Note 1: Organization and Basis of Presentation

 

McorpCX, Inc. (“we,” “us,” “our,” or the “Company””) was incorporated in the State of California on December 14, 2001. We are a customer experience (CX) management solutions company dedicated to helping organizations improve customer experiences, increase customer loyalty, reduce costs and increase revenue. The Company operated as The Innes Group, Inc., d/b/a MCorp Consulting until filing a Certificate of Amendment to the Articles of Incorporation renaming the Company Touchpoint Metrics, Inc., effective October 18, 2011. During Q1 2015, the Company filed a d/b/a (doing business as) with the State of California Secretary of State to begin doing business as McorpCX. On June 11, 2015, at our Annual General Meeting, shareholders passed a resolution to change the name of the Company to McorpCX, Inc.

 

We 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. Our products include 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. Our professional and related services include a range of customer experience management services such as research, training, strategy consulting and process optimization.

 

 

Note 2: Summary of Significant Accounting Policies

 

The financial statements of the Company are presented on the accrual basis. The significant accounting policies followed are described below to enhance the usefulness of the financial statements to the reader.

 

Use of Estimates

 

The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America. This requires management to make estimates and assumptions that affect the reported amounts and disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents  

 

Cash and cash equivalents are comprised of highly liquid investments with original maturity dates of less than three months that are not reported as investments. While the Company may maintain cash and cash equivalents in bank deposit accounts, which at times exceed Federal Deposit Insurance Corporation insured limits, they have not experienced any losses in such accounts.

 

Portions of the bank deposit accounts are held in Canadian banks on a Canadian and US Dollar basis. The balances in these accounts at times exceed Canada Deposit Insurance Corporation insured limits. They have not experienced any losses in these accounts.

 

Management believes it is not exposed to any significant credit risk on cash and cash equivalents.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable are recorded at the invoiced amount, do not require collateral and do not bear interest. The Company estimates its allowance for doubtful accounts by evaluating specific accounts where information indicates the Company ’s customers may have an inability to meet financial obligations, such as bankruptcy and significantly aged receivables outstanding. No allowance for doubtful accounts is required to be recognized as of December 31, 2017 and 2016.

 

 

 

Fair Value of Financial Instruments

 

Effective July 1, 2009, the Company adopted Accounting Standards Codification Topic 820, Fair Value Measurements (ASC 820 ). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair market hierarchy, which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels based on the reliability of the inputs to determine the fair value:

 

●	Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities;

●	Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

●	Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Company ’s financial instruments consist of cash, accounts receivable, accounts payable and notes payable. The carrying amount of cash, accounts receivable and accounts payable approximates fair value because of the short-term nature of these items. The Company does not have any financial instruments that are required to be fair valued on a recurring basis as of December 31, 2017 and 2016.

 

Advertising Expense

 

Advertising is expensed as incurred. There was no advertising expense during the twelve months ended December 31, 2017 and 2016.

 

Property, Equipment, and Depreciation

 

Property and equipment are stated at cost less accumulated depreciation. Betterments, renewals, and extraordinary repairs over $1,000 that extend the life of the assets are capitalized; other repairs and maintenance are expensed. We measure property, plant and equipment, at fair value on a nonrecurring basis. The cost and accumulated depreciation applicable to assets retired are removed from the accounts, and the gain or loss on disposition is recognized as other income or expense. Depreciation and amortization is computed on the straight line method over the applicable estimated depreciable life as follows:

 

Depreciable Asset Class		Depreciable Life
Real Property Improvements (Years)		15
Computer Equipment (Years)		5
Furniture and Fixtures (Years)		7
Leasehold Improvements (Years)		Shorter of useful life or term of the lease
Machinery and Equipment (Years)		7

 

Software Development Costs

 

Costs for the development and delivery of the SaaS technology are capitalized once planning is completed and 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. Capitalized costs include only direct external costs of materials and services as well as compensation and benefits for employees directly associated with the software project. Such amounts are included in the accompanying balance sheets under the caption “Capitalized software development costs”.

 

Website Development Costs

 

An update to our existing Company ’s website began in September 2014; related costs incurred during the design and production stages of website development were capitalized prior to its go-live date, which occurred in March 2015. Now that the website is live, all capitalized costs will be amortized using straight-line basis over two years, the estimated economic life of the completed website. During the twelve months ended December 31, 2017 and 2016, $11,656 and $32,669 of amortization expense was recorded, respectively.

