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Cicero Inc – ‘10-Q’ for 9/30/19

On:  Friday, 11/15/19, at 4:17pm ET   ·   For:  9/30/19   ·   Accession #:  1654954-19-13090   ·   File #:  0-26392

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

11/15/19  Cicero Inc                        10-Q        9/30/19   34:1.4M                                   Blueprint/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    233K 
 2: EX-31.1     Certification Pursuant to Rule 13A-14(A)/15D-14(A)  HTML     20K 
                Certifications Section 302 of the Sarbanes-Oxly                  
                Act of 2002                                                      
 3: EX-32.1     Certificate Pursuant to Section 18 U.S.C. Pursuant  HTML     15K 
                to Section 906 of the Sarbanes-Oxley Act of 2002                 
18: R1          Document and Entity Information                     HTML     40K 
34: R2          Condensed Consolidated Balance Sheets (Unaudited)   HTML     86K 
25: R3          Condensed Consolidated Balance Sheets               HTML     32K 
                (Parenthetical)                                                  
15: R4          Condensed Consolidated Statements of Operations     HTML     67K 
                (Unaudited)                                                      
17: R5          Condensed Consolidated Statements of Cash Flows     HTML     62K 
                (Unaudited)                                                      
33: R6          Condensed Consolidated Statement of Stockholders'   HTML     50K 
                Deficit (Unaudited)                                              
24: R7          1. Interim Financial Statements                     HTML     35K 
13: R8          2. Revenue                                          HTML     21K 
19: R9          3. Debt                                             HTML     28K 
28: R10         4. Income Taxes                                     HTML     16K 
30: R11         5. Conversion of Debt to Equity                     HTML     20K 
21: R12         6. Loss Per Share                                   HTML     16K 
11: R13         7. Commitments                                      HTML     16K 
29: R14         8. Contingencies                                    HTML     17K 
31: R15         9. Subsequent Events                                HTML     15K 
22: R16         1. Interim Financial Statements (Policies)          HTML     41K 
12: R17         1. Interim Financial Statements (Tables)            HTML     18K 
27: R18         3. Debt (Tables)                                    HTML     18K 
32: R19         1. Interim Financial Statements (Details)           HTML     35K 
16: R20         1. Interim Financial Statements (Details            HTML     22K 
                Narrative)                                                       
14: R21         2. Revenue (Details Narrative)                      HTML     19K 
23: R22         3. Debt (Details)                                   HTML     27K 
26: XML         IDEA XML File -- Filing Summary                      XML     53K 
10: EXCEL       IDEA Workbook of Financial Reports                  XLSX     31K 
 4: EX-101.INS  XBRL Instance -- cicn-20190930                       XML    264K 
 6: EX-101.CAL  XBRL Calculations -- cicn-20190930_cal               XML     83K 
 7: EX-101.DEF  XBRL Definitions -- cicn-20190930_def                XML     49K 
 8: EX-101.LAB  XBRL Labels -- cicn-20190930_lab                     XML    294K 
 9: EX-101.PRE  XBRL Presentations -- cicn-20190930_pre              XML    201K 
 5: EX-101.SCH  XBRL Schema -- cicn-20190930                         XSD     49K 
20: ZIP         XBRL Zipped Folder -- 0001654954-19-013090-xbrl      Zip     39K 


‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Part I. Financial Information
"Item 1. Condensed Consolidated Financial Statements
"Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018
"Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)
"Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)
"Condensed Consolidated Statement of Stockholders' Deficit for the three and nine months ended September 30, 2019 and 2018 (unaudited)
"Notes to Condensed Consolidated Financial Statements (unaudited)
"Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 3. Quantitative and Qualitative Disclosures about Market Risk
"Item 4. Controls and Procedures
"Part II . Other Information
"Item 1. Legal Proceedings
"Item 1A. Risk Factors
"Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
"Item 3. Defaults Upon Senior Securities
"Item 4. Mine Safety Disclosures
"Item 5. Other Information
"Item 6. Exhibits
"Signature

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
[X] 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019.
 
[ ] 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                      
 
 
Commission File Number 0-26392
 
CICERO INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
11-2920559
(State or other jurisdiction of incorporation or organization)
(I.R.S Employer Identification Number)
 
 
8000 Regency Parkway, Suite 542, Cary, North Carolina
(Address of principal executive offices)
(Zip Code)
 
(919) 380-5000
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name on each exchange which registered
None
-
-
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO _ 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐ 
Smaller reporting company
☒ 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).
Yes No
208,019,141 shares of common stock, $.001 par value, were outstanding as of November 5, 2019.
 
 
 
Cicero Inc.
Index
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part I.  Financial Information
Item 1. Condensed Consolidated Financial Statements
 
CICERO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
  ASSETS
 
 (unaudited)
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $242 
 $97 
Trade accounts receivable
  84 
  11 
Prepaid expenses and other current assets
  270 
  142 
Total current assets
  596 
  250 
Property and equipment, net
  5 
  6 
Total assets
 $601
 $256 
LIABILITIES AND STOCKHOLDERS' DEFICIT
    
    
Liabilities:
    
    
Current portion of long term debt
 $1,517 
 $411 
Accounts payable
  965 
  982 
Accrued expenses:
    
    
Salaries, wages, and related items
  1,270 
  1,363 
Accrued interest
  220 
  456 
Other
  27 
  36 
Deferred revenue
  367 
  460 
                    Total current liabilities
 $4,366 
  3,708 
Long term debt (Note 3)
  464 
  3,976 
Total liabilities
  4,830 
 $7,684 
Commitments and Contingencies (Note 7 and 8)
  Stockholders' deficit:
    
    
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized
   9,333 Series A shares issued and outstanding at September 30, 2019 and 5,083 issued and outstanding at
   $500 per share liquidation preference
  -- 
  -- 
Common stock, $0.001 par value, 600,000,000 shares authorized
   208,019,141 issued and outstanding at September 30, 2019 and 207,913,541 issued and outstanding
  208 
  208 
Additional paid-in capital
  257,945 
  253,693 
Accumulated deficit
  (262,382)
  (261,329)
Total stockholders' deficit
  (4,229)
  (7,428)
Total liabilities and stockholders' deficit
 $601 
 $256 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
Page 3
 
