Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those discussed below and elsewhere in this annual report, particularly in the section entitled “Risk Factors” beginning on page 6 of this annual report.
Our audited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
Results of Operations - Years Ended December 31, 2019 vs. December 31, 2018.
The following summary of our results of operations should be read in conjunction with our consolidated financial statements for the years ended December 31, 2019 and 2018, which are included herein.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
|
|
December 31,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenue
|
|
$
|
5,872,767
|
|
|
$
|
4,203,921
|
|
|
$
|
1,668,846
|
|
Cost of revenue
|
|
|
3,794,196
|
|
|
|
3,518,571
|
|
|
|
275,625
|
|
Operating Expenses
|
|
|
2,977,739
|
|
|
|
2,984,198
|
|
|
|
(6,459
|
)
|
Net loss
|
|
$
|
(980,225
|
)
|
|
$
|
(2,393,621
|
)
|
|
$
|
1,413,396
|
|
Revenues increased by $1,668,846 or 40% for the fiscal year ended December 31, 2019 compared with the fiscal year ended December 31, 2018. This increase was offset by $67,600 of product sales in 2018, that management has eliminated as a revenue stream. Approximately $183,000 of the increase is related to the purchase of service contracts from Gamwell, approximately $1,065,000 is from net new customers recurring revenue, approximately $488,000 of non-recurring professional services and a contract termination fee of $80,000 collected during the period.
Cost of revenue increased by $275,625 or 8% compared with the prior fiscal year. There was an increase of IT personnel related to managed services costs and professional services costs of approximately $329,540 for new customers and a decrease of approximately $21,600 of fixed assets depreciated. Approximately $32,315 of the decline was related to managements’ decision to focus on recurring services and eliminate product sales. The gross margin of product sales is significantly lower than recurring revenue, with no product sales and significant increase in overall sales, there was an increase in the overall gross profit of the year.
Operating expenses decreased by $6,459 or less than 1% compared with the prior fiscal year. The Company’s management is continuing to control operating expenses while also implementing management growth strategies.
The Company incurred a net loss of $980,225 and $2,393,621 for the fiscal years ended December 31, 2019 and 2018, respectively. The decrease in the net loss is primarily related to an increase in recurring revenue, professional services and an overall gross margin, offset by an increase in selling, general and administrative expenses.
Liquidity and Capital Resources
Working Capital
|
|
At
|
|
|
At
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Current assets
|
|
$
|
2,413,948
|
|
|
$
|
706,089
|
|
Current liabilities
|
|
|
2,905,964
|
|
|
|
1,359,046
|
|
Working capital
|
|
$
|
(492,016
|
)
|
|
$
|
(652,957
|
)
|
Cash Flows
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows provided by (used) in operating activities
|
|
$
|
2,052,916
|
|
|
$
|
(1,851,754
|
)
|
Cash flows used in investing activities
|
|
|
(113,557
|
)
|
|
|
(826,364
|
)
|
Cash flows (used in) provided by financing activities
|
|
|
(336,605
|
)
|
|
|
2,705,126
|
|
Net increase in cash during period
|
|
$
|
1,602,754
|
|
|
$
|
27,008
|
|
At December 31, 2019, the Company had cash of $1,757,695. The increase in cash of $1,602,754 from the December 31, 2018 cash balance of $154,941 was related to an increase in revenue, deferred revenue from certain customers prepaying their annual service fee and a capital infusion of $288,000. Cash flow from operating activities has significantly increased by approximately $3.9 million compared to the year ended December 31, 2018, which is primarily related to the significant increase in revenue of approximately $1.7 million. Cash flow provided by operating activities was $2,003,190 for the year ended December 31, 2019, primarily related to an increase in deferred revenue of $1,977,825.
Net cash used in investing activities for the fiscal year ended December 31, 2019 was $113,557 with $826,364 being used for the fiscal year ended December 31, 2018. The most significant difference was the $800,000 used for the Gamwell purchase during the year ended December 31, 2018. During the year ended December 31, 2019, the use of cash was primarily for the payments related to the acquisition of contracts completed during the year ended December 31, 2018, this was partially offset by cash from the sale of certain unused assets.
Net cash flows (used in) provided by financing activities for the fiscal year ended December 31, 2019 was ($336,605) compared to $2,705,126 for the fiscal year ended December 31, 2018. During the year ended December 31,2019, the Company issued 745,778 shares of common stock and received $288,000 with no material fees and primarily offset by repayments of financed lease obligations of $446,877 and repayment of factoring credit liability of $169,257 in 2019. In December 31, 2018, the Company issued 8,590,847 shares of common stock and received approximately $3,215,738 with no material fees offset by repayments of notes and loans of $261,213 and repayments of financed leases of $418,656 in 2018. In both years the primary use of funds in financing activities was the repayment of equipment financing contracts and the reduction of other debt.
Management intends to finance operating costs over the next twelve months from the date of the issuance of these consolidated financial statements with existing cash on hand, cash flow from operations and short-term debt from the factoring of receivables. With the prepayment of annual services from two customers, the current monthly recurring revenue and the existing cash on hand, management believes the cash flow from operations and cash on hand will be sufficient to finance operations over the next twelve months.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, intangible assets, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We have identified below the accounting policies, related to what we believe are most critical to our business operations and are discussed throughout Management’s Discussion and Analysis of Financial Condition or Plan of Operation where such policies affect our reported and expected financial results.
