MCX Technologies Corp - Quarter Report: 2014 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number:   000-54918

TOUCHPOINT METRICS, INC.

(Exact name of registrant as specified in its charter)

California

(State or other jurisdiction of incorporation or organization)

26-0030631

(I.R.S. Employer Identification No.)

201 Spear Street, Suite 1100

San Francisco, CA   94105

(Address of principal executive offices, including zip code)

(415) 526-2655

(Registrant's telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 last 90 days.   YES x    NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES x     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer," "non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES o     NO x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  16,081,158 as of July 30, 2014.

 

---

 

 

 

---

 

Touchpoint Metrics, Inc.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

---

 

PART I. FINANCIAL INFORMATION

Touchpoint Metrics, Inc.

Balance Sheets

The accompanying notes are an integral part of these statements.

---

 

The accompanying notes are an integral part of these statements.

---

 

 

TOUCHPOINT METRICS, INC.

NOTES TO THE FINANCIAL STATEMENTS

JUNE 30, 2014

Note 1: Organization and Basis of Presentation

Touchpoint Metrics, Inc. (the "Company") is a for profit corporation established under the corporation laws in the State of California, United States of America on December 14, 2001. The corporation operated as The Innes Group, Inc., dba MCorp Consulting until filing a Certificate of Amendment to the Articles of Incorporation renaming the company Touchpoint Metrics, Inc., effective October 18, 2011.

The Company develops and delivers technology-enabled products and services that improve customer experience management capabilities for corporations. Their focus assists companies who wish to improve business performance by measuring and transforming the ways they interact with customers.

The Company services a wide variety of industries and customer size.

The Financial Statements and related disclosures as of June 30, 2014 and for the three and six months ended June 30, 2014, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). The December 31, 2013, Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("U.S.).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the financial statements included in our Annual Report for the year ended December 31, 2013, filed on Form 10-K with the SEC on March 31, 2014.  The results of operations for the three and six months ended June 30, 2014, are not necessarily indicative of the results to be expected for the full year. Unless the context otherwise requires, all references to "Touchpoint Metrics," "we," "us," "our" or the "company" are to Touchpoint Metrics, Inc. and our subsidiaries.

Note 2: Recent Accounting Pronouncements

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740) ("ASU 2013-11"), which requires the financial statement presentation of an unrecognized tax benefit in a particular jurisdiction, or a portion thereof, as a reduction to a deferred tax asset for a net operating loss (NOL") carryforward, a similar tax loss, or a tax credit carryforward, unless the uncertain tax position is not available to reduce, or would not be used to reduce, the NOL or carryforward under the tax law in the same jurisdiction; otherwise, the unrecognized tax benefit should be presented as a gross liability and should not be combined with a deferred tax asset. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013.  ASU 2013-11 was adopted January 1, 2014 and did not have a significant impact on our financial statements.

In May 2014, the FASB and the International Accounting Standards Board ("IASB") jointly issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the first quarter of 2017. An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or recognizing the cumulative effect of adoption at the date of initial application.  The Company is in the process of evaluating the new standard and does not know the effect, if any, ASU 2014-09 will have on the Consolidated Financial Statements or which adoption method will be used.

 

Note 3: Property and Equipment

Property and equipment consist of:

Depreciation expense incurred during the three and six months ended June 30, 2014 was $858 and $1,274, respectively. Depreciation expense incurred during the three and six months ended June 30, 2013 was $1,245 and $3,083, respectively.

 

Note 4: Stock-Based Compensation

The Company's stock-based compensation program was established in 2008. Plan Shares cannot exceed 30% of any outstanding issue or 2,500,000 shares, whichever is the lower amount.

In order to calculate the fair value of stock options at the date of grant, we use the Black-Scholes option pricing model. The volatility used was based on historical volatility of similar sized companies due to lack of historical data of the Company's stock price.  The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.  The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The company currently has five active option commitments. Each commitment has an exercise price equal to the fair market value of our common stock on the date of grant, a graded vesting schedule, and a ten-year term.

At June 30, 2014, 332,000 stock options were exercisable and $67,806 of total compensation cost related to vested share-based compensation grants had been recognized.  Unrecognized compensation expense from stock options was $97,155 at June 30, 2014, which is expected to be recognized over a weighted-average vesting period of 1.41 years beginning July 1, 2014.

