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CICN > SEC Filings for CICN > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for CICERO INC

Form 10-Q for CICERO INC


19-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Cicero, Inc. (the "Company") provides businesses the ability to maximize every interaction from intra-company back office applications to those that take place between employees, customers and vendors while extending the value of the best of breed applications in which businesses have already invested. The Company provides an innovative and unique combination of application and process integration, automation, presentation and real-time analysis, all without changes to the underlying applications or requiring costly development expenditures. The Company's business integration software addresses the emerging need for companies information systems to deliver enterprise-wide views of their business information processes. 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 customer experience management market with emphasis on desktop integration and business process automation with its Cicero XM products. Cicero XM enables businesses to transform human interaction across the enterprise. Cicero XM enables the flow of data between different applications, regardless of the type and source of the application, eliminating redundant entry and costly mistakes. Cicero XM automates up and down-stream process flows, enforcing compliance and optimizing handle time and provides a task-oriented desktop, reducing training time and enabling delivery of best in class service. Cicero XM captures real-time information about each interaction, guiding the business user through an activity and capturing usage data to spot trends and forecast problems before they occur.

Cicero XM software offers a proven, innovative departure from traditional, costly and labor-intensive enterprise application integration solutions. The Company provides non-invasive application integration, reduces enterprise integration implementation cost and time, and extends companies' Service-Oriented Architecture ("SOA") to the desktop. Cicero XM also enables customers to transform applications, business processes and human expertise into a seamless, cost effective business solution that provides a cohesive, task-oriented and role-centric interface that works the way people think.

By using Cicero XM technology, companies can decrease their customer management costs, improve their customer service, maximize the lifetime value of existing customers, and more efficiently cross-sell the full range of their products and services resulting in an overall increase in return on their information technology investments. In addition, the Company's software enables organizations to reduce the business risks inherent in replacement or re-engineering of mission-critical applications and extend the productive life and functional reach of their application portfolio.

The Company provides an integrated toolkit called Cicero XM Studio that provides an intuitive integration and development environment, which simplifies the integration of complex multi-platform applications. Cicero XM 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. Our technology enables automatic information sharing among line-of-business applications and tools. It is ideal for deployment in contact centers where its highly productive, task-oriented user interface promotes business user efficiency. By integrating diverse applications across multiple operating systems, Cicero is ideal for the financial services, insurance, telecommunications, intelligence, security, law enforcement, governmental and other industries requiring a cost-effective, proven application integration solution.

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.

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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 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 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.

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-Qare 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.

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RESULTS OF OPERATIONS

The table below presents information for the three and nine months ended
September 30, 2012 and 2011 (in thousands):

                                               Three months ended September 30,         Nine months ended September 30,
                                                 2012                    2011               2012                 2011
Total revenue                              $            569         $          734      $       5,283       $         2,558
Total cost of revenue                                   425                    470              1,368                 1,420
Gross margin                                            144                    264              3,915                 1,138
Total operating expenses                              1,004                    913              3,635                 2,915
Income/(loss) from operations              $           (860 )       $         (649 )    $         280       $        (1,777 )

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 SEPTEMBER 30, 2012 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 2011.

Total Revenues.Total revenues decreased $165,000, or 22.5%, from $734,000 to $569,000, for the three months ended September 30, 2012 as compared with the three months ended September 30, 2011. Thedecrease is due primarily to a decrease in maintenance and consulting revenue partially offset by an increase in software revenue.

Total Cost of Revenue. Total cost of revenue decreased $45,000, or 9.6%, from $470,000 for the three months ended September 30, 2011 to $425,000 for the three months ended September 30, 2012. The decrease is primarily due to a decrease in consulting expenses.

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Total Gross Margin.Gross margin was $144,000, or 25.3%, for the three months ended September 30, 2012 as compared to the gross margin of $264,000, or 36.0% for the three months ended September 30, 2011. The decrease in gross margin is primarily due to the decrease in total sales.

Total Operating Expenses. Total operating expenses increased $91,000, or 10.0%, from $913,000 to $1,004,000 for the three months ended September 30, 2012, as compared with the three months ended September 30, 2011. The increase in total operating expenses is primarily attributable to higherpersonnel costs, outside professional services and timing of trade show expenses in the thirdquarter of 2012.

Software Products.
Software Product Revenue.The Company earned $96,000 in software product revenue for the three months ended September 30, 2012 as compared to $26,000insoftware revenue for the three months ended September 30, 2011, anincrease of $70,000.

Software Product Gross Margin Loss.The gross margin loss on software products for the three months ended September 30, 2012 was 82.3% compared with a gross margin lossof 573.1%for the three months ended September 30, 2011. The decrease in gross margin loss is primarily due to the increase in software revenue while the related cost remained consistent with the prior quarter due to the amortization of the acquired SOAdesk software.

Maintenance.
Maintenance Revenue.Maintenance revenue for the three months ended September 30, 2012decreased by approximately $68,000, or 17.4%, from $390,000 to $322,000 as compared to the three months ended September 30, 2011 due to the cancellation of two renewal support contractspartially offset byadditional amortizable maintenance sales in 2012.