 

Intangibles

 

Intangible assets are periodically reviewed for impairment indicators and tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss, if any, would be measured as the excess of the carrying value over the fair value determined by discounted future cash flows.

 

Stock-Based Compensation

 

We account for share based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant-date fair value of restricted shares using quoted market prices and the grant-date fair value of stock options using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding the components of the model, including the estimated fair value of underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to the valuation. We recognize compensation costs ratably over the period of service using the straight-line method.

 

 

Revenue Recognition

 

Consulting Services

 

Consulting services r evenues are the primary source of our revenue and are derived from customer experience management solutions consulting services and software-enabled consulting services. Engagements normally span a period of 45 to 120 days in duration, with revenue recognized as project milestones are achieved and accepted by the customer.

 

Products

 

The Company has a SaaS (Software as a Service) technology offering to complement its consulting services. SaaS is a subscription based offering that may include nonrefundable setup fees, subscription fees, professional services, and consulting fees related to implementation, customization, configuration, training, and other value added services. The company accounts 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 . At the inception of the arrangement, and again as each element is delivered, the Company evaluates all deliverables in the offering to determine whether they represent separate units of accounting based on the following criteria: 1 ) the items have value to the customer on a standalone basis and 2 ) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the company.

 

The Company determines the relative selling price for a deliverable based on vendor-specific objective evidence of selling price (“VSOE”), if available, third -party evidence (“TPE”), if VSOE is not available; and best estimate of selling price (“BESP”), if neither VSOE nor TPE is available.

 

VSOE. The Company determines VSOE based on historical pricing and discounting practices for the specific solution when sold separately. In determining VSOE, it is required that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range. Due to the introduction of new services, the non-refundable set-up fee and the SaaS subscription have not been not historically priced. As a result, VSOE has been used to allocate the selling price of deliverables in limited circumstances.

 

TPE. When VSOE cannot be established for deliverables in multiple element arrangements, the Company applies judgment with respect to whether it can establish selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. It has been determined that TPE is not a practical alternative due to differences in service offerings compared to other parties and the availability of relevant third -party pricing information.

 

BESP. When the Company is unable to establish selling price using VSOE or TPE, BESP is used to determine selling price of significant deliverables. The objective of BESP is to determine the price at which the company would transact a sale if the service were sold on a stand-alone basis. The process for determining BESP for deliverables without VSOE or TPE involves management’s judgment. BESP is determined by considering overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the company’s discounting practices, the size and volume of transactions, the customer demographic, and market strategy. If the facts and circumstances underlying the factors considered change or should future facts and circumstances lead the company to consider additional factors, BESPs could change in future periods.

 

The guidance of SEC Codification of Staff Accounting Bulletins Topic 13 (A)( 3 )(f) is followed in accounting for nonrefundable setup fees.   Each of the revenue areas relating to the SaaS offering may or may not be sold as part of a sale to a customer, with the exception of the nonrefundable set-up fee and SaaS technology subscription. Each of the items, except for the set-up fee and SaaS technology subscription, can and often are sold separately and will have value to a customer on a standalone basis. The nonrefundable set-up fee and the SaaS subscription are the only two revenue streams that do not exist without each other. The subscription and services provided are essential to the customer receiving the expected benefit of the set-up fee.  Therefore, the set-up fee is earned and recognized as the related services are delivered and performed over the term of the subscription.

 

SaaS subscriptions are sold with three payment options. The subscription can be paid annually, quarterly, or monthly and are all payable prior to services being provided. The Company determines fair value for the individual elements in these arrangements as the estimated relative selling price charged for each individual element when sold on a standalone basis.

 

 

As payments are received, the revenue is reported as unearned revenue on the balance sheet and recognized at the end of each monthly period as service is provided.   The Company measures and allocates the arrangement consideration to the individual elements based on the relative estimated selling price of each item as sold on a standalone basis. The non-refundable setup fees are recognized over the term of the initial subscription period. The professional services and consulting fees included in the offering follow the same revenue recognition process as the consultation and research services.