The following table summarizes our stock option activity for the six months ended June 30, 2014:

 

 

 

 

The following assumptions were used to calculate weighted average fair values of the options granted in the six months ended June 30, 2014 and 2013.

 

To the extent the actual forfeiture rate is different than what we have anticipated, share-based compensation expense related to these options will be different from our expectations.

Note 5: Concentrations

The Company sells products and services under various terms to a broad range of companies across multiple industries ranging from start-ups to Fortune 500 companies, with sales concentrated among a few large clients. For the six months ended June 30, 2014 and 2013, the percentage of sales and the concentrations are as follows:

During 2012, the Company entered a consulting services agreement with mfifty, which is a related party. The President of the Company is also an owner of mfifty. During the six months ended June 30, 2014 and 2013, the company earned consulting revenues of approximately $5,275 and $2,343, respectively, from this related party.

Sales are made without collateral and the credit-related losses have been insignificant or non-existent. Accordingly, there is no provision made to include an allowance for doubtful accounts.

 

Note 6: Capitalized Software Development Costs

Costs incurred to develop Software as a Service (SaaS) technology consist of external direct costs of materials and services and payroll and payroll-related costs for employees who directly devote time to the project. Research and development costs incurred during the preliminary project stage were expensed as incurred. Capitalization begins when technological feasibility is established. Costs incurred during the operating stage of the software application relating to upgrades and enhancements are capitalized to the extent that they result in the extended life of the product. All other costs are expensed as incurred.

Amortization of software development costs commences when the product is available for general release to customers. The capitalized costs are amortized on a straight line basis over the three year expected useful life of the software. Capitalized software development costs, net of amortization, were $127,929 and $164,480 as of June 30, 2014 and December 31, 2013, respectively. Amortization expense incurred during the six months ended June 30, 2014 and 2013 was $36,551 and $0, respectively and is included in cost of goods sold.

 

 

 

Note 7: Intangible Assets

Intangibles as of June 30, 2014, consist of the following:

 

Amortization of identifiable intangible assets was $417 and $0 for the six months ended June 30, 2014 and 2013, respectively.

At December 31, 2013, management identified impairment indicators and performed tests for recoverability resulting in values less than the PetroPortfolio asset's carrying amount.  A resulting charge for impairment of $17,537 was based on management's review of these analyses, and the balance at June 30, 2014 accurately represents management's opinion of current value.

 

Note 8: Commitments and Contingencies

Leases

The Company leases two facilities in northern California under operating leases that expire in 2016.  Rent expense under operating leases was $9,016 and $15,148 for the three and six months ended June 30, 2014. Rent expense under operating leases was $5,520 and $11,040 for the three and six months ended June 30, 2013.

As of June 30, 2014, estimated future payments under operating leases (including rent escalation clauses) for each of the next five years is as follows:

Purchase Obligations

The Company has entered into non-cancelable service contracts related to SaaS licenses which expire in the years ended December 31, 2014 and 2015. As of June 30, 2014, future payments under these contractual obligations were as follows:

 

---

 

 

 

Legal Matters

The Company has no known legal issues pending.

Note 9: Debt

On September 16, 2011, a $100,000 CDN note was executed with Brad Holland, a 2.67% shareholder.  The note is structured to incur a balloon payment of the principal and 4% APR non-compounding accrued interest on its maturity date of September 16, 2014.  As of June 30, 2014, principal and accrued interest was $100,000 and $10,000, respectively.

On September 7, 2011, a $50,000 USD note was executed with McLellan Investment Corporation, an unrelated party.  The note is structured to incur a balloon payment of the principal and 4% APR non-compounding accrued interest on its maturity date of September 7, 2014.  As of June 30, 2014, principal and accrued interest was $50,000 and $5,500, respectively.

 

Note 10: Interest Expense

Interest expense consists of interest on the Company's debt, short-term promissory note, and credit card balances.  Interest expense was $3,301 and $6,392 for the three months and six months ended June 30, 2014, respectively. Interest expense was $3,123 and $6,196 for the three months and six months ended June 30, 2013, respectively.

