News Column

CICERO INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 14, 2014

Cicero, Inc. (the "Company") provides desktop activity intelligence and improvement software that enables companies to monitor people, processes, and technology, to identify areas for improvement, and to implement change using existing technologies. The Company provides an innovative and unique combination of application and process integration, automation, presentation 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. The Company's software also addresses the emerging need for companies' information systems by securely presenting relevant information in an intuitive manner on desktops. 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 business process automation with its Cicero Discovery™ and Cicero XM® products, respectively.

Cicero Discovery delivers desktop analytics and reporting for the enterprise. 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 XM delivers a unified smart desktop solution for enterprise contact center and back office employees. Leveraging existing IT investments Cicero XM integrates applications, automates workflow, guides the employee (presentation, scripts, etc.) and provides control and adaptability in a Smart Desktop. Cicero XM includes a Studio environment that enables business analysts and other non-IT staff to build and enhance back-end integrations, scripts, smart workflows and composite screens without any impact on underlying applications or business logic.



The Cicero XM suite is highly secure. It has a credentials store that facilitates single sign-on. Passwords can be reset but are non-retrievable. Stored interactions can be selectively encrypted based on the needs of the enterprise. All network communications are compressed and encrypted for transmission.

Cicero XM utilizes the United Data Model® (UDM). The UDM is supported by a database, enabling the abstraction and separation of the department's existing technical environment from its business logic. This physical separation empowers IT and the operations managers to build and change the business logic at their discretion. The abstraction capability converts the contact center and other departments into a flexible and agile operating environment that can rapidly and cost effectively respond to the dynamic needs of the enterprise. The Company provides an integrated toolkit for each product that provides an intuitive configuration and development environment, which simplifies the process of deploying solutions to the enterprise. The Company provides a unique approach that allows companies to organize components 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 by providing a single, seamless user interface for simple access to multiple systems or be configured to display one or more composite applications to enhance productivity either on the desktop. Our technology enables automatic information sharing among line-of-business applications and tools. It is ideal for deployment in organizations that need to provide access to enterprise applications on desktops to improve business performance, the user experience, and customer satisfaction. By integrating diverse applications across multiple operating systems, automating business processes and delivering a better user experience, the Company's products are best suited 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. 14 -------------------------------------------------------------------------------- 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:



? We develop new and unproven technology and products;

? We depend on an unproven strategy for ongoing revenue;

? 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;



? Loss of key personnel associated with Cicero Discovery and XM 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 XM;

? 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. 15

-------------------------------------------------------------------------------- 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, 2014 and 2013 (in thousands):

Three months ended June 30, Six months ended June 30, 2014 2013 2014 2013 Total revenue $ 553 $ 595 $ 1,092$ 1,098 Total cost of revenue 190 214 440 554 Gross margin 363 381 652 544 Total operating expenses 839 1,133 1,672 2,193 Income/(loss) from operations $ (476 ) $



(752 ) $ (1,020 )$ (1,649 )

Revenue. The Company has three categories of revenue: software products, maintenance, and services. Software products revenue is comprised primarily of fees from licensing the Company's proprietary software products. Maintenance revenue is comprised of fees for maintaining, supporting, and providing periodic upgrades to the Company's software products. Services revenue is comprised of fees for consulting and training services related to the Company's software products. The Company's revenues vary from quarter to quarter, due to market conditions, the budgeting and purchasing cycles of customers and the effectiveness of the Company's sales force. The Company typically does not have any material backlog of unfilled software orders and product revenue in any quarter is substantially dependent upon orders received in that quarter. Because the Company's operating expenses are relatively fixed over the short term, variations in the timing of the recognition of revenue can cause significant variations in operating results from quarter to quarter. We generally recognize revenue from software license fees when our obligations to the customer are fulfilled, which is typically upon delivery or installation. Revenue related to software maintenance contracts is recognized ratably over the terms of the contracts. Revenues from services are recognized on a time and materials basis as the services are performed and amounts due from customers are deemed collectible and non-refundable. Within the revenue recognition rules pertaining to software arrangements, certain assumptions are made in determining whether the fee is fixed and determinable and whether collectability is probable. Should our actual experience with respect to collections differ from our initial assessment, there could be adjustments to future results.



THREE MONTHS ENDED JUNE 30, 2014 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 2013.

Total Revenues. Total revenues decreased $42,000, or 7.1%, from $595,000 to $553,000, for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013. The decrease is due primarily to a decrease in consulting revenue and maintenance revenue partially offset by an increase in software revenue. 16

-------------------------------------------------------------------------------- Total Cost of Revenue. Total cost of revenue decreased $24,000, or 11.2%, from $214,000 to $190,000 for the three months ended June 30, 2014, as compared with the three months ended June 30, 2013. The decrease is primarily due to a decrease in headcount and lower travel expenses. Total Gross Margin. Gross margin was $363,000, or 65.6%, for the three months ended June 30, 2014, as compared to the gross margin of $381,000, or 64.0%, for the three months ended June 30, 2013. The decrease in gross margin is primarily due to the decrease in sales partially offset by the lower expenses from a reduction in headcount and lower outside consulting expenses. Total Operating Expenses. Total operating expenses decreased $294,000, or 25.9%, from $1,133,000 to $839,000 for the three months ended June 30, 2014, as compared with the three months ended June 30, 2013. The decrease is primarily attributable to a decrease in headcount and lower trade show expenses of $46,000.