 

Subscription agreements provide service-level commitments of 99.5% uptime per period, excluding scheduled maintenance and any unavailability caused by defined circumstances beyond reasonable control. Failure to meet this availability commitment requires a credit to qualifying customers equal to the value of the time unavailable, up to a maximum of one month of subscription fees. Reserves equal to the maximum potential credits are recorded on the balance sheet and are treated as a reduction in revenue. Revenue is recorded net of applicable sales, use, and excise taxes.

 

Reimbursed Expenses

 

We classify reimbursed expenses in both other revenues and cost of goods sold in our statements of operations. Other revenue is earned from reimbursable expense revenues that are incidental to the consultation and research efforts. The project related expenses consist of costs incurred by the Company on behalf of the customer. This will generally consist of travel costs or products and services purchased as a convenience for the customer.

 

Income Taxes

 

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

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 the “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 in the tax law.

 

While the Company ’s statutory tax rate approximates 35%, 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.

 

Recent Accounting Pronouncements

 

In August 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014 - 15, “Presentation of Financial Statements – Going Concern (Subtopic 205 - 40 ) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014 - 15” ). Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the Liquidation Basis of Accounting. Even if an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in ASU 2014 - 15 require additional disclosure of information about the relevant conditions and events. The amendments in ASU 2014 - 15 are effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company adopted ASU 2014 - 15 with no material impact to the financial statements.

 

In March 2016, the FASB issued ASU No. 2016 - 09, Compensation-Stock Compensation (Topic 718 ): Improvements to Employee Share-Based Payment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including ( 1 ) the income tax consequences, ( 2 ) classification of awards as either equity or liabilities, and ( 3 ) classification on the statement of cash flows. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition, amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively, and amendments related to the presentation of excess tax benefits on the statement of cash flows can be applied using either a prospective transition method or a retrospective transition method. An entity that elects early adoption must adopt all of the amendments in the same period. The Company adopted ASU 2016 - 09 with no material impact to the financial statements.

 

 

In January 2017, the FASB issued ASU No. 2017 - 03, Accounting Changes and Error Corrections (Topic 250 ) and Investments —Equity Method and Joint Ventures (Topic 323 ). The ASU adds SEC disclosure requirements for both the quantitative and qualitative impacts that certain recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. Specially, these disclosure requirements apply to the adoption of ASU No. 2014 - 09, Revenue from Contracts with Customers (Topic 606 ); ASU No. 2016 - 02, Leases (Topic 842 ); and ASU No. 2016 - 13, Financial Instruments—Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments. In addition, ASU No. 2017 - 03 conforms certain paragraphs within the SEC Staff Guidance to the guidance issued in Accounting Standards Update No. 2014 - 01, Investments—Equity Method and Joint Ventures (Topic 323 ): Accounting for Investments in Qualified Affordable Housing Projects. The Company is currently evaluating the impact of these amendments on its financial statements.

 

In May 2017, the FASB issued ASU No. 2017 - 09, Compensation —Stock Compensation (Topic 718 ): Scope of Modification Accounting, to provide clarity and reduce both ( 1 ) diversity in practice and ( 2 ) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this amendment on its financial statements.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014 - 09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015 - 14, Revenue from Contracts with Customers (Topic 606 ): Deferral of Effective Date, which defers the effective date of ASU No. 2014 - 09 by one year allowing early adoption as of the original effective date January 1, 2017. The deferral results in the new revenue standard being effective for the Company as of January 1, 2018. Additional ASUs have been issued to amend or clarify the new guidance in ASC Topic 606 as follows:

 

●

ASU No. 2016 - 08 Revenue from Contracts with Customers (Topic 606 ): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) was issued in March 2016. ASU No. 2016 - 08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal or agent designation.

●

ASU No. 2016 - 10 Revenue from Contracts with Customers (Topic 606 ): Identifying Performance Obligations and Licensing was issued in April 2016. ASU No. 2016 - 10 addresses implementation issues identified by the FASB-International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition concerning identifying performance obligations and accounting for licenses of intellectual property.

●

ASU No. 2016 - 12 Revenue from Contracts with Customers (Topic 606 ): Narrow-Scope Improvements and Practical Expedients was issued in May 2016. ASU No. 2016 - 12 amends the new revenue recognition standard to clarify the guidance on assessing collectability, measuring noncash consideration, presenting sales taxes and certain transition matters.