Maintenance Gross Margin.Gross margin on maintenance products for the three months ended September 30, 2012 was 90.7% compared with 93.8% for the three months ended September 30, 2011. Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company's software products. The decrease of gross margin is primarily due to the decrease in maintenance revenue.

Services.
Services Revenue.Services revenue decreased $167,000, or 52.5%, from $318,000 to $151,000 for the three months ended September 30, 2012as compared with the three months ended September 30, 2011.The decreasein services revenues is primarily attributable to a decrease in paid consulting engagementsfor the threemonths ended September 30, 2012.

Services Gross Margin/(Loss). Services gross margin loss was (45.7%) for the three months ended September 30, 2012 compared with gross margin of 14.8% for the three months ended September 30, 2011. The increasein gross margin loss was primarily attributable to the decrease in consulting revenue partially offset by a decrease in consulting expenses from reduced travel expense.

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, 2012increased by approximately $1,000, or 0.3%, from $354,000 to $355,000 as compared with the three months ended September 30, 2011. The increase is primarily attributable to the timing of certain trade shows and marketing expenses partially offset by a decrease in headcount in 2012.

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 $69,000, or 24.0%, from $288,000 to $357,000 for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The increase in costs for the quarter is primarily due to an increase in headcount in latter part of the third quarter of 2011.

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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, 2012increased by approximately $21,000, or 7.7%, from $271,000 to $292,000 as compared to the three months ended September 30, 2011. The increase is primarily attributable to an increase in professional service expensesand annual audit fees.

Provision for Taxes.The Company's effective income tax rate differs from the statutory rate primarily because an income tax expense/benefit was not recorded as a result of the losses in the third quarter of 2012 and 2011. 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 $971,000 for the three months ended September 30, 2012 as compared to a net loss of $936,000 for the three months ended September 30, 2011. The increase is primarily due to the decrease in sales and increase in operating expenses.

NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 2011.

Total Revenues.Total revenues increased $2,725,000, or 106.5%, from $2,558,000 to $5,283,000, for the ninemonths ended September 30, 2012 as compared with the nine months ended September 30, 2011. The increase is due primarily to an increase in revenue in software salesdue to an enterprise license sale with a major financial services company partially offset by a decrease in maintenance and consulting revenue.

Total Cost of Revenue. Total cost of revenue decreased $52,000, or 3.7%, from $1,420,000 to $1,368,000, for the nine months ended September 30, 2012 as compared with the nine months ended September 30, 2011. The decrease is primarily attributable to a decrease in professional services travel expenses.

Total Gross Margin.Gross margin was $3,915,000, or 74.1%, for the ninemonths ended September 30, 2012 as compared to the gross margin of $1,138,000, or 44.5% for the nine months ended September 30, 2011. The increase in gross margin is primarily due to the increase in total sales.

Total Operating Expenses. Total operating expenses increased $720,000, or 24.7%, from $2,915,000 to $3,635,000 for the nine months ended September 30, 2012, as compared with the nine months ended September 30, 2011. The increase in total operating expenses is primarily attributable to higher personnel costs, commissions, outside professional services and timing of trade show expenses in the first nine monthsof 2012.

Software Products.
Software Product Revenue.The Company earned $3,984,000 in software product revenue for the nine months ended September 30, 2012 as compared to $640,000 in software revenue for the nine months ended September 30, 2011, an increase of $3,344,000. The increase is primarily due to an enterprise license sale with a major financial servicescompany.

Software Product Gross Margin.The gross margin on software products for the nine months ended September 30, 2012 was 86.8% compared with a gross margin of 17.8% for the nine months ended September 30, 2011. The increase in gross margin is primarily due to the increase in software revenue while the related cost remained consistent with the prior quarter due to the amortization of the acquired SOAdesk software.

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Maintenance.
Maintenance Revenue.Maintenance revenue for the nine months ended September 30, 2012 decreased by approximately $157,000, or 13.6%, from $1,158,000 to $1,001,000 as compared to the nine months ended September 30, 2011 due to the cancellation of twosupport contracts partially offset by additional amortizable maintenance sales in the first three quarter in 2012.

Maintenance Gross Margin.Gross margin on maintenance products for the nine months ended September 30, 2012 was 90.1% compared with 92.4% for the nine months ended September 30, 2011. Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company's software products. The decrease of gross margin is due to the decrease in maintenance revenue.

Services.
Services Revenue.Services revenue decreased $462,000, or 60.8%, from $760,000 to $298,000 for the nine months ended September 30, 2012as compared with the nine months ended September 30, 2011.The decrease in services revenues is primarily attributable to a decrease in paid consulting engagements in the first nine months of 2012.

Services Gross Margin Loss. Services gross margin loss was 149.3% for the nine months ended September 30, 2012 compared with gross margin loss of 6.1% for the nine months ended September 30, 2011. The increase in gross margin loss was primarily attributable to the decrease in consulting revenue partially offset by a decrease in consulting expenses from reduced travel expense.

