The accompanying notes are an integral part of the unaudited consolidated financial statements.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Skkynet Cloud Systems, Inc. (“Skkynet” or “the Company”) is a Nevada corporation formed on August 31, 2011 and headquartered in Toronto, Canada. Skkynet operates its business through its wholly-owned subsidiaries Cogent Real-Time Systems, Inc. (“Cogent”), Skkynet Corp. (Canada), Skkynet, Inc. (USA) and Skkynet Japan (Japan). Skkynet was formed primarily for the purpose of taking the existing business lines of Cogent and its current and future customers and integrating these businesses with Cloud based systems. We also intend to expand the areas of business activity to which the kinds of products and services we provide are applied.
On November 1, 2014, the Company acquired Skkynet Japan NiC as a wholly owned subsidiary. On February 1, 2015, the Company formed a wholly owned US subsidiary Skkynet, Inc., and a wholly owned Canadian subsidiary Skkynet Corp.
On July 30, 2015, the Company designated 500,000 shares of the preferred stock as Series B Convertible preferred. The Series B shares have a par value of $0.001 and issue value of $1.00 per share. The series B is convertible by the holder into common stock at $1.35 per share. The Company may, any time at its option, redeem the Series B shares at their stated value. The Series B preferred shares hold a 6% per annum cumulative dividend. On July 30, 2015, the Company issued 193,661 shares of Series B convertible preferred stock to three related parties in exchange for the outstanding notes payable and accrued interest of $193,661. Dividends are not paid. The Company has accounted for $5,810 in Series B dividends which increases the loss to common shareholders from $433,184 to $438,994 for the six month period ended April 30, 2019.
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s October 31, 2018 Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year end October 31, 2018 as reported on Form 10-K, have been omitted.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency in presentation with the current year presentation to better present this year’s grouping. The footnotes were added to present the sales by geographic area and line of business. These reclassifications had no effect on the reported results of operations.
Recently Adopted Accounting Pronouncements
In April 2016, the FASB issued ASU 2016–10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606.
ASC Topic 606 prescribes a new five-step model entities should follow in order to recognize revenue in accordance with the core principle. These five steps are:
|
1.
|
Identify the contract(s) with a customer.
|
|
2.
|
Identify the performance obligations in the contract.
|
|
3.
|
Determine the transaction price.
|
|
4.
|
Allocate the transaction price to the performance obligations in the contract.
|
|
5.
|
Recognize revenue when (or as) the entity satisfied the performance obligations.
|
The Company has five revenue streams, each of which the revenue is recognized in accordance to the five steps included in topic 606. The revenue streams are:
|
1.
|
Sale of software direct to the end customer
|
|
2.
|
Sale of software through distributors and channel partners
|
|
3.
|
Maintenance support services
|
|
4.
|
Cloud services
|
|
5.
|
Hardware sales (Skkynet Japan only)
|
Effective November 1, 2018, the Company implemented the transition using the modified retrospective method of transition. Under this method the determination date of open contracts which could affect any adjustments was November 1, 2018. The open contracts at the time period are the unfulfilled portions of the maintenance contracts. Based on the cut off treatment of the recognition of revenue on the open contracts being determined at the end of the previous period and being no changes in the open obligation requirements, the Company has determined that there are no adjustments in the value of the revenue recognized from these contracts.
As part of the revenue recognition reporting, the Company reports revenue by product line and geographic area. During the six month periods ended April 30, 2019 and 2018 the revenue by product line was as follows:
Category
|
|
2019
|
|
|
2018
|
|
Product sales
|
|
$
|
499,463
|
|
|
$
|
495,340
|
|
Support
|
|
|
183,691
|
|
|
|
168,763
|
|
Other
|
|
|
18,043
|
|
|
|
29,714
|
|
Total
|
|
$
|
701,197
|
|
|
$
|
693,817
|
|
The Company sells its products on a worldwide basis. During the six month periods ended April 30, 2019 and 2018 the Company’s revenue resulted in the following amounts geographically:
Area
|
|
Percentage
|
|
|
2019
|
|
|
2018
|
|
North America
|
|
|
39
|
%
|
|
$
|
269,858
|
|
|
$
|
242,603
|
|
Europe
|
|
|
36
|
%
|
|
|
252,293
|
|
|
|
216,029
|
|
Asia
|
|
|
17
|
%
|
|
|
121,900
|
|
|
|
163,639
|
|
Middle East-Africa
|
|
|
7
|
%
|
|
|
46,870
|
|
|
|
31,999
|
|
South America
|
|
|
1
|
%
|
|
|
10,276
|
|
|
|
39,547
|
|
Total
|
|
|
100
|
%
|
|
$
|
701,197
|
|
|
$
|
693,817
|
|
NOTE 3- RELATED PARTY TRANSACTIONS
Sakura Software, a corporation owned by our CEO and Chairman of the Board of Directors, Andrew S. Thomas, and Benford Consultancy, a corporation owned by our COO and a member of our Board of Directors, Paul Benford, own, respectively, 72.34% and 27.66% of the issued and outstanding shares of Real Innovations International LLC, (“Real Innovations”) a corporation organized under the laws of Nevis, West Indies. In March 2012, Cogent, our operating subsidiary, assigned all of its intellectual property including the pending patent applications for its real-time data transmission and display technology (the “IP”) to Real Innovations under an assignment of intellectual property agreement (the “Assignment Agreement”). In return for the assignment Real Innovations required a one-time payment of $30,000 to Cogent. Cogent elected to forgo the payment allowing Real Innovations to offset future expenses against the payment. There is no ongoing royalty payment or other form of compensation from Real Innovations to Cogent under the Assignment Agreement.
