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Nerds On Site Inc. — Interim / Quarterly Report 2021
Apr 29, 2021
47504_rns_2021-04-28_f71001cc-5099-41df-afc0-0d58af15313f.pdf
Interim / Quarterly Report
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NERDS ON SITE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2021
FORWARD LOOKING STATEMENTS
This MD&A may contain forward- looking statements that involve substantial known and unknown risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding future financial position, business strategy, use of proceeds, corporate vision, proposed acquisitions, partnerships, joint-ventures and strategic alliances and cooperation’s, budgets, cost and plans and objectives of or involving the Company. Such forward- looking information reflects management’s current beliefs and is based on information currently available to management. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “predicts”, “intends”, “targets”, “aims”, “anticipates” or “believes” or variations (including negative variations) of such words and phrases or may be identified by statements to the effect that certain actions “may”, “could”, “should”, “would”, “might” or “will” be taken, occur or be achieved. A number of known and unknown risks, uncertainties and other factors may cause the actual results or performance to materially differ from any future results or performance expressed or implied by the forward-looking information. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond the control of the Company including, but not limited to, the impact of general economic conditions and industry conditions. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. The Company does not assume any obligation to update or revise its forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by securities laws.
The following Management Discussion and Analysis (“MD&A”) of the financial condition and results of Nerds on Site Inc. (the ‘Company’) is prepared as of April 28, 2021. In this MD&A only, references to the ‘‘Company’’, ‘‘NOS’’, ‘‘we’’, ‘‘us’’ or ‘‘our’’ refer to Nerds on Site Inc. This MD&A should be read in conjunction with our interim unaudited financial statements for the period ended February 28, 2021 and our audited financial statements and the accompanying notes thereto for the year ended May 31, 2020. The MD&A contains certain forward-looking information that involves risks and uncertainties, including but not limited to, those described in the ‘‘ Risk Factors ’’ section.
Basis of Presentation
Our audited financial statements for the year ended May 31, 2020 have been prepared in accordance with IFRS and are presented in Canadian dollars unless otherwise indicated. We manage our business based on one operating and reportable segment. The financial statements for the quarter ended February 28, 2021 are condensed financial statements.
Non-IFRS Financial Measures
This MD&A may refer to certain non-IFRS measures. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.
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Overview
The Company incorporated on June 26, 1996 pursuant to the Ontario Business Corporations Act and is engaged in the business of providing information technology services, hardware, software and related support agreements.
We are a Managed IT and CyberSecurity service provider, we operate a network of 130 sub-contractors (“Nerds”) servicing on average 10,000 customers per year in Canada, with over 130,000 customers serviced since the inception. Our centralized ERP system IAMANERD.COM (“IAMANERD”) is an online operating system used to manage day to day operations of our Nerds.
Classified an essential service business during this COVID 19 pandemic, Nerds On Site has not experienced a negative impact as so many other enterprises have. As a truly mobile and remote service with almost no burden of office or real estate overhead, our business model has proven most effective during this global event.
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Objectives and Strategies
Our focus remains Driving up the Pleasure, Productivity and Profitability of Technology in the lives of our SME and corporate Clients across Canada and the USA.
In this current COVID-19 pandemic era, we have new safety protocols in place for our Nerds and clients, including enhanced on-site service safety procedures. We are also preparing to respond to the 350+% *increase in cybercrime activity and the resulting onslaught of monetization efforts of this criminal activity 6-12 months (and beyond) down the road. We are working on expanding our partnering efforts in the Risk Aversion and Cyber Insurance space to more fully serve business Clients and their business systems security needs.
Our efforts are focused on provisioning the SME space with standard, secure and productive Remote Workplace station setups. We are developing strategies to provide our existing and new clients with opportunities to increase productivity with their distributed work-from-home team members. Another new offering is School Zone ( nerdsonsite.com/schoolzone) for the challenging ‘back to school’ experience of families.
One thing becoming quite clear is that online security and technology will play an ever more important role in the new enterprise normal. Bright future for our Cyber Security focused NOS services indeed!
*source: https://www.pcmag.com/news/phishing-attacks-increase-350-percent-amid-covid-19-quarantine
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COMPANY HIGHLIGHTS
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Revenue for the three- month period ended February 28, 2021 was $2,826,950 as compared to $2,728,401 for the prior period ended February 29, 2020, an increase of $98,549. Revenue for the nine- month period ended February 28, 2021 was $7,575,172 as compared to $7,936,490 for the prior period ended February 29, 2020, a decrease of $361,318. The primary reason for drop in revenue in current nine- month period as compared to prior ninemonth period was the added revenue of approximately $550,000 in prior period arising from a non repetitive cyber security project.
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Gross profit for the nine- month period ended February 28, 2021 was $2,089,330 as compared to $2,103,437 for the prior nine-month period ended February 29, 2020. Despite a drop in revenue, gross margin for the current nine-month period as a percentage of revenue was 27.6% as compared to 26.5% in prior period.
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Gross profit for the three- month period ended February 28, 2021 was $718,331 as compared to $847,182 for the prior three-month period ended February 29, 2020. Gross margin for the current three-month period as a percentage of revenue was 25.4% as compared to 31.1% in prior period.
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Selling, general and administrative expenses for the nine-month period ended February 28, 2021 were $2,397,677 as compared to $3,576,092 for prior nine -month period ended February 28, 2020. The substantial reduction in expenses of $1,178,415 or 33% is a result of the Company’s general and administrative cost reduction strategies.
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Selling, general and administrative expenses for the three-month period ended February 28, 2021 were $791,934 as compared to $983,734 for prior three -month period ended February 29, 2020. The substantial reduction in expenses of $191,800 or 19% is a result of the Company’s general and administrative cost reduction strategies.
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Cash used in operating activities was ($285,202) for the nine-month period ended February 28, 2021, compared to ($1,377,821) for the prior period ended February 29, 2020, reflecting an improvement in cash used in operations by $1,092,619.
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Net loss for the nine-month period ended February 28, 2021 was $329,006 as compared to net loss of $1,642,712 for the nine-month prior period ended February 29, 2020, a substantial reduction in net loss by $1,313,706 or 80%. This is in line with the Company’s cost reduction strategy.
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Net loss for the three-month period ended February 28, 2021 was $76,839 as compared to net loss of $206,947 for the three-month prior period ended February 29, 2020, a reduction in net loss by $130,108 or 63%. This is in line with the Company’s cost reduction strategy.
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Loss per share-Basic and diluted was ($0.0038) for the nine-month period ended February 28, 2021 as compared to ($0.0191) for the nine-month prior period ended February 29, 2020, a reduction in loss per share by 80%.
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Loss per share-Basic and diluted was ($0.0009) for the three-month period ended February 28, 2021 as compared to ($0.0024) for the three-month prior period ended February 29, 2020, a reduction in loss per share by 62%.
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Fundraising
In Fiscal 2019, the Company focused on business planning, negotiations and discussion with funding providers to fund the expansion in United States.
On November 26, 2018, the Company announced that it had completed its initial public offering (“IPO”) of 13,519,830 units (“Units”), each Unit consisting of one common share in the capital of the Company (“Common Shares”) and one half (0.5) of one Common Share purchase warrant, at a price of $0.35 per Unit, for gross proceeds of $4,731,940. The Common Shares are listed on the Canadian Securities Exchange (“CSE”) under the symbol NERD and began trading on November 28, 2018 at the opening of the market.
