ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
|
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-K. 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.
Overview
We are a customer experience (CX) management solutions company dedicated to helping organizations improve customer experiences, increase customer loyalty, reduce costs and increase revenue. We believe that delivering better customer experiences is a powerful, sustainable way for any organization to differentiate from their competition, and are engaged in the business of developing and delivering technology-enabled products and professional services that are designed to help corporations improve their customer listening and customer experience management capabilities with the goal of helping them design and deliver better experiences for their customers.
Our products include on-demand “cloud based” customer experience management software such as Touchpoint Mapping® On-Demand (also marketed as McorpCX | Insights, together referred to as “Touchpoint Mapping”), and McorpCX | Persona.
Touchpoint Mapping is a research-based online Software-as-a-Service (“SaaS”) solution designed to provide insights to organizations that can help them improve customer and employee experience, brand, and loyalty. It is designed to be a solution for customer-centric organizations to measure and gather customer data across all their touchpoints, channels and interactions with their customers. Data is analyzed and can be displayed across multiple axes including customer segments, location, time and many other variables of interest to personnel within an organization.
McorpCX | Persona, another online SaaS solution, is designed for developing and managing customer persona, as well as automating the currently manual process of developing, managing and sharing persona across corporations. It is designed to improve the results of customer facing initiatives, and to help customer-centric businesses and the agencies and consultancies that serve them to better understand, connect with and serve their customers.
Our professional and related services are intended to help primarily large and medium sized organizations plan, design and deliver better customer experiences in order to maximize their return on investment, improve efficiency, and increase the adoption of our products and services. Our services offered include a range of customer experience management consulting services in the areas of research, strategy development, planning, education, training and best practices, as well as providing customer-centric strategies and implementation roadmaps in support of these strategies.
There are many potential unforeseen and significant market and competitive risks associated our current products and services. Though we released the first version of Touchpoint Mapping
®
in 2013, and we released the first version of McorpCX | Persona in 2016, we cannot predict the timing or probability of generating material sales revenue from them.
As of this filing, we have yet to engage the necessary sales and marketing staff or the capabilities required to identify, develop, and close material product sales opportunities, and currently lack sufficient resources to market and sell our products in the manner which we believe is required to achieve our product sales and revenue growth objectives. It is our expectation that numerous unforeseen challenges will be encountered as we continue to develop, market, distribute and sell our products and services.
We cannot assure you that that we will be able to compete successfully against current or potential competitors, or that competition will not have a material adverse effect on our business, financial condition and operations.
Sources of Revenue
Our revenue consisted primarily of professional and software-enabled consulting services, product sales and other revenues in 2016 and 2015. 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 migrating the majority of our service revenue from these categories to recurring SaaS subscription fees, we anticipate that fees for professional and software-enabled consulting services will remain a significant revenue source in the near future. As of December 31, 2016, we have successfully delivered certain features and functionality of our software product, Touchpoint Mapping® On-Demand, to several clients. However, 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 sales and marketing staff to develop and execute product sales opportunities.
Should we successfully obtain material sales commitments for Touchpoint Mapping® On-Demand or McorpCX | Persona, we anticipate that subscription agreements and related professional services associated with delivering our software solutions will become a source of increased revenue. Subscriptions and associated professional services pricing are based on our gross margin objectives, growth strategies and the specific needs of our clients' organizations, measured primarily by the following metrics: breadth of insights sought, number of employees, number of customers and customer segments, frequency of insights gathered, and other variables.
Subscription agreements for our software solutions are offered as monthly term agreements which contain a minimum commitment period of at least 12 months, and which include related setup, upgrades, hosting and support. Professional services include consulting fees related to implementation, customization, configuration, training and other services.
Based on data gathered during the implementation stage of on-demand software and software-enabled services engagements, we believe that the average time it will take our clients from placing an order to live deployment of our products is between 30 and 45 days. We typically invoice 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.
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.
Operating 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. However, as certain features of Touchpoint Mapping® On-Demand were made available for general release beginning in 2014, costs of goods now also includes significant 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 management and subscriptions, 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 marketing personnel. Expenses also include contract services, as well as marketing and promotion costs, professional fees, software license fee expenses, administrative costs, insurance, rent and a portion of travel expenses and other overhead, which are categorized as “other general and administrative expenses” in our financial statements.
Sales and marketing expenses are currently reflected in salaries and wages, commissions, contract labor, sales, marketing and promotion, and other related overhead expense categories. Since we currently recognize revenue over the terms of the subscriptions or professional services engagements, we expect to experience a delay between increases in selling and marketing expenses and the recognition of revenue. We expect to continue to incur significant sales and marketing expenses in both absolute dollars and as a percentage of expenses as we hire sales and additional marketing personnel and increase the level of marketing activities.
