MCX Technologies Corp - Quarter Report: 2017 September (Form 10-Q)

PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS.

McorpCX, Inc.

Balance Sheets

The accompanying notes are an integral part of these unaudited financial statements.

McorpCX, Inc.

Statements of Operations

(unaudited) 

The accompanying notes are an integral part of these unaudited financial statements.

McorpCX, Inc.

Statements of Cash Flows

(unaudited)

The accompanying notes are an integral part of these unaudited financial statements.

MCORPCX, INC.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(unaudited)

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," "may," "would," "could," "potential," "continue," "ongoing," "should" and similar expressions, or words which, by their nature, refer to future events. Although we believe that our expectations as reflected in forward-looking statements are reasonable, we cannot assure readers that those expectations will prove to be correct. 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. Other than as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.

Unless the context otherwise requires, all references to "McorpCX," "we," "us," "our" or the "Company" are to McorpCX, Inc. and our subsidiaries.

Overview

We are a customer experience (CX) management solutions company dedicated to helping 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, and are engaged in the business of developing and delivering technology-enabled products and professional services that are designed to help corporations improve their customer listening and customer experience management capabilities with the goal of helping them design and deliver better experiences for their customers.

Our products include on-demand “cloud based” customer experience management software such as Touchpoint Mapping® On-Demand (also marketed as McorpCX | Insights), referred to as “Touchpoint Mapping”, and McorpCX | Persona.

Touchpoint Mapping is a research-based online Software-as-a-Service (“SaaS”) solution designed to provide insights to organizations that can help them improve customer and employee experience, brand, and loyalty. It is designed to be a solution for customer-centric organizations to measure and gather customer data across all their touchpoints, channels and interactions with their customers. Data is analyzed and can be displayed across multiple axes including customer segments, location, time and many other variables of interest to personnel within an organization.

McorpCX | Persona, another online SaaS solution, is designed for developing and managing customer persona, as well as automating the currently manual process of developing, managing and sharing persona across corporations. It is designed to help customer-centric businesses and the agencies and consultancies that serve them to better understand, connect with and serve their customers.

Our professional and related services are intended to help primarily large and medium sized organizations plan, design and deliver better customer experiences in order to maximize their return on investment, improve efficiency, and increase the adoption of our products and services. Our services offered include a range of customer experience management consulting services in the areas of research, strategy development, planning, education, training and best practices, as well as providing customer-centric strategies and implementation roadmaps in support of these strategies.

There are many potential unforeseen and significant market and competitive risks associated our current products and services. Though we released the first version of Touchpoint Mapping in 2013, and we released the first version of McorpCX | Persona in 2016, neither product has generated significant sales revenue to date, and we cannot predict the timing or probability of generating material sales revenue from either of them.

As of the date of this report, we have yet to engage the necessary sales and marketing staff or the capabilities required to identify, develop, and close 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. It is our expectation that numerous unforeseen challenges will be encountered as we continue to develop, market, distribute and sell our products and services.

We cannot assure you that we will be able to compete successfully against current or potential competitors, or that competition will not have a material adverse effect on our business, financial condition and operations. 

Sources of Revenue

Our revenue consists primarily of professional and consulting services, as well as software-enabled product sales and other revenues. 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.

Cost of Revenue and Operating Expenses

Our costs of revenue and operating expenses are detailed at the sub-category level in our Statements of Operations. 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 has historically consisted 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. Costs of goods also includes 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 and subscription management, as applicable.  

General and Administrative Expenses

General and administrative expenses consist primarily of salary and related expenses for management, client delivery, finance and accounting, and marketing personnel. Expenses also include contract services, as well as marketing and promotion costs, professional fees, software license fee expenses, administrative costs, insurance, rent and a portion of travel expenses and other overhead, which are categorized as “other general and administrative expenses” in our financial statements.

Sales and marketing expenses are currently reflected in salaries and wages, commissions, contract labor, sales, marketing and promotion, and other related overhead expense categories. Since we currently recognize 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.

Results of Operations

Revenues increased for the three months ended September 30, 2017 compared to the same period in the prior year primarily due to increased revenues from consulting services while software products and software related services remained flat period over period.

Revenues increased for the nine months ended September 30, 2017 compared to the same period in the prior year primarily due to increased revenues from consulting services of $230,196. Revenues also increased from our software products and software related services in the first nine months of 2017 compared to the same period in 2016 by $42,834.

The growth in revenue during the first nine months of 2017 compared to the same period in 2016 was mainly a result of management’s re-focus on business development and revenue generating efforts primarily related to consulting services.