 
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 
 
 
Three Months Ended
September 30, 
 
 
Nine Months Ended
 
 
 
 2019  
 
 
 2018  
 
 
 2019  
 
 
 2018  
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Software
 $650 
 $12 
 $763 
 $34 
Maintenance
  123 
  119 
  358 
  369 
Services 
  83 
  69 
  187 
  205 
Total operating revenue
  856 
  200 
  1,308 
  608 
 
    
    
    
    
Cost of revenue:
    
    
    
    
Software
  -- 
  -- 
  5 
  -- 
Maintenance
  37 
  37 
  118 
  118 
Services 
  114 
  99 
  331 
  292 
Total cost of revenue
  151 
  136 
  454 
  410 
 
    
    
    
    
Gross margin
  705 
  64 
  854 
  198 
 
    
    
    
    
Operating expenses:
    
    
    
    
Sales and marketing
  75 
  61 
  307 
  278 
Research and product development
  315 
  250 
  846 
  743 
General and administrative
  187 
  169 
  552 
  546 
Total operating expenses
  577 
  480 
  1,705 
  1,567 
Gain/(loss) from operations
  128 
  (416)
  (851)
  (1,369)
 
    
    
    
    
Other expense:
    
    
    
    
Interest expense
  (53)
  (89)
  (202)
  (226)
            Total other expense
  (53)
  (89)
  (202)
  (226)
 
    
    
    
    
 
    
    
    
    
Net income/(loss)
 $75 
 $(505)
 $(1,053)
 $(1,595)
Income/(loss) per share applicable to common stockholders:
    
    
    
    
   Basic and Diluted
 $0.00 
 $(0.00)
 $(0.01)
 $(0.01)
Weighted average shares outstanding:
    
    
    
    
   Basic and Diluted
  208,019,141 
  207,913,541 
  207,961,119 
  207,913,541 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
Page 4
 
 
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
Nine Months Ended
 
 
   
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(1,053)
 $(1,595)
Adjustments to reconcile net loss to net cash used by operating activities:
    
    
Depreciation and amortization
  3 
  3 
       Stock compensation expense
  1 
  2 
       Bad debt expense
  -- 
  2 
Changes in assets and liabilities:
    
    
Trade accounts receivable
  (73)
  173 
Prepaid expenses and other current assets
  (128)
  (115)
Accounts payable and accrued expenses
  4 
  (240)
Deferred revenue
  (93)
  121 
Net cash used by operating activities
  (1,339)
  (1,649)
 
    
    
Cash flows from investing activities:
    
    
Purchases of equipment
  (2)
  (2)
             Net cash used by investing activities
  (2)
  (2)
 
    
    
Cash flows from financing activities:
    
    
Borrowings under debt
  1,545 
  1,776 
Repayments of debt
  (59)
  (125)
Net cash generated by financing activities
  1,486 
  1,651 
Net increase/(decrease) in cash
  145 
  -- 
Cash:
    
    
Beginning of period
  97 
  56 
End of period
 $242 
 $56 
 
Non-Cash Investing and Financing Activities:
 
During May 2019, the Company converted $1 of account payable to a vendor by issuing 105,600 shares of its common stock.
 
During March 2019, the Company converted $3,892 of debt and $356 of interest to a related party lender by issuing 4,250 shares of its Series A preferred stock.
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
Page 5
 
 
CICERO INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Three and Nine Months Ended September 30, 2019
(in thousands, except share amounts)
 
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional
Paid-in
 
 
Accumulated
 
 

 
 
 
 
Shares  
 
 
Amount  
 
 
Shares  
 
 
Amount  
 
 
Capital  
 
 
(Deficit)  
 
 
Total  
 
Balance at June 30, 2018
  207,913,541 
 $208 
  5,083 
  -- 
 $253,692 
 $(260,801)
 $(6,901)
Restricted stock issued as compensation
    
    
    
    
  1 
    
  1 
Net loss
    
    
    
    
    
  (505)
  (505)
Balance at September 30, 2018 (unaudited)
  207,913,541 
 $208 
  5,083 
  -- 
 $253,693 
 $(261,306)
 $(7,405)
 
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
Balance at June 30, 2019
  208,019,141 
 $208 
  9,333 
  -- 
 $257,945 
 $(262,457)
 $(4,304)
Net income
    
    
    
    
    
  75 
  75 
Balance at September 30, 2019 (unaudited)
  208,019,141 
 $208 
  9,333 
  -- 
 $257,945 
 $(262,382)
 $(4,229)
 
 
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional
Paid-in
 
 
Accumulated
 
 

 
 
 
 
Shares  
 
 
Amount  
 
 
Shares  
 
 
Amount  
 
 
Capital  
 
 
(Deficit)  
 
 
Total  
 
Balance at December 31, 2017
  207,913,541 
 $208 
  5,083 
  -- 
 $253,691 
 $(259,711)
 $(5,812)
Restricted stock issued as compensation
    
    
    
    
  2 
    
  2 
Net loss
    
    
    
    
    
  (1,595)
  (1,595)
Balance at September 30, 2018 (unaudited)
  207,913,541 
 $208 
  5,083 
  -- 
 $253,693 
 $(261,306 
 $(7,405)
 
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
Balance at December 31, 2018
  207,913,541 
 $208 
  5,083 
  -- 
 $253,693 
 $(261,329)
 $(7,428)
Restricted stock issued as compensation
    
    
    
    
  1 
    
  1 
Common stock issued for accounts payable
  105,600 
    
    
    
  1 
    
  1 
Series A Preferred Stock issued for conversion of debt/interest
    
    
  4,250 
  -- 
  4,250 
    
  4,250 
Net loss
    
    
    
    
    
  (1,053)
  (1,053)
Balance at September 30, 2019 (unaudited)
  208,019,141 
 $208 
  9,333 
  -- 
 $257,945 
 $(262,382)
 $(4,229)
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
Page 6
 
 
CICERO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
NOTE 1. INTERIM FINANCIAL STATEMENTS
 
The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2019 and 2018 are unaudited, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations. Accordingly, these interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Cicero Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 29, 2019. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for other interim periods or for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of the interim results of operations. All such adjustments are of a normal, recurring nature.
 
