Item 1. Condensed Consolidated Financial
Statements
CICERO
INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
|
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$45
|
$17
|
|
Trade accounts
receivable
|
7
|
63
|
Prepaid expenses
and other current assets
|
292
|
211
|
|
Total current
assets
|
344
|
291
|
|
Property and
equipment, net
|
37
|
69
|
|
Total
assets
|
$381
|
$360
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
Liabilities:
|
|
|
|
Current portion of
long term debt
|
$3,151
|
$1,927
|
|
Accounts
payable
|
908
|
922
|
|
Accrued
expenses:
|
|
|
|
Salaries, wages,
and related items
|
1,322
|
1,271
|
|
Accrued
interest
|
367
|
263
|
|
Other
|
73
|
80
|
|
Deferred
revenue
|
336
|
217
|
|
Total
current liabilities
|
6,157
|
4,680
|
|
Long term debt
(Note 4)
|
158
|
464
|
|
Total
liabilities
|
$6,315
|
$5,144
|
|
Commitments and
Contingencies (Note 8)
Stockholders'
deficit:
|
|
|
|
Convertible
preferred stock, $0.001 par value, 10,000,000 shares
authorized
9,333
Series A shares issued and outstanding at March 31, 2020 and
December 31, 2019.
$500
per share liquidation preference
|
--
|
--
|
|
Common stock,
$0.001 par value, 600,000,000 shares authorized
208,319,141
issued and outstanding at June 30, 2020 and 208,019,141 issued
and
outstanding
at December 31, 2019.
|
208
|
208
|
|
Additional paid-in
capital
|
257,948
|
257,946
|
|
Accumulated
deficit
|
(264,090)
|
(262,938)
|
|
Total stockholders'
deficit
|
(5,934)
|
(4,784)
|
|
Total liabilities
and stockholders' deficit
|
$381
|
$360
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
|
|
Three Months
Ended
June
30,
|
Six Months
Ended
June
30,
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
Software
|
$--
|
$--
|
$--
|
$112
|
|
Maintenance
|
91
|
115
|
206
|
235
|
|
Services
|
6
|
55
|
10
|
105
|
|
Total operating
revenue
|
97
|
170
|
216
|
452
|
|
|
|
|
|
|
|
Cost of
revenue:
|
|
|
|
|
|
Software
|
--
|
--
|
--
|
5
|
|
Maintenance
|
40
|
39
|
69
|
81
|
|
Services
|
95
|
97
|
193
|
217
|
|
Total cost of
revenue
|
135
|
136
|
262
|
303
|
|
|
|
|
|
|
|
Gross
margin/(loss)
|
(38)
|
34
|
(46)
|
149
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Sales and
marketing
|
32
|
135
|
81
|
232
|
|
Research and
product development
|
264
|
263
|
520
|
531
|
|
General and
administrative
|
168
|
165
|
361
|
365
|
|
Total operating
expenses
|
464
|
563
|
962
|
1,128
|
|
Loss from
operations
|
(502)
|
(529)
|
(1,008)
|
(979)
|
|
|
|
|
|
|
|
Other
expense:
|
|
|
|
|
|
Interest
expense
|
(76)
|
(36)
|
(144)
|
(149)
|
|
Total
other expense
|
(76)
|
(36)
|
(144)
|
(149)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$(578)
|
$(565)
|
$(1,152)
|
$(1,128)
|
|
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
|
208,256,504
|
207,949,515
|
208,137,822
|
207,931,627
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(in thousands)
(unaudited)
|
|
Six Months
Ended
June
30,
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
Net
loss
|
$(1,152)
|
$(1,128)
|
|
Adjustments to
reconcile net loss to net cash used by operating
activities:
|
|
|
|
Depreciation and
amortization
|
2
|
2
|
|
Stock
compensation expense
|
2
|
1
|
|
Changes in assets
and liabilities:
|
|
|
|
Trade accounts
receivable
|
56
|
8
|
|
Prepaid expenses
and other current assets
|
(81)
|
(88)
|
|
Accounts payable
and accrued expenses
|
164
|
29
|
|
Deferred
revenue
|
119
|
(49)
|
|
Net cash used by
operating activities
|
(890)
|
(1,225)
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases of
equipment
|
--
|
(2)
|
|
Net
cash used by investing activities
|
--
|
(2)
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Borrowings under
debt
|
1,049
|
1,190
|
|
Repayments
of debt
|
(131)
|
--
|
|
Net cash generated
by financing activities
|
918
|
1,190
|
|
Net
increase/(decrease) in cash
|
28
|
(37)
|
|
Cash:
|
|
|
|
Beginning of
period
|
17
|
97
|
|
End of
period
|
$45
|
$60
|
Non-Cash Investing and Financing Activities:
In
April 2020, the Company issued 300,000 shares of its common stock
to a board member as compensation for his role as Audit Committee
Chairperson and recognized approximately $2 of stock compensation
expense.
