Item 8. Financial Statements and Supplementary Data
nDivison Inc.
December 31, 2020 and 2019
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of nDivision Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of nDivision Inc. (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
|
|
We have served as the Company’s auditor since 2018.
|
|
|
Marlton, New Jersey
|
March 30, 2021
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
1,806,606
|
|
|
$
|
1,757,695
|
|
Accounts receivable, net (allowance for doubtful accounts was $26,000 at December 31, 2020 and $10,000 at December 31, 2019)
|
|
|
531,244
|
|
|
|
548,825
|
|
Prepaid expenses
|
|
|
121,339
|
|
|
|
107,428
|
|
Total current assets
|
|
|
2,459,189
|
|
|
|
2,413,948
|
|
|
|
|
|
|
|
|
|
|
Equipment and software licenses - at cost, less accumulated depreciation and amortization
|
|
|
540,918
|
|
|
|
210,004
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Intangible asset, less accumulated amortization
|
|
|
455,320
|
|
|
|
657,871
|
|
Right-of-use asset
|
|
|
441,940
|
|
|
|
542,975
|
|
Total other assets
|
|
|
897,260
|
|
|
|
1,200,846
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,897,367
|
|
|
$
|
3,824,798
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
153,427
|
|
|
$
|
137,582
|
|
Accrued liabilities
|
|
|
373,487
|
|
|
|
479,081
|
|
Deferred revenue
|
|
|
870,184
|
|
|
|
1,977,825
|
|
Current portion of note payable
|
|
|
514,678
|
|
|
|
-
|
|
Current portion of acquisition note payable
|
|
|
18,102
|
|
|
|
57,492
|
|
Current portion of operating lease payable
|
|
|
105,615
|
|
|
|
124,452
|
|
Current portion of finance lease obligations
|
|
|
125,449
|
|
|
|
129,532
|
|
Total current liabilities
|
|
|
2,160,942
|
|
|
|
2,905,964
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
195,822
|
|
|
|
-
|
|
Acquisition note payable
|
|
|
-
|
|
|
|
14,666
|
|
Convertible notes payable, net of discount
|
|
|
734,282
|
|
|
|
-
|
|
Operating lease payable, net of current portion
|
|
|
336,520
|
|
|
|
412,302
|
|
Finance lease obligations, net of current portion
|
|
|
380,209
|
|
|
|
27,006
|
|
Total long-term liabilities
|
|
|
1,646,833
|
|
|
|
453,974
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 20,000,000 shares authorized, no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value, 180,000,000 shares authorized, and 42,499,783 and 41,249,783 shares issued and outstanding, respectively
|
|
|
42,500
|
|
|
|
41,250
|
|
Additional paid in capital
|
|
|
7,160,175
|
|
|
|
6,037,767
|
|
Accumulated deficit
|
|
|
(7,113,083
|
)
|
|
|
(5,614,157
|
)
|
Total stockholders' equity
|
|
|
89,592
|
|
|
|
464,860
|
|
Total liabilities and stockholders' equity
|
|
$
|
3,897,367
|
|
|
$
|
3,824,798
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
5,927,173
|
|
|
$
|
5,872,767
|
|
|
|
|
|
|
|
|
|
|
Service costs
|
|
|
4,107,556
|
|
|
|
3,794,196
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,819,617
|
|
|
|
2,078,571
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,217,188
|
|
|
|
3,008,496
|
|
Change in contingent consideration
|
|
|
-
|
|
|
|
(30,757
|
)
|
|
|
|
3,217,188
|
|
|
|
2,977,739
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,397,571
|
)
|
|
|
(899,168
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(109,810
|
)
|
|
|
(81,057
|
)
|
Other income
|
|
|
8,455
|
|
|
|
-
|
|
Other (expense) income
|
|
|
(101,355
|
)
|
|
|
(81,057
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income tax
|
|
|
(1,498,926
|
)
|
|
|
(980,225
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,498,926
|
)
|
|
|
(980,225
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
41,437,625
|
|
|
|
41,014,810
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Additional Paid
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Par