The year-end condensed balance sheet data was derived from audited consolidated financial statements in accordance with the rules and regulations of the SEC, but does not include all disclosures required for financial statements prepared in accordance with accounting principles generally accepted in the United States of America.
 
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All of the Company's subsidiaries are wholly owned for the periods presented.
 
Liquidity
 
Although the Company has incurred a net loss of approximately $1,053,000 for the nine months ended September 30, 2019, and has a history of operating losses, management believes that the functionality of the Company’s products resonates in the marketplace as both “analytics” and “automation” are topics often discussed and written about. Further, the Company believes that its repositioned strategy of leading with a no cost, short, “proof of concept” evaluation of the software’s capabilities will shorten the sales cycle and allow for value based selling to our customers and prospects. The Company anticipates success in this regard based upon current discussions and active “proof of concepts” with active partners, customers and prospects. In March 2019, the Company issued 4,250 shares of its Series A preferred stock and a Warrant to purchase up to 17,000,787 shares of the Company’s Common Stock at an exercise price of $0.05 per share to its Chairman, John Steffens, as part of a conversion of debt and interest totaling $4,250,197 reducing its working capital deficiency. The Company has borrowed approximately $1,545,000 and $1,776,000 in 2019 and 2018, respectively. Should the Company be unable to secure customer contracts that will drive sufficient cash flow to sustain operations, the Company will be forced to seek additional capital in the form of debt or equity financing; however, there can be no assurance that such debt or equity financing will be available on terms acceptable to the Company or at all. As a result of these factors, the report of our independent auditors dated March 29, 2019, on our consolidated financial statements for the period ended December 31, 2018 included an emphasis of matter paragraph indicating that there is a substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
 
Page 7
 
 
Use of Accounting Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates. Significant estimates include the recoverability of long-lived assets, stock based compensation, deferred taxes, and related valuation allowances and valuation of equity instruments.
 
Stock-Based Compensation
 
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 718 “Compensation – Stock Compensation” which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards under ASC 718. The plan expired in fiscal 2017 and as such no further options are available to grant. The Company did not recognize any stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018, respectively, in connection with outstanding options. The Company has no unrecognized stock-based compensation expense in connection with outstanding options as of September 30, 2019.
 
The Company recognized approximately $300 for the three months ended September 30, 2019 and 2018, respectively and $1,200 and $2,000 for the nine months ended September 30, 2019 and 2018, respectively, in stock-based compensation in connection with the restricted stock grants issued in fiscal 2018 to certain employees. The grants vest on the second anniversary of the grant date. The Company has approximately $200 of unrecognized stock-based compensation expense in connection with the restricted stock grants
 
The following table sets forth certain information as of September 30, 2019 about shares of the Company’s common stock, par value $.001 (the “Common Stock”), outstanding and available for issuance under the Company’s existing equity compensation plans: the Cicero Inc. 2007 Employee Stock Option Plan and the Outside Director Stock Option Plan. The Company’s stockholders approved all of the Company’s stock-based compensation plans.
 
 
Options
 
Outstanding on December 31, 2018
  706,211 
Granted
  -- 
Exercised
  -- 
Forfeited
  (25,000)
Outstanding on September 30, 2019
  681,211 
 
    
Weighted average exercise price of outstanding options 
 $0.08 
Aggregate Intrinsic Value
 $0 
Shares available for future grants on September 30, 2019
  -- 
 
    
Weighted average of remaining contractual life
  1.5 
 
Recent Accounting Pronouncements
 
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows where diversity in practice exists. This standard did not have a material impact on our consolidated financial statements and related disclosures.
 
Page 8
 
 
 
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
 
The new standard was effective for us on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
 
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We elected all of the new standard’s available transition practical expedients.
 
This standard did not have a material effect on our financial statements. We believe the most significant future effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate operating lease and (2) providing significant new disclosures about our leasing activities.
 
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for our real estate lease that is currently on a month to month lease. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. As our real estate lease is a short term lease, the adoption of this standard did not result in the Company recognizing any right of use asset or liability.
 
NOTE 2. REVENUE
 
On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers and all the related amendments (“the new revenue standard”) and applied it to all contracts using the modified retrospective method. We completed our review of contracts with our customers and did not need to record a cumulative effect adjustment to accumulated deficit upon adoption of the new revenue standard as of January 1, 2018. Under ASC 606, revenue is recognized when a company transfers the promised goods or services to a customer in an amount that reflects consideration that is expected to be received for those goods and services. Adoption of the standard did not have a material impact on the Company’s financial position, results of operations, cash flow, accounting policies, business processes, internal controls or disclosures.
 
Contract Balances
 
Timing differences among revenue recognition may result in contract assets or liabilities. Contract liabilities (deferred revenue) totaled $460,000 and $367,000 as of December 31, 2018 and September 30, 2019, respectively. Revenue recognized from the contract liabilities for the nine months ended September 30, 2019 was $313,000. The contract liability balances reflect the unrecognized transaction price.
 
Page 9
 
 
 
Our net trade accounts receivables were $11,000 and $84,000 as of December 31, 2018 and September 30, 2019, respectively. Trade accounts receivable are stated in the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance of doubtful accounts based on its assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance of doubtful accounts and a credit to trade accounts receivable. Changes in the allowance for doubtful accounts have not been material to the consolidated financial statements.
 
Performance Obligations
 
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under the new revenue recognition standard. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Most of our contracts have multiple performance obligations, which include software, maintenance and professional services.
 
Revenue Recognition
 
Cicero utilizes point in time method for revenue recognition for its software license revenue. Our software licenses are distinct and have standalone functionality as it is fully functional without any services purchased. Cicero utilizes the output method over time for revenue recognition as maintenance contracts are invoiced annually prior to the start of the maintenance period and then recognized monthly over the length of the maintenance contract. Cicero utilizes the output method over time for revenue recognition for its services revenue as service hours/days are logged and billed subsequently. Cicero has no upfront fees that are billable to customers. Cicero established a standalone selling price for its lines of revenue based on price list and historical sales.
 