Real Innovations, in turn, entered into a master intellectual property license agreement (the “License Agreement”) with Cogent for all of the same IP. Under the License Agreement Real Innovations granted a royalty-free license in perpetuity to Cogent for the use and exploitation of the IP in return for which Cogent agreed to: (i) pay all operating expenses of Real Innovations incurred in connection with the continued prosecution of pending patent applications and others that may be prepared; (ii) prosecute all claims for infringement of the IP; (iii) defend and indemnify Real Innovations from and against all claims of infringement of the IP asserted by third parties against Real Innovations, Cogent or our Company; (iv) purchase liability insurance in favor of Real Innovations for this purpose. Under the termination provision of the licenses agreement, there is no unilateral right of termination. Termination may occur by mutual consent of the parities, the Company ceasing doing business, by breach by the Company or by the Company failing to maintain the license and the support to prosecute and protect the license under applicable laws.
Under the License Agreement, Messrs. Andrew S. Thomas and Paul Benford will benefit indirectly from their indirect ownership of all of the shares of Real Innovations to the extent of any such payments or other undertakings by Cogent on behalf of Real Innovations, but the exact amount of these benefits cannot be determined at this time.
During the six months periods ended April 30, 2019 and 2018, the Company recognized but did not pay dividends of $5,810 and $5,810, respectively
.
As of April 30, 2019, and October 31, 2018, the Company had the following outstanding accrued liabilities due to related parties:
As of
|
|
April 30,
2019
|
|
|
October 31,
2018
|
|
Accrued Commissions
|
|
$
|
26,435
|
|
|
$
|
36,772
|
|
Accrued compensation
|
|
$
|
--
|
|
|
$
|
47,438
|
|
Total accrued liabilities and accrued expense
|
|
$
|
26,435
|
|
|
$
|
84,210
|
|
During the six months ended April 30, 2019, three officers of the Company elected to forgo their accrued compensation for the six months ended April 30, 2019 in exchange for options. The $44,700 of accrued compensation was exchanged for 199,800 options granted with a fair value of $55,933 with the difference of $11,233 expensed as a loss on liabilities.
|
|
Accrued
compensation
|
|
|
Options Issued for accrued
compensation
|
|
Andrew Thomas
|
|
$
|
20,860
|
|
|
|
93,200
|
|
Paul Benford
|
|
$
|
11,920
|
|
|
|
53,300
|
|
Paul Thomas
|
|
$
|
11,920
|
|
|
|
53,300
|
|
Total
|
|
$
|
44,700
|
|
|
|
199,800
|
|
On March 2, 2019, the Company issued 7,500 options to three independent directors. (See Note 5 -Options)
On April 29, 2019, an officer and a director exercised 125,000 options for 125,000 common shares of the Company, 50,000 options were exercised and $0.10 per share by the officer and 75,000 options were exercised at $0.001 per share by the director for a total value of $5,075.
NOTE 4 – EQUITY
On January 31, 2018, the Company issued 30,750 shares of common stock at $0.40 per share to an officer and director of the Company for their conversion of accrued compensation to equity with a fair value of $12,300.
On April 30, 2018, the Company issued 25,361 shares of common stock at $0.77 per share to an officer and director of the Company for their conversion of accrued compensation to equity with a fair value of $19,528 for the settlement of a liability of $12,309 which resulted in a loss of $7,219 which was expensed at settlement.
On April 29, 2019, an officer and a director exercised 125,000 options for 125,000 common shares of the Company. The officer exercised 50,000 options at $0.10 per share and the director exercised 75,000 options at $0.001 per share for a total value of $5,075.
NOTE 5 – OPTIONS
The Company, under its 2012 Stock Option Plan, issues options to various officers, directors, and consultants. The options vest in equal annual installments over a five year period with the first 20% vested when the options are granted. All of the options are exercisable at a purchase price based on the last trading price of the Company’s common stock.