|
|
|
In Capital
|
|
|
Deficit
|
|
|
Equity
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
41,249,783
|
|
|
$
|
41,250
|
|
|
$
|
6,037,767
|
|
|
$
|
(5,614,157
|
)
|
|
$
|
464,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock option and warrant expense
|
|
|
-
|
|
|
|
-
|
|
|
|
690,571
|
|
|
|
-
|
|
|
|
690,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
336,300
|
|
|
|
-
|
|
|
|
336,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
1,250,000
|
|
|
|
1,250
|
|
|
|
95,537
|
|
|
|
-
|
|
|
|
96,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,498,926
|
)
|
|
|
(1,498,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
|
42,499,783
|
|
|
$
|
42,500
|
|
|
$
|
7,160,175
|
|
|
$
|
(7,113,083
|
)
|
|
$
|
89,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
40,504,005
|
|
|
$
|
40,504
|
|
|
$
|
5,184,493
|
|
|
$
|
(4,633,932
|
)
|
|
$
|
591,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of stock option and warrant expense
|
|
|
-
|
|
|
|
-
|
|
|
|
566,019
|
|
|
|
-
|
|
|
|
566,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash, net
|
|
|
745,778
|
|
|
|
746
|
|
|
|
287,255
|
|
|
|
-
|
|
|
|
288,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(980,225
|
)
|
|
|
(980,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
41,249,783
|
|
|
$
|
41,250
|
|
|
$
|
6,037,767
|
|
|
$
|
(5,614,157
|
)
|
|
$
|
464,860
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,498,926
|
)
|
|
$
|
(980,225
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
432,278
|
|
|
|
511,142
|
|
Provision for doubtful accounts
|
|
|
24,624
|
|
|
|
22,413
|
|
Amortization of beneficial conversion feature
|
|
|
20,582
|
|
|
|
-
|
|
Non-cash lease expense
|
|
|
101,035
|
|
|
|
12,968
|
|
Stock based compensation
|
|
|
787,358
|
|
|
|
566,019
|
|
Loss on sale of assets
|
|
|
88
|
|
|
|
4,533
|
|
Change in contingent consideration
|
|
|
-
|
|
|
|
(30,757
|
)
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,043
|
)
|
|
|
(93,064
|
)
|
Prepaid expenses
|
|
|
(13,911
|
)
|
|
|
135,221
|
|
Accounts payable and accrued liabilties
|
|
|
(89,749
|
)
|
|
|
(53,970
|
)
|
Deferred revenue
|
|
|
(1,107,641
|
)
|
|
|
1,977,825
|
|
Operating lease payable
|
|
|
(94,619
|
)
|
|
|
(19,189
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(1,445,924
|
)
|
|
|
2,052,916
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Repayment of debt related to acquisition
|
|
|
(54,056
|
)
|
|
|
(88,262
|
)
|
Proceeds from sale of equipment and software license
|
|
|
401
|
|
|
|
31,699
|
|
Acquisition of equipment and software licenses
|
|
|
(11,064
|
)
|
|
|
(56,994
|
)
|
Net cash used in investing activities
|
|
|
(64,719
|
)
|
|
|
(113,557
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
-
|
|
|
|
288,001
|
|
Proceeds of Paycheck Protection note payable
|
|
|
710,500
|
|
|
|
-
|
|
Repayment factor credit facility
|
|
|
-
|
|
|
|
(169,257
|
)
|
Proceeds (repayments) of notes payable
|
|
|
1,050,000
|
|
|
|
(13,358
|
)
|
Repayment of finance lease obligations
|
|
|
(200,946
|
)
|
|
|
(441,991
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,559,554
|
|
|
|
(336,605
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
48,911
|
|
|
|
1,602,754
|
|
Cash, beginning of year
|
|
|
1,757,695
|
|
|
|
154,941
|
|
Cash, end of year
|
|
$
|
1,806,606
|
|
|
$
|
1,757,695
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
33,318
|
|
|
$
|
60,024
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
Operating lease asset obtained in exchange for operating lease obligation
|
|
$
|
34,000
|
|
|
$
|
555,943
|
|
Purchase of equipment under capital lease
|
|
$
|
550,066
|
|
|
$
|
-
|
|
Beneficial conversion feature
|
|
$
|
336,300
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these consolidated financial statements.
