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) and Skkynet, Inc. (USA). 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.
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, 2019 Annual Report on form 10-K filed with the SEC. 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 consolidated financial statements for the most recent fiscal year end October 31, 2019 as reported on Form 10-K, have been omitted.
On August 1, 2019, the Company disposed of its wholly owned subsidiary Skkynet Japan which represented a strategic shift in the Company’s operations. The assets and liabilities have been accounted for as discontinued operations in the Company’s consolidated balance sheets for the periods presented. The operating results related to this subsidiary have been included in discontinued operations in the Company’s consolidated statements of operations and comprehensive loss for all periods presented.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the periods. The extent to which the COVID-19 pandemic may directly or indirectly impact our business, financial condition, and results of operations is highly uncertain and subject to change. We considered the potential impact of the COVID-19 pandemic on our estimates and assumptions and there was not a material impact to our consolidated financial statements as of and for the quarter ended April 30, 2020. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)". The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees are required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company has adopted the new accounting pronouncement and recorded a right to use asset and operating lease liability of $68,584 as of November 1, 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The adoption of the policy did not have a cumulative impact on retained earnings.
NOTE 3 - REVENUE RECOGNITION
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, 2020 and 2019 the revenue by product line is as follows:
Category
|
|
Percentage
|
|
|
2020
|
|
|
Percentage
|
|
|
2019
|
|
Product sales
|
|
|
71
|
%
|
|
|
597,528
|
|
|
|
62
|
%
|
|
|
499,463
|
|
Support
|
|
|
28
|
%
|
|
|
231,804
|
|
|
|
35
|
%
|
|
|
183,691
|
|
Cloud & Other
|
|
|
1
|
%
|
|
|
9,193
|
|
|
|
3
|
%
|
|
|
18,043
|
|
Discontinued operations
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
(65,384
|
)
|
Total
|
|
|
100
|
%
|
|
|
838,525
|
|
|
|
100
|
%
|
|
|
635,813
|
|
The Company sells its products on a worldwide basis. During the six-month periods ended April 30, 2020 and 2019 the Company’s geographic concentration of revenue is as follows:
Area
|
|
Percentage
|
|
|
2020
|
|
|
Percentage
|
|
|
2019
|
|
North America
|
|
|
40
|
%
|
|
|
332,451
|
|
|
|
39
|
%
|
|
|
269,858
|
|
Europe
|
|
|
32
|
%
|
|
|
264,641
|
|
|
|
36
|
%
|
|
|
252,293
|
|
Asia
|
|
|
13
|
%
|
|
|
109,015
|
|
|
|
17
|
%
|
|
|
121,900
|
|
South America
|
|
|
4
|
%
|
|
|
37,269
|
|
|
|
1
|
%
|
|
|
10,276
|
|
Other
|
|
|
11
|
%
|
|
|
95,149
|
|
|
|
7
|
%
|
|
|
46,870
|
|
Discontinued operations
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
(65,384
|
)
|
Total
|
|
|
100
|
%
|
|
|
838,525
|
|
|
|
100
|
%
|
|
|
635,813
|
|
NOTE 4 - 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. No payments have been made as of April 30, 2020.
As of April 30, 2020, and October 31, 2019, the Company had the following outstanding accrued liabilities due to related parties:
As of
|
|
April 30, 2020
|
|
|
October 31, 2019
|
|
Accrued liabilities
|
|
$
|
---
|
|
|
$
|
55,378
|
|
Accrued commissions
|
|
$
|
---
|
|
|
|
21,443
|
|
Total accrued liabilities
|
|
$
|
---
|
|
|
$
|
76,821
|
|
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 December 12, 2019, the Company issued 336,250 options: 120,000 to two officers, 11,250 to three independent directors and 205,000 to six employees and consultants. The options are exercisable into common stock of the Company at $0.59 per share. The Company calculated a fair value of the options of $132,673 using the Black Scholes option pricing model with computed volatility of 207%, risk-free interest rate of 2%, expected dividend yield 0%, stock price at measurement date of $0.39 and the expected term of ten years. The options are expensed over a five-year period with 20% upon issuance and 20% for the first and each subsequent year.
During the six-month period ended April 30, 2020, the Company recognized $114,669 of option expense. The unrecognized future balance to be expensed over the term of the options is $554,751.