Pursuant to the agency agreement dated August 30, 2018, Canaccord Genuity Corp. acted as agent (the “Agent”) for the IPO. The Company paid to the Agent an aggregate cash commission of $378,555. In addition, the Company granted the Agent and its sub-agents non-transferable options entitling the Agent and its sub-agents to purchase a total of 1,081,586 Units at a price of $0.35 per Units until November 28, 2020. In connection with closing of the IPO, the Agent also received a corporate finance fee of $40,000. The Company incurred legal and related expenses for $366,872.
In November and December of 2018, convertible debentures with a face value of $2,826,500 plus interest accrued for $147,057 was converted into 11,894,226 units at $0.25 per unit. Each Unit consists of one (1) Common Share and one (1) Common Share purchase warrant of the Company (each a Warrant). Each Warrant entitles the holder thereof to acquire one (1) Common Share for an exercise price of $0.30 per Common Share for a period of two years following the Closing Date.
In March, 2019, the Company raised $600,000 by way of a non-brokered private placement offering of 3,000,000 common share units of the Corporation ("Units") at a price of $0.20 per Unit, with each Unit consisting of one (1) Common Share in the capital of the Company ("Common Share") and one (1) Common Share purchase warrant ("Warrant"), with each whole Warrant entitling the holder thereof to purchase one (1) additional Common Share at a purchase price of $0.25 per Common Share for a period of three years from the closing. The Company incurred agent commissions of $48,000 related to the private placement. The agent was also granted 240,000 agent warrants, each warrant exercisable to purchase one (1) Common Share at an exercise price of $0.25 per share for a period of 24 months from the date of closing.
We have exclusive software sales agreements with several related companies providing SaaS products. Those products include TimeWellScheduled ™, Adam Networks, and MYbusinessOS ™. From each software sale we receive a 20% royalty, which is split based on our standard splits with Nerds.
Key Performance Indicators
Key performance indicators that we use to manage our business and evaluate our financial results and operating performance include recurring revenue, total revenue, number of customers and expenses.
Recurring revenue and retention rates
Our consulting service customers generally enter into agreements for use of our services. Most of these agreements include provisions by which they renew following the initial term. Our consulting services model results in a high proportion of recurring revenue. The power of the consulting service model is only fully realized when a vendor has high retention rates. Our emphasis on recurring revenue has resulted in growth and in revenue maintenance over the past years.
The recurring nature of our revenue provides high visibility into future performance, and upfront payments result in cash flow generation in advance of revenue recognition. However, this also means that agreements with new customers or agreements with existing customers purchasing additional services in a quarter may not contribute
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significantly to current quarter revenue. As an example, a new customer who enters into an agreement on the last day of a quarter will have no impact on the revenue recognized in that quarter.
Number of customers
We believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business. We define customers as the number of independent entities that are separately billed.
Significant Factors Affecting Results of Operations
Our results of operations are influenced by a variety of factors, including:
Revenue
The Company recognizes revenue when it transfers control of its services to the customer. The Company follows a 5-step process to determine whether to recognize revenue:
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Identifying the contract with a customer
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Identifying the performance obligations
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Determining the transaction price
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Allocating the transaction price to the performance obligations.
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Recognizing revenue when/as performance obligations are satisfied.
Under IFRS 15, the Company classified its revenue as being principally derived from the following sources:
Service fees charged for consulting services performed by the Company’s consultants under written service contracts with customers. The service contracts the Company enters into, generally fall into three specific categories: time and materials, fixed-price and prepaid service agreements.
Sale of off the shelf software, hardware and related support which are specifically charged on the Company’s invoices. Software, hardware and related service are part of what the Company provides to small and medium size enterprises when providing consulting. Software, hardware and related service items are priced and billed separately from IT service charges.
The Company’s customers may also be charged miscellaneous fees, including software licensing fees, shipping fees, cloud storage fees, web hosting fees and fees for other miscellaneous services.
Cost of Revenue
Cost of revenue include both subcontract costs for providing information technology and related services and associated hardware and software costs. The Company provides mobile IT support for various businesses including PC set up, network installation and support & tailored software services. The Company uses a specially trained network of technically proficient IT consultants to help clients on site by providing effective, consistent and customized IT solutions.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of salaries and related expenses for our sales, administrative and marketing staff, including management services, data centre and call centre costs, professional and legal costs and banking services. These costs also include advertising, events, corporate communications, brand building and product marketing activities. We plan to continue to invest in sales and marketing by expanding our domestic and international selling and marketing activities, building brand awareness and sponsoring additional marketing events. We expect that in the future, sales and marketing expenses will increase with increase in revenue in
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absolute dollars and we incur additional employee-related costs and professional fees related to the growth of our business and international expansion.
Our presentation and functional currency is Canadian dollars and all the amounts in this management discussion and analysis are in Canadian dollars unless otherwise indicated. We derive most of our revenue from customers who pay in Canadian dollars. Our head office and most of our employees are in Ontario, Canada, and as such a significant amount of our expenses are paid in Canadian dollars. As the Company is rolling out its operations in the United States, the Company’s future revenues and expenses will include revenues and expenses in both Canadian dollars and United States dollars.
Subsequent events
Subsequent to the period ended February 28, 2021, 400,000 warrants were exercised for 400,000 common shares at $0.25 per share.
On March 1, 2021, Staples Canada issued a press release related to Staples national partnership with the Company to bring IT support services to small business customers. Staples Canada, The Working and Learning Company, and Nerds On Site Inc. a mobile IT solutions company servicing the small, medium enterprise (SME) marketplace in Canada and the USA, announced an exclusive partnership to launch Nerds On Site for Business, which will support small business customers with IT and cyber security services as they continue to navigate the new way of working. A trusted provider in the managed IT and cyber security space, Nerds On Site for Business can support Staples small business customers across Canada with remote and on-site solutions for everything from setting up a company's workforce to work from anywhere to managing an entire IT network. With data, cyber security and managed IT services in demand more than ever before, one of the key services that Nerds On Site for Business will provide to SME customers is a no-commitment, no-obligation cyber security assessment scorecard of their business, with custom solutions to combat any findings. Properly managing and protecting business systems has become a pivotal step to remain secure in the ever-evolving digital world.