Revenue Recognition
Topic ASC 606 is effective as of the annual reporting period beginning after December 15, 2017 using either of two methods: (1) retrospective application of Topic ASC 606 to each prior reporting period presented with the option to elect certain practical expedients as defined within Topic ASC 606 or (2) retrospective application of Topic ASC 606 with the cumulative effect of initially applying Topic ASC 606 recognized at the date of initial application and providing certain additional disclosures as defined per Topic ASC 606. The Company adopted Topic ASC 606 pursuant to the method (2) and we determined that any cumulative effect for the initial application did not require an adjustment to retained earnings at January 1, 2018.
For revenue recognition arrangements that we determine are within the scope of Topic ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company evaluates the goods or services promised within each contract related performance obligation and assesses whether each promised good or service is distinct. The Company recognizes as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company recognizes revenue upon completion of our performance obligations or expiration of the contractual time to use services such as professional service hours purchased in bulk for a given time period. Any early termination fees are recognized in the period the contract is terminated and the termination invoice is paid.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect the Company’s estimate of potential losses inherent in accounts receivable balances, based on historical loss and known factors impacting its customers. Management has determined that there a $10,000 and $0 allowance required for the fiscal years ended December 31, 2019 and 2018. The Company does not accrue interest on past due receivables.
Intangible Assets
Customer contracts acquired were recorded at their estimated fair value at the date of acquisition and are being amortized over their estimated useful life of five years using straight-line method.
Impairment of Long-lived Assets
The Company records an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. The Company did not record any impairment during the years ended December 31, 2019 and December 31, 2018.
Recent Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases.” The amendments in ASU 2018-10 clarify, correct or remove inconsistencies in the guidance provided under ASU 2016-02 related to sixteen specific issues identified. Also in July 2018, the FASB issued ASU No. 2018-11 “Leases (Topic 842): Targeted Improvement” which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. The effective date and transition requirements for these two ASUs are the same as the effective date and transition requirements as ASU 2016-02. The Company recognized no right-of-use assets or corresponding liabilities as a result of this guidance, since the Company was not party to any leases with a term of more than 12 months at January 1, 2019.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard became effective for the Company in the first quarter of 2019. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for non-employee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard became effective in the first quarter of fiscal year 2019. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements. No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASC 326”), authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
Item 8. Financial Statements and Supplementary Data
nDivison Inc.
December 31, 2019 and 2018
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of nDivision Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of nDivision Inc. (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor since 2018.
|
|
Marlton, New Jersey
|
March 25, 2020
|
NDIVISION INC
CONSOLDIATED BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
1,757,695
|
|
|
$
|
154,941
|
|
Accounts receivable, net (allowance for doubtful accounts was $10,000 at December 31, 2019 and $0 at December 31, 2018)
|
|
|
548,825
|
|
|
|
478,174
|
|
Prepaid expenses
|
|
|
107,428
|
|
|
|
72,974
|
|
Total current assets
|
|
|
2,413,948
|
|
|
|
706,089
|
|
|
|
|
|
|
|
|
|
|
Equipment and software licenses - at cost, less accumulated depreciation and amortization
|
|
|
210,004
|
|
|
|
497,833
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Intangible asset, less accumulated amortization
|
|
|
657,871
|
|
|
|
860,422
|
|
Right-of-use asset
|
|
|
542,975
|
|
|
|
-
|
|
Total other assets
|
|
|
1,200,846
|
|
|
|
860,422
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,824,798
|
|
|
$
|
2,064,344
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
137,582
|
|
|
$
|
131,850
|
|
Accrued liabilities
|
|
|
479,081
|
|
|
|
538,783
|
|
Deferred revenue
|
|
|
1,977,825
|
|
|
|
-
|
|
Factoring credit facility
|
|
|
-
|
|
|
|
169,257
|
|
Note payable
|
|
|
-
|
|
|
|
13,358
|
|
Current portion of acquisition note payable
|
|
|
57,492
|
|
|
|
113,598
|
|
Current portion of operating lease payable
|
|
|
124,452
|
|
|
|
-
|
|
Current portion of finance lease obligations
|
|
|
129,532
|
|
|
|
392,200
|
|
Total current liabilities
|
|
|
2,905,964
|
|
|
|
1,359,046
|
|
|
|
|
|
|
|
|
|
|
Acquisition note payable
|
|
|
14,666
|
|
|
|
77,579
|
|
Operating lease payable, net of current portion
|
|
|
412,302
|
|
|
|
-
|
|
Finance lease obligations, net of current portion
|
|
|
27,006
|
|
|
|
36,654
|
|
Total long-term liabilities
|
|
|
453,974
|
|
|
|
114,233
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 20,000,000 shares authorized, no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value, 180,000,000 shares authorized, and 41,249,783 and 40,504,005 shares issued and outstanding, respectively