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.
CICERO INC.
CONDENSED CONSOLIDATED STATEMENT
OF STOCKHOLDERS' DEFICIT
Three and Six Months Ended June 30, 2020
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
|
Balance at March
31, 2019
|
207,913,541
|
$208
|
9,333
|
--
|
$257,944
|
$(261,892)
|
$(3,740)
|
|
Common stock issued
for accounts payable
|
105,600
|
|
|
|
1
|
|
1
|
|
Net
loss
|
|
|
|
|
|
(565)
|
(565)
|
|
Balance at June 30.
2019 (unaudited)
|
208,019,141
|
$208
|
9,333
|
--
|
$257,945
|
$(262,457)
|
$(4,304)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March
31, 2020
|
208,019,141
|
$208
|
9,333
|
--
|
$257,946
|
$(263,512)
|
$(5,358)
|
|
Common stock issued
for stock compensation
|
300,000
|
|
|
|
2
|
|
2
|
|
Net
loss
|
|
|
|
|
|
(578)
|
(578)
|
|
Balance at June 30.
2020 (unaudited)
|
208,319,141
|
$208
|
9,333
|
--
|
$257,948
|
$(264,090)
|
$(5,934)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
|
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
|
|
|
|
|
|
(1,128)
|
(1,128)
|
|
Balance at June 30.
2019 (unaudited)
|
208,019,141
|
$208
|
9,333
|
--
|
$257,945
|
$(262,457)
|
$(4,304)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2019
|
208,019,141
|
$208
|
9,333
|
--
|
$257,946
|
$(262,938)
|
$(4,784)
|
|
Common stock issued
as stock compensation
|
300,000
|
|
|
|
2
|
|
2
|
|
Net
loss
|
|
|
|
|
|
(1,152)
|
(1,152)
|
|
Balance at June 30.
2020 (unaudited)
|
208,319,141
|
$208
|
9,333
|
--
|
$257,948
|
$(264,090)
|
$(5,934)
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
CICERO INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The
accompanying condensed consolidated financial statements for the
three and six months ended June 30, 2020 and 2019 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, 2019, filed with the SEC on
March 27, 2020. 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 $1,152,000 for
the six months ended June 30, 2020, 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 has borrowed
approximately $1,049,000 and $1,955,000 in 2020 and 2019,
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 27,
2020, on our consolidated financial statements for the period ended
December 31, 2019 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.
The
coronavirus (COVID-19) that was reported to have surfaced in Wuhan,
China in December 2019 and that has now spread to other countries
throughout the world could adversely impact our operations or those
of our third-party partners. Additionally, the continued spread of
the virus could negatively impact the development, distribution and
sale of our products and our financial results. The extent to which
the coronavirus impacts our operations or those of our third-party
partners will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, including the
duration of the outbreak, new information that may emerge
concerning the severity of the coronavirus and the actions to
contain the coronavirus or treat its impact, among others. Such
developments could have a material adverse effect on our financial
results and our ability to conduct business as
expected.
