MCX Technologies Corp - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number:   000-54918

MCORPCX, 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 registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.   YES ☑     NO ☐

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 ☑     NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,426,158 as of August 9, 2018.  

MCORPCX, Inc.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS.

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

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

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

MCORPCX, INC.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2018

(unaudited)

Note 11: Related-Party Transactions

During the three months ended June 30, 2018, a company controlled by the Company’s Chief Executive Officer purchased from the Company an internet domain name that was obsolete and not being used in the business nor needed for the go-forward business for $2,000 that is included in other income (expense) on the statements 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,” “may,” “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.

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

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions and estimates associated with revenue recognition, income taxes, stock-based compensation, research and development costs and impairment of long-lived assets have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

A description of the Company’s critical accounting policies and related judgments and estimates that affect the preparation of the Company’s financial statements is set forth in under the heading “Critical Accounting Policies and Estimates” in Item 7, Management’s Discussion and Analysis of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. With the exception of the adoption of Topic 606 discussed in Note 3, such policies were unchanged during the six months ended June 30, 2018.

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 themselves from their competition. As such, we 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 primary source of revenue is derived from our consulting services which 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.

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.

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.

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.

Although management still believes that our ability to achieve long-term profitability will stem in large part from our ability to successfully commercialize our software products, we feel that in the short-term, expanding our consulting business will lead to greater revenues for the Company, which could be utilized for future product development. We intend to continue to evaluate our software products to determine the next phase of new product development and potential enhancements to our existing product suite.

The Company is in the process of determining the optimal path forward for our software products based on current market dynamics, the competitive environment and customer feedback. We continue to evaluate various potential strategies with the goal of improving our ability to achieve additional revenue and profit growth for both our software products as well as our consultant services. These possible strategies, which are generally focused on ways to create a more complete slate of customer experience solutions for our clients, include further software or technology development expenditures, pursuit of merger, acquisitions or joint ventures with companies that provide complimentary products and services, software licensing arrangements, and investment in additional infrastructure within our Company. Each of these possible strategies will be thoroughly vetted by our board of directors to assess the expected level of enterprise value creation for each strategy compared to the various risks associated with each possible scenario.  In addition, we may require financing to pursue these strategies that is beyond our current financial resources.  Accordingly, there is no assurance that we will be able to pursue any strategies that are identified by our board of directors.

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.

Summary of Financial Results

Select financial highlights for the three and six months ended June 30, 2018:

⁽¹⁾ We define EBITDA as the net loss plus interest, tax, depreciation and amortization expenses. We consider EBITDA to be a meaningful supplement to net income (loss) as a performance measure primarily because depreciation and amortization expenses are not actual cash costs, and interest and tax expenses are not related to our direct operating activities. See below for a reconciliation of net income (loss) to EBITDA.

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.

While our plan of operations is based on enhancing our service revenue by cross-selling our products to clients in complement to our consulting services to establish more recurring SaaS subscription fees, we anticipate that fees for professional and consulting services will remain our most significant revenue source in the foreseeable future. We have not obtained material stand-alone sales commitments for Touchpoint Mapping or McorpCX | Persona, 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. During the second half of 2017, we stopped further development of our software in order to re-assess the product roadmap to better define the future direction of our software platform.

Cost of Goods Sold and General and Administrative Expenses

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 sales and marketing. These 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. In addition, the other general and administrative expenses include the professional fees, filing, and registration costs necessary to meet the requirements associated with having to file reports with the United States Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as having our stock listed on the TSX Venture Exchange (the “TSX-V”) in Canada and quoted on the OTCQB venture marketplace in the United States.

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 term 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 seek to increase the level of our sales and marketing activities. We expect that total general and administrative expenses will increase as we continue to add resources in connection with the growth of our business.

Results of Operations

Overall the 133% increase in revenues for three months ended June 30, 2018 compared to the same period in 2017 was attributed to a 145% increase in consulting services revenue and a 72% increase in products and other revenue for the three months ended June 30, 2018 compared to same period in the prior year. The increase in consulting services revenue from $506,304 for the three months ended June 30, 2017 to $1,238,836 for the same period in 2018 was primarily the result of increased revenues from both new clients as well as from existing clients in 2018 compared to 2017, which we believe were mostly the result of our continued marketing efforts related to attracting new clients and from cross-selling different services to our existing clients. The increase in product and other revenue from $96,309 for the three months ended June 30, 2017 to $165,818 for the same period in 2018 was largely attributed to increased recognized revenue for reimbursable travel and miscellaneous expenses plus ancillary services we provided in connection with our consulting services.