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, 2012 increased by approximately $293,000, or 24.7%, from $1,168,000 to $1,461,000 as compared with the nine months ended September 30, 2011. The increase is primarily attributable to increase in commissions from higher sales and an increase in marketing 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 $248,000, or 28.7%, from $863,000 to $1,111,000 for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The increase in costs is primarily due to an increase in headcount in the second half of fiscal 2011.

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, 2012 increased by approximately $179,000, or 20.2%, from $884,000 to $1,063,000 as compared to the nine months ended September 30, 2011. The increase is primarily attributable to an increase in professional service 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 gain in the first nine months of 2012 and loss in the first nine months of 2011. Because 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 $370,000 for the nine months ended September 30, 2012 as compared to a net loss of $1,911,000 for the nine months ended September 30, 2011. The increase is primarily due to a $3,344,000 increase in software product revenue over the prior period primarily as a result of an enterprise license with a major financial services company.

Impact of Inflation.Inflation has not had a significant effect on the Company's operating results during the periods presented.

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LIQUIDITY AND CAPITAL RESOURCES

Cash

Cash and cash equivalents decreased to $9,000 at September 30, 2012 from $184,000 at December 31, 2011, a decrease of $175,000.

Net cash generated/usedin Operating Activities. Cash generated from operations for the nine months ended September 30, 2012 was $282,000 compared to cash used in operations of $1,004,000 for the nine months ended September 30, 2011. Cash generated from operations for the nine months ended September 30, 2012 was primarily due to the income from operations, depreciation and amortization of $540,000, stock compensation of $72,000, bad debt write off of $18,000, a decrease in accounts receivable of $695,000, a decrease in prepaid expenses of $109,000, and in increase in accounts payable and accrued expenses of $74,000 partially offset by a gain of $414,000 from the write off of certain accrued wages, a $184,000 gain from a debt extinguishment, and adecrease in deferred revenue of $998,000.

Net cash used in Investing Activities. The Company purchased $16,000 worth of equipment during the nine months ended September 30, 2012 versus $13,000 during the nine months ended September 30, 2011.

Net cash generated/used in Financing Activities.Net cash used by financing activities for the nine months ended September 30, 2012 was approximately $441,000 as compared with net cash generated by financing activities of approximately $1,032,000 for the nine months ended September 30, 2011. Cash used by financing activities for the nine months ended September 30, 2012 was comprised primarily from the repayment of $1,749,000 of short term debt offset by cash received from short term borrowings of $1,308,000.

Liquidity

The Company funded its cash needs during the nine months ended September 30, 2012 with cash on hand from December 31, 2011; the revenue generated in the first nine months of 2012 and short-term borrowings.

From 2010 through 2012, the Company entered into various 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. At December 31, 2011, the Company was indebted to Mr. Steffens in the amount of $3,065,000.In March 2012, Mr. Steffens converted $3,000,000 of his debt into 20,000,000 shares of common stock of the Company at a price of $0.15 per share.In March 2012, Mr. Steffens agreed to refinance $465,000 of debt and $417,000 of accrued interest at an interest rate of 12% and a maturity date of March 31, 2013. At September 30, 2012, the Company was indebted to Mr. Steffens in the amount of $1,383,000.

The Company maintainedseveral Note agreements with an individual investor. The borrowings from time to time were both secured and unsecured. Several notes in the aggregate of $300,000 are due and outstanding under the Note agreements. The loans bear interest at 36% per annum. In July 2012, the Company entered into a restructuring settlement with the lender whereby the lender agreed to accept $495,000 in full satisfaction of all principal and interest due under the Note agreements, as of June 1, 2012, plus interest in the amount of approximately $21,000 for the period from June 1, 2012 to July 31, 2012. In addition, the Company agreed to pay interest for the period after July 31, 2012 in the aggregate amount of approximately $67,000. This interest is to be paid in seven monthly installments of approximately $9,750 each from August 2012 through February 2013. The Company has made interest payments of approximately $40,000 and principal payments of approximately $79,000 through September 30, 2012 per the settlement agreement. The final payment of the remaining principal of approximately $416,000 is due on February 28, 2013.

During March 2012, the Company converted $3,576,515 in principal and interest of debt held by certain lenders of short and long term notes, including certain directors and significant shareholders of the Company, into 23,843,429 shares of the Company's common stock at a price of $0.15 per share.

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During March 2012, the Company converted $264,800 of accrued Series B dividends owed to certain holders of the Company's Series B Preferred Stock, including certain directors and significant shareholders of the Company, into 1,765,333 shares of the Company's common stock at a price of $0.15 per share.

In March 2009, the Company entered into several secured Promissory Notes with certain investors in the aggregate amount of $750,000. The notes bear interest at 15% and matured on January 31, 2012. The notes are secured by the amount due the Company under its support agreement with Merrill Lynch. In addition, each investor was issued a warrant to purchase common stock of the Company. Under the terms of the warrant, which expires in five years, each note holder is entitled to purchase 1,000 shares of Cicero common stock for every $1,000 of principal . . .

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