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 six months ended
June 30, 2020 and 2019, respectively, in connection with
outstanding options. The Company has no unrecognized stock-based
compensation expense in connection with outstanding options as of
June 30, 2020.
The
Company did not recognize any expense for the three months ended
June 30, 2020 and recognized approximately $400 for the three
months ended June 30 2019, respectively, and $100 and $800 for the
six months ended June 30, 2020 and 2019, 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 no
unrecognized stock-based compensation expense in connection with
the restricted stock grants
The
following table sets forth certain information as of June 30, 2020
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.
|
|
|
|
Outstanding on
December 31, 2019
|
681,211
|
|
Granted
|
--
|
|
Exercised
|
--
|
|
Forfeited
|
--
|
|
Outstanding on June
30, 2020
|
681,211
|
|
|
|
|
Weighted average
exercise price of outstanding options
|
$0.08
|
|
Aggregate Intrinsic
Value
|
$0
|
|
Shares available
for future grants on June 30, 2020
|
--
|
|
|
|
|
Weighted average of
remaining contractual life
|
0.8
|
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
$217,000 and $336,000 as of December 31, 2019 and June 30, 2020,
respectively. Revenue recognized from the contract liabilities for
the six months ended June 30, 2020 was $143,000. The contract
liability balances reflect the unrecognized transaction
price.
Our net
trade accounts receivables were $63,000 and $7,000 as of December
31, 2019 and June 30, 2020, 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. LEASES
On
January 1, 2019, the Company adopted Topic 842, which is intended
to improve financial reporting about leasing transactions. Under
the standard, organizations that lease assets, referred to as
“Lessees” shall recognize on the balance sheet the
assets and liabilities for the rights and obligations created by
those leases. In addition, the standard requires disclosures
including financial statements to assess the amount, timing and
uncertainty of cash flows arising from leases.
The
Company elected to use the practical expedients permitted under the
transition guidance within the new standard, which among other
things, allows the Company to carryforward the historical lease
classifications. The Company made an accounting policy election to
account for leases with an initial term of 12 months or less
similar to existing guidance for operating leases today. The
Company recognized those lease payments in the Consolidated
Statement of Operations on a straight-line basis over the lease
term. 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
with the landlord as it negotiates a new long term lease and as
such the Company has accounted for it as a practical expedient in
fiscal and accounted for it as an operating lease. As of December
31, 2019, the Company reevaluated the lease under the guidance of
Topic 842 and estimated an expected term of one year for analysis
under Topic 842. Under the new standard, the Company’s lease
liability is based on the present value of such payments and the
related right-of-use asset will generally be based on the lease
liability.
Rent
expense was approximately $35,000 and $38,000 for the six months
ended June 30, 2020 and 2019, respectively.
|
|
|
|
Lease
term and discount rate
|
|
|
Weighted-average
remaining lease term operating lease
|
|
|
Weighted-average
discount rate operating lease
|
10.0%
|
Components
of lease assets and liabilities (in thousands):
|
|
|
|
Assets
|
|
|
Property and
equipment, net operating lease-right of use asset
|
$32
|
|
|
|
|
Liabilities
|
|
|
Current liabilities
operating lease-current liability
|
$30
|
NOTE 4. DEBT
Debt
and notes payable to related party consist of the following (in
thousands):
|
|
|
|
|
Note payable
– asset purchase agreement (a)
|
$170
|
$301
|
|
Note payable
– related party (b)
|
2,340
|
1,575
|
|
Notes payable
(c)
|
515
|
515
|
|
PPP Loan
(d)
|
284
|
--
|
|
Total
debt
|
3,309
|
2,391
|
|
Less current
portion
|
(3,151)
|
(1,927)
|
|
Total long term
debt
|
$158
|
$464
|
(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. In January 2020, an amendment extended the maturity date to
December 31, 2020, and a milestone payment of $150,000, to be
applied to any outstanding interest and then principal and payable
on April 10, 2020, was added. At December 31, 2019, the Company was
indebted to SOAdesk for $301,282 in principal and approximately
$11,000 in interest. At June 30, 2020, the Company was indebted to
SOAdesk for $170,101 in principal and approximately $5,000 in
interest.