Note 11: Advertising Expenses

Advertising is expensed as incurred. Advertising expense incurred during the three and six months ended June 30, 2014 was $6,846 and $10,559, respectively. Advertising expense incurred during the three and six months ended June 30, 2013 was $514 and $5,524, respectively.

 

Note 12: Income Taxes

Income taxes are summarized as follows for the six months ended June 30, 2014:

 

 

A full valuation allowance has been established for deferred tax assets based on a "more likely than not" threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carry forward periods provided in the tax law. While the Company's statutory tax rate is 35%, its effective tax rate is 0% due to the effects of the valuation allowance described above. The Company does not have any material uncertainties with respect to its provisions for income taxes.

Note 13: Net Income per Share

Net income per share was computed by dividing the net income by the weighted average number of common shares outstanding during the period.  The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding.  For the three and six months ended June 30, 2014 and 2013, the assumed exercise of share options are anti-dilutive due to the Company's net income and are excluded from the determination of net income per share -basic and diluted.  Accordingly, net income per share basic and diluted is equal in all periods presented.

 

 

 

The computations for basic and diluted net income per share are as follows:

Note 14: Related Party Transactions

The Company has a related party transaction involving a significant shareholder. The nature and details of the transaction are described in Note 9. The Company also has two related party transactions with its President. The nature, description and details of the transaction are described in Note 5.

IREMCO, a controlling shareholder, provides the company with office space on a month-to-month basis at no charge under a verbal agreement. The office space was vacant and not in use by IREMCO. This space provides the company with office space in Canada and will be eliminated if IREMCO has a need for the space.

Note 15: Going Concern

The accompanying financial statements and notes have been prepared assuming that the Company will continue as a going concern.

For the six months ended June 30, 2014, the Company had a net income of $12,271.  In addition, the Company had a net loss of $715,656 for the year ended December 31, 2013. These circumstances result in substantial doubt as to the Company's ability to continue as a going concern.  The Company's ability to continue as a going concern is dependent upon the Company's ability to continue to generate sufficient revenues to operate profitably, or raise additional capital through debt financing and/or through sales of common stock.

The failure to achieve the necessary levels of profitability or obtain the additional funding would be detrimental to the Company.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

---

 

 

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

 

Cautionary Statement

This Management's Discussion and Analysis includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: "believe," "expect," "plan," "estimate," "anticipate," "intend," "project," "will," "predicts," "seeks," "say," "would," "could," "potential," "continue," "ongoing," "should" and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this Form 10-Q. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from our predictions. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

 

Overview

We are a customer experience management solutions company providing Touchpoint Mapping^(R), an on-demand ("cloud based") suite of customer experience software and related services designed to help organizations improve customer experiences, increase customer loyalty, reduce costs and increase revenue.

We believe that delivering better customer experiences is a powerful, sustainable way for any organization to differentiate from their competition.  We are engaged in the business of developing and delivering technology-enabled products and services that help large, medium and small organizations to do this by improving their customer experience management capabilities.

Our product, Touchpoint Mapping^(R) On-Demand, is a research-based software solution designed to be a comprehensive customer experience solution for customer-centric organizations to measure and gather customer data across all their touchpoints, channels and interactions with their customers. It enables an organization's personnel to leverage a common application to see where and how to improve brand and customer loyalty, and their customers' experiences across multiple channels and touchpoints, including web, sales, marketing, contact center, social, mobile, physical locations and others.

Development is ongoing, as Touchpoint Mapping^(R) On-Demand is refined and improved based on customer feedback, and as it is customized for specific organizations and industry sectors. The services delivered with Touchpoint Mapping^(R) On-Demand may include consulting and additional research services, as well as services such as assessment, integration, implementation and additional offline analysis and reporting of data. Customer experience consulting services are offered primarily through our consulting services group, MCorp, which is a dba of the Company.

Although we began sales and marketing activities for Touchpoint Mapping^(R) On-Demand in Q4 2012, we did not offer it to a broader market until 2013. We cannot predict the timing, nor probability, of generating material sales revenue from the product as we continue to build our sales and marketing team to identify, develop, and close sales opportunities.  As of this filing, we have yet to engage the necessary sales and marketing staff to develop and execute material product sales opportunities, and currently lack sufficient resources to market and sell our products in the manner which we believe is required to achieve our product sales and revenue growth objectives.