We expect that total general and administrative expenses will increase as we continue to add personnel in connection with the growth of our business. In addition to increases in sales and marketing and research and development expenses, in order to meet the requirements of a public company we anticipate we will also incur additional employee salaries and related expenses, professional service fees and insurance costs in connection with any growth of our business and operations.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“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.
Revenue Recognition
We enter into arrangements with multiple-deliverables that generally include nonrefundable setup fees, subscription fees, professional services and consulting fees. We account for multiple-element arrangements by following ASC 605-25, Revenue Recognition: Multiple-Element Arrangements, as amended by Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements.
Under the accounting guidance, in order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. To date, we have concluded that subscription services and the associated nonrefundable setup fees do not have standalone value as such services are not sold separately, while professional services and consulting fees included in multiple-deliverable arrangements executed have standalone value as they are often sold separately and will have value to the customer on a standalone basis.
Under the accounting guidance, when multiple-deliverables included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of selling price (“VSOE”), if available, third-party evidence (“TPE”), if VSOE is not available; and our best estimate of selling price (“BESP”), if neither VSOE nor TPE is available. Due to the relatively recent introduction of the Touchpoint Mapping
®
On-Demand, and its related services, and due to differences in our service offerings compared to other parties and the lack of availability of relevant third-party pricing information, we have determined that VSOE and TPE are not practical alternatives. Therefore, the Company uses BESP to determine selling price of significant deliverables.
We determine BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, the customer demographic and our market strategy. The determination of BESP is made through consultation with and approval by management, taking into consideration our market strategy. As our market strategy evolves, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including BESP. Revenue recognition requires judgment, including whether the arrangement includes multiple elements, and if so, whether VSOE or TPE of fair value exists for those elements. A portion of revenue may be recorded as unearned due to undelivered elements. Changes to the elements in a software arrangement, the ability to identify VSOE, TPE or BESP for those elements, and the fair value of the respective elements could materially impact the amount of earned and unearned revenue. Judgment is also required to assess whether future releases of certain software represent new products or upgrades and enhancements to existing products. Variations in the actual outcome of these variables could materially impact our financial statements.
Income Taxes
No provision for income taxes at this time is being made due to the offset of cumulative net operating losses. A full valuation allowance has been established for deferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carry forward periods provided under the United States Internal Revenue Code of 1986, as amended and the rules promulgated thereunder. While the Company’s statutory tax rate can range from 15% - 39% depending on taxable income level, the effective tax rate is 0% due to the effects of the valuation allowance described above. The Company does not have any material uncertainties with respect to its provisions for income taxes.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date using a Black-Scholes valuation model and is recognized as expense over the requisite service period. Determining the fair value of stock-based awards at the grant date requires judgment and assumptions, including expected volatility. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be impacted.
Research and Development Costs
Costs incurred to develop Software as a Service (SaaS) products and technology enabled services consist of external direct costs of materials and services and payroll and payroll-related costs for employees who directly devote time to the project. Research and development costs incurred during the preliminary project stage were expensed as incurred. Capitalization begins when technological feasibility is established. Costs incurred during the operating stage of the software application relating to upgrades and enhancements are capitalized to the extent that they result in the extended life of the product. All other costs are expensed as incurred. Amortization of software development costs commences when the product is available for general release to customers. The capitalized costs are amortized on a straight line basis over the three year expected useful life of the software.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. If such circumstances are present, we assess the recoverability of the long-lived assets by comparing the carrying value to the undiscounted future cash flows associated with the related assets. If the future net undiscounted cash flows are less than the carrying value of the assets, the assets are considered impaired and an expense, equal to the amount required to reduce the carrying value of the assets to the estimated fair value, is recorded in the statements of operations. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.
Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.
Results of Operations
|
|
Year Ended
|
|
|
Change from
|
|
|
Percent Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Prior Year
|
|
|
from Prior Year
|
|
Revenue
|
|
$
|
1,637,671
|
|
|
$
|
1,334,732
|
|
|
$
|
302,939
|
|
|
|
23
|
%
|
Revenues increased for the year ended December 31, 2016 compared to the prior year primarily due to increased revenues from consulting services as well as additional revenues from software products and software related services in 2016 compared to 2015. The growth in revenue during 2016 was mainly a result of management’s re-focus on business development and revenue generating efforts after the first quarter of 2016.