Results of Operations
Three and nine months ended February 28, 2021 and February 29, 2020:
| Three months Nine months 2021 2020 2021 2020 Total Revenue 2,826,950 2,728,401 7,575,172 7,936,490 Gross Profit 718,331 847,182 2,089,330 2,103,437 Operating Expenses 822,749 1,054,501 2,498,916 3,754,508 Operating loss (104,418) (207,319) (409,586) (1,651,071) Net loss (76,839) (206,947) (329,006) (1,642,712) Loss per share (0.0009) (0.0024) (0.0038) (0.0191) Cash flow used in operating activities (285,202) (1,377,821) Cash flow from (used) in investing activities (5,780) 1,278,097 Cash flow from financing activities 248,392 13,389 |
Three months Nine months 2021 2020 2021 2020 Total Revenue 2,826,950 2,728,401 7,575,172 7,936,490 Gross Profit 718,331 847,182 2,089,330 2,103,437 Operating Expenses 822,749 1,054,501 2,498,916 3,754,508 Operating loss (104,418) (207,319) (409,586) (1,651,071) Net loss (76,839) (206,947) (329,006) (1,642,712) Loss per share (0.0009) (0.0024) (0.0038) (0.0191) Cash flow used in operating activities (285,202) (1,377,821) Cash flow from (used) in investing activities (5,780) 1,278,097 Cash flow from financing activities 248,392 13,389 |
|---|---|
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Discussion of Operations: Three- month and nine-month periods ended February 28, 2021 and February 29, 2020:
Revenue
| Service fees Product sales (Sale of software, hardware and related) Miscellaneous fee Total |
9 months 9 months 3 months 3 months 2021 2020 2021 2020 |
|---|---|
| $ $ $ $ 3,538,594 3,906,538 1,241,539 1,315,033 4,026,259 3,989,294 1,585,241 1,402,388 10,319 40,65 170 10,980 |
|
| 7,575,172 7,936,490 2,826,950 2,728,401 |
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Revenue composition for the nine and three months ended
February 28, 2021 and February 29, 2020
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
9 months-2021 9 months-2020 3 months-2021 3 months-2020
Service fees
Product revenue (Sale of software, hardware and related)
Miscellaneous fee
Total revenue
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The Company has a single reportable segment for managed IT consulting services. The Company recorded total revenue of $7,936,490 during the nine months ended February 28, 2021 as compared to total revenue of $7,936,490 during the nine months ended February 29, 2020, a decrease of $361,318. The primary reason for drop in revenue in current nine- month period as compared to prior nine- month period was the additional revenue of approximately $550,000 in prior period arising from a one-time non repetitive cyber security project
Gross profit (3 months ended February 28, 2021 and February 29, 2020)
| 2021 |
2020 | |
|---|---|---|
| $ | $ | |
| Total Revenue | 2,826,950 | 2,728,401 |
| Gross Profit | 718,331 | 847,182 |
| Gross Margin % | 25.4% | 31.1% |
The lower gross margin in the current three- month period as compared to the prior three- month period is primarily the revenue derived from the one- time non-repetitive cyber security project in the prior period with increased margin.
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Revenue, gross profit and gross margin
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3000000 0.35
2500000 0.3
0.25
2000000
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1500000
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1000000
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500000 0.05
0 0
$ $
3 months-2020 3 months-2021
Total Revenue Gross Profit Gross Margin %
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Gross profit (9 months ended February 28, 2021 and February 29, 2020)
| 2021 |
2020 | |
|---|---|---|
| $ | $ | |
| Total Revenue | 7,575,172 | 7,936,490 |
| Gross Profit | 2,089,330 | 2,103,437 |
| Gross Margin % | 27.6% | 26.5% |
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Revenue, gross profit and gross margin
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9000000 0.278
8000000 0.276
7000000 0.274
0.272
6000000
0.27
5000000
0.268
4000000
0.266
3000000
0.264
2000000 0.262
1000000 0.26
0 0.258
$ $
9 months-2020 9 months-2021
Total Revenue Gross Profit Gross Margin %
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The Company recorded gross profit of 718,331 and $847,182 during the three months ended February 28, 2021 and February 29, 2020, respectively.
The Company recorded gross profit of 2,089,330 and $2,103,437 during the nine months ended February 28, 2021 and February 29, 2020, respectively. The gross margin improved to 27.6% from 26.5% during the current ninemonth period.
Selling, general and administrative
The Company has the following breakdown of selling, general and administrative expenses for the three and nine months ended February 28, 2021 and February 29, 2020:
| Programming and related costs Management remuneration Office and administrative expenses Payroll and related costs Legal and professional Advertising and promotion Bank and interest charges Business development Communication Automobile expenses Total |
9 months 9 months 3 months 3 months 2021 2020 2021 2020 |
|---|---|
| $ $ $ $ 585,426 682,068 196,722 223,813 358,158 369,209 111,232 115,800 298,650 694,814 90,564 110,377 229,942 253,973 74,623 94,329 121,400 111,396 47,554 28,918 110,475 479,550 38,230 96,695 169,289 158,585 61,475 60,416 287,558 507,706 84,609 161,487 178,654 176,983 60,340 53,080 58,125 141,808 26,585 38,819 |
|
| 2,397,677 3,576,092 791,934 983,734 |
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| Selling, general and administrative expenses | Three months ended | Three months ended | ||
|---|---|---|---|---|
| February28, | February29, | |||
| 2021 | 2020 | |||
| $ | $ | |||
| Total selling, general and administrative expenses | 791,934 | 983,734 | ||
| Total revenue | 2,826,950 | 2,728,401 | ||
| As a % of revenue | 28% | 36% | ||
| Selling, general and administrative expenses | Selling, general and administrative expenses | Three months ended February28, |
Three months ended February29, |
Three months ended February29, |
|---|---|---|---|---|
| 2021 | 2020 | |||
| $ | $ | |||
| Total selling, general and administrative expenses | 791,934 | 983,734 | ||
| Total revenue | 2,826,950 | 2,728,401 | ||
| As a % of revenue | 28% | 36% | ||
| 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 |
0% 5% 10% 15% 20% 25% 30% 35% 40% $ $ 3 months-2020 3 months-2021 Selling, general and administrative expenses as a % of revenue Total selling, general and administrative expenses Total revenue As a % of revenue |
|||
| Selling, general and administrative expenses | Nine months ended February28, |
Nine months ended February29, |
||
| 2021 | 2020 | |||
| $ | $ | |||
| Total selling, general and administrative expenses | 2,397,677 | 3,576,092 | ||
| Total revenue | 7,575,172 | 7,936,490 | ||
| As a % of revenue | 32% | 45% | ||
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Selling, general and administrative expenses as a % of revenue
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9,000,000 50%
8,000,000 45%
40%
7,000,000
35%
6,000,000
30%
5,000,000
25%
4,000,000
20%
3,000,000
15%
2,000,000 10%
1,000,000 5%
0 0%
Nine months ended February 29, Nine months ended February 28,
2020 2021
Total selling, general and administrative expenses Total revenue As a % of revenue
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Selling, general and administrative expenses have seen a substantial decline during the three and nine months ended February 28, 2021 as compared to February 29, 2020. There has been reduction in every selling, general and administrative expenses category during the three- month and nine-month periods ended February 28, 2021 as compared to the prior period, except for a marginal increase in legal and professional, communication and bank and interest charges which have marginally increased due to our operations in the USA. This is in line with the Company’s expense reduction strategy.
Our operating loss was $104,418 for the three months ended February 28, 2021 as compared to operating loss of $207,319 for the three months ended February 29, 2020. Beyond the impact of selling, general and general expenses reductions as noted above, the other major drivers for our operating losses in 2021 and 2020 is the amortization of right-of-use assets for $7,347 and $62,601 for the three months in 2021 and 2020 respectively arising on the adoption of IFRS 16. The lower amortization of right-to use asset in 2021 is a result of the early termination of vehicle leases during the last quarter of year ended May 31, 2020. In addition, the company amortized intangible assets by $16,307 in the three months of 2021 as compared to $2,038 in 2020. The excess amortization in 2021 is the result of the Company decision to amortize the intangible asset completely over the current year ending May 31, 2021.
