MCCX MCX Technologies Corporation (CE)

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, 2018. With the exception of the policy adoptions discussed in Note 2, such policies were unchanged during the three months ended March 31, 2019.

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 providing customer experience focused consulting services and where applicable, delivering technology-enabled 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.

We have developed 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. Additionally, as of the date of this report, we have yet to engage the necessary development and client support or sales staff required to identify, develop, and close material product sales opportunities which we believe is required to achieve our product sales and revenue growth objectives, and we believe that our current software capabilities are more limited in scope than our desired final software platform and as such, we will require significant further software development expenditures, which at this time the Company is not prepared to make. Consequently, in 2018 we suspended actively selling Touchpoint Mapping and McorpCX | Persona until we more fully assess the roadmap to make these products more marketable to clients. As a result, revenues from our consulting services provided to our clients represented a majority of our revenue in 2018 and the three months ended March 31, 2019, and management believes that consulting services will remain our most significant revenue source for the foreseeable future.

Although management still believes that offering technology enabled consulting services can provide long-term profitability and we intend to continue to explore ways to successfully commercialize our software products, in both the short-term and mid-tem, we are focused on expanding our consulting business which we believe may lead to greater revenues for the Company and which could be utilized for cross sale of technology products to our consulting clients. 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 or to identify other software products that may be more conducive to supporting our CX consulting expertise.

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 months ended March 31, 2019:

⁽¹⁾ We define EBITDA as net income (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 expense.

The consulting services are contracted under master terms and conditions with statements of work (“SOW”) defined for each project. A typical consulting SOW will span a period of 60-180 days and will usually be billed to the client based on certain milestones being achieved throughout the SOW. The Company recognizes revenue based upon a percentage of completion of each SOW during each project. In addition, we typically incur travel other miscellaneous expenses during work on each SOW which we bill to our clients for reimbursement. The travel and miscellaneous expenses are recognized in revenue on a percentage of work complete basis.

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® On-Demand or McorpCX | Persona, and do not anticipate being able to do so until we engage the necessary development, product support to sales and marketing staff to further develop the software 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.

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

When we were actively selling the products, we found that the implementation stage of on-demand software and software-enabled services engagements had an average time it took our clients from placing an order to live deployment of our products was between 30 and 45 days. We typically invoiced 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. We then recognized the subscription fee revenue straight-line over the life of the agreement with any associated professional services or separate set-up fee revenue recognized on a percent of project completion basis.

Professional services related to the subscription agreements are invoiced at the inception of the professional services agreement at a negotiated percentage of total fees, often but not exclusively one-third or one-half of the total estimated professional services 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 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, but is not limited to, product-related hosting and monitoring costs, the cost of licenses for products embedded in the application, amortization of capitalized software development costs, service support costs, and costs related to account and subscription management, 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.

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 consolidated 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 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as having our stock listed on the TSX Venture Exchange 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 consulting and professional services engagements or any software subscriptions, 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.

Overall, the 65% increase in revenue was attributed to a 74% increase in consulting services revenue for the three months ended March 31, 2019 compared to the same period in 2018. The increase in consulting services revenue from $556,236 in the first quarter of 2018 to $965,913 for the three months ended March 31, 2019 was primarily the result of increased revenues from both new clients as well as from existing clients.  We continued in the first quarter of 2019 to focus on sales and marketing efforts for consulting services which we believe allowed us to attract new clients and cross-sell add-on services to our existing clients during that quarter. The increase in consulting services revenue was partially offset by a 23% decrease in product and other revenue for the three months ended March 31, 2019 compared to the same period in 2018. The decrease in product and other revenue from $57,618 to $44,415 for the three months ended March 31, 2018 and 2019, respectively, was primarily the result of our suspension of each of Touchpoint Mapping and McorpCX | Persona in 2018 combined with a decrease in reimbursable expense income during the current quarter compared to the same quarter of 2018 mostly resulting from less travel required to execute the projects during the current quarter compared to the same quarter in 2018.

