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 $8,715 in Series B dividends which increases the loss to common shareholders from $477,924 to $486,641 for the nine month period ended July 31, 2019.
On August 1, 2019 the Company sold its wholly owned subsidiary Skkynet Japan to its former owners. (See: Footnotes 7 and 8)
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
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 nine month periods ended July 31, 2019 and 2018 the revenue by product line was as follows:
Category
|
|
2019
|
|
|
2018
|
|
Product sales
|
|
|
689,220
|
|
|
|
627,911
|
|
Support
|
|
|
284,180
|
|
|
|
251,130
|
|
Total
|
|
|
973,400
|
|
|
|
879,041
|
|
The Company sells its products on a worldwide basis. During the nine month periods ended July 31, 2019 and 2018 the Company’s revenue resulted in the following amounts geographically:
Area
|
|
Percentage
|
|
|
2019
|
|
|
Percentage
|
|
|
2018
|
|
North America
|
|
|
40
|
%
|
|
|
391,389
|
|
|
|
38
|
%
|
|
|
335,844
|
|
Europe
|
|
|
42
|
%
|
|
|
406,095
|
|
|
|
41
|
%
|
|
|
359,489
|
|
Asia
|
|
|
8
|
%
|
|
|
79,803
|
|
|
|
7
|
%
|
|
|
59,260
|
|
Middle East-Africa
|
|
|
7
|
%
|
|
|
62,090
|
|
|
|
8
|
%
|
|
|
69,034
|
|
South America
|
|
|
3
|
%
|
|
|
34,023
|
|
|
|
6
|
%
|
|
|
55,414
|
|
Total
|
|
|
100
|
%
|
|
|
973,400
|
|
|
|
100
|
%
|
|
|
879,041
|
|
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 nine months periods ended July 31, 2019 and 2018, the Company recognized but did not pay dividends of $8,715 and $8,715, respectively.
As of July 31, 2019, and October 31, 2018, the Company had the following outstanding accrued liabilities due to related parties:
As of
|
|
July 31,
2019
|
|
|
October 31,
2018
|
|
Accrued Commissions
|
|
$
|
24,241
|
|
|
$
|
36,772
|
|
Accrued compensation
|
|
$
|
--
|
|
|
$
|
47,438
|
|
Total accrued liabilities and accrued expense
|
|
$
|
24,241
|
|
|
$
|
84,210
|
|
During the nine months ended July 31,2019, three officers of the Company elected to forgo their accrued compensation for the nine months ended July 31, 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 July 31, 2018, the Company issued 19,711 shares of common stock at $0.61 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 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 July 31, 2018, the company issued 84,900 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 Scholes valuation of $52,976 with computed volatility of 197% and a discount rate of 3.05%. The liability for which the options were issued was $52,976 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 July 31, 2019, $310,179 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 $8,236 of option expense was recorded through July 31, 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 nine month period ended July 31, 2019, the Company expensed $318,415 for options. The unrecognized future balance to be expensed over the term of the options is $603,332.
The following sets forth the options granted and outstanding as of July 31, 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 July 31, 2019
|
|
|
7,964,500
|
|
|
|
0.13
|
|
|
|
7.44
|
|
|
|
5,470,540
|
|
|
|
1,187,928
|
|
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
|
|
$
|
12,291
|
|
2020
|
|
$
|
49,164
|
|
2021
|
|
$
|
49,164
|
|
2022
|
|
$
|
36,873
|
|
Total
|
|
$
|
147,942
|
|
NOTE 7 - DISCONTINUED OPERATIONS
On July 9, 2019 the Company entered into an agreement, effective August 1, 2019, to sell the Company’s wholly owned subsidiary Skkynet Japan to the former owners. Under terms of the agreements, 22,500 shares of common stock and 272,500 options of the Company held by the former owners will be returned to the Company for 100% ownership of Skkynet Japan. In addition, the intellectual property, software documentation and source code of the Company will be returned to the Company with the balance of the assets and liabilities remaining in Skkynet Japan. As part of the agreement, the name of Skkynet Japan will be changed to exclude Skkynet in its new name. The Company will forgive the indebtedness owed to the Company by its subsidiary Skkynet Japan.
The Company determined that the sale of the subsidiary in Japan represented a significant portion of its business and will have a major effect on the Company’s operations and financial results and, therefore, classified its Skkynet Japan subsidiary as held for sale on July 30, 2019 thus meeting the criteria for discontinued operations.
Assts and Liabilities of Discontinued Operations
|
|
|
|
July 31,
2019
|
|
|
October 31,
2018
|
|
Carrying amounts of assets included in discontinued operations
|
|
|
|
|
|
|
Cash
|
|
$
|
6,773
|
|
|
$
|
6,476
|
|
Accounts receivable
|
|
|
32,856
|
|
|
|
30,141
|
|
Inventory
|
|
|
2,425
|
|
|
|
2,319
|
|
Prepaid
|
|
|
12,194
|
|
|
|
1,733
|
|
Other assets
|
|
|
6,279
|
|
|
|
7,221
|
|
Total assets of Discontinued Operations
|
|
$
|
60,527
|
|
|
$
|
47,890
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of liabilities included in discontinued operations
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,117
|
|
|
$
|
518
|
|
Accrued liabilities
|
|
|
80,713
|
|
|
|
36,584
|
|
Deferred revenue
|
|
|
1,454
|
|
|
|
2,692
|
|
Total liabilities of Discontinued Operations
|
|
$
|
84,284
|
|
|
$
|
39,794
|
|
Operating Results of Discontinued Operations
|
For Three and Nine Months Ended July 31,
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue included in discontinued operations
|
|
$
|
41,277
|
|
|
$
|
34,263
|
|
|
$
|
106,661
|
|
|
$
|
168,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses included in discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
5,913
|
|
|
|
22,721
|
|
|
|
16,227
|
|
|
|
47,157
|
|
General and administrative cost
|
|
|
51,625
|
|
|
|
47,232
|
|
|
|
149,301
|
|
|
|
148,485
|
|
Net loss from Discontinued operations
|
|
|
(16,261
|
)
|
|
|
(35,690
|
)
|
|
|
(58,867
|
)
|
|
|
(26,683
|
)
|
Net loss per share of discontinued operations basic & diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Cash flows from Discontinued Operations
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Operating costs and expenses included in discontinued operations
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
27,014
|
|
|
$
|
876
|
|
Net cash used in financing activities
|
|
|
--
|
|
|
|
--
|
|
Net cash used in discontinued operations
|
|
$
|
27,014
|
|
|
$
|
876
|
|
NOTE 8 - SUBSEQUENT EVENTS
On August 1, 2019 the Company completed the agreement dated July 9, 2019 to sell the Company’s wholly owned subsidiary Skkynet Japan to the former owners. Under terms of the agreements, 22,500 shares of common stock and 272,500 options of the Company held by the former owners will be returned to the Company for 100% ownership of Skkynet Japan. In addition, the intellectual property, software documentation and source code of the Company will be returned to the Company with the balance of the assets and liabilities remaining in Skkynet Japan. As part of the agreement, the name of Skkynet Japan will be changed to exclude Skkynet in its new name. The Company will forgive the indebtedness owed to the Company by its subsidiary Skkynet Japan.