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The following table summarizes financial information for the three months ended February 28, 2021 and the preceding seven quarters:
| Revenue Net loss Loss per share, basic and fully diluted Total assets Total liabilities Shareholders’ equity Cash dividends for common shares |
Q3 2021 Q2 2021 Q1 2021 Q4 2020 Q3 2020 Q2 2020 Q1 2020 Q4 2019 |
|---|---|
| $ $ $ $ $ $ $ $ 2,826,950 2,452,312 2,295,910 2,206,846 2,728,401 2,277,400 2,930,689 2,392,626 (76,839) (107,173) (144,994) (391,999) (206,947) (846,098) (589,667) (1,919,657) (0.0009) (0.0012) (0.0017) (0.0045) (0.0024) (0.0098) (0.0068) (0.0268) 2,467,669 2,552,088 2,561,309 2,837,657 3,484,699 3,966,295 4,512,350 4,998,194 1,550,588 1,558,168 1,460,216 1,591,570 1,846,613 2,121,262 1,821,219 1,717,396 917,081 993,920 1,101,093 1,246,087 1,638,086 1,845,033 2,691,131 3,280,798 - - - - - - - - |
| Key balance sheet items | ||
|---|---|---|
| February28, 2021 | May31, 2020 | |
| $ | $ | |
| Total Assets | 2,467,669 | 2,837,657 |
| Total Liabilities | 1,550,588 | 1,591,570 |
| Cash dividends declared for common shares |
$nil | $nil |
During the nine -month period ended February 28, 2021, the Company did not raise any cash from private placements and focussed on monitoring of operating costs.
Our balance sheet has several key items that are necessary to analyze to gain a full understanding of our financial results. The following analysis explains those items.
| Trade and other receivables | ||
|---|---|---|
| February28, 2021 | May31, 2020 | |
| $ | $ | |
| Accounts receivables (net) | 265,581 | 144,335 |
We have a diverse group of customers, not one of which represents greater than 10% of the total receivables balance.
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| Accountspayable and accrued liabilities | ||
|---|---|---|
| February 28, 2021 | May31, 2020 | |
| $ | $ | |
| Accounts payable | 315,078 | 336,390 |
| Accrued liabilities | 256,353 | 308,365 |
| Wages payable | 12,876 | 13,253 |
| Subcontractor payable | 63,891 | 33,994 |
| Others | 30,468 | 20,856 |
| Total | 678,666 | 712,859 |
Preferred Shares
On January 27, 2015, the Company issued 1,000,000 shares of Class B Preferred shares to the three founding shareholders. Each Class B Preferred share is entitled to 10 votes per share. Proceeds to the Company were $nil. Class B Shares were issued to provide the founders with 10 votes per share, do not entitle the holders to interest, dividends, and do not provide rights to the assets of the Company in the event of a liquidation of the Company.
On January 27, 2015, the Company issued 1,000,000 Class A Preferred shares. The Class A shares are non-voting and entitle the holder to cumulative dividends at a rate of 7.25% per year, paid quarterly, beginning June 30, 2016 and are redeemable upon given notice at any time, the whole or from time to time any part of the outstanding shares, by the Company from the date of issuance in cash for $1 per share together with an amount equal to all dividends accrued and remaining unpaid. The shares are redeemable any time by the shareholder, with 30 days-notice, starting from June 30, 2016. The Class A Preferred shares do not meet the criteria for equity classification under IFRS due to the cash redemption feature and have therefore been recorded as a liability. During the year ended May 30, 2017, the Company redeemed $500 Thousand of the Class A Preferred shares and during the year ended May 31, 2018, the Company redeemed additional $30 Thousand of the Class A Preferred shares. During the year ended May 31, 2019, the Company redeemed the balance of $470,000 of Class A Preferred Shares.
| Contract liabilities | ||
|---|---|---|
| February28, 2021 | May31, 2020 | |
| $ | $ | |
| Contract liabilities | 292,991 | 267,659 |
Our business model results in us billing our customers in advance of providing the service and, as a result, we record contract liabilities at the close of the reporting period.
| Liquidity and capital resources | ||
|---|---|---|
| February28, 2021 | May31, 2020 | |
| $ | $ | |
| Cash | 274,203 | 316,793 |
The Company’s primary revenues have come from its sale of software, hardware and consulting services. The Company has also increased liquidity through equity and debt financing at various times in its history. The Company
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has successfully raised $2.8 Million by issue of convertible debt in fiscal 2018 and gross of $4.7Million in Units in fiscal 2019.
The following is a summary of our cash flows provided by (used in) operating activities, investing activities and financing activities for the periods as indicated:
| Cash-Flow | Nine- monthperiod | Nine- monthperiod |
|---|---|---|
| February28, 2021 | February29, 2020 | |
| $ | $ | |
| Operatingactivities | (285,202) | (1,377,821) |
| Investingactivities | (5,780) | 1,278,097 |
| Financingactivities | 248,392 | 13,389 |
| Increase (decrease) in cash | (42,590) | (86,335) |
| Cash beginningofperiod | 316,793 | 157,237 |
| Cash end ofperiod | 274,203 | 70,902 |
Net cash from (used in) operating activities
Cash flow used in operations, which is generally the net income or loss adjusted for non-cash items, such as depreciation and changes in non-cash working capital items, was outflow of $(285,202) for nine-months ended February 28, 2021, as compared to outflow of $(1,377,821) for the nine-months ended February 29, 2020.
The main factors which contributed to decrease in cash outflow from operations were:
-
a) The Company had a net loss of $(329,006) in 2021 as compared to a net loss of $(1,642,712) in 2020. The improvement in performance for 2021 was primarily a result of decrease in selling, general and administrative expenses.
-
b) The timing of receipts and payments, including increase in contract liabilities by $25,332 in 2021 as compared to a decrease of $(156,334) in 2020.
Net cash from (used) in investing activities
Cash from (used in) investing activities was $(5,780) in 2021 as compared to inflow of $1,278,097 in 2020. During 2021, the outflow of cash was for acquisition of property and equipment for $(5,780). In 2020, the inflow of cash of $1,278,097 was primarily the reduction in short term investments by $1,353,721.
Net cash from (used) in financing activities
Cash provided by financing activities was $248,392 in 2021 as compared to $13,389 in 2020. In 2021, the Company collected $295,203 receivable from related parties as compared to $229,116 in 2020. In addition, during 2021 the Company incurred $(31,732) being repayment of lease liabilities as compared to $(115,855) in 2020. The decrease in payment in 2021 was due to the cancellation of vehicle leases during the last quarter of prior year ended May 31, 2020.
As of February 28, 2021, the Company has a working capital deficiency of $311,819. As of May 31, 2020, the Company has a working capital deficiency of $367,146.