(b)
From time to time
during 2017 through 2020, 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 December 31, 2018. In
December 2018, all outstanding notes were amended to a new maturity
date of June 30, 2020. The Company is obligated to repay the notes
with the collection of any accounts receivable. 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. In June 2020, all outstanding notes were amended to a new
maturity date of June 30, 2021. At December 31, 2019, the Company
was indebted to Mr. Steffens in the approximate amount of
$1,575,000 of principal and $97,000 of interest. At June 30, 2020,
the Company was indebted to Mr. Steffens in the approximate amount
of $2,340,000 of principal and $198,000 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 $99,000
of interest and $50,000 of principal and $105,000 of interest, as
of December 31, 2019 and June 30, 2020, 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, 2019, the Company was indebted to this
private lender in the amount of $464,350 in principal and $55,000
in interest. At June 30, 2020, the Company was indebted to this
private lender in the amount of $464,350 in principal and $60,000
in interest and has been reclassified as short term debt due to its
maturity date of January 31, 2021.
(d)
On May 4, 2020 the
Company entered into an unsecured promissory note under the
Paycheck Protection Program (the “PPP”), with a
principal amount of $283,917. The PPP was established under the
recently congressional approved Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”) and is
administered by the U.S. Small Business Administration (the
“SBA”). The term of the PPP loan is two years and
matures on May 3, 2022. The interest rate on this loan is 1.0% per
annum, which shall be deferred for the first six months of the term
of the loan. After the initial six-month deferral period, the loan
requires monthly payments of principal and interest until maturity
with respect to any portion of the PPP loan which is not forgiven
as described below. The Company is permitted to prepay or partially
prepay the PPP loan at any time with no prepayment penalties. Under
the terms of the CARES Act, PPP loan recipients can apply for, and
be granted, forgiveness for all or a portion of loans granted under
the PPP. Such forgiveness will be determined, subject to
limitations and ongoing rulemaking by the SBA, based on the use of
loan proceeds for payroll costs and mortgage interest, rent or
utility costs and the maintenance of employee and compensation
levels. While there is no assurance the Company will obtain
forgiveness of the PPP loan in whole or in part, it expects most of
this loan to be forgiven by the SBA as the Company anticipates all
loan covenants to be met. At June 30, 2020, the Company was
indebted to the lender in the amount of $283,917 in principal and
$233 in interest.
NOTE 5. 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 six months ended
on June 30, 2020 and 2019. As a result of the Company's recurring
losses, the deferred tax assets have been fully offset by a
valuation allowance.
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and
Economic Security (CARES) Act was enacted. Under the CARES Act,
NOLs arising in tax years beginning after December 31, 2017, and
before January 1, 2021 (e.g., NOLs incurred in 2018, 2019, or 2020
by a calendar-year taxpayer) may be carried back to each of the
five tax years preceding the tax year of such loss. Since the
enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), NOLs
generally could not be carried back but could be carried forward
indefinitely. Further, the TCJA limited NOL absorption to 80% of
taxable income. The CARES Act temporarily removes the 80%
limitation, reinstating it for tax years beginning after
2020.
NOTE 6. 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.
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 7. 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 six months ended
June 30, 2020 and 2019.
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 June 30, 2020.
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 June 30, 2020.
NOTE 9. SUBSEQUENT EVENTS
In July
2020, the Company entered into notes payable totaling $200,000 with
Mr. Steffens. The notes bear interest at 10% per annum. The notes
are unsecured and mature on June 30, 2021. The Company is obligated
to repay the notes with the collection of any accounts
receivables.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.
Cicero,
Inc. (the “Company”) provides desktop activity
intelligence, process intelligence and automation software to help
organizations isolate issues and automate 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, process intelligence
and customer experience management market with emphasis on desktop
analytics and automation with its Intelligent Analytics Platform
(IAP). Activity intelligence captures what employees are doing,
what resources they are using and how long an activity may take.