Overall the 124% increase in revenue for six months ended June 30, 2018 compared to the same period in 2017 was attributed to a 135% increase in consulting services revenue and a 66% increase in products and other revenue for the six months ended June 30, 2018 compared to same period in the prior year. The increase in consulting services revenue from $764,979 for the six months ended June 30, 2017 to $1,795,072 for the same period in 2018 was primarily the result of increased revenues from both new clients as well as from existing clients in 2018 compared to 2017, which we believe were mostly the result of our continued marketing efforts related to attracting new clients and from cross-selling different services to our existing clients. The increase in product and other revenue from $134,925 for the six months ended June 30, 2017 to $223,436 for the same period in 2018 was largely attributed to increased recognized revenue for reimbursable travel and miscellaneous expenses plus ancillary services we provided in connection with our consulting services.

Cost of goods sold increased by $500,588 and $658,230 for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017 due primarily to increased resources required to support the increase in consulting services revenue provided during the current period. In the six months ended June 30, 2018, our labor costs increased by $533,629 compared to the same period in the prior year mainly as a result of the Company’s need to contract outside services to assist with delivery of our consulting services in 2018. There was also an increase in reimbursable expenses of $110,947 for the six months ended June 30, 2018 compared to the same period in the prior year, which was related to an increase in travel and miscellaneous expenses associated with the delivery of the increased consulting services in 2018.

For the three months ended June 30, 2018 we had a net operating income of $145,177 compared to a net operating loss of $78,650 for the three months June 30, 2017. During 2018, we focused on growing our consulting services operations through increased business development activities which we believe was the primary driver in an 83% increase in gross profit of $301,453 to $663,865 for the three months ended 2018 compared to $362,412 for the same period in the previous year. Similarly, EBITDA improved by $215,780 to a gain of $199,539 for the three months ended June 30, 2018 compared to a loss of $16,241 for the three months ended June 30, 2017.

For the six months ended June 30, 2018 we had a net operating loss of $53,626 compared to a net operating loss of $328,438 for the six months June 30, 2017. During 2018, we focused on growing our consulting services operations through increased business development activities which resulted in an 89% increase in gross profit of $460,374 to $980,304 for the six months ended 2018 compared to $519,930 for the same period in the previous year. Similarly, EBITDA improved by $259,632 to a gain of $49,638 for the six months ended June 30, 2018 compared to a loss of $209,994 for the six months ended June 30, 2017.

We consider EBITDA to be a meaningful supplement to net income (loss) as a performance measure primarily because depreciation and amortization expenses are not an actual cash costs, and interest and tax expenses are not related to our direct operating activities. 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 (if any). 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.

The following table provides a reconciliation of net income (loss) to EBITDA for the periods indicated:

Salaries and wages decreased by $39,122 during the three months ended June 30, 2018 compared to the same period in 2017 mostly as a result of a decrease in stock-based compensation expense of approximately $27,100, which was primarily driven by the Company not granting any options to employees in 2018, combined with a $10,500 reduction in officer salaries and a $1,500 reduction in payroll taxes. From the total officer’s salary costs incurred during the three months ended June 30, 2017, $2,000 was capitalized.

We did not incur any software development costs for the three months ended June 30, 2018 primarily due to the decision to curtail additional software development halfway through 2017.

Salaries and wages decreased by $65,522 during the six months ended June 30, 2018 compared to the same period in 2017 mostly as a result of a decrease in stock-based compensation expense of approximately $72,300, which was primarily driven by the Company not granting any options to employees in 2018, combined with a $20,500 reduction in staff salaries and a $3,900 reduction in payroll taxes, being partially offset by an increase in officers’ salaries of approximately $31,200 during the first half of 2018 compared to the same period in 2017. From the total officer’s salary costs incurred during the six months ended June 30, 2017, $21,000 was capitalized.

We did not incur any software development costs for either the three or six months ended June 30, 2018 primarily due to the decision to curtail additional software development halfway through 2017.

Contract services expenses increased during the three and six months ended June 30, 2018 compared to the same period in 2017 primarily due to increases in accounting and administrative costs and related to the expenses associated with the additional personnel required to support a higher level of consulting projects during the current quarter and first half of 2018.

Other general and administrative costs increased for the three months ended June 30, 2018 compared to the same period in 2017 primarily due to an increase in sales and marketing expenses of $42,300 as well as an increase in professional and legal fees of $52,000 mostly due to increased accounting fees associated with additional work related to the adoption of new accounting standard ASC 606 in January 2018 and an increase in legal fees and other professional fees related to business development and corporate governance activities during the current quarter compared to the same period in 2017.

