositioned strategy of leading with its Discovery product to use analytics to measure and then manage how work happens will shorten the sales cycle and allow for value based selling to our customers and prospects. The Company anticipates success in this regard based upon current discussions with active customers and prospects. The Company has borrowed $575,000$1,410,000 and $2,296,000 in 2015 and 2014, respectively. The Company has also repaid approximately $15,000$210,000 and $391,000$394,000 of debt in 2015 and 2014, respectively. Additionally, in April 2015, the Company’s Chairman, Mr. Launny Steffens, converted $6,950,514 of debt into 69,505,140 shares of common stock of the Company. 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,Group, LLC, for $1,000,000. Additionally,Should the investors can exercise the warrants, forwhich have exercise prices ranging from $0.04 to $0.05 per share, the Company would receive an additional 205,277,778 of the Company’s common shares for an additional $9,000,000.$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.