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 nine months ended July 31, 2020. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term.
Principles of Consolidation
The consolidated financial statements of the Company include the Company and its wholly-owned subsidiaries Cogent Real Time Systems, Inc (Canada), Skkynet Corp. (Canada), Skkynet Inc (US) and the discontinued operations of Skynet Japan (formally NiC Corporation) (Japan) that was sold on August 1, 2019. All material intercompany balances and transactions have been eliminated.
Revenue recognition
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.
|
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.
The Company has four 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
|
Revenue for the sale of software both directly to end users and through the distributor and channel partners is recognized upon delivery of the software and code required for the customer to install the software.
Maintenance support services are recognized as revenue on a straight-line basis over the service period of the arrangement. Revenue from cloud services is recognized over time (typically, on a monthly basis) as service is provided. Payments received in advance of services being rendered are recorded as deferred revenue and recognized to revenue when earned.
Property and equipment
Property and equipment are carried at the cost of acquisition and depreciated over the estimated useful lives of the assets. Costs associated with repair and maintenance is expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency of our property and equipment are capitalized and depreciated over the remaining life of the related asset. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets.
Foreign currency translation
The Company’s reporting currency is in U.S. dollars. The functional currency of the Company’s foreign operations is their local currency. The financial statements of the Company’s subsidiaries in Canada and Japan are translated to U.S. dollars in accordance with ASC 830-30, “Foreign Currency Translation”. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date while the income statement accounts are translated using the average exchange rate for the year. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
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 nine-month periods ended July 31, 2020 and 2019 the revenue by product line is as follows:
Category
|
|
Percentage
|
|
|
2020
|
|
|
Percentage
|
|
|
2019
|
|
Product sales
|
|
|
69
|
%
|
|
|
797,967
|
|
|
|
71
|
%
|
|
|
689,220
|
|
Support
|
|
|
30
|
%
|
|
|
346,505
|
|
|
|
29
|
%
|
|
|
284,180
|
|
Cloud & Other
|
|
|
1
|
%
|
|
|
10,971
|
|
|
|
--
|
|
|
|
--
|
|
Total
|
|
|
100
|
%
|
|
|
1,155,443
|
|
|
|
100
|
%
|
|
|
973,400
|
|
The Company sells its products on a worldwide basis. During the nine-month periods ended July 31, 2020 and 2019 the Company’s geographic concentration of revenue is as follows:
Area
|
|
Percentage
|
|
|
2020
|
|
|
Percentage
|
|
|
2019
|
|
North America
|
|
|
46
|
%
|
|
|
417,279
|
|
|
|
40
|
%
|
|
|
391,389
|
|
Europe
|
|
|
35
|
%
|
|
|
398,546
|
|
|
|
42
|
%
|
|
|
406,095
|
|
Asia
|
|
|
13
|
%
|
|
|
152,730
|
|
|
|
8
|
%
|
|
|
79,803
|
|
South America
|
|
|
4
|
%
|
|
|
50,188
|
|
|
|
3
|
%
|
|
|
34,023
|
|
Middle East- Africa/Other
|
|
|
12
|
%
|
|
|
136,700
|
|
|
|
7
|
%
|
|
|
62,090
|
|
Total
|
|
|
100
|
%
|
|
|
1,155,443
|
|
|
|
100
|
%
|
|
|
973,400
|
|
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 July 31, 2020.
As of July 31, 2020, and October 31, 2019, the Company had the following outstanding accrued liabilities due to related parties:
As of
|
|
July 31,
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 nine month period ended July 31, 2020, the Company recognized $162,053 of option expense. The unrecognized future balance to be expensed over the term of the options is $507,367.
The following sets forth the options granted and outstanding as of July 31, 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 July 31, 2020
|
|
|
7,917,650
|
|
|
|
0.15
|
|
|
|
6.31
|
|
|
|
5,838,550
|
|
|
$
|
3,627,845
|
|
NOTE 6 - LEASE
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 (three months remaining)
|
|
$
|
7,108
|
|
2021
|
|
|
28,428
|
|
2022
|
|
|
21,321
|
|
Total lease payments
|
|
|
56,857
|
|
Less present value discount
|
|
|
(9,498
|
)
|
|
|
|
47,359
|
|
Less operating lease short term
|
|
|
(20,980
|
)
|
Operating lease liability, long term
|
|
$
|
26,379
|
|
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 $62,869 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 nine months ended July 31, 2020, amortization of the right of use lease was $15,510 and the liability was reduced by $15,510.
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 nine months ended July 31, 2019:
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2019
|
|
|
2019
|
|
Revenue included in discontinued operations
|
|
$
|
41,277
|
|
|
$
|
106,661
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses included in discontinued operations
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
5,913
|
|
|
|
16,227
|
|
General and administrative cost
|
|
|
51,625
|
|
|
|
149,301
|
|
Net loss from Discontinued operations
|
|
|
(16,261
|
)
|
|
|
(58,867
|
)
|
Net loss per share of 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 35% of sales (19% and 16% individually) in the three-month period ended July 31, 2020 and two resellers accounted for 33% of sales in the same period in 2019. Four resellers accounted for 46% of sales in the nine-month period ended July 31, 2020 and four resellers accounted for 49% of sales in the same period in 2019. In the three-month period ended July 31, 2020, no end user customers were responsible for more than 10% of revenue. In the same period in 2019 no user customers were responsible for more than 10% of revenue. In the nine-month period ended July 31, 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 sales. 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
NOTE 10 – SUBSEQUENT EVENT
The Company has evaluated subsequent events to determine events occurring after July 31, 2020 through September 14, 2020 that would have a material impact on the Company’s financial results or require disclosure and have determined none exist other than those noted above in this footnote.