NOTE 3. DEBT
 
Debt and notes payable to related party consist of the following (in thousands):
 
 
Note payable – asset purchase agreement (a)
 $302 
 $361 
Note payable – related party (b)
  1,165 
  3,512 
Notes payable (c)
  514 
  514 
Total debt
  1,981 
  4,387 
Less current portion
  (1,517)
  (411)
Total long term debt
 $464 
 $3,976 
 
(a)
As part of a prior acquisition, the Company was subject to certain earn-out obligation payments of up to $2,410,000 over an 18-month period from January 15, 2010 through July 31, 2011, based upon the achievement of certain revenue performance targets. The earn-out was payable fifty percent in cash and fifty percent in common stock of the Company at the rate of one share for every $0.15 earn-out payable. The Company had recorded $842,606 in its accounts payable as of December 31, 2014 due to a portion of earn-out obligations being met. In June 2015, the Company entered into a promissory note with SOAdesk for fifty percent of the earn-out payable ($421,303) to SOAdesk. The maturity date of the note was December 31, 2015 with an annual interest rate of 10%. Through a series of amendments, the maturity date was extended to January 31, 2020 and two milestone payments of $62,500, to be applied to outstanding interest and then principal, payable on June 1, 2018 and December 1, 2018, respectively, were added. At December 31, 2018, the Company was indebted to SOAdesk for $360,580 in principal and approximately $17,000 in interest. At September 30, 2019, the Company was indebted to SOAdesk for $301,282 in principal and approximately $4,000 in interest and the principal has been reclassed to short term debt.
 
Page 10
 
 
 
(b)
From time to time during 2017 through 2019, the Company entered into several short term notes payable with John Steffens, the Company’s Chairman of the Board, for various working capital needs. The notes bear an interest rate of 10% with a maturity date of June 30, 2018. In June 2018, all outstanding notes were amended to a new maturity date of December 31, 2018. In December 2018, all outstanding notes were amended to a new maturity date of June 30, 2020 and as such were reclassed to long term debt. The Company is obligated to repay the notes with the collection of any accounts receivable. At December 31, 2018, the Company was indebted to Mr. Steffens in the approximate amount of $3,511,500 of principal and $299,000 of interest. In March 2019, the Company issued 4,250 shares of its Series A preferred stock and warrants to purchase up to 17,007,787 shares of the Company’s common stock at an excise price of $0.05 per share to convert the total obligation of $3,891,500 of principal and $358,697 of interest. At September 30, 2019, the Company was indebted to Mr. Steffens in the approximate amount of $1,165,000 of principal and $64,000 of interest.
 
(c)
The Company has issued a series of short-term unsecured promissory notes with private lenders, which provide for short term borrowings. The notes, in the aggregate amount of $50,000 of principal and $88,000 of interest and $50,000 of principal and $96,000 of interest, as of December 31, 2018 and September 30, 2019, respectively, bear interest between 10% and 36% per annum.
 
In March 2012 the Company entered into an unsecured promissory note with a private lender for $336,000 at an interest rate of 12% and a maturity date of March 31, 2013. Through a series of amendments, the note was amended to extend the maturity date to January 31, 2021 and a new principal balance of $498,500. Simultaneously a $30,000 principal payment was made to the lender. A new repayment schedule of quarterly principal and interest payments was added beginning in January 31, 2018 with a payment of $30,000. $25,000 quarterly principal and interest payments are required to be made beginning on April 30, 2018 through January 31, 2019. $40,000 principal and interest payments are required to be made on beginning on April 30, 2019 through October 31, 2020. Final payment of remaining principal and interest is due on January 31, 2021. The lender agreed to waive certain quarterly payments in fiscal 2018 as business conditions so warrant without triggering any default and that any deferred payments would be added to the next quarterly payment. At December 31, 2018, the Company was indebted to this private lender in the amount of $464,350 in principal and $51,000 in interest and has been reclassified as long term debt due to its maturity date of January 31, 2021. At September 30, 2019, the Company was indebted to this private lender in the amount of $464,350 in principal and $55,000 in interest.
 
NOTE 4. INCOME TAXES
 
The Company accounts for income taxes in accordance with Financial Accounting Standards Board (“FASB”) guidance ASC 740 “Income Taxes”. The Company's effective tax rate differs from the statutory rate primarily due to the fact that no income tax benefit or expense was recorded for the three and nine months ended on September 30, 2019 and 2018. As a result of the Company's recurring losses, the deferred tax assets have been fully offset by a valuation allowance.
 
NOTE 5. CONVERSION OF DEBT TO EQUITY
 
On March 26, 2019, the Company entered into agreement with John L. Steffens, the Chairman of the Board of Directors, to convert $3,891,500 of principal amount of debt and $358,697 of interest into 4,250 shares of the Company’s Series A Preferred Stock. Per the Certificate of Designation, the initial conversion of preferred stock to common equaled 85,003,934 shares of common stock of the Company at a price of $0.05 per share, subject to adjustment for stock dividends, stock splits and similar events. Additionally, Mr. Steffens was granted a warrant for 17,000,787 of the Company’s common shares at a price of $0.05 per share. The Company accounted for the transaction pursuant to Topic ASC 470-50, Modification and Extinguishment of Debt. Due to the fact that the transaction was with Mr. Steffens, the Company’s Chairman of the Board, the Company determined that this was not an arm’s length agreement and as such has recorded the entire transaction through additional paid in capital.
 
