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 of the Notes to the Consolidated Financial Statements included with this report, such policies were unchanged during the nine months ended September 30, 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 with 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. Further, as of the date of this report, we have yet to engage the necessary development, client support, and sales staff required to identify, develop, and close material product sales opportunities that we believe are required to achieve our product sales and revenue growth objectives. We also believe that our current software capabilities are more limited in scope than our desired final software platform and as such, significant further software development expenditures will be required, which at this time the Company is not prepared to make. Consequently, during the second half of 2017 we stopped further development of our software products, and 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 for the nine months ended September 30, 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-term, 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 and nine months ended September 30, 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 page 15 for a reconciliation of net income (loss) to EBITDA.

Sources of Revenue

Our revenue consists primarily of fees from professional and consulting services and other revenue primarily related to the reimbursement of expenses. Through May 31 of this year, revenue was also derived from software-enabled product sales. 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, while other revenue includes reimbursement of related travel costs and out-of-pocket expenses. Product revenue was from productized and software-enabled service sales not elsewhere classified.

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 and 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 or McorpCX | Persona, and do not anticipate being able to do so until we engage the necessary development, product support, and sales and marketing staff to further develop our software products and execute product sales opportunities. During the second half of 2017, we stopped further development of our software products and in 2018 we suspended actively selling Touchpoint Mapping and McorpCX | Persona in order to re-assess the product roadmap to better define the future direction of our software platform. On May 31, 2019, the last remaining contract for Touchpoint Mapping was closed, and we believe no further revenue will be recognized from this date, unless we decide to resume actively selling our software products and obtain material stand-alone sales commitments for them.

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 (the time between a client placing an order to the live deployment of our product ordered) averaged 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, including any associated professional services or separate set-up fee revenue, on a straight-line basis over the life of the agreement.

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 51% decrease in revenue for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was attributed to a 48% decrease in consulting services revenue and 68% decrease in products and other revenue for the three months ended September 30, 2019 compared to the same quarter in 2018. The decrease in consulting services revenue from $772,081 in the third quarter of 2018 to $401,318 for the three months ended September 30, 2019 was primarily the result of the scope of consulting projects worked on by the Company during the third quarter of 2019 being less than the scope of the consulting projects worked on in the same quarter of 2018. Additionally, consulting services revenues were reduced by $43,966 in the third quarter of 2019 as a result of actual expense reimbursement revenue being less than the forecast expense reimbursement revenue that had previously been recognized by the Company. The decrease in products and other revenue from $161,755 in the third quarter of 2018 to $51,908 for the three months ended September 30, 2019 was primarily the result of our decision to suspend selling each of our software products in 2018 combined with a decrease in reimbursable expense income during the current quarter compared to the same quarter of 2018. 

Overall, the 11% decrease in revenue for the first nine months of 2019 compared to the first nine months of 2018 was primarily attributed to a 63% decrease in product and other revenue for the nine months ended September 30, 2019 compared to the same period in 2018. The decrease in product and other revenue from $385,191 to $143,581 for the nine months ended September 30, 2018 and 2019, respectively, was primarily the result of our decision to suspend selling each of our software products in 2018 combined with a decrease in reimbursable expense mostly resulting from less travel required to execute the projects during the first nine months of 2019 compared to the same period in 2018.  There was also a slight decrease of 3% in consulting services revenue for the nine months ended September 30, 2019 compared to the same period in 2018. The decrease in consulting services revenue from $2,567,153 in the first nine months of 2018 to $2,497,083 for the nine months ended September 30, 2019 was primarily the result of increased consulting services revenue in the first half of 2019 being more than offset by decreased consulting services revenue in the third quarter for the reasons discussed above.

Cost of goods sold decreased by $278,566 for the three months ended September 30, 2019, compared to the same period in 2018 primarily as a result of a 25% decrease in professional fees and a 85% decrease in reimbursable expenses during the current quarter compared to the same quarter of 2018. The decrease in professional fee costs from $407,421 in the third quarter of 2018 to $304,634 for the three months ended September 30, 2019 was primarily the result of a decrease in billings from our contract consultants used to support our consulting services mostly due to reduced consulting services provided to clients during the current quarter compared to the same quarter of 2018. The decrease in reimbursable expenses from $153,896 in the third quarter of 2018 to $23,064 for the three months ended September 30, 2019 was primarily the result of less contracts and lower requirements for travel and other reimbursable costs on those contracts. 