●

ASU No. 2016 - 20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers was issued in December 2016. ASU No. 2016 - 20 provides additional clarification on 13 issues or corrects unintended application of FASB Accounting Standards Codification (Topic 606 ).

 

The standard permits the use of either the full retrospective or modified retrospective method. The Company has completed its analysis in identifying which revenue streams will be impacted by the new guidance. Based on our review, we will adopt the requirements of the new standard in the first quarter of 2018 using the modified retrospective method. Based on the composition of its revenue base and the contracts in place at year end, the Company believes that the adoption of the new standard will have an immaterial effect, if any, on its consolidated financial statements.

 

In November 2017, the FASB issued ASU No. 2017 - 14, Income Statement —Reporting Comprehensive Income (Topic 220 ), Revenue Recognition (Topic 605 ), and Revenue from Contracts with Customers (Topic 606 ) (SEC Update). The ASU amends SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 116 and SEC Release No. 33 - 10403, which bring existing guidance into conformity with Topic 606, Revenue from Contracts with Customers. The amendments were effective upon issuance. The Company has evaluated the impact on revenue recognition, and does not expect these amendments to have a material effect on its financial statements.

 

 

 

Note 3 : Property and Equipment

   

		December 31,				December 31,
		2017				2016
Property and equipment consist of:
Furniture		$	31,731			$	31,731
Computers and hardware			57,681				58,201
Software			38,646				38,646
Equipment			2,359				2,359
Leasehold Improvements			99,246				99,246
Land			85,000				85,000
Land Improvements			4,000				4,000
			318,663				319,183
Less: accumulated depreciation			(232,112	)			(223,479	)
		$	86,551			$	95,704

 

Depreciation expense incurred during the twelve months ended December 31, 2017 and 2016 was $9,208 and $5,247, respectively.

 

 

Note 4 : Capitalized Software Development Costs

 

Costs incurred to develop Software as a Service (SaaS) technology 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 are 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. Expenditures relating to software development costs were capitalized during the twelve months ended December 31, 2017 and December 31, 2016 in the amount of $93,803 and $443,521, respectively.

 

Amortization of software development costs commenced when the product was 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. Capitalized software development costs, net of accumulated amortization, were $301,574 and $398,506 as of December 31, 2017 and December 31, 2016, respectively. Amortization expense incurred during the twelve months ended December 31, 2017 and 2016 was $190,735 and $106,238, respectively and is included in cost of goods sold.

 

 

 

Note 5 : Intangible Assets

 

Intangibles consist of the following as of December 31,

 

		2017
						Accumulated
		Gross				Amortization				Net Book Value
Website development costs		$	70,188			$	(70,188	)		$	-
Media distribution rights			25,000				(19,792	)			5,208
Intellectual property			5,000				(3,958	)			1,042
LinkedIn Group			2,500				(2,500	)			-
Organization costs			1,377				(1,377	)			-
Total intangibles		$	104,065			$	(97,815	)		$	6,250

 

 

		2016
						Accumulated
		Gross				Amortization				Net Book Value
Website development costs		$	70,188			$	(58,532	)		$	11,656
Media distribution rights			25,000				(7,292	)			17,708
Intellectual property			5,000				(1,458	)			3,542
LinkedIn Group			2,500				(2,500	)			-
Organization costs			1,377				(1,377	)			-
Total intangibles		$	104,065			$	(71,159	)		$	32,906

 

We began development of a new Company website in September 2014; related costs incurred during the design and production stages of website development were capitalized prior to its go-live date, which occurred in March 2015. Now that the website is live, all capitalized costs are amortized using straight-line basis over two years, the estimated economic life of the completed website.

 

Acquisition of media distribution rights occurred in May 2016 and all capitalized costs are amortized using straight-line basis over two years, the estimated economic life of this asset.

 

Acquisition of intellectual property occurred in June 2016 and capitalized costs are amortized using straight-line basis over two years, the estimated economic life of this asset.

 

Our intangible assets are reviewed for impairment when facts or circumstances suggest that the carrying value of the asset may not be recoverable. During the twelve months end ed December 31, 2016, an online media asset referred to as PetroPortfolio with a net book value of $41,614 was written off to loss on impairment. There were no impairment charges during the twelve months ended December 31, 2017.

 

Total amortization of intangible assets was $ 26,656 and $41,627 for the twelve months ended December 31, 2017 and 2016, respectively.