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The Series A Preferred Stock ranks senior in preference and priority to the Company’s common stock with respect to dividend and liquidation rights and, except as provided in the Certificate of Designation or otherwise required by law, will vote with the common stock on an as converted basis on all matters presented for a vote of the holders of common stock, including directors. The Series A Preferred Stock is convertible at any time at the option of the holder at an initial conversion ratio of 20,000 shares of Common Stock for each share of Series A Preferred Stock. The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations. The holders of the Series A Preferred Stock are entitled to a liquidation preference of $1,000 per share of Series A Preferred Stock plus any declared but unpaid dividends upon the liquidation of the Company. The Series A Preferred Stock may be redeemed by the Company at any time and must be redeemed by the Company, upon the written request of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, after the occurrence of one of the following events: (x) the Company’s trailing 12 month EBITDA exceeds $5,000,000, (y) the sale of all, or substantially all of the assets of the Company, or (z) the sale of all or substantially all the intellectual property of the Company, which in the case of “y” or “z” result in net proceeds to the Company in excess of $6,000,000, at a redemption price equal to $1,000 plus all declared but unpaid dividends, which amount will be paid in three annual installments. The approval of at least two thirds of the holders of Series A Preferred Stock, voting together as a separate class, is required for: (i) the merger, sale of all, or substantially all of the assets or intellectual property, recapitalization, or reorganization of the Company, unless such action (x) results in net proceeds to the stockholders of the Company in excess of $5,000,000, and (y) has received the prior approval of the Board of Directors. (ii) the authorization or issuance of any equity security having any right, preference or priority superior to or on parity with the Series A Preferred Stock. (iii) the redemption, repurchase or acquisition, directly or indirectly, through subsidiaries or otherwise, of any equity securities (other than the redemption of the Series A Preferred Stock) or the payment of dividends or other distributions on equity securities by the Company (other than on the Series A Preferred Stock). (iv) any amendment or repeal of any provision of the Company’s Certificate of Incorporation or Bylaws that would adversely affect the rights, preferences, or privileges of the Series A Preferred Stock. and (v) the liquidation, dissolution or winding up of the business and affairs of the Company, the effectuation of any Liquidation Event (as defined in Certificate of Designation), or the consent to any of the foregoing, unless such action (x) results in net proceeds to the stockholders of the Company in excess of $5,000,000, and (y) has received the prior approval of the Board of Directors.
 
NOTE 6. EARNINGS/LOSS PER SHARE
 
Basic earnings/loss per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings/loss per share is computed based upon the weighted average number of common shares outstanding and any potentially dilutive securities. Potentially dilutive securities outstanding during the periods presented include stock options, warrants, restricted stock, and convertible preferred stock.
 
The weighted average number of common shares is increased by the number of dilutive potential common shares issuable on the exercise of options less the number of common shares assumed to have been purchased with the proceeds from the exercise of the options pursuant to the treasury stock method; those purchases are assumed to have been made at the average price of the common stock during the respective period. Options, warrants or convertible preferred stock to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation. No options, warrants or convertible preferred stock were included in the calculation of loss per share for the three and nine months ended September 30, 2019 and 2018.
 
NOTE 7. COMMITMENTS
 
In June 2014, the Company entered into an amendment with its landlord and renewed its lease through 2018. In October 2016, the Company entered into an amendment reducing the square footage being leased for the remaining term of the lease. The lease expired in October 2018 and the Company is currently on a month to month lease. The Company is exploring relocation options in the remainder of 2019.
 
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NOTE 8. CONTINGENCIES
 
The Company, from time to time, is involved in legal matters arising in the ordinary course of its business including matters involving proprietary technology. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations. There was no active litigation against the Company as of September 30, 2019.
 
Under the indemnification clause of the Company’s standard reseller agreements and software license agreements, the Company agrees to defend the reseller/licensee against third party claims asserting infringement by the Company’s products of certain intellectual property rights, which may include patents, copyrights, trademarks or trade secrets, and to pay any judgments entered on such claims against the reseller/licensee. There were no claims against the Company as of September 30, 2019.
 
NOTE 9. SUBSEQUENT EVENTS
 
In October 2019, the Company entered into a note payable totaling $50,000 with Mr. Steffens. The note bears interest at 10% per annum. The note is unsecured and mature on June 30, 2020. The Company is obligated to repay the notes with the collection of any accounts receivables.
 
Page 13
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Cicero, Inc. (the “Company”) provides desktop activity intelligence and automation software that helps organizations isolate issues and automates employee tasks in the contact center and back office. The Company provides an innovative and unique combination of application and process integration, automation, and desktop analytics capabilities, all without changing the underlying applications or requiring costly application development. The Company’s software collects desktop activity and application performance data and tracks business objects across time and multiple users, as well as measures against defined expected business process flows, for either analysis or to feed a third-party application. In addition to software solutions, the Company also provides technical support, training and consulting services as part of its commitment to providing customers with industry-leading solutions. The Company’s consulting team has in-depth experience in developing successful enterprise-class solutions as well as valuable insight into the business information needs of customers in the largest Fortune 500 corporations worldwide.
 
The Company focuses on the activity intelligence and customer experience management market with emphasis on desktop analytics and automation with its Cicero Discovery™, Cicero Insight™ and Cicero Automation™ products.
 
Cicero Discovery collects desktop activity leveraging a suite of sensors. Cicero Discovery is a lightweight and configurable tool to collect activity and application performance data and track business objects across time and across multiple users as well as measure against a defined "expected" business process flow, either for analysis or to feed a third-party application.
 
Cicero Insight is a measurement and analytics solution that collects and presents high value information about quality, productivity, compliance, and revenue from frontline activity to target areas for improvement. Powered by Cicero Discovery sensors, Cicero Insight collects activity data about the applications, when and how they are used and makes it readily available for analysis and action to the business community.
 
Cicero Automation delivers all the features of the Cicero Discovery product as well as desktop automation for enterprise contact center and back office employees.  Leveraging existing IT investments Cicero Automation integrates applications, automates workflow, and provides control and adaptability at the end user desktop.
 
Cicero Automation also provides Single Sign-On (SSO) and stay signed on capability. The software maintains a secure credential store that facilitates single sign-on. Passwords can be reset but are non-retrievable. Stored interactions can be selectively encrypted based on the needs of the enterprise. All network communications are compressed and encrypted for transmission.
 
The Company provides an intuitive configuration toolkit for each product, which simplifies the process of deploying and managing the solutions in the enterprise. The Company provides a unique way of capturing untapped desktop activity data using sensors, combining it with other data sources, and making it readily available for analysis and action to the business community. The Company also provides a unique approach that allows companies to organize functionality of their existing applications to better align them with tasks and operational processes. In addition, the Company’s software solutions can streamline end-user tasks and enable automatic information sharing among line-of-business siloed applications and tools. It is ideal for deployment in organizations that need to provide access to enterprise applications on desktops to iteratively improve business performance, the user experience, and customer satisfaction. By leveraging desktop activity data, integrating disparate applications, automating business processes and delivering a better user experience, the Company’s products are ideal for the financial services, insurance, healthcare, governmental and other industries requiring a cost-effective, proven business performance and user experience management solution for enterprise desktops.
 
