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, 2019. 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 three months ended March 31, 2020.

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. Revenues from our consulting services provided to our clients represented a majority of our revenue in 2019 and all revenues for the three months ended March 31, 2020.

In addition, in December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Although the financial impacts of COVID-19 to the Company’s current quarter have been limited due to the timing of onset, the COVID-19 pandemic and the government responses to the outbreak presents uncertainty and risk with respect to the Company and its performance and financial results.

The Company has taken steps, and will continue to take further actions, in its approach to minimizing the impact of the COVID-19 pandemic on its business. With the exception of key operations personnel, we have shifted our office staff to remote workstations, and we expect we will continue to operate remotely until state and local government shelter-in-place orders have been lifted and management determines it is safe for employees to return to offices. The Company has also implemented cost containment strategies across all areas of the organization, including curtailment of Company travel and salary reductions for its senior management and certain employees. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed in the United States, which included amongst other programs, loans to businesses under a Paycheck Protection Program (“PPP”). On May 12, 2020, the Company received an unsecured non-recourse promissory note in the amount of $161,169 under the PPP (the “PPP Note”). The PPP Note incurs interest at a fixed rate of 1.00% and is schedule to mature on May 3, 2022. The Company is required to make monthly payments on the PPP Note of $6,785.42 commencing on November 1, 2020.

The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted.

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 software products. These possible strategies, which are generally focused on ways to create a more complete slate of customer experience solutions for potential 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.

On April 15, 2020, the Company entered into a definitive purchase agreement (the “Purchase Agreement”) to sell all of the membership interests in its wholly-owned subsidiary, McorpCX, LLC, for total consideration of $1,108,000 consisting of $100,000 received upon the signing of the Purchase Agreement and $252,000 to be received at the closing of the transaction along with a $756,000 promissory note. The transaction is expected to close in June 2020, subject to the approval of the majority of the outstanding shares of the Company held by disinterested shareholders. Upon completion of the sale of McorpCX, LLC, the Company intends on focus on growing the Company’s software development and technology services business.

We cannot assure you that we will be able to complete the any of the transactions outlined in the Purchase Agreement, execute on our strategy of developing our software development or technology services business, or otherwise 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, 2020:

⁽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 entirely through the operations of McopCX LLC. Through May 31 of last year, revenue was also derived from the Company’s 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.

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 further develop, upgrade and provide support to resume actively selling our software products and obtain material stand-alone sales commitments for them.

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.

Subscription agreements for our software solutions had 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.

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.

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.

Overall, the 34% decrease in revenue was attributed to a 34% decrease in consulting services revenue and a 27% decrease in products and other revenue in the three months ended March 31, 2020 compared to the same period in the prior year. The decrease in consulting services revenue from $965,913 in 2019 to $637,425 in 2020 was primarily the result of the loss of a major client account. The decrease in product and other revenue from $44,415 for the three months ended March 31, 2019 to $32,367 for the same period in 2020, was primarily the result of our decision to suspend selling each of our software products in 2019 combined with a decrease in reimbursable expense mostly resulting from less travel required to execute the projects in the first quarter of 2020 compared to the same period in 2019.

Cost of goods sold decreased by $129,057, for the three months ended March 31, 2020, compared to the same period in 2019 primarily as a result of a 17% decrease in professional fees and an 84% decrease in non-reimbursable expenses. The decrease in professional fees from $258,152 in 2019 to $215,495 for 2020 was primarily the result of a decrease in billings from our contract consultants mostly due to less consulting revenue volume described above. The decrease in non-reimbursable expenses from $31,750 in 2019 to $5,196 for 2020 was primarily the result of new contracts being structured to allow for more reimbursable expenses in 2020 compared to contracts in the same period in 2019 that did not allow for reimbursable expenses. The remainder of the decrease in cost of goods sold in the first quarter of 2020 compared to the first quarter of 2019 was mostly attributable to a decrease in amortization of capitalized software development costs as well as a reduction in vendor and reimbursable expenses in the first three months of 2020 compared to the same period in the prior year.

For the three months ended March 31, 2020 we had net operating loss of $160,275 compared to a net operating income of $10,508 for the three months ended March 31, 2019. The decrease in net operating income 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 2019.

EBITDA decreased by $221,376 to a loss of $165,220 for the three months ended March 31, 2020 to earnings of $56,156 for the three months ended March 31, 2019. 

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 consolidated financial statements.

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

Salaries and wages decreased by $14,798 during the three months ended March 31, 2020 compared to the same period in 2019 primarily due to a decrease in the compensation of our executives officers in the current quarter compared to the same quarter in 2019.

Expenses related to contract services decreased in the first quarter of 2020 compared to the same quarter in 2019 primarily due to finance and administration services provided by contractors in the first three months of 2019, which were not required in the first three months of 2020.

Other general and administrative costs increased $13,253 during the three months ended March 31, 2020 compared to the same period in 2019, primarily due to increases in professional fees, insurance, dues and subscriptions, and rent partially offset by decreases in sales, marketing and promotion expenses as well as travel, meals, and entertainment.

Other expense increased for the three months ended March 31, 2020 compared to the first quarter of 2019, primarily due to increased state use tax expenses.

Anticipated Uses of Cash

As of March 31, 2020, our cash and cash equivalents and working capital had decreased to $438,461 and $626,340, respectively, from $588,848 and $779,762 as of December 31, 2019. The decrease in cash during the first quarter of 2020 was primarily the result of a net loss of $165,851 combined with a decrease in accounts payable during the first three months of 2020.

For the three months ended March 31, 2020 and the year ended December 31, 2019, 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.

During the three months ended March 31, 2020, 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 currently plan to fund our expenditures with cash flows generated from ongoing operations, or new revenue sources, 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.

The Company entered into Purchase Agreement on April 15, 2020, and assuming the closing conditions are either met or properly waived, expects to receive total consideration of $1,108,000 consisting of $352,000 in cash and a $756,000 promissory note for the sale of McorpCX, LLC.

In addition to the transactions contemplated in the Purchase Agreement, we intend to 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, the proceeds of the sale of McorpCX, LLC, 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, 2020 and 2019

Operating Activities. Net cash used in operating activities increased to $150,387 for the three months ended March 31, 2020 compared to net cash provided by operating activities of $232,921 for the three months ended March 31, 2019. This increase in cash used in 2020 was primarily due to decreased accounts payable and accrued liabilities, combined with a net loss of $165,851 in the first three months of 2020.

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 three months of 2020 compared to the same period of the prior year. During the three months ended March 31, 2020, DSO was approximately 57 days, up from approximately 34 days during three months ended March 31, 2019. This increase was largely attributed to the 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 three months ended March 31, 2020 and 2019.

Financing Activities. There was no cash provided by, or used in, financing activities for the three months ended March 31, 2020 and 2019.

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2020.