During the first quarter of 2016, we focused on internal initiatives that we believed were critical to our long-term growth. These initiatives included the listing of our shares of common stock on the TSX Venture Exchange and the closing of the related private placement of our common stock in February 2016.
|
|
Year Ended
|
|
|
Change from
|
|
|
Percent Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Prior Year
|
|
|
from Prior Year
|
|
Cost of Goods Sold
|
|
$
|
483,420
|
|
|
$
|
490,716
|
|
|
$
|
(7,296
|
)
|
|
|
(1
|
%)
|
Cost of goods sold decreased slightly during the year ended December 31, 2016 compared to 2015 primarily as a result of a decrease of $19,000 in reimbursable professional fee costs and a decrease of $14,000 in reimbursable expenses such as lodging, meals and entertainment and transportation. A decrease of approximately $19,000 in non-reimbursable professional fee costs in the same period also contributed to the decrease in cost of goods sold and was largely due to decreased revenue for the first quarter 2016 combined with the hiring of an additional salaried employee in the second quarter of 2016 resulting in a reduced need for contract services. These decreases in cost of goods sold and reimbursable professional fee costs in 2016 were partially offset by increases in software amortization of $32,000 in 2016 compared to 2015 primarily due to software purchases made during the period and increased capitalized expenses related to updates and enhancements to our current software in 2016. Non-reimbursable project expenses and vendor costs also increased slightly during the period compared to 2015, in line with increases in revenues for the period.
|
|
Year Ended
|
|
|
Change from
|
|
|
Percent Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Prior Year
|
|
|
from Prior Year
|
|
Salaries and Wages
|
|
$
|
1,061,755
|
|
|
$
|
994,214
|
|
|
$
|
67,541
|
|
|
|
6.79
|
%
|
Salaries and wages increased for the year ended December 31, 2016 compared to 2015 primarily due to the hiring of new employees in 2016 resulting in an increase of $212,000 in employee salaries in 2016 and increased stock based compensation expense of $81,000 mostly due to the issuance of option grants to these new employees. Of this increase in employee related costs, an aggregate of $220,000 in salaries and wages associated with software development efforts were capitalized during 2016, which when combined with a small decrease in commissions expense of $5,000 resulted in salary and wage expense increasing by only $68,000 in 2016 compared to the prior year.
Software development costs increased for the year ended December 31, 2016 compared to 2015 primarily due to increased investments in software development following the February 2, 2016 completion of a $2,745,000 private placement and listing of the Company’s common stock on the TSX Venture Exchange. This increase included capitalization of a certain portion of salaries and wages totaling $229,108, as well as an aggregate cost for independent software designers, developers, programmers and project management professionals of $443,521.
|
|
Year Ended
|
|
|
Change from
|
|
|
Percent Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Prior Year
|
|
|
from Prior Year
|
|
Contract Services
|
|
$
|
152,530
|
|
|
$
|
182,429
|
|
|
$
|
(29,899
|
)
|
|
|
(16.39
|
%)
|
Contract services expenses decreased during the year ended December 31, 2016 compared to 2015 primarily due to decreases in corporate and investor relations, accounting, and marketing expenses in 2016 partially offset by increases in costs associated with business development and sales.
|
|
Year Ended
|
|
|
Change from
|
|
|
Percent Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Prior Year
|
|
|
from Prior Year
|
|
Other General and Administrative
|
|
$
|
1,045,569
|
|
|
$
|
659,154
|
|
|
$
|
386,415
|
|
|
|
58.62
|
%
|
Other general and administrative costs increased for the year ended December 31, 2016 compared to 2015 primarily due to an increase of $198,000 in professional fees associated with our listing on the TSX-V exchange and the closing of our private placement in February 2016, as well as the engagement of a new audit firm. Other increases include $91,000 in administration costs related primarily to human resource and recruiting expenses, investor relations, and license fees. There were also increases of $20,000 in sales, marketing, and promotion expenses, $14,000 in travel, meals, and entertainment expenses and increased aggregate expenses of $63,000 across all of the following categories: computers and software, dues and subscriptions, insurance, rent, and repairs and maintenance.
|
|
Year Ended
|
|
|
Change from
|
|
|
Percent Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Prior Year
|
|
|
from Prior Year
|
|
Other Income/Expense
|
|
$
|
(37,722
|
)
|
|
$
|
12,428
|
|
|
$
|
(50,150
|
)
|
|
|
(403.52
|
%)
|
Other expenses decreased primarily due to the loss on impairment of an intangible asset in the amount of $42,000. The remaining decrease is due to the net effect of fluctuating unrealized gains and losses associated with the revaluation of a promissory note from Canadian dollars to United States dollars in 2016.
Liquidity and Capital Resources
We measure our liquidity in a variety of ways, including the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash and cash equivalents
|
|
$
|
1,925,744
|
|
|
$
|
492,733
|
|
Working capital
|
|
$
|
1,764,629
|
|
|
$
|
349,740
|
|
Anticipated Uses of Cash
As at December 31, 2016, our cash and cash equivalents and working capital had increased to $1,925,744 and $1,764,629, respectively, from $492,733 and $349,740 as at December 31, 2015. The closing of a private placement of our common stock in February 2016 for proceeds of $2,745,000 was the primary driver behind the increase in cash and working capital.