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In addition to software products, the Company also provides technical support, training and consulting services as part of its commitment to providing its customers industry-leading integration solutions. The Company’s consulting team has in-depth experience in developing successful enterprise-class solutions as well as valuable insight into the business information needs of customers in the Global 5000. We offer services around our integration software products.
 
This Quarterly Report on Form 10-Q contains forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities, liquidity and capital resources and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause its actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risk and uncertainties include, among others, the following:
 
An inability to obtain sufficient capital either through internally generated cash or through the use of equity or debt offerings could impair the growth of our business;
 
Economic conditions could adversely affect our revenue growth and cause us not to achieve desired revenue;
 
The so-called “penny stock rule” could make it cumbersome for brokers and dealers to trade in our common stock, making the market for our common stock less liquid which could cause the price of our stock to decline;
 
Because we cannot accurately predict the amount and timing of individual sales, our quarterly operating results may vary significantly, which could adversely impact our stock price;
 
A loss of key personnel associated with Cicero Discovery and Cicero Discovery Automation development could adversely affect our business;
 
Different competitive approaches or internally developed solutions to the same business problem could delay or prevent adoption of Cicero Discovery and Cicero Discovery Automation;
 
Our ability to compete may be subject to factors outside our control;
 
The markets for our products are characterized by rapidly changing technologies, evolving industry standards, and frequent new product introductions;
 
We may face damage to the reputation of our software and a loss of revenue if our software products fail to perform as intended or contain significant defects;
 
We may be unable to enforce or defend our ownership and use of proprietary and licensed technology; and
 
Our business may be adversely impacted if we do not provide professional services to implement our solutions.
 
Reference should be made to such factors and all forward-looking statements are qualified in their entirety by the above cautionary statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Given these uncertainties, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this quarterly report. We assume no obligation to update or revise them or provide reasons why actual results may differ.
 
 
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RESULTS OF OPERATIONS
 
The table below presents information for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
 
 
Three months ended September 30,
 
 
Nine months ended September 30,
 
 
   
 
2018
 
 
2019
 
 
2018
 
Total revenue
 $856 
 $200 
 $1,308 
 $608 
Total cost of revenue
  151 
  136 
  454 
  410 
Gross margin
  705 
  64 
  854 
  198 
Total operating expenses
  577 
  480 
  1,705 
  1,567 
Income/(loss) from operations
 $128 
 $(416)
 $(851)
 $(1,369)
 
Revenue. The Company has three categories of revenue: software products, maintenance, and services. Software products revenue is comprised primarily of fees from licensing the Company's proprietary software products. Maintenance revenue is comprised of fees for maintaining, supporting, and providing periodic upgrades to the Company's software products. Services revenue is comprised of fees for consulting and training services related to the Company's software products.
 
The Company's revenues vary from quarter to quarter, due to market conditions, the budgeting and purchasing cycles of customers and the effectiveness of the Company’s sales force. The Company typically does not have any material backlog of unfilled software orders and product revenue in any quarter is substantially dependent upon orders received in that quarter. Because the Company's operating expenses are relatively fixed over the short term, variations in the timing of the recognition of revenue can cause significant variations in operating results from quarter to quarter.
 
On January 1, 2018, we adopted the new accounting standard Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers and all the related amendments (“the new revenue standard”) and applied it to all contracts using the modified retrospective method. According to the new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration for which the Company expects to be entitled in exchange for those goods or services. We completed our review of contracts with our customers and did not need to record a cumulative effect adjustment to accumulated deficit upon adoption of the new revenue standard as of January 1, 2018. Based on the evaluation the Company performed on its customer contracts, the adoption has not and will not have a material impact on the Company’s financial position, results of operations, cash flow, accounting policies, business processes, internal controls or disclosures.
 
THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2018.
 
Total Revenues. Total revenues increased $656,000, or 328.0%, from $200,000 to $856,000, for the three months ended September 30, 2019 as compared with the three months ended September 30, 2018. The increase is primarily due to an increase in software revenue.
 
Total Cost of Revenue. Total cost of revenue increased $15,000 or 11.0%, from $136,000 for the three months ended September 30, 3018 to $151,000 for the three months ended September 30, 2019. The increase in cost of revenue is primarily due to an increase in outside consulting expenses.
 
Total Gross Margin. Gross margin was $705,000, or 82.4%, for the three months ended September 30, 2019, as compared to the gross margin of $64,000, or 32.0%, for the three months ended September 30, 2018. The increase in gross margin is primarily due to the increase in sales.
 
Page 16
 
 
Total Operating Expenses. Total operating expenses increased $97,000, or 20.2%, from $480,000 to $577,000 for the three months ended September 30, 2019, as compared with the three months ended September 30, 2018. The increase is primarily attributable to an increase in personnel costs and outside consulting expenses partially offset by lower corporate insurance expense.
 
Software Products:
Software Product Revenue. The Company had $650,000 software product revenue for the three months ended September 30, 2019 as compared to $12,000 in software revenue for the three months ended September 30, 2018, an increase of $638,000. The increase is primarily due to additional software sales to an existing customer.
 
Software Product Gross Margin. The Company had 100% gross margin on software products for the three months ended September 30, 2019 and September 30, 2018, respectively.
 
Maintenance:
Maintenance Revenue. Maintenance revenue for the three months ended September 30, 2019 increased by approximately $4,000, or 3.4%, from $119,000 to $123,000 as compared to the three months ended September 30, 2018. The increase in maintenance revenue is primarily due to the addition of new sales to customers in fiscal 2019.
 
Maintenance Gross Margin. Gross margin on maintenance products for the three months ended September 30, 2019 was $86,000 or 69.9% compared with $82,000 or 68.9% for the three months ended September 30, 2018. Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company’s software products. The increase in gross margin is due to the increase in maintenance revenue.
 