|
|
|
41,250
|
|
|
|
40,504
|
|
Additional paid in capital
|
|
|
6,037,767
|
|
|
|
5,184,493
|
|
Accumulated deficit
|
|
|
(5,614,157
|
)
|
|
|
(4,633,932
|
)
|
Total stockholders' equity
|
|
|
464,860
|
|
|
|
591,065
|
|
Total liabilities and stockholders' equity
|
|
$
|
3,824,798
|
|
|
$
|
2,064,344
|
|
NDIVISION INC
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
|
|
|
|
|
Product sales
|
|
$
|
-
|
|
|
$
|
67,624
|
|
Service revenue
|
|
|
5,872,767
|
|
|
|
4,136,297
|
|
Net revenues
|
|
|
5,872,767
|
|
|
|
4,203,921
|
|
|
|
|
|
|
|
|
|
|
Product costs
|
|
|
-
|
|
|
|
22,277
|
|
Service costs
|
|
|
3,794,196
|
|
|
|
3,496,294
|
|
Cost of revenues
|
|
|
3,794,196
|
|
|
|
3,518,571
|
|
Gross profit
|
|
|
2,078,571
|
|
|
|
685,350
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,008,496
|
|
|
|
2,984,198
|
|
Change in contingent consideration
|
|
|
(30,757
|
)
|
|
|
-
|
|
|
|
|
2,977,739
|
|
|
|
2,984,198
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(899,168
|
)
|
|
|
(2,298,848
|
)
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(81,057
|
)
|
|
|
(94,773
|
)
|
Other expense
|
|
|
(81,057
|
)
|
|
|
(94,773
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income tax
|
|
|
(980,225
|
)
|
|
|
(2,393,621
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(980,225
|
)
|
|
|
(2,393,621
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
41,014,810
|
|
|
|
38,365,165
|
|
NDIVISION INC
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Additional Paid
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Par
|
|
|
In Capital
|
|
|
Deficit
|
|
|
(Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
27,500,000
|
|
|
$
|
27,500
|
|
|
$
|
1,566,161
|
|
|
$
|
(2,240,311
|
)
|
|
$
|
(646,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of reverse acquisition on February 13, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustement for reverse acquisition
|
|
|
4,400,000
|
|
|
|
4,400
|
|
|
|
(18,285
|
)
|
|
|
-
|
|
|
|
(13,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock option and warrant expense
|
|
|
-
|
|
|
|
-
|
|
|
|
403,325
|
|
|
|
-
|
|
|
|
403,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
13,158
|
|
|
|
13
|
|
|
|
4,987
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant issued for acquisition of contracts
|
|
|
-
|
|
|
|
-
|
|
|
|
21,158
|
|
|
|
-
|
|
|
|
21,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash, net
|
|
|
8,590,847
|
|
|
|
8,591
|
|
|
|
3,207,147
|
|
|
|
-
|
|
|
|
3,215,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,393,621
|
)
|
|
|
(2,393,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
40,504,005
|
|
|
$
|
40,504
|
|
|
$
|
5,184,493
|
|
|
$
|
(4,633,932
|
)
|
|
$
|
591,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock option and warrant expense
|
|
|
-
|
|
|
|
-
|
|
|
|
566,019
|
|
|
|
-
|
|
|
|
566,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash, net
|
|
|
745,778
|
|
|
|
746
|
|
|
|
287,255
|
|
|
|
-
|
|
|
|
288,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(980,225
|
)
|
|
|
(980,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
41,249,783
|
|
|
$
|
41,250
|
|
|
$
|
6,037,767
|
|
|
$
|
(5,614,157
|
)
|
|
$
|
464,860
|
|
NDIVISION INC
CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(980,225
|
)
|
|
$
|
(2,393,621
|
)
|
Adjustments to reconcile net loss to net cash provided (used) operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
511,142
|
|
|
|
568,055
|
|
Provision for doubtful accounts
|
|
|
22,413
|
|
|
|
-
|
|
Non-cash lease expense
|
|
|
12,968
|
|
|
|
-
|
|
Stock based compensation
|
|
|
566,019
|
|
|
|
403,325
|
|
Gain on sale of assets
|
|
|
4,533
|
|
|
|
-
|
|
Stock issued for services
|
|
|
-
|
|
|
|
5,000
|
|
Change in contingent consideration
|
|
|
(30,757
|
)
|
|
|
-
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(93,064
|
)
|
|
|
(1,919
|
)
|
Prepaid expenses
|
|
|
135,221
|
|
|
|
(6,224
|
)
|
Accounts payable and accrued liabilties
|
|
|
(53,970
|
)
|
|
|
(426,370
|
)
|
Deferred revenue
|
|
|
1,977,825
|
|
|
|
-
|
|
Operating lease payable
|
|
|
(19,189
|
)
|
|
|
-
|
|
Net cash provided by (used in) by operating activities
|
|
|
2,052,916
|
|
|
|
(1,851,754
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of contracts
|
|
|
-
|
|
|
|
(800,000
|
)
|
Repayment of debt related to acquisition
|
|
|
(88,262
|
)
|
|
|
-
|
|
Proceeds from sale of equipment and software license
|
|
|
31,699
|
|
|
|
-
|
|
Acquisition of equipment and software licenses
|
|
|
(56,994
|
)
|
|
|
(26,364
|
)
|
Net cash used in investing activities
|
|
|
(113,557
|
)
|
|
|
(826,364
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Lines of credit, net
|
|
|
-
|
|
|
|
(92,075
|
)
|
Proceeds from issuance of common stock, net
|
|
|
288,001
|
|
|
|
3,215,738
|
|
(Repayment of) proceeds of factor credit facility
|
|
|
(169,257
|
)
|
|
|
169,257
|
|
Repayments of loans from officers
|
|
|
-
|
|
|
|
(137,000
|
)
|
Repayments of note payable
|
|
|
(13,358
|
)
|
|
|
(32,138
|
)
|
Repayment of finance lease obligations
|
|
|
(441,991
|
)
|
|
|
(418,656
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(336,605
|
)
|
|
|
2,705,126
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
1,602,754
|
|
|
|
27,008
|
|
Cash, beginning of period
|
|
|
154,941
|
|
|
|
127,933
|
|
Cash, end of period
|
|
$
|
1,757,695
|
|
|
$
|
154,941
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
60,024
|
|
|
$
|
52,437
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
Operating lease asset obtained in exchange for operating lease obligation
|
|
$
|
555,943
|
|
|
$
|
-
|
|
Consideration for the purchase of contracts
|
|
$
|
-
|
|
|
$
|
212,335
|
|
nDivision Inc.
Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
1. DESCRIPTION OF BUSINESS
nDivision Inc. (“nDivision” or the “Company”) was incorporated under the laws of the state of Texas. nDivision’s registered office is located at located at 7301 N. State Highway 161, Suite 100, Irving, TX, 75039. The Company provides managed IT services and project-based professional services in the information technology industry, selling its services directly to customers and through global service providers (GSP). The Company operates in most states of the United States of America.
On February 13, 2018, Go2Green Landscaping, Inc., a Nevada corporation (the “Registrant”) executed an Agreement and Plan of Merger (the “Merger Agreement”) with nDivision Inc., and NDI Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Registrant (“Acquisition”) whereby Acquisition was merged with and into nDivision (the “Merger”) in consideration for Twenty Seven Million Five Hundred Thousand (27,500,000) newly-issued shares of Common Stock of the Company (the “Merger Shares”).
As a result of the Merger, nDivision became a wholly-owned subsidiary of the Registrant and following the consummation of the Merger and giving effect to the issuance of the Merger Shares and the retirement of 10,000,000 shares of the then 14,400,000 shares issued and outstanding of the Registrant by its principal stockholders, the stockholders of nDivision beneficially owned approximately seventy percent (70%) of the issued and outstanding Common Stock of the Registrant.
For accounting purposes, nDivision was deemed to be the accounting acquirer in the transaction and, consequently, the transaction was treated as a recapitalization of the Company. Accordingly, nDivision’s assets, liabilities and results of operations are the historical consolidated financial statements of the Company and the Company’s assets, liabilities and results of operations are consolidated with nDivision effective as of the date of the Merger. No step-up in basis or intangible assets or goodwill was recorded in this transaction.
On February 26, 2018, the Company executed an Asset Purchase Agreement (the “Agreement”) with Gamwell Technologies Inc., a Texas corporation (“Gamwell”). Gamwell is engaged in the business of providing managed services, VIOP telephone, security consulting and professional services to its customers.
As a result of the Agreement, nDivision acquired various managed services contracts (the “Purchased Contracts”) from Gamwell. As consideration for the Purchased Contracts, nDivision paid $800,000 (the “Cash Consideration”) to Gamwell. In addition, Gamwell received a promissory note (the “Promissory Note”) in an amount that equals fourteen (14) multiplied by the closing monthly recurring revenue from managed services. The Promissory Note was originally estimated at approximately $191,177 based on the closing monthly recurring revenue. Gamwell also received warrants (the “Warrants”) to purchase common stock of the Company equal to one fourth percent (0.25%) of the outstanding stock of the Company as of the agreement date. The Warrants were valued at approximately $21,158. The consideration for the contracts purchased was approximately $1,012,335. The Cash Consideration, Promissory Note and Warrants shall be defined as the “Purchase Price” and can be adjusted after one year, based on the newly calculated monthly recurring revenue.
The Company calculated an approximate 3% decline in the purchased contracts monthly recurring revenue and recognized a gain in contingent consideration of $30,757 and reduced the loan $30,757.
Since February 13, 2018, the Company has sold 9,336,625 shares of the Registrant’s common shares at approximately $0.375 - $0.45 per share for $3,503,738. There were no material fees paid in association with these shares being sold.
On April 9, 2018, the parent company Go2Green Landscaping, Inc. changed its name to nDivision Inc. and changed the ticker symbol to NDVN.
2. LIQUIDITY
The Company has experienced significant losses and negative cash flows from operations in the past. Management has secured new managed services contracts, implemented a strategy which includes cost reduction efforts, as well as identifying strategic acquisitions to improve the overall profitability and cash flows of the Company.
During the fiscal year ended December 31, 2019, the Company sold 745,778 shares of common stock at a price of approximately $0.37 - $0.45 per share for $288,000.
The Company has entered into a factoring agreement to provide short term working capital. The Company receives 90% of the factored receivables for a fee of 1.9% of the factored invoice. As of March 24, 2020, the Company has no factored invoices.