The following sets forth the options granted and outstanding as of April 30, 2020:
|
|
Options
|
|
|
Weighted Average Exercise price
|
|
|
Weighted Average Remaining Contract Life
|
|
|
Granted Options Exercisable
|
|
|
Intrinsic value
|
|
Outstanding at October 31, 2019
|
|
|
7,581,400
|
|
|
|
0.13
|
|
|
|
7.19
|
|
|
|
5,470,540
|
|
|
$
|
1,827,117
|
|
Granted
|
|
|
336,250
|
|
|
|
0.56
|
|
|
|
9.75
|
|
|
|
--
|
|
|
|
--
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Forfeited/Expired by termination
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
-
|
|
Outstanding at April 30, 2020
|
|
|
7,917,650
|
|
|
|
0.15
|
|
|
|
6.56
|
|
|
|
5,838,550
|
|
|
$
|
3,646,322
|
|
NOTE 6 - LEASES
The Company leases office space located at 2233 Argentia Road Suite 306 Mississauga, Ontario Canada L5N 2X7. During May 2017, the Company signed a 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 base monthly rental cost including common area charges of $2,369.
The yearly rental obligations including the lease agreements are as follows:
Fiscal Year
|
|
|
|
2020 (six months remaining)
|
|
$
|
14,215
|
|
2021
|
|
|
28,428
|
|
2022
|
|
|
21,321
|
|
Total lease payments
|
|
|
63,964
|
|
Less present value discount
|
|
|
(9,999
|
)
|
|
|
|
53,965
|
|
Less operating lease short term
|
|
|
(20,980
|
)
|
Operating lease liability, long term
|
|
$
|
32,985
|
|
Under the new standards the lease has been determined to be a right to use operating lease and is recognized based on the present value of the lease payments over the lease term at the commencement date which upon adoption of ASC 842 was determined to be $68,584 which is presented in the consolidated balance sheet as an asset labeled “right to use lease asset” offset by a liability labeled “operating lease liability”. The amount was determined as the net present value of the lease over a 30-month period using an 8% interest rate as the incremental borrowing cost. During the six months ended April 30, 2020, amortization of the right of use lease was $14,619 and the liability was reduced by $12,020.
NOTE 7 - DISCONTINUED OPERATIONS
On August 1, 2019, the Company disposed its wholly owned subsidiary Skkynet Japan by entering into a share purchase agreement with the former owners. The following table presents the breakdown of the results of operations related to the discontinued operations for the three and six months ended April 30, 2019:
Operating Results of Discontinued Operations
|
For the Three and Six Months Ended April 30, 2019
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
Revenue included in discontinued operations
|
|
$
|
35,244
|
|
|
$
|
65,384
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses included in discontinued operations
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,160
|
|
|
|
10,314
|
|
General and administrative expenses
|
|
|
45,495
|
|
|
|
97,676
|
|
Net loss from discontinued operations
|
|
$
|
(14,411
|
)
|
|
$
|
(42,606
|
)
|
Net loss per share from discontinued operations - basic & diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
NOTE 8 - MAJOR CUSTOMERS
The Company sells to their end-user customers both directly and through resellers. Two resellers accounted for 48% of sales (36% and 11% individually) in the three-month period ended April 30, 2020 and two resellers accounted for 47% of sales in the same period in 2019. Four resellers accounted for 48% of sales in the six-month period ended April 30, 2020 and three resellers accounted for 47% of sales in the same period in 2019. In the three-month period ended April 30, 2020, two end user customers were each responsible for more than 10%. In the same period in 2019 one end user customer was responsible for 16% of revenue. In the six-month period ended April 30, 2020, no end user customers were responsible for more than 10% of our revenues. In the same period in 2019, no end user customers were responsible for more than 10% of our. The Company maintains all the information on their end user customers, and should a reseller discontinue operations, the Company can sell directly to the end user.
NOTE 9 - LOAN PAYABLE
On April 30, 2020, the Company’s subsidiary Cogent Systems issued a two year note for US$28,717 (CDN $40,000) under the Canadian Emergency Business Account (CEBA). The CEBA provides interest free loans to small businesses to help cover operating costs during a period when their revenues may have been reduced due to the impact of COVID-19. The loan is subject to zero interest and 25% of the amount will be forgiven if 75% of the loan amount is repaid on or before December 31, 2022. The Company has the option to extend the term of the loan for another 3 years subject to an annual interest of 5% on any balance remaining.