Cost of goods sold decreased by $490,204 for the nine months ended September 30, 2019, compared to the same period in 2018 primarily as a result of 20% decrease in professional fees and 64% decrease in reimbursable expenses during the first nine months of 2019 compared to the same period on 2018. The decrease in professional fees from $1,120,502 in the first nine months of 2018 to $900,290 for the nine months ended September 30, 2019 was primarily the result of a decrease in billings from our contract consultants due to less consulting revenue volume described above. The decrease in reimbursable expenses from $344,903 in the first nine months of 2018 to $123,095 for the nine months ended September 30, 2019 was primarily the result of reduction in reimbursable research costs required under the specific contracts.

For the three months ended September 30, 2019 we had net operating loss of $517,571 compared to a net operating loss of $249,756 for the three months ended September 30, 2018. The increase in net operating loss in the current quarter was primarily a result of decreased total revenues, and an increase in general and administrative costs being partially offset by decrease in costs of goods sold when compared to the same period in 2018.

For the three months ended September 30, 2019 we had net loss of $524,453 compared to a net loss of $254,176 for the three months ended September 30, 2018, and EBITDA decreased by $299,108 to a loss of $503,586 for the three months ended September 30, 2019 compared to a loss of $204,478 for the three months ended September 30, 2018.

For the nine months ended September 30, 2019 we had net operating loss of $423,537 compared to a net operating loss of $303,382 for the nine months ended September 30, 2018. The increase in net operating loss in the first nine months of 2019 was primarily a result of decreased total revenues, and an increase in general and administrative costs being partially offset by decrease in costs of goods sold when compared to the same period in 2018.

For the nine months ended September 30, 2019 we had net loss of $434,492 compared to a net loss of $308,962 for the nine months ended September 30, 2018, and EBITDA decreased by $178,624 to a loss of $333,464 for the nine months ended September 30, 2019 compared to loss of $154,840 for the nine months ended September 30, 2018.

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

Salaries and wages increased by $31,772 during the three months ended September 30, 2019 compared to the same period in 2018 primarily due to an increase in the number of executives in the current quarter compared to the same quarter in 2018.

Salaries and wages increased by $186,784 during the nine months ended September 30, 2019 compared to the same period in 2018 primarily due to increase executive salaries 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 and nine months ended September 30, 2019 primarily due to the decision to curtail additional software development halfway through 2017.

Contract services for the three months ended September 30, 2019 increased compared to the same period in the prior year primarily due to an increase in marketing costs, being partially offset by a decrease in corporate and investor relations costs in the current quarter compared to the same quarter in 2018. Contract services expenses decreased during the nine months ended September 30, 2019 compared to the same periods in 2018 primarily due to finance and administration services provided by contractors in the first nine months of 2018, which were not required in the first nine months of 2019.

Other general and administrative costs increased $26,611 and $146,420 during the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018, primarily due to increases in computers and software and travel expenses being partially offset by decreases in professional fees, rent, and marketing and promotion costs.

Other expense increased for the three months ended September 30, 2019 compared to the third quarter of 2018, primarily due to increased state use tax expenses in the current quarter compared to the same quarter of 2018.

Other expense increased for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to increased state use tax expenses in the current quarter compared to the same period of 2018.

Anticipated Uses of Cash

For the nine months ended September 30, 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 consolidated 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 nine months of 2018 and staff for administration, sales and marketing activities.

During the nine months ended September 30, 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 growing our sales pipeline to create more consistency in our revenues which required a greater level of expenses associated with the cost of sales and marketing.  We plan to continue to focus on sales pipeline growth so that we can more reliably hire lower cost employees versus utilizing independent contractors to execute upon our consulting projects. 

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 – Nine months Ended September 30, 2019 and 2018

Operating Activities. Net cash used in operating activities increased to $580,869 for the nine months ended September 30, 2019 compared to net cash used in operating activities of $133,512 for the nine months ended September 30, 2018. This increase in cash used in 2019 was primarily due to decreased accounts payable and accrued liabilities, combined with an increase in net loss of $125,530 in the first nine months of 2019 compared to the same period in 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, increased in the first nine months of 2019 compared to the same period of the prior year. During the nine months ended September 30, 2019, DSO was approximately 58 days, up from approximately 45 days during nine months ended September, 2018. This increase was largely attributed to the increase in accounts receivable and decrease in sales during the current period. 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 nine months ended September 30, 2019. There was $4,474 net cash used in investing activities for the nine months ended September 30, 2018.

Financing Activities. There was no cash provided by, or used in, financing activities for the nine months ended September 30, 2019. Net cash used in financing activities for nine months ended September 30, 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 September 30, 2019.