Cost of goods sold increased by $128,595 and $297,708 for the three and nine months ended September 30, 2017, respectively, when compared to the same periods in 2016 due primarily to an increase of $70,455 and $168,485 in professional fee costs during the third quarter and first nine months of 2017, respectively. This increase corresponds with the increase in revenues from consulting services and is primarily due to the Company’s need to contract outside services to assist with delivery of our consulting services. There was also an increase in reimbursable expenses of $49,275 and $82,396 for the three and nine months ended September 30, 2017, respectively, in line with increases in consulting services revenue. The remaining increase was primarily due to an increase in software amortization mainly due to amortization of the increased capitalized expenses related to updates and enhancements to our current software. We recorded $142,277 in capitalized expenses related to software amortization for the nine months ended September 30, 2017, compared to $66,751 in expenses related to software amortization for the nine months ended September 30, 2016.

Salaries and wages decreased for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016 mostly as a result of a decrease of $59,691 in employee wages and other employee expenses primarily as a result of fewer employees combined with a decrease in stock based compensation expense of $45,882. These decreases were partially offset by a $88,600 decrease in the amount of software development salaries and wages that were capitalized during the third quarter of 2017.

Software development costs decreased for the three months ended September 30, 2017 compared to 2016 primarily due to product development nearing completion. There were no capitalized expenses for the three months ended September 30, 2017 compared to the capitalization of a certain portion of salaries and wages totaled $88,600 for three months ended September 30, 2016. In addition, the aggregate cost for independent software designers, developers, programmers and project management professionals was $0 and $119,829 for three months ended September 30, 2017 and 2016, respectively.

Salaries and wages decreased slightly for the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016 mostly as a result of a decrease of $144,607 in officer salaries, employee wages, and other employee expenses in 2017 primarily due to fewer employees. There was also a decrease in stock based compensation expense of $107,184 during the first nine months of 2017 compared to the same period last year. These decreases were partially offset by a $171,358 decrease in the amount of software development salaries and wages that were capitalized during the current period.

Software development costs decreased for the nine months ended September 30, 2017 compared to 2016 primarily due to product development nearing completion. Capitalization of a certain portion of salaries and wages totaled $21,175 and $192,533 for nine months ended September 30, 2017 and 2016, respectively. The aggregate cost for independent software designers, developers, programmers and project management professionals was $72,628 and $184,345 for nine months ended September 30, 2017 and 2016, respectively.

Contract services expenses decreased for the three and nine months ended September 30, 2017 compared to the same period in 2016 primarily due to decreases in corporate and investor relations, business development, product development, and marketing expenses in 2017.

Other general and administrative costs decreased for the three months ended September 30, 2017 compared to the same period in 2016 primarily due to $28,847 in professional fees incurred in the prior year associated with our listing on the TSX-V exchange and the closing of our private placement in February 2016 as well as decreased aggregate expenses of $69,222 across all of the following categories during the current third quarter: administrative expenses, computers and software, rent, and dues and subscriptions. These decreases were partially offset by an increase of $17,630 in sales, marketing and promotion. 

Other general and administrative costs decreased by $388,105 for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 primarily due to a decrease of $191,340 in professional fees associated with our listing on the TSX-V exchange and the closing of our private placement in February 2016, and a decrease of $173,508 in sales, marketing, and promotion expenses, and administration costs. There was also decreased aggregate expenses of $48,313 across all of the following categories during the current period: computers and software, travel and meals, and dues and subscriptions. These decreases were partially offset by an increase of $25,056 in insurance costs associated with the Company’s first director and officer insurance policy that began in August 2016 as well as increases in rent costs for the Company’s corporate headquarters.

Other expenses fluctuated for the three and nine months ended September 30, 2017 when compared to the corresponding periods in 2016 primarily due to the net effect of fluctuating unrealized gains and losses associated with the revaluation of a promissory note from Canadian dollars to United States dollars.

Liquidity and Capital Resources

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

As of September 30, 2017, our cash and cash equivalents and working capital had decreased to $1,683,647 and $1,583,805, respectively, from $1,925,744 and $1,764,629 as at December 31, 2016, respectively.