nDivision Inc.
Notes to the Consolidated Financial Statements
December 31, 2020 and 2019
1. DESCRIPTION OF BUSINESS
nDivision Inc. (“nDivision” or the “Company”) was incorporated under the laws of the state of Texas. nDivision’s registered office is located at located at 7301 N. State Highway 161, Suite 100, Irving, TX, 75039. The Company provides managed IT services and project-based professional services in the information technology industry, selling its services directly to customers and through global service providers (GSP). The Company operates in most states of the United States of America.
2. LIQUIDITY
The Company has experienced significant losses and negative cash flows from operations in the past. Management has secured new managed services contracts, implemented a strategy which includes cost reduction efforts, as well as identifying strategic acquisitions to improve the overall profitability and cash flows of the Company.
During the year ended December 31, 2020, the Company received proceeds from the issuance of notes payable of approximately $1,760,500. The Company also has working capital of $298,247 at December 31, 2020.
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 expected cash flow from operations, in addition to the issuance of additional convertible debt to invest in sales and marketing activities. Management believes the expected cash flow from operations, cash flow from the issuance of convertible notes and cash on hand will be sufficient to finance operations over the next twelve months from the date of this report.
In December 2019, a novel strain of coronavirus (COVID-19) surfaced. The spread of COVID-19 around the world in 2020 has caused significant volatility in U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, as of August 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.
3. SUMMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States.
Principles of Consolidation
The consolidated financial statements include the accounts and transactions of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation.
Use of Estimates
Management uses estimates and assumptions in preparing these consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Revenue Recognition
For revenue recognition arrangements that we determine are within the scope of Topic ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company evaluates the goods or services promised within each contract related performance obligation and assesses whether each promised good or service is distinct. The Company recognizes as revenue, the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company recognizes revenue upon completion of our performance obligations or expiration of the contractual time to use services such as professional service hours purchased in bulk for a given time period. Any early termination fees are recognized in the period the contract is terminated and the termination invoice is paid.
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.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The Company’s cash balances are primarily maintained at a single bank. Balances are insured by the Federal Deposit Insurance Corporation subject to certain limitations.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect the Company’s estimate of potential losses inherent in accounts receivable balances, based on historical loss and known factors impacting its customers. Management has determined that a $26,000 and $10,000 allowance was required for the fiscal years ended December 31, 2020 and 2019, respectively. The Company does not accrue interest on past due receivables.
Intangible Assets
Customer contracts acquired were recorded at their estimated fair value at the date of acquisition and are being amortized over their estimated useful life of five years using the straight-line method.
Impairment of Long-lived Assets
The Company records an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. The Company did not record any impairment during the years ended December 31, 2020 and December 31, 2019.
Paycheck Protection Note Payable
The Company received a loan from the Paycheck Protection Program in the amount of $710,500 established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The loan is subject to a note dated May 2, 2020 and may be forgiven to the extent proceeds of the loan are used for eligible expenditures such as payroll and other expenses described in the CARES Act. No determination has been made as to whether the Company will be eligible for forgiveness, in whole or in part. The loan bears interest at a rate of 1% and is payable in monthly installments of principal and interest over 24 months beginning 6 months from the date of the note. The loan may be repaid at any time with no prepayment penalty.
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 a major financial institution 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.
