General Overview
nDivision Inc. 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.
The Company operates in most states of the United States of America.
In December 2019, 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.
Recent Developments
The Company is in contract renegotiations with a customer and has agreed to a
reduction of billed services of $90,000 that will be credited to the customer
over a three-month period of future services and was recorded as a reduction of
sales for the three and nine months ended September 30, 2021. Although we are
still in contractual negotiations, we expect the resulting agreement to result
in a reduction of annual recurring revenue between $950,000 and $1,300,000. The
Company expects to retain approximately $500,000 in on-going annual revenue
related to a portion of the original contract.
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
nine months ended September 30, 2021 and 2020, which are included herein.
Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020
September 30,
2021 2020 Change
Revenue $ 1,695,923 $ 1,477,296 $ 218,627
Cost of revenue 1,460,285 1,046,413 413,872
Operating expenses 1,359,530 931,874 427,656
Other income (expenses) (208,612 ) 1,047 (209,659 )
Net loss $ (1,332,504 ) $ (499,944 ) $ 832,560
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Revenues increased by $218,627 or 14.8% compared with the same period last year.
Revenue increased by approximately $251,448 from new customers and an increase
of approximately $71,232 of new, non-recurring revenue, which was offset by
approximately $41,363 from the loss of customers and an increase of $27,310 due
to changes in services or devices. Included as a reduction in revenue for the
quarter is a credit to a customer for implementation fees of $90,000. 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. Part of these costs are recurring and fixed to
provide our minimum service level as a managed service provider. Cost of revenue
increased by $413,872 or 40% 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 $195,245
and the gross margin decreased by approximately 52.36% to 15.3%. This decrease
in gross margin is primarily related to a single customer contract where support
volumes exceeded the estimates expected when services were contracted and
additional employees were necessary to provide support to both this customer and
our other customers to maintain expected service levels. Ultimately the Company
was not able to bill for these additional services and the Company discounted
its services during the period by $90,000, which all significantly impacted our
gross margin.
The Company's management team is continuing to focus on controlling operating
expenses while also implementing new growth strategies. Operating expenses for
the quarter increased by $427,656 or 45.89% compared with the same period last
year. The increases in payroll expenses, and the $302,115 impairment of
intangible assets were the primary reason for the increase of operating
expenses.
Other income (expenses) decreased by $209,659 compared with the same period last
year. The decrease was primarily related to the non-cash interest expense
related to the convertible debt issued in 2020 and the first quarter of 2021 and
the impairment loss on the intangible asset.
The Company incurred a net loss of $1,332,504 and $499,944 for the three months
ended September 30, 2021, and 2020, respectively. The increase in the net loss
is primarily related to the increase in operating expenses, other income
(expenses) and lower profit margins.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
September 30,
2021 2020 Change
Revenue $ 4,644,449 $ 4,647,242 $ (2,793 )
Cost of revenue 3,853,669 3,077,540 776,129
Operating expenses 3,949,655 2,365,025 1,584,630
Other income (expenses) 205,814 (57,750 ) 263,564
Net loss $ (2,953,061 ) $ (853,073 ) $ 2,099,988
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Revenues decreased by $2,793 compared with the same period last year. The
Company increased recurring revenue by approximately $438,241 from new customers
and increased implementation fees by approximately $253,711 for these new
contracts. This was offset by approximately $340,111 from lost customers and
overall lower services fees of more than $300,000 to existing customers based on
changes in these customers' services and monitored devices. These decreases in
revenue were primarily from a single customer.
Cost of revenue increased by $776,129 or 25% 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 in MSP costs. Gross profit decreased by $778,992 and the gross
margin decreased by approximately 50%. The decrease in gross margin is
primarily related to a single customer contract where support volumes exceeded
the estimates expected when services were contracted, and additional employees
were necessary to provide support to both this customer and our other customers
to maintain expected service levels. Ultimately the Company was not able to
bill for these additional services and the Company discounted its services
during the period by $90,000, which all impacted our gross margin.
Operating expenses increased by $1,584,630 or 67% 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, the $302,115 impairment of intangible asset 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. Management is in the process
of implementing its channel partner sales strategy that has increased operating
expenses to achieve long-term revenue growth and profitability.
Other income (expenses) increased by $263,564 compared with the same period last
year. The increase was primarily due to the gain from the SBA PPP loan
forgiveness, which was offset by the increase in interest expense related to the
convertible debt and the impairment of the intangible asset.
The Company incurred a net loss of $2,953,061 and $853,073 for the nine months
ended September 30, 2021 and 2020, respectively. The increase in the net loss is
primarily related to the increases in cost of revenue, operating expenses and
other income (expense).
Liquidity and Capital Resources
Working Capital
As at As at
September 30, December 31,
2021 2020
Current assets $ 1,262,249 $ 2,459,189
Current liabilities 1,431,373 2,160,942
Working capital $ (169,124 ) $ 298,247
Cash Flows
Nine Months Ended September 30,
2021 2020
Cash flows used in operating activities $ (2,512,604 ) $ (887,601 )
Cash flows used in investing activities
(21,994 ) (51,223 )
Cash flows provided by financing activities 1,090,778 1,031,101
Net (decrease) increase in cash during period $ (1,443,820 ) $ 92,277
On September 30, 2021, the Company had cash of $362,786 or a decrease of
$1,443,820 from December 31, 2020. Cash used in operating activities was
$2,512,604 for the nine months ended September 30, 2021. The increase in cash
used in operating activities is primarily related to increased net loss
sustained during the period. On September 30, 2021 and December 31, 2020
deferred revenue was $485,431 and $870,184, respectively.
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Net cash used in investing activities for the nine months ended September 30,
2021 and 2020 was $21,994 and $51,223, respectively. The decrease in net cash
used in investing activities is due to the acquisition loan for the purchase of
the MSP contracts purchased from Gamwell being paid in full during the nine
months ended September 30, 2021.
Net cash flows provided by financing activities for the nine months ended
September 30, 2021 was $1,090,778 compared to $1,031,101 for the nine months
ended September 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 the Company's factoring
credit facility agreement for the three and nine months ended September 30,
2021, and 2020. The Company receives 90% of the factored receivables for a fee
of 2.4% of the factored invoice and has committed to a minimum balance of
$150,000 of invoices factored for six months. As of November 13, 2021, the
Company has factored approximately $210,000 of its invoices and received
approximately $189,000 as an advance against these 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
unaudited condensed consolidated financial statements with existing cash on
hand, invoice factoring, obtaining additional debt 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, and existing cash on hand will be insufficient to finance
operations over the next twelve months, see Note 2 for more information.
In December 2019, 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 U.S. 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.
Revenue Recognition
For revenue recognition arrangements that we determine are within the scope of
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 ASC 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
ASC 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.
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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. 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 September 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.
During the three and nine months ended September 30, 2021, the Company recorded
a $302,115 impairment related to the contracts purchased in February 2018 based
on the expected negative cash flow from the business unit over the next 18-month
period. The Company did not record any impairment during the three and nine
months ended September 30, 2020.
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.
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New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses
(Topic 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.
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NDIVISION INC. 