 

 

Sources of Revenue

Our revenue consisted primarily of professional and software-enabled consulting services, product sales and other revenues in the six months ended June 30, 2014 and 2013. Consulting services include customer experience management consulting in the areas of strategy development, planning, education, training and program design, and includes the articulation of customer-centric strategies and implementation roadmaps in support of these strategies. Product revenue is from productized and software-enabled service sales not elsewhere classified, while other revenue includes reimbursement of related travel costs and out-of-pocket expenses.

While our plan of operations is based on migrating the majority of our service revenue from these categories to recurring SaaS subscription fees, we anticipate that fees for professional and software-enabled consulting services will remain a significant revenue source in the near future. As of June 30, 2014, we have successfully delivered certain features and functionality of our software product, Touchpoint Mapping^(R) On-Demand, to several clients. However, we have not obtained material stand-alone sales commitments for Touchpoint Mapping^(R) On-Demand, and do not anticipate being able to do so until we engage the necessary sales and marketing staff to develop and execute product sales opportunities.

Should we successfully obtain material sales commitments for Touchpoint Mapping^(R) On-Demand, we anticipate that subscription agreements and related professional services associated with delivering our software solutions will become a source of significant revenue. Subscriptions and associated professional services pricing are be based upon our gross margin objectives, growth strategies and the specific needs of our clients' organizations, measured primarily by the following metrics: breadth of insights sought, number of employees, number of customers and customer segments, frequency of insights gathered, and other variables.

Subscription agreements for our software solutions are offered as monthly term agreements which contain a minimum commitment period of at least 12 months, and which include related setup, upgrades, hosting and support. Professional services include consulting fees related to implementation, customization, configuration, training and other value added services.

Based on data gathered during the implementation stage of on-demand software and software-enabled services engagements, we believe that the average time it will take our clients from placing an order to live deployment of our products is between 30 and 45 days. We typically invoice clients upon inception of subscription agreements for setup and total subscription fees contracted over the term of the agreements, with payment due within 30 days. Professional services related to the subscription agreements are invoiced at the inception of the professional services agreement at one-third or fifty percent of total fees, with the balance of payments due over the duration of the contract as project milestones are met. Amounts invoiced are recorded in accounts receivable and deferred revenue or revenue, depending on whether revenue recognition criteria have been met.

Cost of Revenue and Operating Expenses

Our costs of revenue and operating expenses are detailed at the sub-category level in our Income Statements. And while the financial results for these categories are further explained in the Results of Operations section below, a general description of these categories follows:

Cost of Goods Sold

Cost of goods sold consists primarily of expenses directly related to providing professional and consulting services. Those expenses include contract labor, third-party services, and materials and travel expenses related to providing professional services to our clients.

As certain features of Touchpoint Mapping^(R) On-Demand were made available for general release in 2013, costs of goods also included product-related hosting and monitoring costs, licenses for products embedded in the application, amortization of capitalized software development costs, related sales commissions, service support, account management and subscriptions, as applicable.

 

 

 

Should our client base grow, we intend to continue to invest additional resources in our hosting, technical support and professional services capabilities, as well as our utilization of third-party licensed software. We expect our professional services costs to increase in absolute dollars as we increase our overall revenue, but expect that professional services as a percentage of total revenue will decrease as we continue to shift  our business towards sales of on-demand software solutions and software-enabled services. Because cost as a percentage of revenue is higher for professional services revenue than for software product sales revenue, a decrease in professional services as a percentage of total revenue will likely increase gross profit as a percentage of total revenue.

 

General and Administrative Expenses

General and administrative expenses consist primarily of salary and related expenses for management, client delivery, finance and accounting, and sales personnel. Expenses also include contract services, marketing and promotion, professional fees, software license fee expenses, administrative costs, insurance, rent and a portion of travel expenses and other overhead.

Sales and marketing expenses are currently reflected in salaries and wages, contract labor, marketing and promotion, and other related overhead expense categories. While we have not yet recognized material commissionable sales, we plan to expense sales commissions through cost of goods sold. Since we will be recognizing revenue over the terms of the subscriptions or professional services engagements, we expect to experience a delay between increases in selling and marketing expenses and the recognition of revenue. We expect to continue to incur significant sales and marketing expenses in both absolute dollars and as a percentage of expenses as we hire sales and additional marketing personnel and increase the level of marketing activities.