Convertible Debt and Securities
The Company follows beneficial conversion feature guidance in ASC 470-20, which applies to convertible stock as well as convertible debt. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment date. The beneficial conversion feature guidance requires recognition of the conversion option's in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as interest over the life of the instrument, if a stated maturity date exists, or to the earliest conversion date, if there is no stated maturity date. If the earliest conversion date is immediately upon issuance, the expense must be recognized at inception. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on occurrence.
Earnings and Loss per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. There were approximately 9,488,750 and 2,585,177 of common stock equivalents excluded for the fiscal years ended December 31, 2020 and 2019, respectively because their effect is anti-dilutive.
Marketing Costs
Marketing costs, which are expensed as incurred, totaled approximately $56,943 and $92,144 for the fiscal years ended December 31, 2020 and 2019, respectively and is included in selling, general and administrative expenses.
Stock-Based Compensation
Compensation expense related to share-based transactions, including employee stock options, is measured in the financial statements based on a determination of the fair value. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all stock options, the Company recognizes expense over the requisite service period on a straight-line basis (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
See Note 12 for the assumptions used to calculate the fair value of stock-based employee and non-employee compensation.
Leases
The Company determines if an arrangement is a lease at the inception of a contract. Operating lease right-of-use ("ROU") assets are included in right-of-use assets on the consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current portion of operating lease liabilities and operating lease liabilities, net of current portion, respectively on the consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
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 are accounted for as finance costs and expensed over the lease term using the effective interest rate method.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company has determined the deferred tax assets and liabilities on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2020, no accrued interest or penalties are included on the related tax liability line in the balance sheet.
4. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements Recently Adopted
In 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 impact of adopting this ASU did not have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASC 326”), authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.
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 consolidated financial statements.
No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future consolidated financial statements.
5. EQUIPMENT AND SOFTWARE LICENSES
Equipment and software licenses consist of the following:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Equipment and software
|
|
$
|
599,900
|
|
|
$
|
489,151
|
|
Software licenses
|
|
|
1,302,141
|
|
|
|
868,041
|
|
|
|
|
1,902,041
|
|
|
|
1,357,192
|
|
Less - Accumulated depreciation and amortization
|
|
|
(1,361,123
|
)
|
|
|
(1,147,188
|
)
|
|
|
$
|
540,918
|
|
|
$
|
210,004
|
|
Depreciation and amortization expense related to assets for the fiscal years ended December 31, 2020 and 2019 was approximately $58,157 and $31,614 respectively.
Included in the above paragraph is depreciation and amortization expense related to leased assets for the years ended December 31, 2020 and 2019 was approximately $171,570 and $276,505, respectively.
During the year ended December 31, 2020, the Company disposed of $16,105 of equipment and software and related accumulated depreciation of $15,792, for proceeds of $401 which resulted in a gain $88.
During the year ended December 31, 2019, the Company disposed of $790,803 of equipment and software and related accumulated depreciation of $754,570, for proceeds of $31,699 which resulted in a gain $4,533.
6. INTANGIBLE ASSETS
Intangible Assets
As of December 31, 2020
|
|
Useful
Life
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Contracts
|
|
|
5
|
|
|
$
|
1,012,335
|
|
|
$
|
557,015
|
|
|
$
|
455,320
|
|
There was approximately $202,551 of amortization expense for the fiscal year ended December 31, 2020 and 2019. 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 three years, annual amortization expense for these finite life intangible assets will total approximately $455,320, as follows: fiscal 2021- $202,551, fiscal 2022- $202,551, fiscal 2023 - $50,218.
Long-lived assets, including purchased intangibles subject to amortization, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company regularly evaluates whether events and circumstances have occurred that indicate possible impairment and relies on several factors, including operating results, business plans, economic projections, and anticipated future cash flows. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether the assets are recoverable. As of December 31, 2020 and 2019, the Company has not recorded any impairments.