For the year ended December 31, 2016 and the year ended December 31, 2015, we were able to finance our operations, including capital expenditures for infrastructure, product development and marketing activities with cash generated through operating activities, cash on hand, and the proceeds received from our private placement of common stock in February 2016. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As reflected in the financial statements included in this report, for the year ended December 31, 2016 we had a net loss of $1,158,854 and a net loss of $994,351 for the year ended December 31, 2015.
We have had material operating losses and have not yet created positive cash flows. These factors raise substantial doubt as to our ability to continue as a going concern. Although we believe that sufficient funding will be available from operations, private placements of equity securities or additional borrowings to meet our liquidity needs over the next 12 months, our ability to continue as a going concern is entirely dependent upon our ability to achieve a level of profitability, and/or to raise additional capital through debt financing and/or through sales of common stock. We cannot provide any assurance that profits from operations, if any, will generate sufficient cash flow to meet our working capital needs and service our existing debt, nor that sufficient capital can be raised through debt or equity financing. The financial statements do not include adjustments related to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
In 2016 our primary areas of investment were professional staff to support our professional services and SaaS product delivery business, including client relationship management, and product development staff as well as investments in sales and marketing activities, such as sales and marketing staff, marketing and sales automation software and other related services.
We currently anticipate that our uses of cash in 2017 will mirror the primary uses of cash during the second half of 2016, which included cash paid to professional staff to support our professional services and SaaS product delivery business. We also anticipate making cash investments in sales and marketing activities such as sales and marketing staff, marketing and sales automation software and other related services during 2017.
We currently plan to fund these planned expenditures with cash flows generated from ongoing operations during this period and/or additional capital raised through debt financing and/or through sales of common stock. We will consider raising capital through debt financing and/or additional sales of common stock if necessary. We do not intend to pay dividends in the foreseeable future.
Based upon the current level of our operations and our current expectations for future periods in light of the current economic environment, we believe that cash flow from our operations and available cash, together with available borrowings, will be adequate to finance the capital requirements for our business during the next 12 months. 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 will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.
Debt Obligations
On September 16, 2011, we executed a $100,000 (Canadian dollars) note with Brad Holland. The note is structured to incur a balloon payment of the principal and 4% APR non-compounding accrued interest on its amended maturity date of October 31, 2017. As of December 31, 2016, principal and accrued interest was $74,386 and $496, respectively.
On September 7, 2011, we executed a $50,000 note with McLellan Investment Corporation, an unrelated party. The note was structured to incur a balloon payment of the principal and 4% APR non-compounding accrued interest which was paid in full just prior to its amended maturity date of December 31, 2016. As such, as of December 31, 2016, there was no principal and accrued interest outstanding
.
Cash Flow for the Years Ended December 31, 201
6
and 201
5
Operating Activities.
Net cash used in operating activities increased to $777,243 for the year ended December 31, 2016 compared to $582,445 for the year ended December 31, 2015. This increase in cash used by operating activities was attributable primarily to a $164,503 increase in net losses in 2016 compared to 2015 combined with cash used in connection with decreased accounts payables in the current year being partially offset by an increase in stock compensation expense in 2016 compared to the prior year.
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 2016 compared to the prior year. During the year ended December 31, 2016, DSO was approximately 7 days, down from approximately 31 days during the year ended December 31, 2015. This decrease mainly resulted from a lower accounts receivable balance at the end of 2016 compared to 2015 driven primarily by increased collection of billings in 2016 compared to the prior year. DSO can fluctuate due to the timing and nature of contracts that lead to up-front billings related to deferred revenue on services not yet performed.
Investing Activities.
Net cash used in investing activities for the year ended December 31, 2016 increased to $484,747 compared to $87,635 in net cash used in investing activities for 2015. Net cash used in investing activities in 2016 primarily consisted of cash used for capitalized software development costs of $443,521
as well as payments for acquisition of intangible assets of $30,000 and equipment for $11,226.
Financing Activities.
Net cash provided by financing activities for the year ended December 31, 2016 and 2015 amounted to $2,695,000 and $513,750, respectively. Cash provided in both years was the result of separate private placements of our common stock in each period.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of December 31, 2016.
Contractual Obligations
We lease two facilities in northern California, under operating leases both expected to expire in 2018. We do not have any debt capital lease obligations. As of December 31, 2016, the following table summarizes our contractual obligation under the foregoing lease agreement and the effect such obligation is expected to have on our liquidity and cash flow in future periods:
2017
|
|
$
|
44,091
|
|
2018
|
|
|
11,023
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
55,114
|
|
The operating lease obligations presented reflect future minimum lease payments due under the non-cancelable portions of our operating lease.