Management intends to finance operating costs over the next twelve months from the date of the issuance of these consolidated financial statements with existing cash on hand, expected cash flow from operations and short-term debt from the factoring of receivables. With the prepayment of annual services from two customers, the current monthly recurring revenue and the existing cash on hand, management believes the expected cash flow from operations and cash on hand will be sufficient to finance operations over the next twelve months from the date of this report.
3. SUMMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States.
Principles of Consolidation
The consolidated financial statements include the accounts and transactions of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation.
Use of Estimates
Management uses estimates and assumptions in preparing these consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Reclass
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported assets, liabilities, or net loss. The Company reclassed approximately $2,337,164 from selling, general and administrative expense to service costs in 2018.
Revenue Recognition
Topic ASC 606 is effective as of the annual reporting period beginning after December 15, 2017 using either of two methods: (1) retrospective application of Topic ASC 606 to each prior reporting period presented with the option to elect certain practical expedients as defined within Topic ASC 606 or (2) retrospective application of Topic ASC 606 with the cumulative effect of initially applying Topic ASC 606 recognized at the date of initial application and providing certain additional disclosures as defined per Topic ASC 606. The Company adopted Topic ASC 606 pursuant to the method (2) and we determined that any cumulative effect for the initial application did not require an adjustment to retained earnings at January 1, 2018.
For revenue recognition arrangements that we determine are within the scope of Topic ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company evaluates the goods or services promised within each contract related performance obligation and assesses whether each promised good or service is distinct. The Company recognizes as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company recognizes revenue upon completion of our performance obligations or expiration of the contractual time to use services such as professional service hours purchased in bulk for a given time period. Any early termination fees are recognized in the period the contract is terminated and the termination invoice is paid.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The Company’s cash balances are primarily maintained at two separate banks. Balances are insured by the Federal Deposit Insurance Corporation subject to certain limitations.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect the Company’s estimate of potential losses inherent in accounts receivable balances, based on historical loss and known factors impacting its customers. Management has determined that a $10,000 and $0 allowance was required for the fiscal years ended December 31, 2019 and 2018, respectively. The Company does not accrue interest on past due receivables.
Intangible Assets
Customer contracts acquired were recorded at their estimated fair value at the date of acquisition and are being amortized over their estimated useful life of five years using the straight-line method.
Impairment of Long-lived Assets
The Company records an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. The Company did not record any impairment during the years ended December 31, 2019 and December 31, 2018.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and accounts receivable. See Note 15 for significant customer concentration disclosure.
Cash is maintained with two separate major financial institutions in the United States and may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.
Equipment and Software Licenses
Equipment and software licenses are stated at cost. Depreciation is calculated using the straight-line method over an estimated useful life of one to ten years.
Earnings and Loss per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. There were approximately 2,585,177 and 2,582,667 of common stock equivalents excluded for the fiscal years ended December 31, 2019 and 2018, respectively because their effect is anti-dilutive.
Marketing Costs
Marketing costs, which are expensed as incurred, totaled approximately $92,144 and $12,540 for the fiscal years ended December 31, 2019 and 2018, respectively and is included in selling, general and administrative expenses.
Stock-Based Compensation
Compensation expense related to share-based transactions, including employee stock options, is measured in the financial statements based on a determination of the fair value. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all stock options, the Company recognizes expense over the requisite service period on a straight-line basis (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
See Note 11 for the assumptions used to calculate the fair value of stock-based employee and non-employee compensation.
Leases
Leases of assets where the Company has assumed substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are recognized at the lower of the fair value of the leased assets and the present value of the minimum lease payments. The interest element of the finance leases is accounted for as finance costs and expensed over the lease term using the effective interest rate method.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company has determined the deferred tax assets and liabilities on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2019, no accrued interest or penalties are included on the related tax liability line in the balance sheet.
4. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements Recently Adopted
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases.” The amendments in ASU 2018-10 clarify, correct or remove inconsistencies in the guidance provided under ASU 2016-02 related to sixteen specific issues identified. Also in July 2018, the FASB issued ASU No. 2018-11 “Leases (Topic 842): Targeted Improvement” which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. The effective date and transition requirements for these two ASUs are the same as the effective date and transition requirements as ASU 2016-02. The Company recognized right-of-use assets and a corresponding liability of $555,943 for an operating lease with a term in excess of 12 months.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard became effective for the Company in the first quarter of 2019. The adoption of this standard does not have a material impact on the condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for non-employee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard became effective in the first quarter of fiscal year 2019. The adoption of this standard does not have a material impact on the condensed consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASC 326”), authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future consolidated financial statements.
5. EQUIPMENT AND SOFTWARE LICENSES
Equipment and software licenses consist of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
$
|
489,151
|
|
|
$
|
1,124,245
|
|
Software licenses
|
|
|
868,041
|
|
|
|
966,754
|
|
|
|
|
1,357,192
|
|
|
|
2,090,999
|
|
Less - Accumulated depreciation and amortization
|
|
|
(1,147,188
|
)
|
|
|
(1,593,166
|
)
|
|
|
$
|
210,004
|
|
|
$
|
497,833
|
|
During the year ended December 31, 2019, the Company disposed of $790,803 of equipment and software and related accumulated depreciation of $754,570, for proceeds of $31,699 which resulted in a gain $4,533.
Depreciation and amortization expense related to owned assets for the fiscal years ended December 31, 2019 and 2018 was approximately $31,614 and $40,698 respectively.