 

 

 

Note 6 : Shareholders’ Equity

 

Common stock

 

The Company is authorized to issue 500,000,000 shares of common stock, no par value per share. At the Company ’s annual meeting of shareholders held on August 10, 2016, the Company’s shareholders approved a resolution to increase the total number of shares of common stock the Company is authorized to issue from 30,000,000 shares of common stock to the current 500,000,000 shares of common stock.

 

On February 2, 2016 we completed a private placement of 3,660,000 restricted shares of common stock in consideration for $2,745,000 or at a rate of $0.75 per share. The private placement was completed in connection with and as a condition of our listing on the TSX Venture Exchange. The proceeds will be used for sales and marketing, product development and for general working capital purposes.

 

Options

 

Our stock-based compensation plan was originally established in 2008. The shares of our common stock issuable pursuant to the terms of such plan (the “Plan Shares”) could not exceed 30% of any outstanding issue or 2,500,000 shares, whichever was the lower amount.

 

In December 2015, we adopted a revised share option plan in which Plan Shares cannot exceed 10% of the total issued and outstanding shares at any given time. All stock option grants have an exercise price equal to the fair market value of our common stock on the date of the grant and all option grants have a 10 -year term. This share option plan was approved by the Company ’s shareholders at the annual meeting of shareholders on August 10, 2016.

 

 

To calculate the fair value of stock options at the date of grant, we use the Black-Scholes option pricing model. The volatility used is based on a blended historical volatility of our own stock and similar sized companies due to the limited historical data available for our own stock price. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

At December 31, 201 7, 1,340,000 stock options were exercisable and $103,762 and $240,732 of total compensation cost related to vested share-based compensation grants had been recognized for years ended December 31, 2017 and 2016, respectively. Unrecognized compensation expense from stock options was $5,834 at December 31, 2017, which is expected to be recognized over a weighted-average vesting period of 0.20 years beginning January 1, 2018.

 

There were no options granted during the twelve months ended December 31, 2017.

 

The following table summarizes our stock option activity for the twelve months ended December 31, 201 7 and 2016:

 

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
		Shares				Price				Term (in years)				Value
Outstanding at December 31, 2015			1,730,000			$	0.70				8.37				1,810,200
Granted			70,000				1.95				-				-
Exercised			-				-				-				-
Forfeited or expired			(225,000	)			1.12				-				-
Outstanding at December 31, 2016			1,575,000			$	0.70				7.35				394,000
Granted			-				-				-				-
Exercised			-				-				-				-
Forfeited or expired			(225,000	)			1.31				-				-
Outstanding at December 31, 2017			1,350,000			$	0.60				6.07				-
Exercisable at December 31, 2017			1,340,000			$	0.59				6.06			$	-

 

There we re no options granted in the year ended December 31, 2017. During the year ended December 31, 2016, the Company granted 70,000 options to certain employees of the Company with an incremental vesting schedule, a ten -year term and a weighted-average grant date fair value of $1.95. The following assumptions were used to calculate weighted average fair values of the options granted in the year ended December 31, 2016

 

		2016
Expected life (in years)			5.84
Risk-free interest rate			1.45	%
Volatility			111.43	%
Dividend yield			-
Weighted average grant date fair value per option granted		$	1.81

 

 

 

To the extent the actual forfeiture rate is different than what has been anticipated, share-based compensation expense related to these options will be different from expectations.

 

 

Note 7 : Concentrations

 

We sell products and services under various terms to a broad range of companies across multiple industries ranging from start-ups to Fortune 500 companies, with sales historically concentrated among a few large clients. We continue to make efforts to mitigate risk from loss of a single client and shift sales concentration to a more even distribution among our clients. For the twelve months ended December 31, 2017 and 2016, the percentage of sales and the concentrations are:

 

		2017				2016
Largest client			28	%			20	%
Second largest client			20	%			20	%
Third largest client			15	%			19	%
Next three largest clients			22	%			22	%
All other clients			15	%			19	%
			100	%			100	%

 

Sales are made without collateral and the credit-related losses have been insignificant or non-existent. Accordingly, there is no provision made to include an allowance for doubtful accounts.