7. ACCRUED LIABILITIES
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued compensation
|
|
$
|
138,707
|
|
|
$
|
128,942
|
|
Accrued interest
|
|
|
23,185
|
|
|
|
-
|
|
Accrued sales tax
|
|
|
23,525
|
|
|
|
140,683
|
|
Accrued franchise tax
|
|
|
11,832
|
|
|
|
5,000
|
|
Accrued professional fees and other payables
|
|
|
176,238
|
|
|
|
204,456
|
|
Total accrued liabilities
|
|
$
|
373,487
|
|
|
$
|
479,081
|
|
8. FACTORING CREDIT FACILITY
The Company has agreements with an unrelated third party for factoring of specific accounts receivable. Under this arrangement, the Company has transferred the relevant receivables to the factor in exchange for cash and is prevented from selling or pledging the receivables. The agreement provides for an advanced rate of 90% with a fee of 1.9% to be charged on the gross face amount of the invoices purchased for 30 days, and an additional 0.06% charge for each additional day until the invoice(s) are paid. The Company has retained late payment and credit risk related to the factored receivables and therefore continues to recognize the factored receivables in their entirety on its balance sheet. The receivables under factoring arrangements are recorded within accounts receivable and factoring credit facility. The balance of the accounts receivable amount factored, and the related factor payable is $0 as of December 31, 2020 and 2019. The Company has recognized $0 and $24,676 in interest expense related to these arrangements for the fiscal year ended December 31, 2020 and 2019, respectively.
9. NOTE PAYABLE
On May 2, 2020, the Company entered into a Paycheck Protection Program loan for $710,500 in connection with the CARES Act related to COVID-19. $514,678 of the Paycheck Protection Program loan is classified as current. The promissory note has a fixed payment schedule, commencing ten months following the funding of the note and consisting of seventeen monthly payments of principal and interest, with the principal component of each payment based upon the level of amortization of principal over a two year period from the funding date. A final payment for the unpaid principal and accrued interest will be payable no later than May 2, 2022. The note will bear interest at a rate of 1.00% per annum and is deferred for the first six months of the loan. Certain portions of the loan and accrued interest may qualify for loan forgiveness based on the terms of the program. The Company is in the process of applying for forgiveness of this loan, however at the date of this report has not submitted the application.
10. CONVERTIBLE NOTES PAYABLE
The Company follows beneficial conversion feature guidance in ASC 470-20, which applies to convertible stock as well as convertible debt. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment date. The beneficial conversion feature guidance requires recognition of the conversion option’s in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as interest over the life of the instrument, if a stated maturity date exists, or to the earliest conversion date, if there is no stated maturity date. If the earliest conversion date is immediately upon issuance, the expense must be recognized at inception. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on occurrence.
During the year ended December 31, 2020, the Company entered several promissory notes with various investors of the Company with a face value of $1,050,000, $200,000 of which to a related party (“the Notes”). The Notes have an initial beneficial conversion feature valued at $336,300, which is recorded as a discount. The total discount on the Notes will be amortized over the life of the Notes and recorded as interest expense. For the year ended December 31, 2020, the Company has amortized $20,582 of the discount to interest expense. The notes have an interest rate of 8%. The principle and interest of the note is due in full during 2022 or can be converted into the Company’s common stock at a purchase price of the lesser of $0.40 per common share at any time after issuance or a 25% discount of the common stock price of a Qualified Offering.
11. 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 $354 to $10,813 including interest, ranging from 3.6% to 13.2% per annum.
Future minimum lease payments, including principal and interest, under the finance leases for subsequent years are as follows:
Year ended
|
|
|
|
2021
|
|
$
|
161,394
|
|
2022
|
|
|
145,374
|
|
2023
|
|
|
125,790
|
|
2024
|
|
|
116,918
|
|
2025
|
|
|
43,970
|
|
|
|
|
|
|
Total
|
|
|
593,446
|
|
Less: interest
|
|
|
(87,788
|
)
|
Present value of net minimum lease payments
|
|
|
505,658
|
|
|
|
|
|
|
Short term
|
|
|
125,449
|
|
Long term total
|
|
$
|
380,209
|
|
Lease payments for the years ended December 31, 2020 and 2019 aggregated approximately $194,478 and $494,691, respectively.
