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, 2018 vs. December 31, 2017.
The following summary of our results
of operations should be read in conjunction with our consolidated financial statements for the years ended December 31, 2018 and
2017, which are included herein.
In January of 2018, management decided
to no longer continue with product sales, due to the low margins and to allow our management team and sales team to focus on the
services revenue. This change in focus had a direct result of lowering our total revenue by approximately $1,000,000. In addition,
it was announced in December of 2018, the Company signed a new client to a five-year agreement for nDivision’s Autonomic
Managed Service, which covers approximately 5,000 IT assets across the client’s datacenters, network and public cloud environment.
There are addition new sales contract that management expects to see significant growth in 2019.
Our operating results for the years
ended December 31, 2018 and 2017 and the changes between those periods for the respective items are summarized as follows:
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Revenue
|
|
$
|
4,203,921
|
|
|
$
|
5,163,690
|
|
|
$
|
(959,769)
|
|
Cost of revenue
|
|
|
1,141,407
|
|
|
|
2,365,326
|
|
|
|
(1,223,919)
|
|
Operating Expenses
|
|
|
5,361,362
|
|
|
|
4,488,936
|
|
|
|
872,426
|
|
Net loss
|
|
$
|
(2,393,621)
|
|
|
$
|
(1,807,861)
|
|
|
$
|
(585,760)
|
|
Revenues declined by $959,769 or 19%
for the fiscal year ended December 31, 2018 compared with the fiscal year ended December 31, 2017. Approximately $1,012,000 of
the decline was related to managements' decision to focus on recurring services and eliminate product sales during 2018, this was
offset by additional professional fees, new customers and approximately $620,000 from the purchased contracts from the Gamwell
transaction.
Cost of revenue declined by $1,223,919
or 52% compared with the prior fiscal year. Approximately $925,000 of the decline was related to managements' decision to
focus on recurring services and eliminate product sales. The remaining decrease was related to the negotiated reduction or
elimination of certain contracted services used to generate service revenues and overall lower staff needed to support professional
services. The gross margin of recurring revenue ranges between 65% and 75%, which is significantly higher than the gross margin
of product sales which ranges between 10% and 15%. The decline of product sales has greatly increased the overall gross margin
of the Company for the year.
Operating expenses increased by $872,426
or 19% compared with the prior fiscal year. The Company has begun the investment in a new sales and marketing initiative,
in addition had an increase of approximately $220,000 in stock options and warrants expense than in the same period in the prior
year and approximately $152,000 of amortization of customer contracts purchased in 2018.
The Company incurred a net loss of $2,393,621
and $1,807,861 for the fiscal years ended December 31, 2018 and 2017, respectively. The increase in the net loss is primarily
related to the increase in operating expenses that were in excess of the increase in gross profit.
Liquidity and Capital Resources
Working Capital
|
|
As at
|
|
|
As at
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Current assets
|
|
$
|
706,089
|
|
|
$
|
670,938
|
|
Current liabilities
|
|
|
1,359,046
|
|
|
|
1,862,503
|
|
Working capital
|
|
$
|
(652,957
|
)
|
|
$
|
(1,191,565)
|
|
Cash Flows
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows used in operating activities
|
|
$
|
(1,851,754
|
)
|
|
$
|
(656,859
|
)
|
Cash flows (used in) provided by investing activities
|
|
|
(826,364
|
)
|
|
|
8,005
|
|
Cash flows provided by financing activities
|
|
|
2,705,126
|
|
|
|
595,087
|
|
Net increase (decrease) in cash during period
|
|
$
|
27,008
|
|
|
$
|
(53,767)
|
|
At December 31, 2018, the Company had
cash of $154,941. The increase in cash of $27,008 from the December 31, 2017 cash balance of $127,933 was related to the cash provided
by the issuance of common stock, which was offset by the acquisition of recurring service contracts and an increase in operating
expenses. Cash outflows in operating activities was approximately $1,851,754 for the fiscal year ended December 31, 2018 and primarily
related to the losses of the Company as well as repayments of accounts payable.
Net cash used in investing activities
for the fiscal year ended December 31, 2018 was $826,364 with $8,005 being provided for the fiscal year ended December 31, 2017.
The use of cash was primarily used in the acquisition of contracts.
Net cash flows provided by financing
activities for the fiscal year ended December 31, 2018 was $2,705,126 compared to $595,087 for the fiscal year ended December 31,
2017. The Company issued 8,590,847 shares of common stock and received $3,215,738 with no material fees. This was partially
offset by the reduction of debt. In 2017 the Company issued shares of common stock and received approximately $1,000,000 with no
material fees, which was partially offset by the reduction of debt.
The ability to continue as a going
concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to
meet its obligations and repay its liabilities arising from normal business operations when they come due. 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. Management believes
the Company will only need to raise additional capital for acquisitions, sales initiatives and unexpected decreases in operating
cashflow. If the Company must raise capital, there is, however, no assurance that the Company will be able to raise any additional
capital through any type of offering on terms acceptable to the Company, as existing cash on hand will be insufficient 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
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (“Topic 606”): Topic 606 which supersedes nearly all existing revenue recognition
guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to
customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines
a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in
the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction
price to each separate performance obligation, among others. Topic 606 also provides guidance on the recognition of costs related
to obtaining customer contracts.
Topic 606 was effective as of January
1, 2018 using either of two methods: (1) retrospective application of Topic 606 to each prior reporting period presented with the
option to elect certain practical expedients as defined within Topic 606 or (2) retrospective application of Topic 606 with the
cumulative effect of initially applying Topic 606 recognized at the date of initial application and providing certain additional
disclosures as defined per Topic 606. We adopted Topic 606 pursuant to the method (2) and we determined that any cumulative effect
for the initial application did not require an adjustment to accumulated deficit at January 1, 2018.
For revenue recognition arrangements that
we determine are within the scope of Topic 606, we perform 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. We only apply 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, we evaluate the goods
or services promised within each contract related performance obligation and assess whether each promised good or service is distinct.
We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when
(or as) the performance obligation is satisfied.
Project based, services revenue is recognized
when the professional consulting, maintenance or other ancillary services are provided to the customer.
The Company provides recurring services.
There are two components to the recurring services; set-up revenues are recognized upon completion of the set-up procedures and
the monthly recurring revenue is recognized as services are rendered.
The Company is a value-added reseller
and engages in "drop-shipping" whereby products are transferred directly from the Company's supplier to the customer.
Product sales are recognized as revenue upon shipment of the products by the vendor. Shipping and handling costs charged
to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of sales.
The Company provides customers with
payment terms of thirty days.
Accounts Receivable
Accounts receivable are stated at the
amount’s 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 was no allowance required for the fiscal years ended December 31, 2018 and 2017. 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, 2018 and December
31, 2017.
Recent Accounting Pronouncements
New Accounting Pronouncements
Recently Adopted
On May 28, 2014, the Financial Accounting
Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 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 replaced 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 the Effective Date,
which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities
to choose to adopt the standard as of the original effective date. This ASU permits the use of either the retrospective or cumulative
effect transition method. The Company has used the retrospective method in the presentation of these consolidated financial statements,
however there was no adjustment necessary.
In August 2016, the FASB issued
authoritative guidance designed to address diversity in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows, including: i) contingent consideration payments made after a business combination; ii) proceeds
from the settlement of insurance claims; and iii) proceeds from the settlement of corporate-owned life insurance policies. The
new guidance is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted in any interim or annual period. There was no material impact on its consolidated financial
statements as a result of adopting this guidance.
New Accounting Pronouncements
Not Yet 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. We adopted this standard on January 1, 2019 and are
applying the transition guidance as of the date of adoption, under the current period adjustment method. Management believes
the effect on the financial statements will not be material.
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 will be effective for the Company in the first quarter of 2019. Early adoption is permitted.
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 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 will be effective in the
first quarter of fiscal year 2019, although early adoption is permitted. Management believes the effect on the
consolidated financial statements will not be material.
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.
Item 8. Financial Statements and
Supplementary Data
nDivison Inc.
December 31, 2018 and 2017
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
21
|
|
CONSOLIDATED FINANCIAL STATEMENTS:
|
|
|
|
Balance Sheets
|
|
22
|
|
Statements of Operations
|
|
23
|
|
Statements of Changes in Stockholders' Equity (Deficit)
|
|
24
|
|
Statements of Cash Flows
|
|
25
|
|
Notes to the Consolidated Financial Statements
|
|
26
|
|
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, 2018 and 2017, 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, 2018 and 2017, 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.
The Company’s Ability to Continue
as a Going Concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has an
accumulated deficit of $4,633,932 as of December 31, 2018 and has suffered recurring losses from operations and has a
net working capital deficiency as of December 31, 2018. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that may result from the outcome of these uncertainties. If the Company is unable to
successfully raise additional capital to satisfy the obligations, there could be a material adverse effect on the Company.
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/ Frieman LLP
|
|
|
We have served as the Company’s auditor since 2018.
|
|
|
|
|
Marlton, NJ
|
March 29, 2019
|
NDIVISION INC
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
154,941
|
|
|
$
|
127,933
|
|
Accounts receivable
|
|
|
478,174
|
|
|
|
476,255
|
|
Prepaid expenses
|
|
|
72,974
|
|
|
|
66,750
|
|
Total current assets
|
|
|
706,089
|
|
|
|
670,938
|
|
|
|
|
|
|
|
|
|
|
Equipment and software licenses - at cost, less accumulated
|
|
|
|
|
|
|
|
|
depreciation and amortization
|
|
|
497,833
|
|
|
|
887,641
|
|
Intangible assets, less accumulated amortization
|
|
|
860,422
|
|
|
|
-
|
|
Total assets
|
|
$
|
2,064,344
|
|
|
$
|
1,558,579
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Lines of credit
|
|
$
|
-
|
|
|
$
|
92,075
|
|
Accounts payable
|
|
|
131,850
|
|
|
|
565,226
|
|
Accrued liabilities
|
|
|
538,783
|
|
|
|
517,922
|
|
Factoring credit facility
|
|
|
169,257
|
|
|
|
-
|
|
Loan from officer
|
|
|
-
|
|
|
|
137,000
|
|
Note payable
|
|
|
13,358
|
|
|
|
45,496
|
|
Current portion of acquisition note payable
|
|
|
113,598
|
|
|
|
-
|
|
Current portion of finance lease obligations
|
|
|
392,200
|
|
|
|
504,784
|
|
Total current liabilities
|
|
|
1,359,046
|
|
|
|
1,862,503
|
|
|
|
|
|
|
|
|
|
|
Acquisition note payable
|
|
|
77,579
|
|
|
|
-
|
|
Finance lease obligations
|
|
|
36,654
|
|
|
|
342,726
|
|
Total long-term liabilities
|
|
|
114,233
|
|
|
|
342,726
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
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 40,504,005 and 27,500,000 shares issued and outstanding, respectively
|
|
|
40,504
|
|
|
|
27,500
|
|
Additional paid in capital
|
|
|
5,184,493
|
|
|
|
1,566,161
|
|
Accumulated deficit
|
|
|
(4,633,932
|
)
|
|
|
(2,240,311
|
)
|
|
|
|
591,065
|
|
|
|
(646,650
|
)
|
|
|
$
|
2,064,344
|
|
|
$
|
1,558,579
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
NDIVISION INC
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Revenue
|
|
|
|
|
Product sales
|
|
$
|
67,624
|
|
|
$
|
1,080,079
|
|
Service revenue
|
|
|
4,136,297
|
|
|
|
4,083,611
|
|
Revenues
|
|
|
4,203,921
|
|
|
|
5,163,690
|
|
|
|
|
|
|
|
|
|
|
Product costs
|
|
|
22,277
|
|
|
|
946,637
|
|
Service costs
|
|
|
1,119,130
|
|
|
|
1,418,689
|
|
Cost of revenues
|
|
|
1,141,407
|
|
|
|
2,365,326
|
|
Gross profit
|
|
|
3,062,514
|
|
|
|
2,798,364
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
5,361,362
|
|
|
|
4,488,936
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,298,848
|
)
|
|
|
(1,690,572
|
)
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(94,773
|
)
|
|
|
(117,289
|
)
|
Other expense
|
|
|
(94,773
|
)
|
|
|
(117,289
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income tax
|
|
|
(2,393,621
|
)
|
|
|
(1,807,861
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,393,621
|
)
|
|
|
(1,807,861
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
38,365,165
|
|
|
|
25,166,841
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
NDIVISION INC
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Common Stock
|
|
Common Stock
|
|
Additional Paid
|
|
Accumulated
|
|
Stockholders'
|
|
|
Shares
|
|
Par
|
|
In Capital
|
|
Deficit
|
|
(Deficit) Equity
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017
|
|
|
23,139,904
|
|
|
$
|
23,140
|
|
|
$
|
367,665
|
|
|
$
|
(432,450
|
)
|
|
$
|
(41,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for modification of stock options
|
|
|
1,482,296
|
|
|
|
1,482
|
|
|
|
168,627
|
|
|
|
-
|
|
|
|
170,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
57,857
|
|
|
|
58
|
|
|
|
17,442
|
|
|
|
-
|
|
|
|
17,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
15,247
|
|
|
|
-
|
|
|
|
15,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash
|
|
|
2,819,943
|
|
|
|
2,820
|
|
|
|
997,180
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,807,861
|
)
|
|
|
(1,807,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment 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
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
NDIVISION INC
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,393,621
|
)
|
|
$
|
(1,807,861
|
)
|
Adjustments to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
|
operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
568,055
|
|
|
|
444,344
|
|
Stock based compensation
|
|
|
403,325
|
|
|
|
185,356
|
|
Stock issued for services
|
|
|
5,000
|
|
|
|
17,500
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,919
|
)
|
|
|
259,556
|
|
Prepaid expenses
|
|
|
(6,224
|
)
|
|
|
72,688
|
|
Income taxes recoverable
|
|
|
-
|
|
|
|
43,803
|
|
Accounts payable
|
|
|
(433,376
|
)
|
|
|
-
|
|
Accrued liabilities
|
|
|
7,006
|
|
|
|
127,755
|
|
Net cash used in operating activities
|
|
|
(1,851,754
|
)
|
|
|
(656,859
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of contracts
|
|
|
(800,000
|
)
|
|
|
-
|
|
Repayment from officer
|
|
|
-
|
|
|
|
23,286
|
|
Acquisition of equipment and software licenses
|
|
|
(26,364
|
)
|
|
|
(15,281
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(826,364
|
)
|
|
|
8,005
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Lines of credit, net
|
|
|
(92,075
|
)
|
|
|
(130,155
|
)
|
Proceeds from issuance of common stock, net
|
|
|
3,215,738
|
|
|
|
1,000,000
|
|
Loans from officers
|
|
|
-
|
|
|
|
137,000
|
|
Factoring credit facility, net
|
|
|
169,257
|
|
|
|
-
|
|
Repayments of loans from officers
|
|
|
(137,000
|
)
|
|
|
(24,000
|
)
|
Repayments of long-term debt
|
|
|
(32,138
|
)
|
|
|
(58,984
|
)
|
Repayments of finance lease obligations
|
|
|
(418,656
|
)
|
|
|
(328,774
|
)
|
Net cash provided by financing activities
|
|
|
2,705,126
|
|
|
|
595,087
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
27,008
|
|
|
|
(53,767
|
)
|
Cash, beginning of year
|
|
|
127,933
|
|
|
|
181,700
|
|
Cash, end of year
|
|
$
|
154,941
|
|
|
$
|
127,933
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
52,437
|
|
|
$
|
117,289
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
Consideration for the purchase of contracts (warrants and acquisition note)
|
|
$
|
212,335
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
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
4925 Greenville Avenue, Dallas, Texas 75206. 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 is currently 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 at the time of purchase, however these warrants have not been issued as the final purchase price adjustment
calculation has not been completed at the time of this report. 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. To date, the Company has not made any adjustment
to the “Purchase Price” as there has been no newly calculated monthly recurring revenue at the time of this report.
Since February 13, 2018, the Company
has sold 8,590,847 shares of the Registrant's common shares at a price of approximately $0.375 per share for $3,215,738.
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.
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
2. LIQUIDITY AND GOING CONCERN
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, 2018, the Company sold 8,590,847 shares of common stock at a price of approximately $0.375 per share for $3,215,738.
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 28, 2019, the Company has approximately $134,000 of factored invoices.
The ability to continue as a going concern
is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its
obligations and repay its liabilities arising from normal business operations when they come due. 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 and/or the private placement of common stock. There is, however, no assurance that the Company will be able
to raise any additional capital through any type of offering on terms acceptable to the Company, as existing cash on hand will
be insufficient to finance operations over the next twelve months.
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 subsidiary, Vi3 Technologies, Inc. (inactive subsidiary). 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.
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (“Topic 606”): Topic 606 which supersedes nearly all existing revenue recognition
guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to
customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines
a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in
the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction
price to each separate performance obligation, among others. Topic 606 also provides guidance on the recognition of costs related
to obtaining customer contracts.
Topic 606 was effective as of January
1, 2018 using either of two methods: (1) retrospective application of Topic 606 to each prior reporting period presented with the
option to elect certain practical expedients as defined within Topic 606 or (2) retrospective application of Topic 606 with the
cumulative effect of initially applying Topic 606 recognized at the date of initial application and providing certain additional
disclosures as defined per Topic 606. We adopted Topic 606 pursuant to the method (2) and we determined that any cumulative effect
for the initial application did not require an adjustment to accumulated deficit at January 1, 2018.
For revenue recognition arrangements that
we determine are within the scope of Topic 606, we perform 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. We only apply 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, we evaluate the goods
or services promised within each contract related performance obligation and assess whether each promised good or service is distinct.
We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when
(or as) the performance obligation is satisfied.
Project based, services revenue is recognized
when the professional consulting, maintenance or other ancillary services are provided to the customer.
The Company provides recurring services.
There are two components to the recurring services; set-up revenues are recognized upon completion of the set-up procedures and
the monthly recurring revenue is recognized as services are rendered.
The Company is a value-added reseller
and engages in "drop-shipping" whereby products are transferred directly from the Company's supplier to the customer.
Product sales are recognized as revenue upon shipment of the products by the vendor. Shipping and handling costs charged
to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of sales.
The Company provides customers with
payment terms of thirty days.
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.
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
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’s 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 was no allowance required for the fiscal years ended December 31, 2018 and 2017. 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, 2018 and December
31, 2017.
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 earnings (loss) per share is computed
by dividing net income (loss) attributable to common stockholders by the weighted average common shares outstanding for the period.
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 2,582,667 and 752,062
of common stock equivalents excluded for the fiscal years ended December 31, 2018 and 2017, respectively because their effect is
anti-dilutive.
n
Division, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Marketing Costs
Marketing costs, which are expensed
as incurred, totaled approximately $12,540 and $20,625 for the fiscal years ended December 31, 2018 and 2017, respectively.
Stock-Based Compensation
The Company accounts for stock-based
awards to employees in accordance with applicable accounting principles, which requires compensation expense related to share-based
transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination
of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton ("Black-Scholes")
pricing model. For all employee stock options, we recognize expense over the requisite service period on an accelerated basis over
the employee's requisite service period (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.
Options awarded to purchase shares of
common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with applicable
accounting principles. Such options are valued using the Black-Scholes option pricing model.
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.
n
Division, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
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, 2018, no accrued interest or penalties are included on the related tax liability line in the balance sheet.
Recent Accounting Pronouncements
New Accounting Pronouncements
Recently Adopted
On May 28, 2014, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 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 replaced 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 the
Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed
to allow entities to choose to adopt the standard as of the original effective date. This ASU permits the use of either the retrospective
or cumulative effect transition method. The Company has used the retrospective method in the presentation of these consolidated
financial statements, however there was no adjustment necessary.
In August 2016, the FASB issued
authoritative guidance designed to address diversity in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows, including: i) contingent consideration payments made after a business combination; ii) proceeds
from the settlement of insurance claims; and iii) proceeds from the settlement of corporate-owned life insurance policies. The
new guidance is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted in any interim or annual period. There was no material impact on its consolidated financial
statements as a result of adopting this guidance.
New Accounting Pronouncements
Not Yet 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. We
adopted this standard on January 1, 2019 and are applying the transition guidance as of the date of adoption, under the current
period adjustment method. Management believes the effect on the financial statements will not be material.
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 will be effective for the Company in the first quarter of 2019. Early adoption is permitted.
n
Division, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
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 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 will be effective in the first quarter of fiscal year
2019, although early adoption is permitted. Management believes the effect on the
consolidated financial statements will not be material.
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.
4. EQUIPMENT AND SOFTWARE LICENSES
Equipment and software licenses consist of the following:
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
|
|
|
Equipment and software
|
|
$
|
1,124,245
|
|
|
$
|
1,119,765
|
|
Software licenses
|
|
|
966,754
|
|
|
|
955,408
|
|
|
|
|
2,090,999
|
|
|
|
2,075,173
|
|
Less - Accumulated depreciation and amortization
|
|
|
(1,593,166
|
)
|
|
|
(1,187,532
|
)
|
|
|
$
|
497,833
|
|
|
$
|
887,641
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization expense
related to owned assets for the fiscal years ended December 31, 2018 and 2017 was approximately $40,698 and $33,689 respectively.
Depreciation and Amortization expense
related to leased assets for the fiscal years ended December 31, 2018 and 2017 was approximately $375,444 and $410,655, respectively.
n
Division, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
5. INTANGIBLE ASSETS
Intangible Assets
As of December 31, 2018
|
|
Useful Life
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
Book Value
|
|
|
|
|
|
|
|
|
|
|
|
Service Contracts
|
|
|
5
|
|
|
$
|
1,012,335
|
|
|
$
|
151,913
|
|
|
$
|
860,422
|
|
There was no amortization expense
attributable to the amortization of identifiable intangible assets for the fiscal year ended December 31, 2017 as the assets
were not acquired until 2018. 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 $860,422, as follows: fiscal 2019 - $202,551, 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 a number of 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, 2018, the Company has
not recorded any impairments.
6. ACCRUED LIABILITIES
|
|
December 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Accrued compensation
|
|
$
|
156,139
|
|
|
$
|
314,722
|
|
Accrued sales tax
|
|
|
149,821
|
|
|
|
157,218
|
|
Accrued franchise tax
|
|
|
35,000
|
|
|
|
43,372
|
|
Accrued professional fees and other payables
|
|
|
197,823
|
|
|
|
2,610
|
|
Total accrued liabilities
|
|
$
|
538,783
|
|
|
$
|
517,922
|
|
n
Division, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
7. LINE OF CREDIT
|
|
December 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
The Company obtained a line of credit on April 4, 2014 with an original maturity date of April 4, 2015, an interest rate of 6% and maximum borrowings of $500,000. The line of credit was renewed in 2015 under the same terms, with a maturity date of April 4, 2016, and renewed again in 2016 with a maturity date of April 4, 2018. This line of credit was secured by the accounts receivable of the Company. This obligation was subsequently repaid in 2018, and the line of credit was terminated.
|
|
$
|
-
|
|
|
$
|
92,075
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
92,075
|
|
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 re
ceivables
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 $169,257 and $0 as of December 31, 2018
and 2017, respectively.