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The following constitutes the current assets and current liabilities as of February 28, 2021:
| ASSETS CURRENT Cash $ Accounts receivable (net) Inventory Prepaid expenses and other current assets Current portion of due from related party LIABILITIES CURRENT Accounts payable and accrued liabilities $ Contract liabilities Bank debt Preferred shares Dividend payable Current portion of lease liabilities Current portion of loans payable |
274,203 265,581 43,130 54,605 334,921 972,440 678,666 292,991 193,611 100 69,479 22,407 27,005 1,284,259 |
|---|---|
| The followingconstitutes the current assets and current liabilities as of May31, 2020: | 316,793 144,335 34,542 121,175 324,984 941,829 712,859 267,659 206,649 100 69,479 22,366 29,863 1,308,975 |
| ASSETS CURRENT Cash $ Accounts receivable (net) Inventory Prepaid expenses and other current assets Current portion of due from related party LIABILITIES CURRENT Accounts payable and accrued liabilities $ Contract liabilities Bank debt Preferred shares Dividend payable Current portion of lease liabilities Current portion of loans payable |
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Contractual Obligations
The carrying values of loans payable were as follows:
| Current portion BDC Loans $ Vehicle loans Non-current portion BDC Loans CERB loan Vehicle loans $ |
February 28, 2021 19,920 $ 7,085 27,005 21,988 60,000 14,388 96,376 123,381 $ |
May 31, 2020 |
|---|---|---|
| 19,920 9,943 |
||
| 29,863 | ||
| 36,520 40,000 19,039 |
||
| 95,559 | ||
| 125,422 |
BDC loans payable were obtained on December 2014 for the two principal amounts of $150,000 and $100,000 with interests charged at BDC floating base rate plus 3.5% and 1% or 8.2% and 5.7%, respectively, and principal plus interest repayable monthly until the years 2020 and 2019, respectively. In addition, the Company obtained an additional BDC for $100,000 with interests charged at BDC floating base rate plus 2.06%, the first principal and interest payment due April 3, 2018 and repayable monthly to 2023. The BDC loans are secured by a guarantee for a full outstanding amount of the loans and first security interest in all present and after-acquired property except consumer goods, subject only to priority on inventory and receivables to lender extending the line of credit.
CERB (Canada Emergency Business Account) is an interest free loan to assist with cash flow needs. If this loan is repaid in full by December 31, 2022, $20,000 of the amount loaned under CEBA is forgiven.
Interest expense incurred for the nine- month periods ended February 28, 2021 was $3,522 (February 29, 2020: $8,055)
In addition, the Company has a revolving line of credit from Toronto-Dominion Bank (“TD Bank”) available for up to $175,000 in order to fund working capital. Interest is charged at TD Bank Prime rate plus 2.25% and repayment is due on demand. During the nine months ended February 28, 2021, total interest expense recorded under selling, general and administrative expenses was $5,226 (2020: $ 6,941). The operating line is secured by a general security agreement, assignment of insurance, unlimited guarantee advances executed by the Company and postponement of assignments of creditors’ claims.
Any amounts overdrawn over $175,000 are considered temporary as such overdrawn amounts are repaid subsequently.
The balance outstanding was $193,611 and $206,649 at February 28, 2021 and May 31, 2020, respectively, and is presented as a current liability in the consolidated statements of financial position.
| Payments Due by Period | Payments Due by Period | Payments Due by Period | |||
|---|---|---|---|---|---|
| Contractual Obligations |
Total (thousands of dollars) |
Less than 1 Year |
1 – 3 Years | 4 – 5 Years | After 5 Years |
| Obligations | Total | Year | Years | Years | 5 Years |
| Loans Obligation | 123,381 | 27,005 | 96,376 | nil | nil |
| Purchase Obligations | nil | nil | nil | nil | nil |
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Transactions with related parties
Amounts due from related parties as at February 28, 2021 and May 31, 2020 included the following. The origin of these related party receivables was to provide start-up costs and cash flow for start-up operations. The Company has executed agreements with these related parties to repay the principal outstanding in monthly installments over a period of five years at rates of interest ranging from 8%pa to 10%pa. In addition, an amount of $149,000 due to a related party in the prior year was netted during the year ended May 31, 2020, with a receivable from related party. The carrying values of the related party balances were as follows:
| Current portion Ready Aim Fire Enterprising Inc. (a) and (b) $ Nerds On-Site South Africa (b) Adam Networks Inc. (a) and (b) $ Non-current portion Ready Aim Fire Enterprising Inc. (a) and (b) $ Nerds On-Site South Africa (b) Adam Networks Inc. (a) and (b) Other related parties (b) $ |
February 28, 2021 May 31, 2020 103,770 98,830 28,451 27,455 202,700 198,699 |
|---|---|
| 334,921 $324,984 |
|
| 387,702 $ 481,724 114,651 135,581 507,184 676,475 25,724 46,621 |
|
| 1,035,261 $1,340,401 |
(a) via same key management personnel (b) by virtue of common control
- This related party changed its name from DNSthingy Inc to Adam Networks Inc.
The Company recorded revenue from the following related parties during the three and nine months ended February 28, 2021 and February 29, 2020:
| Ready Aim Fire Enterprising Inc. ($) |
Adam Networks Inc ($) |
Nerds On Site South Africa ($) |
Total ($) |
|
|---|---|---|---|---|
| Three months ended February 28, 2021 |
18,434 (a) |
14,406 (b) |
9,310 (c) |
42,150 |
| Three months ended February 29, 2020 |
16,245 | 19,165 | 6,290 | 41,700 |
| Nine months ended February 28, 2021 |
71,650 (d) |
46,169 (e) |
28,404 (f) |
146,223 |
| Nine months ended February 29, 2020 |
63,519 | 58,390 | 20,455 | 142,364 |
(a) includes interest on receivables for $12,797 (3 months ended February 29, 2020: $nil)
(b) includes interest on receivables for $ 14,406 (3 months ended February 29, 2020: $19,165) (c) includes interest on receivables for $3,537 (3 months ended February 29, 2020: $nil)
(d) includes interest on receivables for $40,187 (9 months ended February 29, 2020: $nil)
(e) includes interest on receivables for $46,169 (9 months ended February 29, 2020: $58,390)
(f) includes interest on receivables for $11,106 (9 months ended February 29, 2020: $nil)
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Key management personnel are comprised of the Company’s directors and executive officers. Key management personnel compensation is as follows:
| personnel compensation is as follows: | ||||||||
|---|---|---|---|---|---|---|---|---|
| For the three | For the nine | |||||||
| month period | For the three | For the nine month | month period | |||||
| ended February | month period ended | period ended | ended February | |||||
| 28, 2021 | February 29, 2020 | February 28, 2021 | 29, 2020 | |||||
| Salaries and benefits, including bonuses | $ | 90,090 |
$ | 82,800 |
$ | 270,270 |
$ | 254,400 |
| Directors fees | $ | 21,142 |
$ | 33,000 |
$ | 87,888 |
$ | 114,809 |
| Total | $ | 111,232 |
$ | 115,800 |
$ | 358,158 |
$ | 369,209 |
Off-balance sheet arrangement
The Company has no off-balance sheet arrangement as of February 28, 2021 and May 31, 2020.
Outstanding Share Data
- (a) Authorized: Unlimited number of common shares
(b) Issued
On June 25, 1996, the Company issued 1,550 founder shares to three founding stockholders. Effective with a stock split on January 27, 2015 of 5,031 to 1, the 1,550 shares were adjusted to 7,800,000 common shares outstanding. Effective with stock split on October 3, 2017, these 7,800,000 common shares outstanding were further adjusted to 39,000,000 common shares outstanding. Historical amounts have been adjusted to reflect the stock split.