The finance lease obligations are secured by underlying leased assets with a net book value of approximately $509,050 and $125,553 as of December 31, 2020 and 2019, respectively.
Operating Lease
The Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option will result in an economic penalty. All of the Company’s real estate leases are classified as operating leases.
Most real estate leases include one or more options to renew, with renewal terms that generally can extend the lease term for an additional four to five years. The exercise of lease renewal options is at the Company’s discretion. The Company evaluates renewal options at lease inception and on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants.
The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of December 31, 2020 are:
Weighted average remaining lease term
|
|
47 Months
|
|
Weighted average incremental borrowing rate
|
|
|
5.0
|
%
|
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized in the condensed consolidated balance sheet as of December 31, 2020:
2021
|
|
$
|
105,615
|
|
2022
|
|
|
129,392
|
|
2023
|
|
|
131,859
|
|
2024
|
|
|
120,871
|
|
2025
|
|
|
-
|
|
Total undiscounted future minimum lease payments
|
|
|
487,737
|
|
Less: Imputed interest
|
|
|
(45,602
|
)
|
Present value of operating lease obligation
|
|
$
|
442,135
|
|
The Company has one leased facility which is office, manufacturing, and warehouse space. The Company is responsible for real estate taxes, utilities, and repairs under the terms of certain of the operating leases. Therefore, all lease and non-lease components are combined and accounted for as single lease component.
For the year ended December 31, 2020, the components of lease expense, included in cost of services and general and administrative expenses and the related interest expense in the consolidated statements of operations income, are as follows:
|
|
December 31,
2020
|
|
Operating lease cost:
|
|
|
|
Operating lease cost
|
|
$
|
124,457
|
|
|
|
|
|
|
Financing lease cost:
|
|
|
|
|
Amortization of leased assets
|
|
|
99,662
|
|
Interest expense
|
|
|
24,817
|
|
Total lease cost
|
|
$
|
124,479
|
|
12. STOCK BASED COMPENSATION
Number of options outstanding:
|
|
|
|
2018 Equity Incentive Plan
|
|
|
7,401,677
|
|
Options granted not part of a shareholder approved plan
|
|
|
2,200,000
|
|
|
|
|
|
|
December 31, 2020
|
|
|
9,601,677
|
|
The Board of Directors approved the Company’s 2018 Equity Incentive Plan (the “2018 Plan”). The purpose of the 2018 Plan is to provide additional incentives to select persons who can make, are making, and continue to make substantial contributions to the growth and success of the Company, to attract and retain the employment and services of such persons, and to encourage and reward such contributions, by providing these individuals with an opportunity to acquire or increase stock ownership in the Company through either the grant of options or restricted stock. The 2018 Plan is administered by the Compensation Committee or such other committee as is appointed by the Board of Directors pursuant to the 2018 Plan (the “Committee”). The Committee has full authority to administer and interpret the provisions of the 2018 Plan including, but not limited to, the authority to make all determinations with regard to the terms and conditions of an award made under the 2018 Plan. The maximum number of shares that may be granted under the 2018 Plan is 8,000,000. This number is subject to adjustment to reflect changes in the capital structure or organization of the Company.