Process intelligence captures the workflows that are being utilized
and identifies any bottlenecks that exist within those
workflows.
Cicero
collects desktop activity leveraging a suite of sensors. Cicero IAP
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’s
IAP 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’s Deep Sensor Technology
including our System Sensors, our Session Sensors, our Activity
Sensors and our Process Sensors, Cicero Insight collects activity
data about the applications and workflows being used and makes it
readily available for analysis and action to the business
community.
Cicero
Automation delivers all the features of the Cicero IAP product as
well as desktop automation for enterprise contact center and back
office employees. Leveraging existing IT investments Cicero
Automation integrates applications, automates workflow, and
provides control and adaptability at the end user
desktop.
Cicero
Automation also provide Single Sign-On (SSO) and stay signed on
capability. The software maintains a secure credential store that
facilitates single sign-on. Passwords can be reset but are
non-retrievable. Stored interactions can be selectively encrypted
based on the needs of the enterprise. All network communications
are compressed and encrypted for transmission.
The
Company provides an intuitive configuration toolkit for each
product, which simplifies the process of deploying and managing the
solutions in the enterprise. The Company provides a unique way of
capturing untapped desktop activity data using sensors, combining
it with other data sources, and making it readily available for
analysis and action to the business community. The Company also
provides a unique approach that allows companies to organize
functionality of their existing applications to better align them
with tasks and operational processes. In addition, the
Company’s software solutions can streamline end-user tasks
and enable automatic information sharing among line-of-business
siloed applications and tools. It is ideal for deployment in
organizations that need to provide access to enterprise
applications on desktops to iteratively improve business
performance, the user experience, and customer satisfaction. By
leveraging desktop activity data, integrating disparate
applications, automating business processes and delivering a better
user experience, the Company’s products are ideal for the
financial services, insurance, healthcare, governmental and other
industries requiring a cost-effective, proven business performance
and user experience management solution for enterprise
desktops.
In
addition to software products, the Company also provides technical
support, training and consulting services as part of its commitment
to providing its customers industry-leading integration solutions.
The Company’s consulting team has in-depth experience in
developing successful enterprise-class solutions as well as
valuable insight into the business information needs of customers
in the Global 5000. We offer services around our integration
software products.
This
Quarterly Report on Form 10-Q contains forward-looking statements
relating to such matters as anticipated financial performance,
business prospects, technological developments, new products,
research and development activities, liquidity and capital
resources and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor,
the Company notes that a variety of factors could cause its actual
results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements.
These risk and uncertainties include, among others, the
following:
●
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.
RESULTS OF OPERATIONS
The
table below presents information for the three and six months ended
June 30, 2020 and 2019 (in thousands):
|
|
Three months ended
June 30,
|
Six months ended
June 30,
|
|
|
|
|
|
|
|
Total
revenue
|
$97
|
$170
|
$216
|
$452
|
|
Total cost of
revenue
|
135
|
136
|
262
|
303
|
|
Gross
margin/(loss)
|
(38)
|
34
|
(46)
|
149
|
|
Total operating
expenses
|
464
|
563
|
962
|
1,128
|
|
Loss from
operations
|
$(502)
|
$(529)
|
$(1,008)
|
$(979)
|
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 JUNE 30, 2020 COMPARED WITH THE THREE MONTHS
ENDED JUNE 30, 2019.
Total Revenues. Total revenues decreased $73,000, or 42.9%,
from $170,000 to $97,000, for the three months ended June 30, 2020
as compared with the three months ended June 30, 2019. The decrease
is due to a decrease in software product, maintenance and services
revenue.
Total Cost of Revenue. Total cost of revenue decreased
$1,000 or 0.7%, from $136,000 for the three months ended June 30,
2019 to $135,000 for the three months ended June 30, 2020. The
decrease in cost of revenue is primarily due to a decrease in
outside consulting expenses.
Total Gross Margin/Loss. Gross margin loss was $38,000, or
39.2%, for the three months ended June 30, 2020, as compared to the
gross margin of $34,000, or 20.0%, for the three months ended June
30, 2019. The decrease in gross margin is primarily due to the
decrease in sales.