For the nine months ended September 30, 2017 and the year ended December 31, 2016, we were able to finance our operations, including capital expenditures for infrastructure, product development and marketing activities with cash generated through operating activities, and cash on hand.  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 financial statements included in this report, for the nine months ended September 30, 2017 we had a net loss of $341,881 and a net loss of $1,158,854 for the year ended December 31, 2016. In the year over year comparison, we have focused our efforts on consulting services business development combined with cost containment to reduce our level of net losses in the quarter and year to date ended September 30, 2017 compared to 2016 by $93,719 and $520,371, respectively. Further, EBITDA increased by $588,331 to ($164,032) for the nine months ended September 30, 2017 compared to ($752,363) for the nine months ended September 30, 2016. EBITDA increased by $106,226 to $45,962 for the three months ended September 30, 2017 compared to ($60,264) for the three months ended September 30, 2016.

We consider EBITDA to be a meaningful supplement to net income (loss) as a performance measure primarily because depreciation expense is not an actual cash costs, and interest and tax expenses are not related to our operations. In addition, we believe EBITDA is commonly used by investors and other interested parties to evaluate our financial performance. EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs. EBITDA should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, or as an alternative to net cash from operating activities as a measure of liquidity. EBITDA is an internal measure and therefore may not be comparable to other companies. EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; and (iii) the interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt. Because of these limitations, EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. Because all companies do not calculate EBITDA in the same manner, EBITDA as calculated by us may differ from EBITDA as calculated by other companies. We compensate for these limitations by using EBITDA as a supplemental measure of our performance and by relying primarily on our GAAP financial statements.

Our material losses from operations raise substantial doubt as to our ability to continue as a going concern. During this year we have taken steps to improve our core consulting services revenue and contain costs in order to reduce our net operating losses. We believe that our increased revenues and improved net losses in 2017 coupled with our cash balance of $1,683,647 as at September 30, 2017 and our belief that sufficient funding will be available from private placements of equity securities or additional borrowings if needed will enable us to meet our liquidity needs over the next 12 months. Notwithstanding the foregoing, our longer term ability to continue as a going concern is entirely dependent upon our ability to achieve a level of profitability, and/or to raise additional capital through debt financing and/or through sales of common stock. We cannot provide any assurance that profits from operations, if any, 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 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 2016 and the first nine months of 2017, our primary areas of investment were professional staff to support our professional services and SaaS product delivery business, including client relationship management, and product development staff as well as investments in sales and marketing activities, such as sales and marketing staff, marketing and sales automation software and other related services.

We currently anticipate that our uses of cash for the remainder of 2017 will mirror the primary uses of cash during the last quarter of 2016, which included cash paid to professional staff to support our professional services and SaaS product delivery business.

Cash Flow – Nine Months Ended September 30, 2017 and 2016

Operating Activities. Net cash used in operating activities decreased to $147,941 for the nine months ended September 30, 2017 compared to $582,459 for the nine months ended September 30, 2016. This decrease in cash used by operating activities was attributable primarily to a $520,371 decrease in net losses in the nine months ended September 30, 2017 compared to the same period in 2016 partially offset by changes in net working capital.

Days Sales Outstanding (“DSO”), which the Company defines as the average number of days it takes to collect revenue once a sale has been made, decreased in 2017 compared to the same period of the prior year. During the nine months ended September 30, 2017, DSO was approximately 31 days compared to 33 days during the nine months ended September 30, 2016. DSO can fluctuate due to the timing and nature of contracts that lead to up-front billings related to deferred revenue on services not yet performed.

Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2017 decreased to $94,156 compared to $417,096 in net cash used in investing activities for the same period in 2016. Net cash used in investing activities in 2017 primarily consisted of cash used for capitalized software development costs of $93,803 partially offset by proceeds from the sale of equipment.

Financing Activities. There was no cash provided by, or used in, financing activities for the nine months ended September 30, 2017. Net cash provided by financing activities for the nine months ended September 30, 2016 amounted to $2,745,000. Cash provided in 2016 was the result of a completed private placement of our common stock during the first quarter of 2016.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of September 30, 2017.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as such, are not required to provide the associated information under this item.

Disclosure Controls and Procedure

Our management, with the participation of our Chief Executive Officer and Chief 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 Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were not effective.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

We are not involved in any legal actions or claims and to our knowledge no such actions or claims are pending.

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

Recent Sales of Unregistered Securities

There were no unregistered sales of our equity securities during the nine-month period ended on September 30, 2017.

Purchases of Equity Securities

During the nine months ended September 30, 2017, there were no purchases of our common stock made by, or on behalf of, the Company or any "affiliated purchaser," as defined by Rule 10b-18 of the Exchange Act.

None.

Not applicable.

*Furnished, not filed

Notes to Exhibits List:

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 7^th day of November 2017.

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