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. Although we believe that our expectations as reflected in forward-looking statements are reasonable, we cannot assure readers that those expectations will prove to be correct. 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. Other than as required by law, 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.

Overview

We are a customer experience (CX) management solutions company that develops on-demand “cloud based” customer experience management software such as Touchpoint Mapping® and McorpCX | Persona, and that also provides professional and related services designed to help 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. We are engaged in the business of developing and delivering technology-enabled products and professional services that help large, medium and small organizations improve their customer listening and customer experience management capabilities.

Our current products include Touchpoint Mapping® On-Demand and McorpCX | Persona. Touchpoint Mapping® On-Demand is a research-based Software-as-a-Service (“SaaS”) solution designed to be a comprehensive customer experience solution for customer-centric organizations to measure and gather customer data across all their touchpoints, channels and interactions with their customers. Touchpoint Mapping® On-Demand is designed to enable an organization to see where and how to improve brand and customer loyalty, as well as their customers' experiences across multiple channels and touchpoints. 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. McorpCX | Persona is designed to improve the results of customer facing initiatives, and designed to help customer-centric businesses and the agencies and consultancies that serve them to better understand, connect with and serve their customers.

Our professional services are intended to help primarily large and medium sized organizations plan, design and deliver better customer experiences, and to analyze and review client data gathered through our software application. Other services include customer experience training, strategy consulting and business process optimization, which are intended to increase our customers' adoption of our products and services, help our customers maximize their return on investment, and improve our customers' efficiency.

Development of our software is ongoing, as both Touchpoint Mapping® On-Demand and McorpCX | Persona are refined and improved based on customer feedback, and customized for specific organizations and industry sectors. The services delivered with our products may include consulting and additional research services, as well as services such as assessment, integration, implementation and additional offline analysis and reporting of data.

Though we initially released Touchpoint Mapping ^®  On-Demand in 2013, we cannot predict the timing or probability of generating material sales revenue from it.  Similarly, we released McorpCX | Persona in September of 2016 and cannot predict the timing or probability of generating material sales revenue from it either. As of this filing, we have yet to engage the necessary sales and marketing staff or possess 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.

  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 foreseeable future. As of September 30, 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.

Cost of Revenue and Operating Expenses

Our costs of revenue and operating expenses are detailed at the sub-category level in our Income Statements. And while the financial results for these categories are further explained in the Results of Operations section below, a general description of these categories follows:

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.

Total revenues were 19% higher for the nine months ended September 30, 2016 when compared to the same period in 2015, primarily due to increased revenues from consulting services. Revenues also increased from our software products and software related services in the nine months of 2016 compared to the same period in 2015.

Total revenues in the third quarter of 2016 were 76% higher than total revenues in the third quarter of 2015, mainly due to increased revenue from consulting services. Revenue has been growing in the second and third quarters primarily as 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.

Cost of goods sold increased by $67,000 for the three months ended September 30, 2016 when compared to the same period in 2015 due primarily to an increase of approximately $64,000 in professional fee costs. This increase corresponds with the increase in revenues from consulting services and is primarily due to the Company’s need to contract outside services to assist with delivery of professional services.

Cost of goods sold decreased by $36,000 during the nine months ended September 30, 2016 when compared to the same period in 2015 primarily as a result of a decrease of $48,000 in reimbursable expenses such as lodging, meals and entertainment and transportation in the first nine months of 2016. A decrease of approximately $20,000 in 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, being partially offset by increased professional fee costs in the third quarter of 2016 for the reasons discussed above. These decreases in cost of goods sold and professional fee costs in the first nine months of 2016 were partially offset by increases in software amortization due to software purchases made during the period. Non-reimbursable project expenses and vendor costs also increased slightly during the period compared to the same period in 2015, in line with increases in revenues for the period.