Total Operating Expenses. Total operating expenses decreased
$99,000, or 17.6%, from $563,000 to $464,000 for the three months
ended June 30, 2020, as compared with the three months ended June
30, 2019. The decrease is primarily attributable to a decrease in
headcount and lower trade show costs from cancelation of trade show
due to COVID-19 partially offset by higher outside consulting
fees.
Software Products:
Software Product Revenue. The Company did not have any
software product revenue for the three months ended June 30, 2020
and June 30, 2019, respectively. The Company believes this is
primarily due to timing of expected software sales.
Software Product Gross Margin. The Company had no gross
margin on software products for the three months ended June 30,
2020, and June 30, 2019, respectively.
Maintenance:
Maintenance Revenue. Maintenance revenue for the three
months ended June 30, 2020 decreased by approximately $24,000, or
20.9%, from $115,000 to $91,000 as compared to the three months
ended June 30, 2019. The decrease in maintenance revenue is
primarily due to the decrease in license renewals of one customer
in fiscal 2020 and lack of new sales to customers in fiscal
2020.
Maintenance Gross Margin. Gross margin on maintenance
products for the three months ended June 30, 2020 was $51,000 or
56.0% compared with $76,000 or 66.1% for the three months ended
June 30, 2019. Cost of maintenance is comprised of personnel costs
and related overhead for the maintenance and support of the
Company’s software products. The decrease in gross margin is
due to the decrease in maintenance revenue.
Services:
Services Revenue. Services revenue for the three months
ended June 30, 2020 decreased by approximately $49,000, or 89.1%,
from $55,000 to $6,000 as compared with the three months ended June
30, 2019. The decrease is primarily due to a decrease in paid
services engagements.
Services Gross Margin Loss. Services gross margin loss was
$89,000 or 1,483.3% for the three months ended June 30, 2020
compared with gross margin loss of $42,000 or 76.4% for the three
months ended June 30, 2019. The increase in gross margin loss was
primarily attributable to a decrease 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 June 30, 2020 decreased by approximately
$103,000, or 76.3%, from $135,000 to $32,000 as compared with the
three months ended June 30, 2019. The decrease is primarily
attributable to a decrease in headcount, lower outside consulting
expenses and a trade show being canceled in fiscal 2020 due to
COVID-19.
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 $1,000, or 0.4%,
from $263,000 to $264,000 for the three months ended June 30, 2020
as compared to the three months ended June 30, 2019. The increase
in research and development costs for the quarter is primarily due
to 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 June 30, 2020
increased by approximately $3,000, or 1.8%, from $165,000 to
$168,000 as compared to the three months ended June 30, 2019. The
increase is primarily due to an increase in personnel
costs.
Provision for Taxes. The Company’s effective income
tax rate differs from the statutory rate primarily because an
income tax expense/benefit was not recorded as a result of the
losses in the second quarter of 2020 and 2019, respectively. 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 net loss of $578,000 for the
three months ended June 30, 2020 as compared to a net loss of
$565,000 for the three months ended June 30, 2019. The increase in
net loss is primarily due to the decrease in total revenue
partially offset by a decrease in operating expenses.
SIX MONTHS ENDED JUNE 30, 2020 COMPARED WITH THE SIX MONTHS ENDED
JUNE 30, 2019.
Total Revenues. Total revenues decreased $236,000, or 52.2%,
from $452,000 to $216,000, for the six months ended June 30, 2020
as compared with the six months ended June 30, 2019. The decrease
is due to a decrease in software product, maintenance and services
revenue.
Total Cost of Revenue. Total cost of revenue decreased
$41,000 or 13.5%, from $303,000 for the six months ended June 30,
2019 to $262,000 for the six months ended June 30, 2020. The
decrease in cost of revenue is primarily due to a decrease in
personnel costs and outside consulting expenses.