On January 11, 2018, the Company modified the conversion price of 815,000 options which had been granted to Vice President of Marketing and Sales on August 22, 2014. The modification extended the term of the options 10 years, reduced the conversion price per option from $1.20 to $0.40 per share and increased the fair value of the options by $3,720 to be amortized over the term of the option with no changes to the vesting of the options.
On January 31, 2018, the company issued 138,000 options to two independent directors and three officers with exercise price of $0.001 for accrued compensation contributed to capital. The options have a fair value using the Black Sholes valuation of $55,114 with computed volatility of 206% and a discount rate of 2.72%. The options were vested upon issuance.
On March 27, 2018, the company issued 215,000 options to various employees and consultants with an exercise price of $0.38. The options have a fair value using the Black Sholes valuation of $105,270 with computed volatility of 208% and a discount rate of 2.82%. The options are vested at 20% upon issuance and 20% each annual anniversary thereafter.
On April 30, 2018, the company issued 110,500 options to two independent directors and three officers with exercise price of $0.001 for accrued compensation contributed to capital. The options have a fair value using the Black Sholes valuation of $84,947 with computed volatility of 207% and a discount rate of 2.95%.The liability for which the options were issued was $52,973 with a loss recognized at settlement of $31,974 which was expensed. The options were vested upon issuance.
On March 2, 2019, the Company modified 3,148,700 options to an exercise price of $0.21 per share upon conversion. The modified options vest in five years and expire in 10 years. The fair value of the modified options was calculated using the Black Scholes method with a 10 year expiration, stock measurement price of $0.20, volatility of 196.31% and discount rate of 3.00%. The total value calculated to be $628,638. The modified options were calculated and the difference between the calculation before modification was subtracted from the calculation of the modified options. The incremental value of the options is $38,162. The modified options have an unamortized expense of $796,286, therefore fair value is $834,448. As of April 30, 2019, $268,547 of option expense was recorded.
On March 2, 2019, the Company issued 130,000 options to four consultants and 7,500 options to three independent directors all with an exercise price of $0.21 per share upon conversion. The options vest in five years and expire in 10 years. The fair value of the options was calculated using the Black Scholes method with a 10 year expiration, stock measurement price of $0.20, volatility of 196.31% and discount rate of 3.00%. the total value calculated to be $27,754 of which $6,863 of option expense was recorded on April 30, 2019.
On April 30, 2019, the company issued 199,800 options to three officers with exercise price of $0.001 for accrued compensation contributed to capital. The options have a fair value using the Black Sholes valuation of $55,933 with computed volatility of 197.12% and a discount rate of 3.00%.The liability for which the options were issued was $44,700 with a loss recognized at settlement of $11,233. The options were vested upon issuance.
On April 29, 2019, 125,000 options were converted into common stock, 50,000 at $0.10 per share with a value of $5,000 and 75,000 at $0.001 with a value of $75 for a total conversion value of $5,075.
The Company has elected to expense the options over the life of the option as stock based compensation. The expense is calculated with a Black Scholes model to reach the fair value over the length of each option. During the six month period ended April 30, 2019, the Company expensed $275,320 for options. The unrecognized future balance to be expensed over the term of the options is $646,427.
The following sets forth the options granted and outstanding as of April 30, 2019:
|
|
Options
|
|
|
Weighted Average Exercise price
|
|
|
Weighted Average Remaining Contract Life
|
|
|
Granted Options Exercisable
|
|
|
Intrinsic value
|
|
Outstanding at October 31, 2018
|
|
|
7,772,200
|
|
|
|
0.34
|
|
|
|
5.27
|
|
|
|
6,317,750
|
|
|
|
2,241,496
|
|
Granted
|
|
|
337,300
|
|
|
|
0.09
|
|
|
|
9.75
|
|
|
|
--
|
|
|
|
--
|
|
Exercised
|
|
|
(125,000
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Forfeited/Expired by termination
|
|
|
(20,000
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Outstanding at April 30, 2019
|
|
|
7,964,500
|
|
|
|
0.13
|
|
|
|
7.68
|
|
|
|
5,470,540
|
|
|
|
1,084,178
|
|
NOTE 6– COMMITMENTS AND CONTINGENCIES
The Company leases office space located at 2233 Argentia Road Suite 306 Mississauga, Ontario Canada L5N 2X7.
During May 2017, the Company signed a new 5 year lease for the Company’s office being effective on August 1, 2017 through July 31, 2022. The lease is for approximately 2,210 square feet of office space with a gross monthly rental cost including common area charges of $4,097.
The yearly rental obligations including the lease agreements are as follows:
Fiscal Year
|
|
|
|
2019
|
|
$
|
24,582
|
|
2020
|
|
$
|
49,164
|
|
2021
|
|
$
|
49,164
|
|
2022
|
|
$
|
36,873
|
|
Total
|
|
$
|
159,783
|
|