We expect that total general and administrative expenses will increase as we continue to add personnel in connection with the growth of our business. In addition to increases in sales and marketing and research and development expenses, we anticipate we will also incur additional employee salaries and related expenses, professional service fees and insurance costs related to the growth of our business and operations to meet the requirements of a public company.

 

Results of Operations

Revenues increased for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013, due to increased sales of our consulting and software-enabled services, including delivery of Touchpoint Mapping^(R) On-Demand.

 

 

 

Cost of goods sold decreased for the three months ended June 30, 2014 as compared to the same period in 2013 based on the following:

·	A decrease of approximately $45,500 in direct labor costs primarily due to the shift from the use of contract labor to full-time employees in delivering professional services.

·	An increase of approximately $27,900 in travel expenses resulting from an increase in consulting engagements requiring client site visits.

·	A decrease of approximately $5,800 in non-reimbursable expenses as we began to include these costs in contractual arrangements with professional consulting engagements.

·

Cost of goods sold as a percent of sales decreased from 28% to 21% in part as a result of an increased reliance on full time employees to deliver consulting engagements during the three months ended June 30, 2014.  In the comparative period in 2013, consulting contract labor was a more material component of cost of goods sold.

  Cost of goods sold decreased for the six months ended June 30, 2014 as compared to the same period in 2013 based on the following:

·	A decrease of approximately $88,300 in direct labor costs primarily due to the shift from the use of contract labor to full-time employees in delivering professional services.

·	An increase of approximately $31,400 primarily due to amortization of software development costs, product-related hosting and monitoring costs, and licenses for products embedded in Touchpoint Mapping(R) On-Demand, sales of which began in the second quarter of 2013.

·	An increase of approximately $52,300 in travel expenses resulting from an increase in consulting engagements requiring client site visits.

·	A decrease of approximately $14,600 in non-reimbursable expenses as we began to include these costs in contractual arrangements with professional consulting engagements.

·	Cost of goods sold as a percent of sales decreased in part due to a large increase in billed accounts receivable.  In the comparative period in 2013, consulting contract labor was a more material component of cost of goods sold.

Salaries and wages increased for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 due to the addition of research, consulting services and sales staff in accordance with our strategic plan.  These increases also resulted from discontinuing the capitalization of certain employee payroll costs in Q1 2014 which were capitalized during Q1 2013.

Contract services expenses remained approximately static and increased for the three and six months ended June 30, 2014 as compared to the same periods in 2013, respectively due to an increase in investor relations-related expenses.

 

 

General and administrative costs remained consistent for the three months ended June 30, 2014 as compared to the same period in 2013.

General and administrative costs increased for the six months ended June 30, 2014 as compared to the same period in 2013, based on the following:

·	An increase of approximately $44,500 in marketing expenses.

·	An increase of approximately $900 in other costs including fees related to SEC and SEDAR filings, professional memberships and contact data list licensing.

·	An increase of approximately $9,000 due to travel and entertainment expenses related to marketing, business development and quarterly management planning meetings.

·	An increase of approximately $10,400 in software license expenses related to accounting, project management, and other productivity software.

·	An increase of approximately $5,400 in other miscellaneous charges.

·	A decrease of approximately $45,100 in professional fees primarily resulting from the non-renewal of a services agreement with a market research provider Q1 2014.

 

Other income (expense) was unchanged for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. Other income (expense) increased for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due to the write off of leasehold improvements with a net book value of approximately $63,000 in Q1 2013, which were written off as the lease term of the subject property had been terminated.

 

  Net income increased by 191% for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, from ($139,851) to $126,694, and by 104% for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, from ($295,618) to $12,271. These changes resulted from an increase in products and services sales, as well as a reduction in costs of goods sold for the three and 6 months ended June 30, 2014 as compared to the same periods in 2013.

Liquidity and Capital Resources

We measure our liquidity in a variety of ways, including the following:

 

 

During the six months ended June 30, 2014, we were able to finance our operations, including capital expenditures for infrastructure, product development, sales and marketing through operating activities and proceeds from private placement offerings.