The following table reflects the stock options for year ended December 31, 2020 and 2019:
A summary of stock option activity is as follows:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Number of options outstanding:
|
|
|
|
|
|
|
Beginning of year
|
|
|
6,939,178
|
|
|
|
5,901,678
|
|
Granted
|
|
|
2,825,000
|
|
|
|
1,325,000
|
|
Exercised, converted
|
|
|
-
|
|
|
|
-
|
|
Forfeited / exchanged / modification
|
|
|
(162,501
|
)
|
|
|
(287,500
|
)
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
9,601,677
|
|
|
|
6,939,178
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable at end of year
|
|
|
6,513,572
|
|
|
|
3,507,661
|
|
Number of options available for grant at end of year
|
|
|
598,323
|
|
|
|
1,060,822
|
|
|
|
|
|
|
|
|
|
|
Weighted average option prices per share:
|
|
|
|
|
|
|
|
|
Granted during the year
|
|
$
|
0.30
|
|
|
$
|
0.61
|
|
Exercised during the year
|
|
|
-
|
|
|
|
-
|
|
Terminated during the year
|
|
|
0.60
|
|
|
|
0.38
|
|
Outstanding at end of year
|
|
|
0.39
|
|
|
|
0.45
|
|
Exercisable at end of year
|
|
$
|
0.40
|
|
|
$
|
0.39
|
|
Stock-based compensation expense attributable to stock options, restricted stock awards and warrants was $787,358 for the year ended December 31, 2020. As of December 31, 2020, there was approximately $1,419,423 of unrecognized compensation expense related to unvested stock options, restricted stock awards and warrants outstanding, and the weighted average vesting period for those options and warrants was 5 years.
During the year ended December 31, 2020, the Company granted options to purchase 625,000 shares of common stock with an average vesting period of 3 years, an average expected life of 6.5 years and an average exercise price of $0.35 per common share. Total value was approximately $190,175.
On August 11, 2020, the Company issued an option to an employee to purchase up to 2,000,000 shares of common stock at a per common share price of $0.34 per common share and an average expected life of 6.5 years. The option vests over 5 years; 400,000 shares on the employees 12 month anniversary and vests the remaining 1,600,000 shares 1/48th per month over the following 48 months. Total value of this option was $597,214. These shares were not part of the Shareholder approved stock option plan and issued as an inducement of the employee.
On August 27, 2020, the Company issued an option to an employee to purchase up to 200,000 shares of common stock at a per common share price of $0.35 per common share and an average expected life of 6.5 years. The option vested immediately. Total value of this option was $61,172. These shares were not part of the Shareholder approved stock option plan and issued as an inducement of the employee.
During the year ended December 31, 2019, the Company granted options to purchase 1,325,000 shares of common stock with an average vesting period of 3 years, an average expected life of 6.5 years and an average exercise price of $0.61 per common share. Total value was approximately $755,000.
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Expected option life (years)
|
|
|
7.5
|
|
|
|
6.5
|
|
Expected stock price volatility
|
|
114-116
|
%
|
|
137-145
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
Risk-free interest rate
|
|
|
2.07
|
%
|
|
2.40-2.90
|
%
|
During the year ended December 31, 2020, the Company issued a warrant to a related party consultant to purchase up to 750,000 shares of common stock at a per common share price of $0.625. The consulting contract is for eighteen months and the warrant term is eighteen months. The warrant vests immediately and the total value was approximately $174,000.
The Gamwell contract acquisition warrants remain outstanding. The warrant can be exercised for 122,752 of the Company’s common stock at an exercise price of $0.375 per share and expire April 23, 2028.
13. COMMON STOCK
During the years ended December 31, 2020 and 2019, the Company issued the following stock:
2020
During the year ended December 31, 2020, the Company entered into three consulting agreements in which 1,250,000 shares of common stock, valued at $0.35 per share, were issued for consulting services. The value of these shares was $437,500, of which $95,537 was recognized as stock compensation expense during the year ended December 31, 2020 and the remainder of the services and value to be amortized during the years ended December 31, 2021 and 2022.
2019
The Company issued approximately 745,778 shares of common stock and received $288,001 with no material fees.