Depreciation and amortization expense related to leased assets for the fiscal years ended December 31, 2019 and 2018 was approximately $276,505 and $375,444, respectively.
6. INTANGIBLE ASSETS
Intangible Assets
As of December 31, 2019
|
|
Useful Life
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Contracts
|
|
|
5
|
|
|
$
|
1,012,335
|
|
|
$
|
354,464
|
|
|
$
|
657,871
|
|
There was approximately $202,551 of amortization expense for the fiscal year ended December 31, 2019. There was approximately $151,913 of amortization expense for the fiscal year ended December 31, 2018. Service contracts are amortized based on the future undiscounted cash flows or straight – line basis over estimated remaining useful lives of five years.
Over the next four years, annual amortization expense for these finite life intangible assets will total approximately $657,871, as follows: fiscal 2020 - $202,551, fiscal 2021- $202,551, fiscal 2022- $202,551, fiscal 2023 - $50,218.
Long-lived assets, including purchased intangibles subject to amortization, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company regularly evaluates whether events and circumstances have occurred that indicate possible impairment and relies on several factors, including operating results, business plans, economic projections, and anticipated future cash flows. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether the assets are recoverable, as of December 31, 2019, the Company has not recorded any impairments.
7. ACCRUED LIABILITIES
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued compensation
|
|
$
|
128,942
|
|
|
$
|
156,139
|
|
Accrued sales tax
|
|
|
140,683
|
|
|
|
149,821
|
|
Accrued franchise tax
|
|
|
5,000
|
|
|
|
35,000
|
|
Accrued professional fees and other payables
|
|
|
204,456
|
|
|
|
197,823
|
|
Total accrued liabilities
|
|
$
|
479,081
|
|
|
$
|
538,783
|
|
8. FACTORING CREDIT FACILITY
The Company has agreements with an unrelated third party for factoring of specific accounts receivable. Under this arrangement, the Company has transferred the relevant receivables to the factor in exchange for cash and is prevented from selling or pledging the receivables. The agreement provides for an advanced rate of 90% with a fee of 1.9% to be charged on the gross face amount of the invoices purchased for 30 days, and an additional 0.06% charge for each additional day until the invoice(s) are paid. The Company has retained late payment and credit risk related to the factored receivables and therefore continues to recognize the factored receivables in their entirety on its balance sheet. The receivables under factoring arrangements are recorded within accounts receivable and factoring credit facility. The balance of the accounts receivable amount factored, and the related factor payable are $0 and $169,257 as of December 31, 2019 and 2018, respectively. The Company has recognized $24,676 and $19,011 in interest expense related to these arrangements for the fiscal year ended December 31, 2019 and 2018, respectively.
9. NOTES PAYABLE
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
The Company obtained an $85,670 promissory note with a maturity date of June 30, 2019, an interest rate of 6%, which is repayable in monthly installments of principal and interest of $2,270. The note is unsecured. The note has been fully repaid as of December 31, 2019.
|
|
$
|
-
|
|
|
$
|
13,358
|
|
10. LEASE OBLIGATIONS
Finance Lease Obligations
The Company finances certain property and equipment using finance leases. These leases range from one to five years. The finance lease obligations represent the present value of the minimum lease payments, net of imputed interest. The finance lease obligations are secured by the underlying leased assets. Leases are payable in monthly installments ranging from $225 to $15,530 including interest, ranging from 3.6% to 55.9% per annum.
Future minimum lease payments, including principal and interest, under the finance leases for subsequent years are as follows:
Year ended
|
|
|
|
2020
|
|
$
|
140,905
|
|
2021
|
|
|
20,701
|
|
2022
|
|
|
4,082
|
|
Total
|
|
|
165,688
|
|
Less: interest
|
|
|
(9,150
|
)
|
Present value of net minimum lease payments
|
|
|
156,538
|
|
Short term
|
|
|
129,532
|
|
Long term total
|
|
$
|
27,006
|
|
Lease payments for the years ended December 31, 2019 and 2018 aggregated approximately $494,691 and $650,620, respectively.
The finance lease obligations are secured by underlying leased assets with a net book value of approximately $125,553 and $450,834 as of December 31, 2019 and December 31, 2018, respectively.
Operating Lease
The Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option will result in an economic penalty. All of the Company’s real estate leases are classified as operating leases.
Most real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term for an additional four to five years. The exercise of lease renewal options is at the Company’s discretion. The Company evaluates renewal options at lease inception and on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
During September 2019, the Company entered into a new lease for a Texas facility that commenced on October 1, 2019 and recorded a right of use asset and corresponding lease liability. Lease expense was $30,945 for the year ended December 31, 2019. Lease expense for the year ended December 31, 2019 includes $63,497 related to month to month lease expense and leases that expire in one year or less.
The Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of December 31, 2019 are:
Weighted average remaining lease term
|
|
59 Months
|
|
Weighted average incremental borrowing rate
|
|
|
5.0
|
%
|
For the year ended December 31, 2019, the components of lease expense, included in general and administrative expenses and interest expense in the consolidated statements of operations income, are as follows:
Operating lease cost:
|
|
|
|
Operating lease cost
|
|
$
|
23,000
|
|
Finance lease cost:
|
|
|
|
|
Amortization of ROU assets
|
|
$
|
446,877
|
|
Interest expense
|
|
|
30,938
|
|
Total lease cost
|
|
$
|
500,812
|
|
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized in the consolidated balance sheet as of December 31, 2019:
2020
|
|
$
|
124,452
|
|
2021
|
|
|
127,143
|
|
2022
|
|
|
129,841
|
|
2023
|
|
|
131,859
|
|
2024
|
|
|
98,894
|
|
Total undiscounted future minimum lease payments
|
|
|
612,189
|
|
Less: Imputed interest
|
|
|
(75,435
|
)
|
Present value of operating lease obligation
|
|
|
536,754
|
|
The Company has one leased facility which is office, manufacturing and warehouse space. The Company is responsible for real estate taxes, utilities, and repairs under the terms of certain of the operating leases. Therefore, all lease and non-lease components are combined and accounted for as single lease component.
11. STOCK BASED COMPENSATION
The Board of Directors approved the Company’s 2018 Equity Incentive Plan (the “2018 Plan”). The purpose of the 2018 Plan is to provide additional incentives to select persons who can make, are making, and continue to make substantial contributions to the growth and success of the Company, to attract and retain the employment and services of such persons, and to encourage and reward such contributions, by providing these individuals with an opportunity to acquire or increase stock ownership in the Company through either the grant of options or restricted stock. The 2018 Plan is administered by the Compensation Committee or such other committee as is appointed by the Board of Directors pursuant to the 2018 Plan (the “Committee”). The Committee has full authority to administer and interpret the provisions of the 2018 Plan including, but not limited to, the authority to make all determinations with regard to the terms and conditions of an award made under the 2018 Plan. The maximum number of shares that may be granted under the 2018 Plan is 8,000,000. This number is subject to adjustment to reflect changes in the capital structure or organization of the Company.
The following table reflects the stock options for year ended December 31, 2019 and 2018:
A summary of stock option activity is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Number of options outstanding:
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
5,901,678
|
|
|
$
|
752,062
|
|
Granted
|
|
|
1,325,000
|
|
|
|
6,405,314
|
|
Exercised, converted
|
|
|
-
|
|
|
|
-
|
|
Forfeited / exchanged / modification
|
|
|
(287,500
|
)
|
|
|
(1,225,699
|
)
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
6,939,178
|
|
|
|
5,937,677
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable at end of year
|
|
|
3,507,661
|
|
|
|
1,541,660
|
|
Number of options available for grant at end of year
|
|
|
1,060,822
|
|
|
|
2,098,323
|
|
|
|
|
|
|
|
|
|
|
Weighted average option prices per share:
|
|
|
|
|
|
|
|
|
Granted during the year
|
|
$
|
0.61
|
|
|
$
|
0.38
|
|
Exercised during the year
|
|
|
-
|
|
|
|
-
|
|
Terminated during the year
|
|
|
0.38
|
|
|
|
0.13
|
|
Outstanding at end of year
|
|
|
0.45
|
|
|
|
0.38
|
|
Exercisable at end of year
|
|
$
|
0.39
|
|
|
$
|
0.38
|
|
Stock-based compensation expense attributable to stock options was $566,019 for the year ended December 31, 2019. As of December 31, 2019, there was approximately $951,932 of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3 years.
The Company granted options to purchase 1,325,000 shares of common stock with an average vesting period of 3 years, an average expected life of 6.5 years and an average exercise price of $0.61 per common share. Total value was approximately $755,000.
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Expected option life (years)
|
|
|
6.5
|
|
|
|
6.5
|
|
Expected stock price volatility
|
|
|
137-145
|
%
|
|
|
51-135
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Risk-free interest rate
|
|
|
2.40-2.90
|
%
|
|
|
2.00
|
%
|
The Company issued approximately 2,200,000 warrants related to three consulting agreements during the year ended December 31, 2018 and did not issue any warrants during the year ended December 31, 2019. The fair value of the warrants granted was approximately $61,780 for the year ended December 31, 2018. The compensation was recognized as stock compensation expense in the year ended December 31, 2018 as the warrants are immediately exercisable, regardless of the service period of the consulting agreements. This estimate was made using the Black-Scholes option pricing model using the weighted average assumptions detailed above. All of these warrants have since expired. The only warrants remaining are related to the Gamwell contract acquisition. The warrant can be exercised for 122,752 of the Company’s common stock at an exercise price of $0.375 per share and expire April 23, 2028.
12. COMMON STOCK
During the years ended December 31, 2018 and December 31, 2019, the Company issued the following stock:
2018
nDivision recorded the issuance of 4,400,000 common shares and the assumed liabilities of approximately $13,885 in connection with the reverse acquisition.
nDivision issued 2,819,943 common shares and received approximately $1,000,000 with no material fees recorded.
nDivision issued 13,158 common shares for services provided to the Company during the year ended December 31, 2018. The services provided were valued at approximately $5,000.
nDivision issued 8,590,847 shares of common stock and received approximately $3,215,738 with no material fees.
2019
Issued approximately 745,778 shares of common stock and received $288,001 with no material fees.