For the year ended December 31, 2013, we were able to finance our operations, including capital expenditures for infrastructure, product development, sales and marketing activities through operating activities, private sales of common stock, and cash on hand.   On July 2, 2013 the Company completed a private placement of 2,948,856 restricted shares of common stock.  Gross proceeds from that private placement totaled $1,032,100.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  As reflected in the consolidated financial statements included in this report, we had a net income of $12,271 for the six months ended June 30, 2014, and a net loss of $715,656 for the year ended December 31, 2013.  We have had material operating losses and have not yet created consistent positive cash flows.  These factors raise substantial doubt as to our ability to continue as a going concern.  Our ability to continue as a going concern is dependent upon our ability to achieve a level of profitability, and/or raise additional capital through debt financing and/or through sales of common stock.  We cannot provide any assurance that profits from operations will generate sufficient cash flow to meet our working capital needs and service our existing debt, nor that sufficient capital can be raised through debt or equity financing.  The consolidated financial statements do not include adjustments related to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

 

Anticipated Uses of Cash

In 2014, our primary areas of investment are expected to continue to be ongoing product development and supporting sales and marketing activities, including building our sales, marketing and consulting services staffand other related services.  Dependent on product sales, a secondary area of investment may include hiring client support staff to support SaaS product delivery and client relationship management.

We currently plan to fund anticipated expenditures with cash flows generated from ongoing operations during this period. We will consider raising capital through debt financing and/or additional sales of common stock if necessary.

We do not intend to pay dividends in the foreseeable future.

 

Cash Flow

Six Months Ended June 30, 2014 and 2013

Operating Activities. During the six months ended June 30, 2014, we reported negative cash flows from operations of $127,866.  This consisted of our net income of $12,271 adjusted primarily by depreciation and amortization of $36,825, stock compensation expense of $24,284, increases in accounts receivable of $277,091, other assets of $23,835, accounts payable of $2,729, deferred revenue of $92,951 and accrued liabilities of $3,000.

The increase in accounts receivable is a direct result of entering four significant consulting services engagements in Q1 of 2014.  Increases in accounts payable were due to increased spending associated with the marketing and sales of our SaaS product, direct costs incurred in delivering our consulting services, and legal and advisory fees relating to our SEC and SEDAR filings.

Accrued liabilities decreased primarily due to the return of deposits in Q2 of 2014.

 

Days Sales Outstanding (DSO) during the six months ended June 30, 2014 was approximately 65 days, up from approximately 44 days during the six months ended June 30, 2013. The company was engaged in a substantial consulting services project that had been placed on hold during the six months ended June 30, 2014.  Additionally, approximately $173,000 in receivables issued in late June were collected in early July, so we anticipate an improvement in this ratio for the upcoming quarter.

 

Investing Activities. Net cash used in investing activities for the six months ended June 30, 2014 and 2013 amounted to $0 and $34,574, respectively and primarily consisted of capitalized software development costs in Q1 of 2013.

 

Financing Activities. Net cash provided by financing activities for the six months ended June 30, 2014 and June 30, 2013 amounted to $0 and $1,057,100, respectively, and resulted from a non-convertible promissory note entered into with Michael Hinshaw, President in Q1 of 2013 and proceeds from the private placement of common stock of $1,032,100 that closed on July 2, 2013.

 

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of June 30, 2014.

Contractual Obligations

We lease two facilities in northern California from Four Kays, under operating leases both expected to expire in 2016. We do not have any debt capital lease obligations. We have four purchase obligations primarily representing non-cancelable contractual obligations related to SaaS licenses.  As of June 30, 2014,  the following table summarizes our contractual obligation under the foregoing leases and SaaS license agreements, and the effect such obligations are  expected to have on our liquidity and cash flow in future periods:

(a)	The operating lease obligations presented reflect future minimum lease payments due under the non-cancelable portions of our operating lease.

(b)	Purchase obligations primarily represent non-cancelable contractual obligations related to SaaS licenses.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

    Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of  June 30, 2014, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

 

    

PART II. OTHER INFORMATION

 

    We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

---

 

---

 

---

 

---

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report has been signed on its behalf by the undersigned, thereunto duly authorized on this 31st day of July, 2014.

---

 

EXHIBIT INDEX

---

 

---

 

---