Software Products.

Software Product Revenue. The Company earned $180,000 in software product revenue for the three months ended June 30, 2014 as compared to $33,000 in software revenue for the three months ended June 30, 2013, an increase of $147,000. The increase is primarily due to one enterprise sale during the second quarter.

Software Product Gross Margin. The gross margin on software products for the three months ended June 30, 2014 and June 30, 2013 was 100.0% due to the intangible assets from the SOAdesk acquisition being fully amortized as of the first quarter 2013. Maintenance. Maintenance Revenue. Maintenance revenue for the three months ended June 30, 2014 decreased by approximately $5,000, or 1.3%, from $372,000 to $367,000 as compared to the three months ended June 30, 2013. The decrease in maintenance revenue is primarily due to the decrease in one renewal contract. Maintenance Gross Margin. Gross margin on maintenance products for the three months ended June 30, 2014 was 92.6% compared with 97.3% for the three months ended June 30, 2013. 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 and the timing of outside consulting expense in 2013.



Services.

Services Revenue. Services revenue decreased $184,000, or 96.8%, from $190,000 to $6,000 for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013. The decrease in services revenues is primarily attributable to a decrease in paid consulting engagements in the second quarter of 2014. Services Gross Margin Loss. Services gross margin loss was 2,616.7% for the three months ended June 30, 2014 compared with gross margin loss of 7.4% for the three months ended June 30, 2013. The increase in gross margin loss was primarily attributable to a decrease in consulting revenue partially offset by a decrease in headcount and lower travel 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 three months ended June 30, 2014 decreased by approximately $153,000, or 33.8%, from $453,000 to $300,000 as compared with the three months ended June 30, 2013. The decrease is primarily attributable to a decrease in headcount, decrease in outside professional services expense and lower trade show expenses. 17

-------------------------------------------------------------------------------- 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 $85,000, or 21.8%, from $390,000 to $305,000 for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The decrease in costs for the quarter is primarily due to a decrease in headcount and lower outside consulting expense for research development. 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, 2014 decreased by approximately $56,000, or 19.3%, from $290,000 to $234,000 as compared to the three months ended June 30, 2013. The decrease is primarily attributable to a decrease in headcount and lower 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 second quarter of 2014 and 2013. Because of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance. Net Loss. The Company recorded a net loss of $652,000 for the three months ended June 30, 2014 as compared to a net loss of $865,000 for the three months ended June 30, 2013. The decrease in net loss is primarily due to the decreases in operating expenses partially offset by the decrease in total revenue.



SIX MONTHS ENDED JUNE 30, 2014 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2013.

Total Revenues. Total revenues decreased $6,000, or 0.5%, from $1,098,000 to $1,092,000, for the six months ended June 30, 2014 as compared with the six months ended June 30, 2013. The decrease is due primarily due to a decrease in consulting revenue partially offset by an increase in software and maintenance revenue. Total Cost of Revenue. Total cost of revenue decreased $114,000, or 20.6%, from $554,000 to $440,000 for the six months ended June 30, 2014, as compared with the six months ended June 30, 2013. The decrease is primarily due to a decrease in headcount, lower travel expenses and the intangible assets from the SOAdesk acquisition being fully amortized as of the first quarter 2013. Total Gross Margin. Gross margin was $652,000, or 59.7%, for the six months ended June 30, 2014, as compared to the gross margin of $544,000, or 49.5%, for the six months ended June 30, 2013. The increase in gross margin is primarily due to the increase in software and maintenance revenue and its higher gross margin partially offset by the lower revenue consulting revenue and its lower gross margin. The impact of the lower consulting revenue was offset by the decrease in expenses from a decrease in headcount, a decrease in travel expenses and lower outside consulting expenses.



Total Operating Expenses. Total operating expenses decreased $521,000, or 23.8%, from $2,193,000 to $1,672,000 for the six months ended June 30, 2014, as compared with the six months ended June 30, 2013. The decrease is primarily attributable to a decrease in headcount and lower trade show expense of $127,000.

Software Products.

Software Product Revenue. The Company earned $296,000 in software product revenue for the six months ended June 30, 2014 as compared to $43,000 in software revenue for the six months ended June 30, 2013, an increase of $253,000. The increase is primarily due to the sale of one enterprise license during the first six months of 2014.