Salaries and wages decreased by $5,000 for the three months ended September 30, 2016 when compared to the three months ended September 30, 2015 driven largely by a decrease in officer salaries expense of $89,000 partially offset by an increase in staff salaries and related benefits of approximately $56,000 and an increase in stock based compensation expense of $29,000. The decrease in officer salaries expense was primarily due to the capitalization of officer salaries for software development efforts during 2016. We hired additional staff in 2016 to assist with the delivery of our professional services and other tasks, which primarily contributed to the increased staff salaries and stock compensation expenses in the current quarter.  

For the nine months ended September 30, 2016, salaries increased by $94,000 when compared to the nine months ended September 30, 2015, primarily due to the hiring of new employees in 2016 resulting in an increase of $31,000 and increased stock based compensation expense of $138,000 mostly due to the issuance of option grants to these employees. This increase was partially offset by capitalization of officer salaries for software development efforts in the first nine months of 2016.

Contract services expenses decreased for the three and nine months ended September 30, 2016 primarily due to decreases in corporate and investor relations, accounting, and marketing expenses in 2016.

Other general and administrative costs increased for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 primarily due to an increase in administration costs of $44,000 as well as professional fees of $27,000 mainly as a result of increased legal costs in 2016. We also recorded aggregate increased costs of $25,000 in the third quarter of 2016 compared to the same quarter of 2015 across all of the following categories: computers and software, dues and subscriptions, insurance, rent, and repairs and maintenance. These increases were partially offset by a decrease in sales, marketing, and promotion expenses of $42,000 and $9,000 in travel expenses in the third quarter of 2016 compared to the same quarter of 2015.

Other general and administrative costs increased for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 primarily due to an increase of $214,000 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 $73,000 in administration costs related primarily to human resource and recruiting expenses, investor relations, and license fees. There were also increases of $49,000 in sales, marketing, and promotion expenses, $15,000 in travel, meals, and entertainment expenses and increased aggregate expenses of $50,000 across all of the following categories: computers and software, dues and subscriptions, insurance, rent, and repairs and maintenance in the first nine months of 2016 compared to the same period of 2015.

Other expenses decreased for the three and nine months ended September 30, 2016 when compared to the same periods in 2015 primarily 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.

As at September 30, 2016, our cash and cash equivalents and working capital had increased to $2,238,178 and $2,092,721, 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 nine months ended September 30, 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 nine months ended September 30, 2016 we had a net loss of $862,252 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.

Anticipated Uses of Cash

In 2015 and the first three quarters of 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.

For the remainder of 2016, we currently anticipate that our uses of cash will mirror the primary areas of investment for the first three quarters of 2016, including professional staff to support our professional services and SaaS product delivery business. Investments are anticipated to include 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. 

Cash Flow – Nine Months Ended September 30, 2016 and 2015

Operating Activities. Net cash used in operating activities increased to $582,459 for the nine months ended September 30, 2016 compared to $512,891 for the nine months ended September 30, 2015. This increase in cash used by operating activities was attributable primarily to a $212,359 increase in net losses combined with cash used in connection with increased accounts receivables and other assets, partially offset by an increase in stock compensation expense as well as cash provided in connection with accounts payable and accrued interest in the first nine months of 2016.

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 nine months of 2016 compared to the same period in the prior year.  During the nine months ended September 30, 2016, DSO was approximately 33 days, down from approximately 44 days during the nine months ended September 30, 2015. This decrease mainly resulted from a lower accounts receivable balance at the end of the third quarter of 2016 compared to the same quarter of 2015 driven primarily by increased collection of billings in the current quarter. DSO can fluctuate quarter to quarter 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 nine months ended September 30, 2016 increased to $417,096 compared to $43,460 in net cash used in investing activities for the same period in 2015. Net cash used in investing activities in the first nine months of 2016 primarily consisted of cash used for capitalized software development costs of $376,878 as well as payments for acquisition of intangible assets of $30,000 and equipment for $10,218.

Financing Activities. Net cash provided by financing activities for the nine months ended September 30, 2016 and 2015 amounted to $2,745,000 and $513,750, respectively. Cash provided in both years was the result of separate private placement of our common stock in each period.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of September 30, 2016.