On February 20, 2013, the Company issued, on a split adjusted basis, 1,199,000 shares of common stock to two consultants in exchange for consulting services to execute certain capital market transactions. Effective with stock split on October 3, 2017, these 1,199,000 common shares outstanding are adjusted to 5,995,000 common shares outstanding. The shares were valued based on the value of services provided and the Company recorded a charge of $191,859 recorded over three years (2013 - 2015) based on term of services provided.
On January 27, 2015, the Company issued 1,000,000 shares of Class B Preferred shares to the three founding shareholders. Each Class B Preferred share is entitled to 10 votes per share. Proceeds to the Company were $nil. Class B Shares were issued to provide the founders with 10 votes per share, do not entitle the holders to interest, dividends, and do not provide assets rights in the event of a liquidation of the Company.
On January 27, 2015, the Company issued 1,000,000 Class A Preferred shares and 1,000,000 Common shares to a certain investor in exchange for $1,000,000. Effective with stock split on October 3, 2017, these 1,000,000 common shares outstanding are adjusted to 5,000,000 common shares outstanding. The Class A shares are non-voting and entitle the holder to cumulative dividends at a rate of 7.25% per year, paid quarterly, beginning June 30, 2016 and are redeemable upon given notice at any time, the whole or from time to time any part of the outstanding shares, by the Company from the date of issuance in cash for $1 per share together with an amount equal to all dividends accrued and remaining unpaid. The shares are redeemable any time by the shareholder, with 30 days-notice, starting from June 30, 2016. The Class A Preferred shares are not convertible but do have priority in event of liquidation. Preferred shares do not meet the criteria for equity classification due to the cash redemption feature and have therefore been recorded as a liability. During the years ended May 21, 2018 and 2017, the Company redeemed $30,000 and $500,000 of preferred shares respectively.
On November 8, 2017, the Company issued 100,000 common shares at $0.25 per share for a total cash consideration of $25,000. On November 8, 2017, $50,000 of debt was settled by issuance of 200,000 common shares at $0.25 per share.
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During the year ended May 31, 2018, the Company issued 7,500,000 common shares issued of $150,000 owed to a related party for services. These common shares issued for services were recorded based on the fair value of services received by the Company.
On November 28, 2018, the Company announced that it had completed its initial public offering (“IPO”) of 13,519,830 units (“Units”), each Unit consisting of one common share in the capital of the Company (“Common Shares”) and one half (0.5) of one Common Share purchase warrant, at a price of $0.35 per Unit, for gross proceeds of $4,731,940.
In March, 2019, the Company raised $600,000 by way of a non-brokered private placement offering of 3,000,000 common share units of the Corporation ("Units") at a price of $0.20 per Unit, with each Unit consisting of one (1) Common Share in the capital of the Company ("Common Share") and one (1) Common Share purchase warrant ("Warrant").
In March 2019, the Company received cash for $1,000 for the exercise of 4,000 agent warrants at $0.25 per share.
As at February 28, 2021 and May 31, 2020, the Company had the following number of shares outstanding post- split adjustment:
| Description | February 28, 2021 | May 31, 2020 |
|---|---|---|
| Common A Shares | 86,213,056 | 86,213,056 |
| Class A Preferred Shares | - | - |
| Class B Preferred Shares | 1,000,000 | 1,000,000 |
All references to common shares and per common share amounts have been retroactively adjusted to reflect the five-for-one forward stock split which was effective October 3, 2017, unless otherwise noted.
As at April 28, 2021, the Company had the following number of shares outstanding post- split adjustment:
| Description | April 28, 2021 | ||
|---|---|---|---|
| Common A Shares | 86,613,056 | ||
| Class A Preferred Shares | - | ||
| Class B Preferred Shares | 1,000,000 | ||
Financial Instruments and Risk Management
Risk management
In the normal course of its business, the Company is exposed to a number of financial risks that can affect its operating performance. These risks, and the actions taken to manage them, are as noted below.
Interest rate
Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in interest rates. The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates, relative to interest rates on cash and cash equivalents and bank debt due to the short-term nature of these balances and the loans and capital leases payable due to the Company’s current borrowing rate does not materially differ from market rates for similar bank borrowings.
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Credit risk
Credit risk is the risk of loss associated with the counterparty's inability to fulfill its payment obligations. For financial assets, this is typically the gross carrying amount, net of any amounts offset and any impairment losses. In the normal course of business, the Company’s trade accounts receivable are potentially exposed to credit risk from its customers. To mitigate this risk the Company provides an allowance for expected credit losses equal to the estimated losses expected to be incurred in the collection of accounts receivable.
Currency risk
The Company’s reported earnings include gain/losses on foreign exchange, largely reflecting revaluation of its foreign operations in the United States. The future foreign exchange gain or loss would change based on the level of foreign operating activities.
Liquidity risk
Liquidity risk is the risk that the Company will not have sufficient cash resources to meet its financial obligations as they come due. The Company’s liquidity and operating results may be adversely affected if its access to the capital market is hindered, whether as a result of a downturn in stock market conditions generally or matters specific to the Company.
As of February 28, 2021, the Company had cash of $274,203, and current liabilities for $1,284,259. Appropriate going concern disclosures have been made in Notes to the financial statements.
Capital Management
Our objective in managing capital is to ensure sufficient liquidity to pursue our growth strategy and to provide sufficient resources to meet day-to-day operating requirements, while at the same time taking a conservative approach towards financial leverage and management of financial risk. In managing the capital structure, we take into consideration various factors, including the growth of the business and related infrastructure and the up-front cost of taking on new customers. The officers and senior management of the Company are responsible for managing the capital and do so through monthly meetings and regular review of financial information. The Board of Directors is responsible for overseeing this process. We manage capital to ensure that there are adequate capital resources while maximizing the return to shareholders through the optimization of the cash flows from operations and capital transactions.
Critical Accounting Estimates
The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs, expenses and other comprehensive loss that are reported in the financial statements and accompanying disclosures. The estimates and associated assumptions are based on historical experience, actions that the Company may undertake in the future and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Significant areas requiring the use of estimates and assumptions include the determination of useful lives of property and equipment, accounts receivable, valuation allowance and loans. Management uses judgment in determining assumptions for cash flow projections, such as anticipated financing, anticipated sales and future commitments to assess the Company’s ability to continue as a going concern. A critical judgment is that the Company continues to raise funds going forward and satisfy their obligations as they become due.
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IFRS 15 Revenue from Contracts with Customers
The Company recognizes revenue when it transfers control of its services to the customer. The Company follows a 5-step process to determine whether to recognize revenue:
-
Identifying the contract with a customer
-
Identifying the performance obligations
-
Determining the transaction price
-
Allocating the transaction price to the performance obligations.
-
Recognizing revenue when/as performance obligations are satisfied.
Under IFRS 15, the Company classified its revenue as being principally derived from the following sources:
-
Service fees charged for consulting services performed by the Company’s consultants under written service contracts with customers. The service contracts the Company enters into, generally fall into three specific categories: time and materials, fixed-price and prepaid service agreements.