Cost of goods sold increased by $90,985 for the three months ended March 31, 2019, compared to the same period in 2018 due primarily to increased resources required to support the increase in consulting services revenue provided during the current three month period. In the three months ended March 31, 2019, our labor costs increased by $56,713 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 2019. There was also an increase in non-reimbursable expenses of $28,205 for the three month period ended March 31, 2019 compared to the same periods in the prior year, which was mostly related to an increase in project expenses associated with the delivery of one large client project.  The remaining increase was due to increases in other expenses to support higher level of revenue.

For the three months ended March 31, 2019 we had net operating income of $10,508 compared to a net operating loss of $198,803 for the three months ended March 31, 2018. The net operating income in the current quarter was primarily a result of increased total revenues partially offset by increased labor costs and increased salaries and wages when compared to the same period in 2018. During the current quarter we focused on growing our consulting services operations through increased business development activities which we believe resulted in a 97% increase in gross profit for the three months ended March 31, 2019 compared to the same period in 2018. EBITDA increased by $206,058 to a gain of $56,157 for the three months ended March 31, 2019 compared to a loss of $149,901 for the three months ended March 31, 2018.

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

Salaries and wages increased by $74,751 during the three months ended March 31, 2019 compared to the same period in 2018 mostly as a result of an increase in commissions of $54,536, combined with increased executive salaries that mostly resulted from an increase in the number of executive officers in connection with our corporate restructuring in August 2018.

We did not incur any software development costs for the three months ended March 31, 2019 primarily due to the decision to curtail additional software development halfway through 2017.

Contract services expenses decreased during the three months ended March 31, 2019 compared to the same periods in 2018 primarily due to finance and administration services provided by contractors in the first quarter of 2018, which were not required in the first quarter of 2019.

Other general and administrative costs increased $53,312 during the three months ended March 31, 2019 compared to the same period in 2018 as a result of an increase in sales, marketing and promotion costs of $50,004 compared to same period in the prior year.

Other expense increased for the three months ended March 31, 2019, mostly as a result of increase in state and municipal tax expenses for the year to date period.

Anticipated Uses of Cash

For the three months ended March 31, 2019 and the year ended December 31, 2018, we were able to finance our operations 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 2018, our primary area of investment was professional staff to support our consulting services, including client relationship management, software maintenance costs during the first half of 2018 and staff for administration, sales and marketing activities.

During the three months ended March 31, 2019, our primary uses of cash included cash paid to professional staff to support our consulting services, general and administrative support and new business development activities. We implemented plans at the start of 2019 with the goal of reducing our administrative and operating expenses and focused on increasing our gross profit received from consulting services primarily by increasing the number of consulting service contracts combined with seeking lower cost resources to assist us in providing services under such contracts.

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 may be required. Depending on the size of a transaction, the capital resources that may 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 – Three months Ended March 31, 2019 and 2018

Operating Activities. Net cash provided by operating activities increased to $232,921 for the three months ended March 31, 2019 compared to net cash used in operating activities of  $117,857 for the three months ended March 31, 2018, mostly as a result of  the change from a net loss of $202,716 for the three months ended March 31, 2018 to net income of $4,777 for the three months ended March 31, 2019, combined with a $156,136 increase in deferred revenue, $28,270 increase in other assets, and $8,369 increase in accounts payable and accrued liabilities during the current quarter compared to the same quarter of 2018, being partially offset by an increase of $54,325 in cash used in connection with increased accounts receivables in the first three months of 2019 compared to the first three months of 2018.

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 the first three months of 2019 compared to the same period of the prior year. During the three months ended March 31, 2019, DSO was approximately 34 days, down from approximately 38 days during three months ended March 31, 2018. This decrease was largely attributed to the increase in sales that outpaced the increase in accounts receivable. 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 no cash provided by, or used in, investing activities for three months ended March 31, 2019 and 2018.

Financing Activities. There was no cash provided by, or used in, financing activities for the three months ended March 31, 2019. Net cash used in financing activities for three months ended March 31, 2018 amounted to $8,169 which related to the repayment of a $100,000 CAD note during the period.

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2019.