Services:
Services Revenue. Services revenue for the three months ended September 30, 2019 increased by approximately $14,000, or 20.3%, from $69,000 to $83,000 as compared with the three months ended September 30, 2018. The increase is primarily due to an increase from new services performed on existing customers.
 
Services Gross Margin Loss. Services gross margin loss was $31,000 or 37.3% for the three months ended September 30, 2019 compared with gross margin loss of $30,000 or 43.5% for the three months ended September 30, 2018. The increase in gross margin loss was primarily attributable to an increase in outside consulting expenses partially offset by an increase in service revenue.
 
Operating Expenses:
Sales and Marketing. Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses for the three months ended September 30, 2019 increased by approximately $14,000, or 23.0%, from $61,000 to $75,000 as compared with the three months ended September 30, 2018. The increase is primarily attributable to an increase in headcount and higher outside consulting expenses.
 
Research and Development. Research and product development expenses primarily include personnel costs for product developers and product documentation and related overhead. Research and development expense increased by approximately $65,000, or 26.0%, from $250,000 to $315,000 for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The increase in research and development costs for the quarter is primarily due higher outside consulting expenses partially offset by a decrease in headcount.
 
General and Administrative. General and administrative expenses consist of personnel costs for the legal, financial, human resources, and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses for the three months ended September 30, 2019 increased by approximately $18,000, or 10.7%, from $169,000 to $187,000 as compared to the three months ended September 30, 2018. The increase is primarily due to higher personnel costs partially offset by lower corporate insurance expenses.
 
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Provision for Taxes. The Company’s effective income tax rate differs from the statutory rate primarily because an income tax expense/benefit was not recorded as a result of the income or losses in the third quarter of 2019 and 2018, respectively. As a result of the Company’s recurring losses, the deferred tax assets have been fully offset by a valuation allowance.
 
Net Income/(Loss). The Company recorded net income of $75,000 for the three months ended September 30, 2019 as compared to a net loss of $505,000 for the three months ended September 30, 2018. The net income is primarily due to the increase in total revenue and a decrease in interest expenses partially offset by an increase in operating expenses.
 
NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2018.
 
Total Revenues. Total revenues increased $700,000, or 115.1%, from $608,000 to $1,308,000, for the nine months ended September 30, 2019 as compared with the nine months ended September 30, 2018. The increase is due primarily to an increase in software revenue partially offset by lower maintenance and services revenue.
 
Total Cost of Revenue. Total cost of revenue increased by $44,000, or 10.7%, from $410,000 to $454,000 for the nine months ended September 30, 2019, as compared with the nine months ended September 30, 2018. The increase is due primarily to outside consulting expenses.
 
Total Gross Margin. Gross margin was $854,000, or 65.3%, for the nine months ended September 30, 2019, as compared to the gross margin of $198,000, or 32.6%, for the nine months ended September 30, 2018. The increase in gross margin is primarily due to the increase in sales.
 
Total Operating Expenses. Total operating expenses increased $138,000, or 8.8%, from $1,567,000 to $1,705,000 for the nine months ended September 30, 2019, as compared with the nine months ended September 30, 2018. The increase is primarily attributable to an increase in personnel costs and outside consulting expenses partially offset by lower corporate insurance expense.
 
Software Products:
Software Product Revenue. The Company earned $763,000 in software product revenue for the nine months ended September 30, 2019 as compared to $34,000 in software revenue for the nine months ended September 30, 2018, an increase of $729,000. The increase is primarily due to the sale of additional licenses to a current customer in the third quarter of 2019.
 
Software Product Gross Margin. The gross margin on software products for the nine months ended September 30, 2019 was 99.3% as compared with 100.0% for the nine months ended September 30, 2018. The decrease was due to royalty expense in 2019.
 
Maintenance:
Maintenance Revenue. Maintenance revenue for the nine months ended September 30, 2019 decreased by approximately $11,000, or 3.0%, from $369,000 to $358,000 as compared to the nine months ended September 30, 2018. The decrease in maintenance revenue is primarily due to the decrease in maintenance renewals partially offset by the addition of new sales to customers in fiscal 2019.
 
Maintenance Gross Margin. Gross margin on maintenance products for the nine months ended September 30, 2019 was $240,000 or 67.0% compared with $251,000 or 68.0% for the nine months ended September 30, 2018. Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company’s software products. The decrease in gross margin is due to the decrease in maintenance revenue.
 
 
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Services:
Services Revenue. Services revenue for the nine months ended September 30, 2019 decreased by approximately $18,000, or 8.8%, from $205,000 to $187,000 as compared with the nine months ended September 30, 2018. The decrease is primarily due to a decrease from new services performed on existing customers.
 
Services Gross Margin Loss. Services gross margin loss was $144,000 or 77.0% for the nine months ended September 30, 2019 compared with gross margin loss of $87,000 or 42.4% for the nine months ended September 30, 2018. The increase in gross margin loss was primarily attributable to a decrease in services revenue and an increase in outside consulting expenses.
 
Operating Expenses:
Sales and Marketing. Sales and marketing expenses primarily include personnel costs for salespeople, marketing personnel, travel and related overhead, as well as trade show participation and promotional expenses. Sales and marketing expenses for the nine months ended September 30, 2019 increased by approximately $29,000, or 10.4%, from $278,000 to $307,000 as compared with the nine months ended September 30, 2018. The increase is primarily attributable to an adjustment of certain accruals in fiscal 2018 for personnel costs and higher outside consulting expenses in fiscal 2019.
 
Research and Development. Research and product development expenses primarily include personnel costs for product developers and product documentation and related overhead. Research and development expense increased by approximately $103,000, or 13.9%, from $743,000 to $846,000 for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase in research and development costs is primarily due to an adjustment of certain accruals in fiscal 2018 for personnel costs and higher outside consulting expenses in fiscal 2019.
 
General and Administrative. General and administrative expenses consist of personnel costs for the legal, financial, human resources, and administrative staff, related overhead, and all non-allocable corporate costs of operating the Company. General and administrative expenses for the nine months ended September 30, 2019 increased by approximately $6,000, or 1.1%, from $546,000 to $552,000 as compared to the nine months ended September 30, 2018. The increase is primarily due to higher personnel costs partially offset by lower corporate insurance and outside consulting expenses.
 