14. RELATED PARTY TRANSACTIONS
The Company contracted with Norco Professional Services, LLC. (“Norco”) to provide consulting services. The Company spent $72,500 for the year ended December 31, 2020 and $90,000 for the year ended December 31, 2019. 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 Company obtained $200,000 in debt and granted a warrant to a related party, see note 10 and 12 for additional related party transaction details.
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.
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, 2020 and 2019 include revenues from significant customers as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
|
43
|
%
|
|
|
44
|
%
|
Customer C
|
|
|
27
|
%
|
|
|
6
|
%
|
Accounts receivable balances as of December 31, 2020 and 2019 from significant customers are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
|
79
|
%
|
|
|
75
|
%
|
Customer D
|
|
|
0
|
%
|
|
|
17
|
%
|
Customer E
|
|
|
14
|
%
|
|
|
0
|
%
|
16. INCOME TAXES
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current expense (benefit):
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current expense (benefit):
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total deferred expense (benefit):
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit):
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the Company’s tax provision for (benefit from) income taxes as computed by applying the U.S. statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income at US Statutory Rate
|
|
$
|
(439,687
|
)
|
|
$
|
(211,240
|
)
|
State taxes, net of Federal benefit
|
|
|
-
|
|
|
|
-
|
|
Valuation allowance
|
|
|
439,687
|
|
|
|
211,240
|
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
The net deferred income tax asset balance related to the following:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net Operating Losses
|
|
$
|
1,391,824
|
|
|
$
|
1,032,904
|
|
Stock Options
|
|
|
335,726
|
|
|
|
250,182
|
|
Other
|
|
|
806
|
|
|
|
240
|
|
Total Deferred tax assets
|
|
$
|
1,728,356
|
|
|
$
|
1,283,326
|
|
Depreciation
|
|
|
(17,358
|
)
|
|
|
(12,015
|
)
|
Total deferred tax liability
|
|
$
|
(17,358
|
)
|
|
$
|
(12,015
|
)
|
Deferred tax asset (liability)
|
|
$
|
1,710,998
|
|
|
$
|
1,271,311
|
|
Valuation allowance
|
|
|
(1,710,998
|
)
|
|
|
(1,271,311
|
)
|
Net deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2020, the Company had federal and state net operating loss carryforwards of approximately $6,627,773.
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of December 31, 2019 and 2018, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company also considered whether there was any currently available information about future years. Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or by extrapolating past results. Moreover, the Company’s earnings are strongly influenced by national economic conditions and have been volatile in the past. Considering these factors, the Company determined that it was not possible to reasonably quantify future taxable income. The Company determined that it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of December 31, 2019 and 2018.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2019, and 2018 we have not recorded any uncertain tax positions in our financial statements.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2019, and 2018, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from December 31, 2014, to the present. Earlier years may be examined to the extent that the net operating loss carryforwards from those earlier years are used in future periods. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.
17. SUBSEQUENT EVENTS
Subsequent to December 31, 2020, the Company entered into several promissory notes with various investors of the Company with a face value of $535,000 (“the Notes”). The Notes have a beneficial conversion feature valued at $389,500, which is recorded as a discount. The total discount on the Notes will be amortized over the life of the Notes and recorded as interest expense. The notes have an interest rate of 8% and are payable quarterly and twelve months after issuance, 1/12 of the principle will repaid monthly. The principal and interest of the note is convertible into the Company’s common stock at a purchase price of the lesser of $0.40 per common share at any time after issuance or a 25% discount of the common stock price of a Qualified Offering.
On January 15, 2021, the Company leased equipment under a finance lease. The lease is for three years with a monthly payment of $856. The finance lease obligation is secured by the underlying leased assets valued at $24,788.
On January 12, 2021, the Company issued 500,000 common stock options to an individual for services rendered valued at $243,964. The option vests 20% on January 12, 2022 with the remainder vesting monthly over 48 months.
Subsequent to December 31, 2020, the Company issued 85,103 shares of common stock related to the cashless exercise of stock options.