Software Product Gross Margin. The gross margin on software products for the six months ended June 30, 2014 was 100.0% compared with a gross margin of 34.9% for the six months ended June 30, 2013. The increase in gross margin is primarily due to the increase in revenue and the amortization costs of the acquired SOAdesk software being fully amortized as of the first quarter of 2013. 18 --------------------------------------------------------------------------------



Maintenance.

Maintenance Revenue. Maintenance revenue for the six months ended June 30, 2014 increased by approximately $23,000, or 3.3%, from $705,000 to $728,000 as compared to the six months ended June 30, 2013. The increase in maintenance revenue is primarily due to new software sales in the second half of fiscal 2013.

Maintenance Gross Margin. Gross margin on maintenance products for the six months ended June 30, 2014 was 92.6% compared with 91.6% for the six months ended June 30, 2013. 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 and lower outside consulting expense.



Services.

Services Revenue. Services revenue decreased $282,000, or 80.6%, from $350,000 to $68,000 for the six months ended June 30, 2014 as compared with the six months ended June 30, 2013. The decrease in services revenues is primarily attributable to a decrease in paid consulting engagements in the first six months of 2014.

Services Gross Margin Loss. Services gross margin loss was 467.6% for the six months ended June 30, 2014 compared with gross margin loss of 33.4% for the six months ended June 30, 2013. The increase in gross margin loss was primarily attributable to a decrease in consulting revenue partially offset by a decrease in headcount and lower travel 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 six months ended June 30, 2014 decreased by approximately $276,000, or 33.1%, from $835,000 to $559,000 as compared with the six months ended June 30, 2013. 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 $193,000, or 25.1%, from $770,000 to $577,000 for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The decrease in costs is primarily due to a decrease in headcount and lower 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 six months ended June 30, 2014 decreased by approximately $52,000, or 8.8%, from $588,000 to $536,000 as compared to the six months ended June 30, 2013. The decrease is primarily attributable to a decrease in headcount. 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 2014 and 2013. Because of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance. Net Loss. The Company recorded a net loss of $1,375,000 for the six months ended June 30, 2014 as compared to a net loss of $1,878,000 for the six months ended June 30, 2013. The decrease in net loss is primarily due to the decreases in operating expenses and software being fully amortized in 2013.



LIQUIDITY AND CAPITAL RESOURCES

Cash

Cash and cash equivalents increased to $50,000 at June 30, 2014 from $5,000 at December 31, 2013, an increase of $45,000.

19 -------------------------------------------------------------------------------- Net cash used by Operating Activities. Cash used by operations for the six months ended June 30, 2014 was $307,000 compared to cash used by operations of $652,000 for the six months ended June 30, 2013. Cash used by operations for the six months ended June 30, 2014 was primarily due to depreciation and amortization of $11,000, stock compensation of $44,000, a decrease in accounts receivable of $1,047,000, a decrease in prepaid expenses of $36,000, and an increase in accounts payable and accrued expenses of $295,000 partially offset by the loss from operations of $1,375,000 and a decrease in deferred revenue of $365,000.



Net cash used in Investing Activities. The Company had purchases of equipment totaling $5,000 and $7,000 for the six months ended June 30, 2014 and 2013, respectively.

Net cash generated by Financing Activities. Net cash generated in financing activities for the six months ended June 30, 2014 was approximately $357,000 as compared with net cash generated by financing activities of approximately $669,000 for the six months ended June 30, 2013. Cash generated by financing activities for the six months ended June 30, 2014 was comprised primarily from the cash received from short term borrowings of $748,000 offset by the repayment of $391,000 of short term debt.



Liquidity

The Company funded its cash needs during the six months ended June 30, 2014 with cash on hand from December 31, 2013, the revenue generated in the first three months of 2014, and short term borrowings. From time to time during 2012 through 2014, 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. At December 31, 2013, the Company was indebted to Mr. Steffens in the approximate amount of $4,398,000 of principal and $505,000 in interest. In March 2014, Mr. Steffens agreed to extend the maturity date of all outstanding short term notes until June 30, 2015. At June 30, 2014, the Company was indebted to Mr. Steffens in the approximate amount of $5,146,000 of principal and $784,000 in interest.



Subsequent to June 30, 2014, the Company entered into various notes payable totaling $245,000 with Mr. Steffens. The notes bear interest at 12%. They are unsecured and mature on June 30, 2015.

The Company has incurred an operating loss of approximately $3,206,000 for the year ended December 31, 2013, and has a history of operating losses. For the six months ended June 30, 2014, the Company incurred losses of $1,375,000 and had a working capital deficiency of $12,851,000 as of June 30, 2014. However, management believes that its repositioned strategy of leading with its Discovery product 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 continued success in this regard based upon current discussions with active customers and prospects. The Company has borrowed $748,000 and $2,671,000 in 2014 and 2013, respectively. The Company has also retired approximately $391,000 and $416,000 of debt in 2014 and 2013, 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 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. 20



--------------------------------------------------------------------------------


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters