General Overview
As used in this current report and unless otherwise indicated, the terms "we",
"us" and "our" mean nDivision, Inc.
nDivision Inc. ("nDivision" or the "Company") was incorporated under the laws of
the state of Nevada. nDivision's registered office is 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.
In December 2019, a novel strain of coronavirus (COVID-19) surfaced. The spread
of COVID-19 around the world 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 has transitioned
its operations to 100% work from home and there has been minimal impact to our
internal operations from the transition. The Company is unable to determine if
there will be a material future impact to its customers' operations and
ultimately an impact to the Company's overall revenues.
Results of Operations
The following summary of the Company's operations should be read in conjunction
with its unaudited condensed consolidated financial statements for the three and
six months ended June 30, 2021 and 2020, which are included herein.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
June 30,
2021 2020 Change
Revenue $ 1,571,072 $ 1,503,056 $ 68,016
Cost of revenue 1,251,361 1,010,975 240,386
Operating expenses 1,219,531 697,198 522,333
Other income (expenses) 527,451 (28,750 ) 556,201
Net loss $ (372,369 ) $ (233,867 ) $ 138,502Revenues increased by $68,016 or 5% compared with the same period last year.
Revenue increased by approximately $270,606 from new customers and an increase
of approximately $110,650 of new, non-recurring revenue, which was offset by
approximately $81,566 loss of customers and loss of $231,674 due to changes in
services or devices. The loss of customers were non-renewed contracts. This loss
of revenue primarily related to the loss of a single customer that continued and
extended their Help Desk services.
Cost of revenue includes system infrastructure, software licenses, wages and
related payroll taxes and employee benefits of the engineers providing direct
services to our customers. TPart of these costs that are recurring and fixed to
provide our minimum service level as a managed service provider. Cost of revenue
increased by $240,386 or 24% compared with the same period last year. The
increase was related to the addition of nine service employees in 2021 to
support recurring contracts and additional direct expenses incurred including
annual service personnel salary increases. This was offset by the decrease in
depreciation for fully depreciated assets. Gross profit decreased by $172,370
and the gross margin decreased by approximately 13%. This was caused by the
lower-than-planned for revenue and the additional costs incurred from the new
service employees, professional services cost and increase is MSP costs.
The Company's management team is continuing to focus on controling operating
expenses while also implementing new growth strategies Operating expenses
increased by $522,333 or 75% compared with the same period last year. There was
an increase for a new marketing campaign, compensation for a new Chief Revenue
Officer and the addition of one new sales director, sales commissions, and
consulting fees, increased stock compensation expense which was partially offset
by decreases in travel, depreciation, and other general expenses. The Company's
management is continuing to control operating expenses while also implementing
management growth strategies.
Other income (expenses) increased by $556,201 compared with the same period last
year. The increase was primarily due to the gain from the SBA PPP loan
forgiveness, which was partially offset by the increase in interest expense
related to the convertible debt.
The Company incurred a net loss of $372,369 and $233,867 for the three months
ended June 30, 2021, and 2020, respectively. The increase in the net loss is
primarily related to the increase in operating expenses and lower profit
margins.
21
Table of Contents
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
June 30,
2021 2020 Change
Revenue $ 2,948,526 $ 3,169,946 $ (221,420 )
Cost of revenue 2,393,384 2,031,127 362,257
Operating expenses 2,590,125 1,433,151 1,156,974
Other income (expenses) 414,426 (58,797 ) 473,223
Net loss $ (1,620,557 ) $ (353,129 ) $ 1,267,428Revenues decreased by $221,420 or 7% compared with the same period last year.
The Company increased recurring revenue by approximately $470,992 from new
customers and increased implementation fees by approximately $182,480 for these
new contracts. This was offset by approximately $955,899 from a lost customers
and overall lower services fees to existing customers based on changes in these
customers services and monitored devices. These decreasea in revenue were
primarily from a single customer.
Cost of revenue increased by $362,257 or 18% compared with the same period last
year. The increase was related to the addition of nine service employees in the
second quarter of 2021 to support recurring contracts and additional direct
expenses incurred. This was offset by the decrease in depreciation for fully
depreciated assets. This was a result of lower-than-planned revenue and the
additional costs incurred from the new service employees, professional services
cost and increase is MSP costs.
Operating expenses increased by $1,156,974 or 81% compared with the same period
last year. The primary difference was the increased expenses in a new marketing
campaign, investor relations expenses, compensation for new Chief Revenue
Officer and the addition of two new sales directors and related sales expenses.
In addition, there was an increase in non-cash expenses of stock-based
compensation and the amortization of the beneficial conversion feature of newly
issued convertible debt. Management is in the process of implementing its sales
strategy that has increased operating expenses to achieve long-term revenue
growth and profitability.
Other income (expenses) increased by $473,223 compared with the same period last
year. The increase was primarily due to the gain from the SBA PPP loan
forgiveness, which was partially offset by the increase in interest expense
related to the convertible debt.
The Company incurred a net loss of $1,620,557 and $353,129 for the six months
ended June 30, 2021 and 2020, respectively. The increase in the net loss is
primarily related to the increases in cost of revenue and operating expenses.
Liquidity and Capital Resources
Working Capital
As at As at
June 30, December 31,
2021 2020
Current assets $ 1,786,826 $ 2,459,189
Current liabilities $ 1,341,391 $ 2,160,942
Working capital $ 445,435 $ 298,247
22
Table of Contents
Cash Flows
Six Months Ended June 30,
2021 2020
Cash flows used in operating activities $ (2,123,719 ) $ (554,447 )
Cash flows used in investing activities
(21,994 ) (28,949 )
Cash flows provided by financing activities 1,124,077 572,450
Net decrease in cash during period
$ (1,021,636 ) $ (10,946 )
On June 30, 2021, the Company had cash of $784,970 or a decrease of $1,021,636
from the December 31, 2020. Cash used in operating activities was $2,123,719 for
the six months ended June 30, 2021. The increase in cash used in operating
activity is primarily related to increased net loss sustained during the period.
On June 30, 2021 and December 31, 2020 deferred revenue was $543,042 and
$870,184, respectively.
Net cash used in investing activities for the six months ended June 30, 2021 and
2020 was $21,994 and $28,949, respectively. The acquisition loan was paid in
full during the six months ended June 30, 2021
Net cash flows provided by financing activities for the six months ended June
30, 2021 was $1,124,077 compared to $572,450 for the six months ended June 30,
2020. The increase is primarily related to the issuance of convertible notes
payable of $1,190,000 net of repayment of the finance lease obligations.
The Company has not factored any receivables under this agreement for the three
and six months ended June 30, 2021 and 2020, however management does expect to
use the factoring of certain account receivable for cash flow purposes in the
next twelve months.
Management intends to finance operating costs over the next twelve months from
the date of filing these unaudited condensed consolidated financial statements
with existing cash on hand, projected cash flow from operations and short-term
debt from the factoring of receivables. Management continues to monitor cash
flow and monthly recurring revenues to adjust expenses as necessary to complete
the implementation of several new recurring revenue contracts and support the
business until these contracts are fully implemented, and the monthly billing
begins. Management believes the cash flow from operations and cash on hand will
be sufficient to finance operations over the next twelve months.
In December 2019, a novel strain of coronavirus (COVID-19) surfaced. The spread
of COVID-19 around the world 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 has transitioned
its operations to 100% work from home and there has been minimal impact to our
internal operations from the transition. The Company is unable to determine if
there will be a material future impact to its customers' operations and
ultimately an impact to the Company's overall revenues.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based on our unaudited condensed 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 unaudited
condensed 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.
23
Table of Contents
Revenue Recognition
For revenue recognition arrangements that we determine are within the scope of
Topic ASC 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.
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.
The Company has elected the following practical expedients in applying ASC 606:
Unsatisfied Performance Obligations - all performance obligations relate to
contracts with a duration of less than one year, the Company has elected to
apply the optional exemption provided in ASC 606 and therefore, is not required
to disclose the aggregate amount of the transaction price allocated to
performance obligations that are unsatisfied or partially unsatisfied at the end
of the reporting period.
Contract Costs - all incremental customer contract acquisition costs are
expensed as they are incurred as the amortization period of the asset that the
Company otherwise would have recognized is one year or less in duration.
Sales Tax Exclusion from the Transaction Price - the Company excludes from the
measurement of the transaction price all taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific
revenue-producing transaction and collected by the Company from the customer.
Accounts Receivable
Accounts receivable are stated at the amounts 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. The Company recorded an allowance for doubtful accounts
of $10,000 and $26,000 as of June 30, 2021 and December 31, 2020, 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 three and six months ended June
30, 2021 and June 30, 2020.
24
Table of Contents
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
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 were effective for the Company
in the first quarter of 2021. The Company determined that the adoption of this
ASU had no impact on its consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
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.
In August 2020, the FASB issued ASU 2020-06-Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's
Own Equity, which simplifies the guidance for certain convertible debt
instruments by removing the separation models for convertible debt with a cash
conversion feature or convertible instruments with a beneficial conversion
feature. As a result, convertible debt instruments will be reported as a single
liability instrument with no separate accounting for embedded conversion
features. Additionally, ASU 2020-06 requires the application of the if-converted
method for calculating diluted earnings per share and the treasury stock method
will be no longer available. The provisions of ASU 2020-06 are applicable for
fiscal years beginning after December 15, 2021, with early adoption permitted no
earlier than fiscal years beginning after December 15, 2020. The Company expects
the primary impacts of this new standard will be to increase the carrying value
of its Convertible Debt and reduce its reported interest expense. In addition,
the Company will be required to use the if-converted method for calculating
diluted earnings per share. The Company is currently evaluating the impact the
adoption of this standard will have on its condensed consolidated financial
statements.
© Edgar Online, source Glimpses
NDIVISION INC. 