-
Sale of off the shelf software, hardware and related support which are specifically charged on the Company’s invoices. Software, hardware and related service are part of what the Company provides to small and medium size enterprises when providing consulting. Software, hardware and related service items are priced and billed separately from IT service charges.
-
The Company’s customers may also be charged miscellaneous fees, including software licensing fees, shipping fees, cloud storage fees, web hosting fees and fees for other miscellaneous services.
Revenue from the sale of consulting services is recognized based on the transaction price specified in the contracts the Company has with its customers. When a customer enters into a time and materials, fixed-price or a prepaid service contract, the Company recognizes revenue in accordance with the Company’s evaluation of the performance obligations in each contract. If the obligations represent separate units of accounting, the Company then measures and allocates the consideration from the arrangement to the separate units, based on reliable evidence of fair value for each deliverable. Units of accounting from obligations include specific objectives delineated in the service contract. Revenue under time and materials contracts is recognized as services are rendered and billed at contractually agreed upon rates. Most contracts are short in duration and revenue is recognized on delivery.
The Company recognizes revenue for sale of off the shelf software, hardware and related support when it transfers control of the product to the buyer. This is generally at the time the customer obtains legal title to the product and when it is physically transferred to the delivery mechanism agreed with the customer.
The Company has evaluated its revenue streams and major contracts with customers using the IFRS 15 five step model.
Financial instruments
Financial assets and liabilities are measured at initial recognition at fair value, and are classified and subsequently measured at fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVOCI”) or amortized cost (“AMC”), based on the business model and its contractual cash flow characteristics.
Adoption of IFRS 16 Leases
Effective June 1, 2019 (hereafter referred to as the “date of initial application”), the Company adopted IFRS 16 Leases as issued by the IASB in January 2016. The standard sets out the principles for the recognition,
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measurement, presentation and disclosure of leases for both the lessee and lessor. The standard supersedes the requirements in IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC 15 Operating Leases – Incentives, and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.
The Company adopted IFRS 16 using the modified retrospective approach and accordingly the information presented for prior year has not been restated. It remains as previously reported under IAS 17 and related interpretations. On initial application, the Company has elected to record right-of-use assets based on the corresponding lease liability, adjusted by the amount of any prepaid or accrued lease payments. Right-of-use assets and lease obligations of $262,770 were recorded as of June 1, 2019, with no net impact on deficit. When measuring lease liabilities, the Company discounted lease payments using an incremental borrowing rate of 10% for all leases. The Company has elected to apply the practical expedient to account for leases for which the lease term ends within 12 months of the date of initial application as short-term leases. The Company has elected to apply the practical expedient to grandfather the assessment of which transactions are leases on the date of initial application, as previously assessed under IAS 17 and IFRIC 4. The Company applied the definition of a lease under IFRS 16 to contracts entered into or changed on or after June 1, 2019.
The Company’s incremental borrowing rate is used to estimate the initial value of the lease liability and associated right of use asset. The Company’s incremental borrowing rate is determined with reference to the borrowing rate for a similar asset within a country for a similar lease term.
Property and equipment
Property and equipment are carried at historical cost less accumulated depreciation and any accumulated impairment losses. Each component of an item of property and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Maintenance and repair expenditures that do not improve or extend the life are expensed in the period incurred.
Depreciation is recognized to write off the cost or valuation of assets (other than land) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each year, with the effect of any changes in estimate accounted for on a prospective basis. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.
Estimated useful lives for the principal asset categories are as follows:
| Estimated useful lives for the principal asset categories are as follows: | ||
|---|---|---|
| Computer hardware | 3 - 5years | |
| Computer software | 3years | |
| Furniture and fixtures | 3 - 5years | |
| Vehicles | 3 - 5years | |
| Websites | 3years | |
Preferred shares
Preferred shares with mandatory redemption on a specific date are classified as liabilities. The dividends on these preferred shares are recognized in the statements of (loss) and comprehensive (loss) as interest expense.
Loss per share
Basic and diluted loss per share is calculated by dividing the loss for the period by the weighted average number of common shares outstanding during the period. The treasury stock method is used to calculate diluted Income (loss)
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per common share amounts. Under the treasury stock method, the weighted average number of common shares outstanding used for the calculation of the diluted per common share amount assumes that the proceeds to be received on the exercise of dilutive share options and warrants are used to repurchase common shares at the average market price during the year. The Company has securities outstanding which could potentially dilute basic earnings per share in the future but were excluded from the computation of diluted loss per share in the year presented, as their effect would have been anti-dilutive.
Segment information
The Company has a single reportable segment for managed IT consulting services.
The Company provides managed IT support for various businesses including PC set up, network installation and support & tailored software services. The Company uses a specially trained network of technically proficient IT consultants to help clients on site by providing effective, consistent and customized IT solutions.
For the three months ended February 28, 2021, the Company’s revenue comprises 96% sales in Canada and 4% sales within USA. (February 29, 2020: 97% sales in Canada and 3% sales within USA).
For the nine months ended February 28, 2021, the Company’s revenue comprises 96% sales in Canada and 4% sales within USA. (February 29, 2020: 98% sales in Canada and 2% sales within USA).
As of February 28, 2021, all assets of the business are located in Canada except for cash and cash equivalent for $31,098 (May 31, 2020: $35,704), accounts receivable for $6,537 (May 31, 2020: $13,639), vehicles for $197,663 (May 31, 2020: $197,664), inventory for $826 (May 31, 2020: $nil) and prepaid expenses for $nil (May 31, 2020: $25,066) which are located in USA.
Risks Related to Our Business and Industry
Uncertainty due to Covid-19
Since December 31, 2019, the break of the novel strain of coronavirus, specially identified as “COVID-19” has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Corporation and its operating subsidiaries in future periods.
If the Corporation fails to identify, recruit and contract with a sufficient number of qualified Consultants, our ability to increase revenues could be materially adversely affected.
We may not be able to identify, recruit or contract with suitable Consultants in our target markets on a timely basis or at all. In addition, our Consultants may not ultimately be able to access the financial or management resources that they need to operate the business, or they may elect to cease business development for other reasons. If we are unable to recruit suitable Consultants or if our Consultants are unable or unwilling to continue to act as consultants, our growth may be slower than anticipated, or cease, which could materially adversely affect our ability to increase our revenue and materially adversely affect our business, financial condition and results of operations.
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New Consultants may not be profitable initially and may adversely impact our business.
Historically, many of our new Consultants go through an initial ramp-up period typically lasting 6 to 12 months, during which time they generate sales and income below the levels at which we expect. This is in part due to the time it takes to build a customer base in a new area and other start-up inefficiencies that are typical of new businesses. It may also be difficult for us and our Consultants to attract a customer base, or otherwise overcome the higher costs associated with a new business. New Consultants may not have results similar to existing Consultants or may not be profitable. If new Consultants remain unprofitable for a prolonged period of time, we may jointly decide to terminate the franchise relationship. The termination of a franchise agreement could have a negative impact on our business and operating results.
The Corporation has a history of negative cash flow from operating activities.
The Corporation had negative cash flow from operating activities for the period ended February 28, 2021 and may have negative cash flow from operating activities in the future. Some or all of the net proceeds of the Offerings may be used to fund any negative operating cash flow.
Our expansion into new markets in the United States may present increased risks due to lower customer awareness of our brand, our unfamiliarity with those markets and other factors.
While we intend to expand into the United States, our operating experience in Canada may not be relevant or necessarily translate into similar results in the U.S. market. We anticipate that our U.S. franchise partners will experience lower brand awareness, lower sales and/or transaction counts. As a result, new U.S. consultants may be less successful than their Canadian counterparts. Consultants in new markets may take longer to ramp up and reach expected sales and profit levels, or may never do so, thereby affecting our overall growth and profitability as a result of reduced royalty revenue. To build brand awareness in these new markets, we and our franchise partners may need to make greater investments in advertising and promotional activity than originally planned, which could negatively impact the profitability of our operations in those markets. We may also find it more difficult in these new markets to hire, motivate and keep qualified Consultants who can project our vision, passion and culture. The United States may also have regulatory differences with Canada, which we and our U.S. franchise partners may not be familiar with, or that subject us and our U.S. Consultants to significant additional expense or to which we and our U.S. Consultants are not able to successfully comply with, which may have a particularly adverse impact on their sales or profitability and could in turn adversely impact our revenue and results of operations. If we do not successfully execute our U.S. expansion plans, our business, financial condition and results of operations could be materially adversely affected.
Our proposed expansion into the United States may be scaled back or abandoned.
While the Corporation intends to proceed with its expansion into the United States, the Corporation may scale back or abandon the U.S. expansion and reallocate its capital resources to its Canadian operations if the Corporation is unable to successfully establish itself in the U.S. market.
We and our Consultants rely heavily on information technology, and any material failure, weakness, interruption or breach of our security systems could prevent us from effectively operating our business.
Our operations depend upon our collective ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, expanding our systems as we grow or a breach in security of these systems could result in delays in customer service and reduce efficiency in our operations. Remediation of such problems could result in significant and unplanned capital investments.
We have limited influence over the operations of our Consultants, and we require their cooperation.
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Our success also depends on the willingness and ability of our Consultants to implement major initiatives, which may include financial investment, and to remain aligned with us on operating, promotional and capital-intensive reinvestment plans. If Consultants do not successfully operate their business in a manner consistent with our required standards, the brand’s image and reputation could be harmed, which in turn could hurt our business and results of operations.
Conflicts of Interest
Certain of the directors and officers of the Corporation also serve as directors and/or officers of other companies involved in information technology. To the extent that such other companies may participate in ventures which the Corporation may participate there exists the possibility for such directors and officers to be in a position of conflict. Such directors and officers have duties and obligations under the laws of Canada to act honestly and in good faith with a view to the best interests of the Corporation and its Shareholders. Accordingly, such directors and officers will declare and abstain from voting on any matter in which such director and/or officer may have a conflict of interest.
If the Corporation is not able to continue to innovate or if the Corporation fails to adapt to changes in the IT services industry, the Corporation’s business, financial condition and results of operations would be materially and adversely affected.
The IT services industry is characterized by rapidly changing technology, evolving industry standards, new service and product introductions and changing customer demands. Furthermore, the Corporation’s competitors are constantly developing innovations to service options. The Corporation’s failure to innovate and adapt to these changes would have a material adverse effect on the Corporation’s business, financial condition and results of operations.
Security breaches and attacks against the Corporation’s systems and network, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information could damage the Corporation’s reputation and negatively impact the Corporation’s business, as well as materially and adversely affect the Corporation’s financial condition and results of operations.
Although the Corporation intends to employ significant resources to develop the Corporation’s security measures against breaches, the Corporation’s cybersecurity measures may be unable to detect or prevent all attempts to compromise the Corporation’s systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by the Corporation’s systems or that the Corporation otherwise maintains. Breaches of the Corporation’s cybersecurity measures could result in unauthorized access to the Corporation’s systems, misappropriation of information or data, deletion or modification of user information, or a denial-of-service or other interruption to the Corporation’s business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against the Corporation, the Corporation may be unable to anticipate, or implement adequate measures to protect against, these attacks.
The Corporation may be subject to material litigation.
In connection with the Corporation’s planned U.S. expansion, it may face an increasing number of claims, including those involving higher amounts of damages. The outcome of any claims, investigations and proceedings is inherently uncertain, and in any event defending against these claims could be both costly and time consuming and could significantly divert the efforts and resources of the Corporation’s management and other personnel. An adverse determination in any such litigation or proceedings could cause the Corporation to pay damages as well as legal and other costs, limit the Corporation’s ability to conduct business and change the manner in which the Corporation operates.
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The Corporation may need additional capital but may not be able to obtain it on favorable terms or at all.
The Corporation may require additional cash resources due to future growth and development of the Corporation’s business, including any investments or acquisitions the Corporation may decide to pursue. If the Corporation’s cash resources are insufficient to satisfy the Corporation’s cash requirements, the Corporation may seek to issue additional equity or debt securities or obtain new or expanded credit facilities. The Corporation’s ability to obtain external financing in the future is subject to a variety of uncertainties, including the Corporation’s future financial condition, results of operations, cash flows and share price performance. In addition, incurring indebtedness would subject the Corporation to increased debt service obligations and could result in operating and financing covenants that would restrict the Corporation’s operations. There can be no assurance that financing will be available in a timely manner or in amounts or on terms acceptable to it, or at all. Any failure to raise needed funds on terms favorable to the Corporation, or at all, could severely restrict the Corporation’s liquidity as well as have a material adverse effect on the Corporation’s business, financial condition and results of operations. Moreover, any issuance of equity or equitylinked securities could result in significant dilution to the Corporation’s existing shareholders.
Our dual class share structure has the effect of concentrating voting control and the ability to influence corporate matters with Nerds On Site Holdings Ltd., a corporation controlled by Charles Regan, John Harbarenko and David Redekop.
Our Class B special shares have 10 votes per share and our Subordinate Voting Shares have one vote per share. Nerds On Site Holdings Ltd., the corporation controlled by our Chief Executive Officer and our founders, will hold all of our Class B special shares and will hold approximately 65% of the voting power of our outstanding voting shares following the Offering (assuming the maximum Offering, but no exercise of the Over-Allotment Option) and will therefore have significant influence over our management and affairs and over all matters requiring shareholder approval, including election of directors and significant corporate transactions. The concentrated voting control of Nerds On Site Holdings Ltd. will limit the ability of the holders of our Subordinate Voting Shares to influence corporate matters for the foreseeable future, including the election of directors as well as with respect to decisions regarding amendments of our share capital, creating and issuing additional classes of shares, making significant acquisitions, selling significant assets or parts of our business, merging with other companies and undertaking other significant transactions.
Each of our directors and officers owes a fiduciary duty to the Corporation and must act honestly and in good faith with a view to the best interests of the Corporation. However, any director and/or officer that is a shareholder, even a controlling shareholder, is entitled to vote its shares in its own interests, which may not always be in the interests of our shareholders generally. The concentration of voting power in Nerds On Site Holdings Ltd. may also have an adverse effect on the price of our Subordinate Voting Shares. Nerds On Site Holdings Ltd. may take actions that our other shareholders do not view as beneficial, which may adversely affect our results of operations and financial condition and cause the value of your investment to decline.
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