Total Gross Margin/Loss. Gross margin loss was $46,000, or
21.3%, for the six months ended June 30, 2020, as compared to the
gross margin of $149,000, or 33.0%, for the six months ended June
30, 2019. The decrease in gross margin is primarily due to the
decrease in sales and lower outside consulting
expenses.
Total Operating Expenses. Total operating expenses decreased
$166,000, or 14.7%, from $1,128,000 to $962,000 for the six months
ended June 30, 2020, as compared with the six months ended June 30,
2019. The decrease is primarily attributable to a decrease in
headcount and lower trade show expenses due to the cancelation of a
trade show due to COVID-19.
Software Products:
Software Product Revenue. The Company did not have any
software product revenue for the six months ended June 30, 2020 as
compared to $112,000 in software revenue for the six months ended
June 30, 2019, a decrease of $112,000. The decrease is primarily
due to timing of expected software sales.
Software Product Gross Margin. The Company had no gross
margin on software products for the six months ended June 30,
2020. The Company had
95.5% gross margin on software products for the six months ended
June 30, 2019.
Maintenance:
Maintenance Revenue. Maintenance revenue for the six months
ended June 30, 2020 decreased by approximately $29,000, or 12.3%,
from $235,000 to $206,000 as compared to the six months ended June
30, 2019. The decrease in maintenance revenue is primarily due to
the decrease of new sales to customers in fiscal 2020 and a
decrease in renewal licenses for one customer.
Maintenance Gross Margin. Gross margin on maintenance
products for the six months ended June 30, 2020 was $137,000 or
66.5% compared with $154,000 or 65.5% for the six months ended June
30, 2019. 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 partially offset by a
decrease in cost of maintenance expenses.
Services:
Services Revenue. Services revenue for the six months ended
June 30, 2020 decreased by approximately $95,000, or 90.5%, from
$105,000 to $10,000 as compared with the six months ended June 30,
2019. The decrease is primarily due to a decrease in paid services
engagements.
Services Gross Margin Loss. Services gross margin loss was
$183,000 or 1,830.0% for the six months ended June 30, 2020
compared with gross margin loss of $112,000 or 106.7% for the six
months ended June 30, 2019. The increase in gross margin loss was
primarily attributable to a decrease in service revenue partially
offset by a decrease in 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 six
months ended June 30, 2020 decreased by approximately $151,000, or
65.1%, from $232,000 to $81,000 as compared with the six months
ended June 30, 2019. The decrease is primarily attributable to a
decrease in headcount, lower outside consulting expenses, and lower
trade show expenses due to the cancelation of a trade show due to
COVID-19.
Research and Development. Research and product development
expenses primarily include personnel costs for product developers
and product documentation and related overhead. Research and
development expense decreased by approximately $11,000, or 2.1%,
from $531,000 to $520,000 for the six months ended June 30, 2020 as
compared to the six months ended June 30, 2019. The decrease in
research and development costs for the quarter is primarily due to
a decrease in headcount partially offset by higher outside
consulting expenses.
General and Administrative. General and administrative
expenses consist of personnel costs for the legal, financial, human
resources, and administrative staff, related overhead, and all
non-allocable corporate costs of operating the Company. General and
administrative expenses for the six months ended June 30, 2020
decreased by approximately $4,000, or 1.1%, from $365,000 to
$361,000 as compared to the six months ended June 30, 2019. The
decrease is primarily due to a decrease in personnel
costs.
Provision for Taxes. The Company’s effective income
tax rate differs from the statutory rate primarily because an
income tax expense/benefit was not recorded as a result of the
losses in the first six months of 2020 and 2019, respectively. 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 net loss of $1,152,000 for
the six months ended June 30, 2020 as compared to a net loss of
$1,128,000 for the six months ended June 30, 2019. The increase in
net loss is primarily due to the decrease in total revenue
partially offset by a decrease in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash
Cash
and cash equivalents increased $28,000 to $45,000 at June 30, 2020
from $17,000 at December 31, 2019. The increase is primarily
attributable to the revenue generated in the first six months of
2020 and short term borrowings partially offset by the expenses in
the first six months of 2020.
