SMS ALTERNATIVES INC. General Information
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. Cicero offers services around our integration and customer experience management software products.
This discussion 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. See ''Item 1. Business-Forward Looking and Cautionary Statements.''
Business Strategy
Management makes operating decisions and assesses performance of the Company's operations based on one reportable segment, the Software product segment.
The Software product segment is comprised of the Cicero Intelligent Analytics Platform and Cicero Automation products. Cicero IAP delivers desktop analytics and reporting for the enterprise. Cicero IAP collects activity and application performance data and tracks business objects across time and across multiple users as well as measures against a defined "expected" business process flow, either for analysis or to feed a third-party application. Cicero 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. Using a set of configurable sensors at the employees' desktop Cicero IAP 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 enables businesses to transform human interaction across the enterprise. Cicero Automation enables the flow of data between different applications, regardless of the type and source of the application, eliminating redundant entry and costly mistakes. Cicero Automation automates up and down-stream process flows, enforcing compliance and optimizing handle time, reducing training time and enabling delivery of best in class service. Cicero Automation captures real-time information about business processes at the desktop, allowing organizations to spot trends and forecast problems before they occur.
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Results of Operations
The following table sets forth, for the years indicated, the Company's results of operations expressed as a percentage of revenue and presents information for the three categories of revenue.
Years Ended December 31,
2019 2018
Revenue:
Software 52.1% 7.8%
Maintenance 31.8% 57.8%
Services 16.1% 34.4%
Total 100.0% 100.0%
Cost of revenue:
Software 0.3% 0.1%
Maintenance 10.2% 18.6%
Services 28.4% 48.3%
Total 38.9% 67.0%
Gross margin 61.1% 33.0%
Operating expenses:
Sales and marketing 26.8% 51.0%
Research and product development 74.7% 117.3%
General and administrative 47.5% 85.2%
Total 149.0% 253.5%
Loss from operations (87.8)% (220.5)%
Other income/(expense), net (16.9)% (23.9)%
Net loss (104.8)% (244.4)%
The following table sets forth data for total revenue for operations by geographic origin as a percentage of total revenue for the periods indicated:
2019 2018
United States 50% 88%
Europe 50% 12%
100% 100%
Years Ended
Revenue and Gross Margin. 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 does not have any material backlog of unfilled software orders and product revenue in any period is substantially dependent upon orders received in that quarter. Because the Company's operating expenses are based on anticipated revenue levels and are relatively fixed over the short term, variations in the timing of the recognition of revenue can cause significant variations in operating results from period to period. Fluctuations in operating results may result in volatility of the price of the Company's common stock.
Total revenues for the year ended
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Software Products. Software products revenue for the year ended
The gross margin on software products was 99.4% and 98.5 % for the years ended
The Company expects to see an increase in software sales coupled with improving margins on software products as Cicero Intelligent Analytics Platform and Cicero Automation gain acceptance in the marketplace. 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. Using data and analytics to drive change in an organization begins with capturing that data. We believe that this approach is being embraced by the Company's prospects. In addition, the Company and its products continue to be recognized in the marketplace with technology and partnership awards.
Maintenance. Maintenance revenues for the years ended
Cost of maintenance is comprised of personnel costs and related overhead for the maintenance and support of the Company's software products. The Company experienced a gross margin on maintenance products of 68.0% and 67.8% for 2019 and 2018, respectively.
Maintenance revenues are expected to increase as a result of our expected increase in software sales of the Cicero Discovery, Cicero Insight and Cicero Automation products. The cost of maintenance as a percentage should decrease slightly.
Services. Services revenue for the year ended
Cost of services primarily includes personnel and travel costs related to the delivery of services. Services gross margin loss was (76.5%) and (40.2%) for 2019 and 2018, respectively. The increase in gross margin loss in 2019 was primarily attributable to the decrease in consulting revenue.
Services revenues are expected to increase as the Cicero Discovery, Cicero Insight, and Cicero Automation products gain acceptance.
Sales and Marketing. Sales and marketing expenses primarily include personnel
costs for salespeople, marketing personnel, travel and related overhead, as well
as industry conference participation and promotional expenses. Sales and
marketing expenses decreased 4.4% or
Sales and marketing expenses are expected to increase as the Company adds variable compensation based on sales.
Research and Development. Research and development expenses primarily include
personnel costs for product authors, product developers and product
documentation and related overhead. Research and development expense increased
15.7% or
The Company intends to continue to make a significant investment in research and development while enhancing efficiencies in this area.
General and Administrative. General and administrative expenses consist of
personnel costs for the executive, legal, financial, human resources, investor
relations and administrative staff, related overhead, and all non-allocable
corporate costs of operating the Company. General and administrative expenses
increased 1.3% or
General and administrative expenses are not expected to increase in 2020.
15Provision for Taxes. The Company's effective income tax rate for continuing operations differs from the statutory rate primarily because an income tax benefit was not recorded for the net loss incurred in 2019 and 2018. Because of the Company's inconsistent earnings history, the deferred tax assets have been fully offset by a valuation allowance.
Other Income/(Loss). Other income (net) decreased
Interest expense decreased
Net Loss. Net loss decreased
Impact of Inflation. Inflation has not had a significant effect on the Company's operating results during the periods presented.
Liquidity and Capital Resources
Operating and Investing Activities
The Company's cash was
Operating activities utilized
During 2019, the Company utilized approximately
Financing Activities
The Company funded its cash needs during the year ended
From time to time during 2017 through 2019, the Company entered into several
short term notes payable with
Although the Company has incurred an operating loss of approximately
16Off Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements. We have no unconsolidated limited purpose entities, and we have not guaranteed or otherwise supported the obligations of any other entity.
Critical Accounting Policies
The policies discussed below are considered by us to be critical to an understanding of our consolidated financial statements because they require us to apply the most judgment and make estimates regarding matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. With respect to the policies discussed below, we note that because of the uncertainties inherent in forecasting, the estimates frequently require adjustment.
Our consolidated financial statements and related disclosures, which are
prepared to conform to accounting principles generally accepted in
We consider the most significant accounting policies and estimates in our consolidated financial statements to be those surrounding: (1) revenue recognition; (2) allowance for doubtful trade accounts receivable; (3) goodwill; and (4) valuation of deferred tax assets. These accounting policies, the basis for any estimates and potential impact to our consolidated financial statements, should any of the estimates change, are further described as follows:
Revenue Recognition. On
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.
Allowance for Doubtful Trade Accounts Receivable. In addition to assessing the probability of collection in conjunction with revenue arrangements, we continually assess the collectability of outstanding invoices. Assumptions are made regarding the customer's ability and intent to pay and are based on historical trends, general economic conditions, and current customer data. Should our actual experience with respect to collections differ from our initial assessment, there could be adjustments to bad debt expense.
Leases. As of
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Valuation of Deferred Tax Assets. Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards. Deferred
income tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is established to the
extent that it is more likely than not, that we will be unable to utilize
deferred income tax assets in the future. At
At
Recent Accounting Pronouncements:
In
The new standard was effective for us on
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 of
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