The Company
has recognized
$19,011
and $
0 in interest expense related to these arrangements for the fiscal year ended December
31, 2018 and 2017, respectively.
9. NOTES PAYABLE
|
|
December 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
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.
|
|
$
|
13,358
|
|
|
$
|
38,932
|
|
|
|
|
|
|
|
|
|
|
The Company obtained a $20,175 promissory note with a maturity date of November 17, 2018, an interest rate of 6%, which is repayable in monthly installments of principal and interest of $615. This note was guaranteed by the shareholders of the Company.
|
|
|
-
|
|
|
|
6,564
|
|
|
|
|
|
|
|
|
|
|
Current portion of debt
|
|
|
13,358
|
|
|
|
45,496
|
|
|
|
|
|
|
|
|
|
|
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
10. 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 $90 to $15,350 including interest, ranging from 3.6% to 17.8% per
annum.
Future minimum lease payments, including
principal and interest, under the finance leases for subsequent years are as follows:
Year ended
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
$
|
-
|
|
|
$
|
544,073
|
|
2019
|
|
|
|
410,800
|
|
|
|
328,994
|
|
2020
|
|
|
|
46,584
|
|
|
|
40,407
|
|
2021
|
|
|
|
2,021
|
|
|
|
-
|
|
Total
|
|
|
|
459,405
|
|
|
|
913,474
|
|
Less: interest
|
|
|
|
(30,551
|
)
|
|
|
(65,964
|
)
|
Present value of net minimum lease payments
|
|
|
|
428,854
|
|
|
|
847,510
|
|
Short term
|
|
|
|
392,200
|
|
|
|
504,784
|
|
Long term total
|
|
|
$
|
36,654
|
|
|
|
342,726
|
|
Lease payments for the years ended December
31, 2018 and 2017 aggregated approximately $650,620 and $544,772, respectively.
The finance lease obligations are secured by underlying leased
assets with a net book value of approximately $450,834 and $848,250 as of December 31, 2018 and December 31, 2017, respectively.
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.
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The following table reflects the stock
options for year ended December 31, 2018 and 2017:
|
|
2018
|
|
2017
|
|
|
|
|
|
Number of options outstanding:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
752,062
|
|
|
$
|
2,523,456
|
|
Granted
|
|
|
6,405,314
|
|
|
|
115,702
|
|
Exercised, converted
|
|
|
-
|
|
|
|
-
|
|
Forfeited / exchanged / modification
|
|
|
(1,225,699
|
)
|
|
|
(1,887,097
|
)
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
5,931,677
|
|
|
|
752,062
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable at end of year
|
|
|
1,541,660
|
|
|
|
-
|
|
Number of options available for grant at end of year
|
|
|
2,098,323
|
|
|
|
809,913
|
|
|
|
|
|
|
|
|
|
|
Weighted average option prices per share:
|
|
|
|
|
|
|
|
|
Granted during the year
|
|
$
|
0.38
|
|
|
$
|
0.06
|
|
Exercised during the year
|
|
|
-
|
|
|
|
-
|
|
Terminated during the year
|
|
|
0.13
|
|
|
|
-
|
|
Outstanding at end of year
|
|
|
0.38
|
|
|
|
0.03
|
|
Exercisable at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
Stock-based compensation expense attributable
to stock options was $341,545 for the year ended December 31, 2018. As of December 31, 2018, there was approximately $846,516 of
unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those
options was 3 years.
The Company issued approximately 2,200,000
warrants related to three consulting agreements during the year ended December 31, 2018. 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
for 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
below.
These warrants are fully vested at the
time of issuance and there is no unamortized expense related to these warrants. There are no other warrants outstanding at
December 31, 2018.