Net cash used by Operating Activities. Cash used by
operations for the six months ended June 30, 2020 was $890,000
compared to $1,225,000 for the six months ended June 30, 2019. Cash
used by operations for the six months ended June 30, 2020 was
primarily due to the net loss from operations of $1,152,000, an
increase of prepaid expenses of $81,000 partially offset by
depreciation expense of $2,000, stock compensation expense of
$2,000, a decrease in accounts receivable of $56,000, an increase
of accounts payable and accrued expenses of $164,000 and an
increase in deferred revenue of $119,000.
Net cash used in Investing Activities. The Company had no
purchases of equipment for the six months ended June 30, 2020 and
had $2,000 in purchases of equipment in the six months ended June
30, 2019.
Net cash generated by Financing Activities. Net cash
generated by financing activities for the six months ended June 30,
2020 was approximately $918,000, compared to $1,190,000 for the six
months ended June 30, 2019. Cash generated by financing activities
for the six months ended June 30, 2020 was comprised primarily from
short term borrowings of $1,049,000 partially offset by repayments
of $131,000.
Liquidity
The
Company funded its cash needs during the six months ended June 30,
2020 with cash on hand from December 31, 2019, the revenue
generated in the first six months of 2020, and short term
borrowings.
From
time to time during 2017 through 2020, 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 December 31, 2018. In December 2018, all outstanding notes were
amended to a new maturity date of June 30, 2020. The Company is
obligated to repay the notes with the collection of any accounts
receivable. 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. In June 2020, all outstanding
notes were amended to a new maturity date of June 30, 2021. At
December 31, 2019, the Company was indebted to Mr. Steffens in the
approximate amount of $1,575,000 of principal and $97,000 of
interest. At June 30, 2020, the Company was indebted to Mr.
Steffens in the approximate amount of $2,340,000 of principal and
$198,000 of interest.
Although
the Company has incurred a net loss of approximately $1,152,000 for
the six months ended June 30, 2020, 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 has borrowed
approximately $1,049,000 and $1,955,000 in 2020 and 2019,
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 27,
2020, on our consolidated financial statements for the period ended
December 31, 2019 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.
The
coronavirus (COVID-19) that was reported to have surfaced in Wuhan,
China in December 2019 and that has now spread to other countries
throughout the world could adversely impact our operations or those
of our third-party partners. Additionally, the continued spread of
the virus could negatively impact the development, distribution and
sale of our products and our financial results. The extent to which
the coronavirus impacts our operations or those of our third-party
partners will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, including the
duration of the outbreak, new information that may emerge
concerning the severity of the coronavirus and the actions to
contain the coronavirus or treat its impact, among others. Such
developments could have a material adverse effect on our financial
results and our ability to conduct business as
expected.
On May
4, 2020 we entered into an unsecured promissory note under the
Paycheck Protection Program (the “PPP”), with a
principal amount of $283,917. The PPP was established under the
recently congressional approved Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”) and is
administered by the U.S. Small Business Administration (the
“SBA”). The term of the PPP loan is two years. The
interest rate on this loan is 1.0% per annum, which shall be
deferred for the first six months of the term of the loan. After
the initial six-month deferral period, the loan requires monthly
payments of principal and interest until maturity with respect to
any portion of the PPP loan which is not forgiven as described
below. The Company is permitted to prepay or partially prepay the
PPP loan at any time with no prepayment penalties. Under the terms
of the CARES Act, PPP loan recipients can apply for, and be
granted, forgiveness for all or a portion of loans granted under
the PPP. Such forgiveness will be determined, subject to
limitations and ongoing rulemaking by the SBA, based on the use of
loan proceeds for payroll costs and mortgage interest, rent or
utility costs and the maintenance of employee and compensation
levels. While there is no assurance the Company will obtain
forgiveness of the PPP loan in whole or in part, it expects most of
this loan to be forgiven by the SBA as the Company anticipates all
loan covenants to be met.
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.