 

 

Note 8 : Commitments and Contingencies

 

Leases

 

Our corporate headquarters, located at 201 Spear Street, Suite 1100, San Francisco, CA 94105 is a leased space, which we lease on a month-to-month basis for $129 a month. The Company also leases office space in San Anselmo, Califor nia under an operating lease that was scheduled to expire in 2018 and monthly rent of $2,300. Effective January 1, 2018 this lease was renegotiated for an extended 27 -month term and monthly rent of $2,362 and now expires March 31, 2020. Effective January 1, 2017, the Company also entered into a second lease for a facility in the same building with a 12 -month term which ended on December 31, 2017 with a  monthly rent of $1,375.  This lease was not renewed beyond the original term date of December 31, 2017. Rent expense under operating leases was $46,453 and $42,687 for the twelve months ended December 31, 2017 and 2016, respectively.

 

As of December 31, 2017, the estimated future payments under this operating lease (including rent escalation clauses) for each of the next five years is as follows:

 

2018		$	28,339
2019			28,339
2020			7,085
2021			-
2022			-
Total minimum lease payments		$	63,763

 

 

Note 9 : Debt

 

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 and 2017, there was no principal and accrued interest outstanding.

 

On September 16, 2011, a $100,000 CAD note was executed with an individual, a 1.86% shareholder. 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. Effective October 31, 2016 the note's previous maturity date of September 16, 2016 was amended to extend the maturity date to October 31, 2017. In October 2017, $66,217 was paid to the note holder and the remaining balance of $8,169 was paid in February 2018 fully satisfying the debt. The balance of $8,169 is presented under notes payable on the balance sheet as of December 31, 2017 and there were  no fees or penalties incurred by the Company. We have recorded foreign currency losses of $4,047 and $3,711 during the twelve months ended December 31, 2017 and 2016, respectively, related to the revaluation of this note's principal from CAD to USD.

 

 

Interest expense was $ 8,978 and $15,529 for the twelve months ended December 31, 2017 and 2016, respectively and consists of interest on our short-term promissory notes, and credit card balances.

   

 

Note 1 0 : Income Taxes  

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, we revalued our ending net deferred tax assets at December 31, 2017, which were fully offset by a valuation allowance. The Company has evaluated the other changes resulting from the Tax Act and does not expect them to have a material impact on the tax provision, therefore, the company considers the accounting complete.

 

As of December 31, 2017, the Company has net operating loss carry-forwards of approximately $4,010,000 that begin to expire in 2031. Pursuant to Sections 382 and 383 of the Internal Revenue Code, the utilization of NOLs and other tax attributes may be subject to substantial limitations if certain ownership changes occur during a three -year testing period (as defined by the Internal Revenue Code). A valuation allowance was established for all the net deferred tax assets because realization is not assured. The components of the deferred tax assets consist of the following:

 

		December 31,
		2017				2016
Net operating losses		$	800,000			$	1,200,000
Less: valuation allowance			(800,000	)			(1,200,000	)
Net deferred tax assets		$	-			$	-

 

 

Note 1 1 : Net Income / (Loss) per Share

 

Net income (loss) per share was computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. For the twelve months ended December 31, 201 7 and 2016, the assumed exercise of share options is anti-dilutive due to the Company’s net loss and are excluded from the determination of net income (loss) per share – basic and diluted. Accordingly, net income / (loss) per share basic and diluted are equal in all periods presented. Securities that were not included in the diluted per share calculations because they would be anti-dilutive were options to purchase common stock of 1,340,000 and 1,120,000 for years ended December 31, 2017 and 2016, respectively.

 

 

The computations for basic and diluted net loss per share are as follows:

 

		Year Ended
		December 31,
		2017				2016
Net loss		$	(411,073	)		$	(1,158,854	)
Basic and diluted weighted average common shares outstanding			20,426,158				20,106,158
Net loss per share, basic and diluted		$	(0.02	)		$	(0.06	)

 

 

Note 1 2 : Going Concern

 

The accompanying financial statements and notes have been prepared assuming that the Company will continue as a going concern.

 

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. However, during this year we have taken steps to improve our core consulting services revenue and contain costs in order to reduce our net operating losses. We believe that our increased revenues and improved net losses in 2017 coupled with our cash balance of $1, 616,076 as at December 31, 2017 and our belief that sufficient funding may be available from private placements of equity securities or additional borrowings if needed will enable us to meet our liquidity needs over the next 12 months. Notwithstanding the foregoing, our longer-term 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.