Other general and administrative costs increased for the six months ended June 30, 2018 compared to the same period in 2017 primarily due to an increase in sales and marketing expenses of $84,000 as well as an increase in professional fees and legal fees of $102,000 mostly due to increased accounting fees associated with additional work related to the adoption of new accounting standard ASC 606 in January 2018 and the timing of incurring accounting fees, an increase in legal fees and other professional fees related to business development and corporate governance activities during the current period compared to the same period in 2017. These increases were partially offset by an $18,500 decrease in expenses related to administration and rent in the first half of 2018 compared to the same period in 2017.

Other income/(expense) decreased for the three and six months ended June 30, 2018 when compared to the corresponding periods in 2017 primarily due to an increase in state use tax expenses.

Liquidity and Capital Resources

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

Anticipated Uses of Cash

For the six months ended June 30, 2018 and the year ended December 31, 2017, we were able to finance our operations, including capital expenditures for 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 GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

In 2017 and the first half of 2018, our primary area of investment was professional staff to support our consulting services and manage our SaaS product business, including client relationship management, product development, staff sales and marketing activities.

We currently anticipate that our uses of cash for the remainder of 2018 will mirror the primary uses of cash during the first half of 2018, which included cash paid to professional staff to support our consulting services, professional services and SaaS product delivery business along with our general and administrative support and new business development activities.

We currently plan to fund our expenditures with cash flows generated from ongoing operations and/or if needed, the possibility may exist to raise additional capital through debt financing and/or through sales of common stock. We do not intend to pay dividends in the foreseeable future. Based upon the current level of our pipeline of signed contracts and pipeline of potential new projects plus our current expectations for future periods in light of the current economic environment, we believe that cash flow from operations and available cash will be adequate to finance the capital requirements for our business during the next 12 months.

We continue to seek ways to expand upon our business and as such, in the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources may be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities, and there is no assurance these capital resources will be available to us when required.

Cash Flow – Six Months Ended June 30, 2018 and 2017

Operating Activities. Net cash used in operating activities increased to $265,142 for the six months ended June 30, 2018 compared to $55,767 for the six months ended June 30, 2017, mostly as a result of increased cash from a reduction in net operating loss of $276,400 combined with a $42,190 increase in accounts payable during the current period compared to the same period of 2017, being more than offset by a $309,398 increase in accounts receivable, a reduction of the non-cash stock compensation expenses, and  cash used in connection with decreased deferred revenue in the first half of 2018 compared to the first half of 2017.

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, increased in 2018 compared to the same period of the prior year. During the six months ended June 30, 2018, DSO was approximately 60 days, up from approximately 23 days during the six months ended June 30, 2017. The increase in DSO was caused by the increase in accounts receivable balance at June 30, 2018 compared to June 30, 2017, which was driven by the 133% and 124% increase in revenue during the three and six months ended June 30, 2018, respectively. 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. There was $4,474 net cash used in investing activities for the six months ended June 30, 2018 compared to $94,156 in net cash used in investing activities for the same period in 2017. 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. Net cash used in financing activities for the six months ended June 30, 2018 amounted to $8,169 which related to the repayment of a $100,000 CAD note during the period. There was no cash provided by, or used in, financing activities for the six months ended June 30, 2017.  

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2018.

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.

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, as a result of the material weaknesses identified in connection with our financial statements as of December 31, 2017, as disclosed on our Form 10-K annual report for the year ended December 31, 2017.

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. However, in order to address the deficiencies in the Company’s internal control over financial reporting, the Company engaged an external firm in the first quarter of 2018 to provide outsourced controller services. This external firm is currently in the process of documenting our internal control process and is expected to provide guidance to assist the Company in developing sufficient segregation of duties within our accounting functions in order to remediate the identified deficiencies.

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.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Annual Report”), which could materially affect our business, results of operations or financial condition.

The risk factors affecting the Company have not materially changed as of June 30, 2018 from those disclosed in the 2017 Annual Report. However, it is important to note that the risks described in our 2017 Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, results of operations or financial condition.

Recent Sales of Unregistered Securities

There were no unregistered sales of our equity securities during the six-month period ended on June 30, 2018.

Purchases of Equity Securities

During the six months ended June 30, 2018, 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 10th day of August 2018.

EXHIBIT INDEX

*Furnished, not filed

Notes to Exhibits List:

21