Provision for Taxes. The Company’s effective income tax rate differs from the statutory rate primarily because an income tax expense/benefit was not recorded as a result of the losses in the first nine months of 2019 and 2018. As a result of the Company’s recurring losses, the deferred tax assets have been fully offset by a valuation allowance.
 
Net Loss. The Company recorded a net loss of $1,053,000 for the nine months ended September 30, 2019 as compared to a net loss of $1,595,000 for the nine months ended September 30, 2018. The decrease in net loss is primarily due to the increase in total revenue and a decrease in interest expenses partially offset by an increase in cost of revenue and operating expenses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash
 
Cash and cash equivalents increased $145,000 to $242,000 at September 30, 2019 from $97,000 at December 31, 2018. The increase is primarily attributable to the revenue generated in the first nine months of 2019 and short term borrowings partially offset by the expenses in the first nine months of 2019.
 
Net cash used by Operating Activities. Cash used by operations for the nine months ended September 30, 2019 was $1,339,000 compared to $1,649,000 for the nine months ended September 30, 2018. Cash used by operations for the nine months ended September 30, 2019 was primarily due to the net loss from operations of $1,053,000, an increase in accounts receivable of $73,000, and increase of prepaid expenses of $128,000 and a decrease in deferred revenue of $93,000 partially offset by depreciation expense of $3,000, stock compensation expense of $1,000, and an increase of accounts payable and accrued expenses of $4,000.
 
Net cash used in Investing Activities. The Company had $2,000 in purchases of equipment in the nine months ended September 30, 2019 and September 30, 2018, respectively.
 
Page 19
 
 
Net cash generated by Financing Activities. Net cash generated by financing activities for the nine months ended September 30, 2019 was approximately $1,486,000, compared to $1,651,000 for the nine months ended September 30, 2018. Cash generated by financing activities for the nine months ended September 30, 2019 was comprised primarily from short term borrowings of $1,545,000 partially offset by repayments of debt of $59,000.
 
Liquidity
 
The Company funded its cash needs during the three months ended September 30, 2019 with cash on hand from December 31, 2018, the revenue generated in the first nine months of 2019, and short term borrowings.
 
From time to time during 2017 through 2019, the Company entered into several short term notes payable with John Steffens, the Company’s Chairman of the Board, for various working capital needs. The notes bear an interest rate of 10% with a maturity date of June 30, 2018. In June 2018, all outstanding notes were amended to a new maturity date of December 31, 2018. In December 2018, all outstanding notes were amended to a new maturity date of June 30, 2020 and as such were reclassed to long term debt. The Company is obligated to repay the notes with the collection of any accounts receivable. At December 31, 2018, the Company was indebted to Mr. Steffens in the approximate amount of $3,511,500 of principal and $299,000 of interest. In March 2019, the Company issued 4,250 shares of its Series A preferred stock and warrants to purchase up to 17,007,787 shares of the Company’s common stock at an excise price of $0.05 per share to convert the total obligation of $3,891,500 of principal and $358,697 of interest. At September 30, 2019, the Company was indebted to Mr. Steffens in the approximate amount of $1,165,000 of principal and $64,000 of interest.
 
Although the Company has incurred a net loss of approximately $1,053,000 for the nine months ended September 30, 2019, and has a history of operating losses, management believes that the functionality of the Company’s products resonates in the marketplace as both “analytics” and “automation” are topics often discussed and written about. Further, the Company believes that its repositioned strategy of leading with a no cost, short, “proof of concept” evaluation of the software’s capabilities will shorten the sales cycle and allow for value based selling to our customers and prospects. The Company anticipates success in this regard based upon current discussions and active “proof of concepts” with active partners, customers and prospects. In March 2019, the Company issued 4,250 shares of its Series A preferred stock and a Warrant to purchase up to 17,000,787 shares of the Company’s Common Stock, at an exercise price of $0.05 per share, to its Chairman, John Steffens as part of a conversion of debt and interest totaling $4,250,197 reducing its then working capital deficiency. The Company has borrowed approximately $1,545,000 and $1,776,000 in 2019 and 2018, respectively. Should the Company be unable to secure customer contracts that will drive sufficient cash flow to sustain operations, the Company will be forced to seek additional capital in the form of debt or equity financing; however, there can be no assurance that such debt or equity financing will be available on terms acceptable to the Company or at all. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
The Company does not have any off-balance sheet arrangements. We have no unconsolidated subsidiaries or other unconsolidated limited purpose entities, and we have not guaranteed or otherwise supported the obligations of any other entity.
 
Page 20
 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable.
 
Item 4. Controls and Procedures
 
a) Evaluation of Disclosure Controls and Procedures.
 
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019.
 
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that as of September 30, 2019, our disclosure controls and procedures were effective.
 
(b) Changes in Internal Controls.
 
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Page 21
 
 
Part II. Other Information
 
Item 1. Legal Proceedings
 
Not Applicable.
 
Item 1A. Risk Factors
 
Not Applicable.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Mine Safety Disclosures
 
None.
 
Item 5. Other Information
 
None
 
Item 6. Exhibits
 
Exhibit No.
Description
Certification of Chief Executive Officer/Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
Certification of Chief Executive Officer/Chief Financial Officer pursuant to 18 USC § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
Page 22
 
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
CICERO INC.
 
 
 
 
 
By:  
/s/ John P. Broderick
 
 
 
John P. Broderick
 
 
 
Chief Executive Officer and Chief Financial and Accounting Officer
 
 
 

Page 23

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
1/31/21
10/31/20
6/30/2010-Q
1/31/20
Filed on:11/15/19NT 10-Q
11/5/19
For Period end:9/30/19NT 10-Q
6/30/1910-Q
4/30/19
3/29/1910-K,  4,  8-K
3/26/19
1/31/19
1/1/19
12/31/1810-K
12/1/18
9/30/1810-Q
6/30/1810-Q
6/1/18
4/30/18
1/31/18
1/1/18
12/31/1710-K
12/31/1510-K,  10-K/A
12/31/1410-K
3/31/1310-Q
7/31/11
1/15/104,  8-K,  8-K/A
 List all Filings 
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