During
2017 options for approximately 6,400,000 common stock was modified and exchanged for approximately 6,400,000 common stock of the
Company. The Company recognized approximately $170,000 of stock modification expense related to the exchange and modification,
the intrinsic value of these options was $0.
The average
fair value of stock options granted was estimated to be $0.19 per share in fiscal 2018 and $0.04 per share in fiscal 2017. The
estimates were made using the Black-Scholes option pricing model and the following weighted average assumptions:
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Expected option life (years)
|
|
|
6.5
|
|
|
|
10
|
|
Expected stock price volatility
|
|
|
51 - 135
|
%
|
|
|
51
|
%
|
Expected dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Risk-free interest rate
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
12. COMMON STOCK
In 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.
Subsequent
to December 31, 2018 the Company issued nDivision issued 101,334 shares of common stock and received approximately $38,000 with
no material fees.
13. RELATED PARTY TRANSACTIONS
To ensure the
Company had adequate near-term liquidity, in 2017 the officers of the Company loaned the Company short-term loans at
an interest rate of 0.05%. At December 31, 2018 and 2017 there was approximately $0 and $137,000, respectively, owed
to officers of the Company, other than reimbursable expenses.
The
Company contracted with Norco Professional Services, LLC. (“Norco”) to provide consulting services. The Company spent
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.
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
14. COMMITMENTS
The Company leases office and Data Center
space. Future minimum lease payments are as follows:
December 31,
|
|
|
|
2019
|
|
$
|
30,998
|
|
|
|
$
|
30,998
|
|
Lease payments for the years ended December
31, 2018 and 2017 aggregated $65,838 and $62,928, respectively. The office lease is a month to month lease and the Data Center
space expire September 30, 2019.
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. To date, the Company has not made any adjustment
to the “Purchase Price” as there has been no newly calculated monthly recurring revenue at the time of this report.
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, 2018 and 2017 include revenues from significant customers as follows:
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
Customer A
|
42%
|
|
32%
|
|
Customer B
|
10%
|
|
17%
|
|
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
Accounts receivable balances as of December
31, 2018 and 2017 from significant customers are as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Customer A
|
|
74%
|
|
47%
|
Customer B
|
|
8%
|
|
8%
|
16. INCOME TAXES
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
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 by applying the U.S. statutory income tax rate to the Company's effective income tax rate is as follows:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
Income at US Statutory Rate
|
|
$
|
(515,830
|
)
|
|
$
|
(614,700
|
)
|
Change in tax law
|
|
|
340,826
|
|
|
|
|
|
State taxes, net of Federal benefit
|
|
|
(52,000
|
)
|
|
|
(68,000
|
)
|
Valuation allowance
|
|
|
227,004
|
|
|
|
682,700
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
The net deferred income tax asset balance related to the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Net Operating Losses
|
|
$
|
974,283
|
|
|
$
|
966,045
|
|
Stock Options
|
|
|
131,318
|
|
|
|
75,576
|
|
Other
|
|
|
4,770
|
|
|
|
5,080
|
|
Total Deferred tax assets
|
|
$
|
1,110,371
|
|
|
$
|
1,046,701
|
|
481(a) adjustment
|
|
$
|
-
|
|
|
$
|
(85,226
|
)
|
Depreciation and amortization
|
|
|
(40,376
|
)
|
|
|
(40,708
|
)
|
Total deferred tax liability
|
|
$
|
(40,376
|
)
|
|
$
|
(125,934
|
)
|
Deferred tax asset (liability)
|
|
$
|
1,069,995
|
|
|
$
|
920,767
|
|
Valuation allowance
|
|
|
(1,069,995
|
)
|
|
|
(920,767
|
)
|
Net deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December
31, 2018, 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, 2018 and 2017, 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, 2018 and 2017.
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, 2018, and 2017 we have not recorded any uncertain tax positions in our financial statements.
nDivision, Inc.
Notes to the Consolidated Financial
Statements
December 31, 2018 and 2017
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, 2018, and 2017, 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.