13. RELATED PARTY TRANSACTIONS
The Company contracted with Norco Professional Services, LLC. (“Norco”) to provide consulting services. The Company spent approximately $90,000 for the year ended December 31, 2019 and approximately $55,000 for the year ended December 31, 2018. Norco is owned by Andrew J. Norstrud, who joined the Company in January of 2019, as the Company’s Chief Financial Officer. The Company continues to contract Andrew Norstrud’s services through Norco.
The above related party transactions are not necessarily indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent parties.
14. COMMITMENTS
Contract Purchase Price Adjustment
On the one-year anniversary of the Closing Date for the Gamwell contract purchase, nDivision will calculate (using the same methods and procedures used to calculate the aggregate monthly recurring revenue from the Purchased Contracts calculated on the Closing Date (the “Closing MRR”) the monthly recurring revenue for the Purchased Contracts that are still active or that have renewed their contract term (the “Anniversary MRR”), plus any monthly recurring revenue from new managed service contracts that are being invoiced at the one year anniversary of the Closing Date (the “New MRR”) (Anniversary MRR plus New MRR is referred to herein as the “Total MRR”). The Cash Consideration, the amount due under the Promissory Note and the number of shares issuable pursuant to the Warrants shall be adjusted as follows: (x) the Cash Consideration shall be decreased on the Closing Date, by the amount of Customer Prepayments, as defined in the agreement, if any; (y) the principal balance of the Promissory Note shall be decreased by an amount equal to the product of the MRR Percentage Decrease, as defined in the Agreement, multiplied by the Multiple Price, as defined in the Agreement, and (z) the Warrant Percentage shall be decreased by the MRR Percentage Decrease, if any. For clarity, the Purchase Price shall not be adjusted upward for any increase in monthly recurring revenue after Closing.
The Cash Consideration, Promissory Note and Warrants shall be defined as the “Purchase Price” and can be adjusted after one year, based on the newly calculated monthly recurring revenue. The Company calculated an approximate 3% decline in the purchased contracts monthly recurring revenue and recognized a gain in contingent consideration of $30,757 and reduced the loan $30,757.
15. SIGNIFICANT CUSTOMERS
The Company had significant customers in each of the years presented. A significant customer is defined as one that makes up ten percent or more of total revenues in a particular quarter or ten-percent of outstanding accounts receivable balance as of the year end.
Net revenues for the years ended December 31, 2019 and 2018 include revenues from significant customers as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Customer A
|
|
|
44
|
%
|
|
|
42
|
%
|
Customer B
|
|
|
2
|
%
|
|
|
10
|
%
|
Customer C
|
|
|
6
|
%
|
|
|
0
|
%
|
Accounts receivable balances as of December 31, 2019 and 2018 from significant customers are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Customer A
|
|
|
75
|
%
|
|
|
74
|
%
|
Customer B
|
|
|
0
|
%
|
|
|
8
|
%
|
Customer D
|
|
|
17
|
%
|
|
|
0
|
%
|
16. INCOME TAXES
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current expense (benefit):
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current expense (benefit):
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total deferred expense (benefit):
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit):
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the Company’s tax provision for (benefit from) income taxes as computed by applying the U.S. statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Income at US Statutory Rate
|
|
$
|
(211,240
|
)
|
|
$
|
(515,830
|
)
|
Change in tax law
|
|
|
-
|
|
|
|
340,826
|
|
State taxes, net of Federal benefit
|
|
|
-
|
|
|
|
(52,000
|
)
|
Valuation allowance
|
|
|
211,240
|
|
|
|
227,004
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The net deferred income tax asset balance related to the following:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net Operating Losses
|
|
$
|
1,032,904
|
|
|
$
|
974,283
|
|
Stock Options
|
|
|
250,182
|
|
|
|
131,318
|
|
Other
|
|
|
204
|
|
|
|
4,770
|
|
Total Deferred tax assets
|
|
$
|
1,283,326
|
|
|
$
|
1,110,371
|
|
Depreciation
|
|
|
(12,015
|
)
|
|
|
(40,376
|
)
|
Total deferred tax liability
|
|
$
|
(12,015
|
)
|
|
$
|
(40,376
|
)
|
Deferred tax asset (liability)
|
|
$
|
1,271,311
|
|
|
$
|
1,069,995
|
|
Valuation allowance
|
|
|
(1,271,311
|
)
|
|
|
(1,069,995
|
)
|
Net deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2019, the Company had federal and state net operating loss carryforwards of approximately $4,628,700, which begin to expire in 2034.
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of December 31, 2019 and 2018, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company also considered whether there was any currently available information about future years. Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or by extrapolating past results. Moreover, the Company’s earnings are strongly influenced by national economic conditions and have been volatile in the past. Considering these factors, the Company determined that it was not possible to reasonably quantify future taxable income. The Company determined that it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of December 31, 2019 and 2018.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2019, and 2018 we have not recorded any uncertain tax positions in our financial statements.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2019, and 2018, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from December 31, 2014, to the present. Earlier years may be examined to the extent that the net operating loss carryforwards from those earlier years are used in future periods. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.
17. SUBSEQUENT EVENT
In December 2019, a novel strain of coronavirus (COVID-19) surfaced. The spread of COVID-19 around the world in the first quarter of 2020 has caused significant volatility in U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, the Company is unable to determine if it will have a material impact to its operations.