Skkynet Cloud Systems, Inc. - Quarter Report: 2014 January (Form 10-Q)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended January 31, 2014
OR
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o
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TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
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For the transition period from ___________ to ____________.
Commission File Number 000-54747
SKKYNET CLOUD SYSTEMS INC.
(Exact name of registrant as specified in its charter)
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Nevada
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45-3757848
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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20 Bay Street – Suite 1100, Toronto, Ontario, Canada M5J 2N8
(Address of principal executive offices)
(888) 628-2028
(Issuer's telephone number)
Indicate by check mark whether the Company (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
Indicate by check mark whether the Company is a large accelerated filer, an accelerated file, non-accelerated filer, or a smaller reporting company.
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Large accelerated filer
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o |
Accelerated filed
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o |
| Non-accelerated filer | o | Smaller reporting company | x |
Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of March 7, 2014 there were 49,844,000 shares of Common Stock of the issuer outstanding.
TABLE OF CONTENTS
2
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q that are not historical or current facts are forward-looking statements. These statements often can be identified by the use of terms such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate” or “continue,” or the negative thereof. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. Among the factors that could cause actual results to differ materially from the forward-looking statements are the following: the Company’s ability to obtain necessary capital, the Company’s ability to meet anticipated development timelines, the Company’s ability to protect its proprietary technology and knowhow; the Company’s ability to identify and develop a network of physicians, the Company’s ability to establish a global market, clinical trial results, the Company’s ability to successfully consummate future acquisitions and such other risk factors identified from time to time in the Company’s reports filed with the Securities and Exchange Commission, including those filed with this Form 10-Q quarterly report. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.
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PART I
ITEM 1: FINANCIAL STATEMENTS
SKKYNET CLOUD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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January 31,
2014
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October 31,
2013
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$ | 511,180 | $ | 365,415 | ||||
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Accounts receivable
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192,439 | 88,806 | ||||||
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Stock Subscription receivable
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32,625 | -- | ||||||
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Total current assets
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736,244 | 454,221 | ||||||
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Property and equipment, net of accumulated depreciation of $0 and $70,484 respectively
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4,843 | 5,398 | ||||||
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Intangible assets
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1,648 | 1,648 | ||||||
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Total Assets
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$ | 742,735 | $ | 461,267 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
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Current Liabilities:
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Accounts payable and accrued expenses
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$ | 28,144 | $ | 34,567 | ||||
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Accounts payable – related parties
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-- | 52,432 | ||||||
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Accrued liabilities – related party
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85,813 | 143,872 | ||||||
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Deferred income
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66,046 | 59,312 | ||||||
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Total current liabilities
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180,003 | 290,183 | ||||||
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Note payable to related parties
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161,530 | 197,434 | ||||||
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Total liabilities
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341,533 | 487,617 | ||||||
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Stockholders’ Deficit:
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Preferred stock; $0.001 par value, 5,000,000 shares authorized, 5,000 shares issued and outstanding
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5 | 5 | ||||||
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Common stock; $0.001 par value, 70,000,000 shares authorized, 49,844,000 and 49,334,000 shares issued and outstanding, respectively
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49,844 | 49,334 | ||||||
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Additional paid-in capital
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1,064,437 | 555,773 | ||||||
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Accumulative other comprehensive income (loss)
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30,904 | 12,603 | ||||||
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Accumulated deficit
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(743,988 | ) | (644,065 | ) | ||||
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Total stockholders’ equity (deficit)
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401,202 | (26,350 | ) | |||||
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Total Liabilities and Stockholders’ Equity
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$ | 742,735 | $ | 461,267 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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SKKYNET CLOUD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended
January 31,
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2014
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2013
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Revenue
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$ | 287,049 | $ | 155,016 | ||||
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Direct material costs
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82 | 1,867 | ||||||
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Operating Expenses:
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Depreciation
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440 | 449 | ||||||
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General and administrative
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383,362 | 255,088 | ||||||
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Loss from operations
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(96,835 | ) | (102,388 | ) | ||||
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Other Income (Expenses):
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Tax refund
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-- | 86,081 | ||||||
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Interest expense
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(3,088 | ) | (3,857 | ) | ||||
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Total other income (expenses)
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(3,088 | ) | (82,224 | ) | ||||
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Net loss
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$ | (99,923 | ) | $ | (20,164 | ) | ||
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Net loss per common share attributable to common stockholders (basic and diluted)
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$ | 0.00 | $ | 0.00 | ||||
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Weighted average common shares outstanding (basic and diluted):
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49,428,239 | 49,334,000 | ||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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SKKYNET CLOUD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
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January 31,
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2014
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2013
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net income (loss)
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$ | (99,923 | ) | $ | (20,164 | ) | ||
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
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Depreciation expense
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440 | 449 | ||||||
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Option based compensation
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139,424 | -- | ||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(103,633 | ) | 4,107 | |||||
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Accounts payable and accrued expenses
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(64,482 | ) | 26,965 | |||||
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Accrued liabilities – related parties
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(52,432 | ) | 97,439 | |||||
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Deferred Income
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6,734 | -- | ||||||
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
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(173,872 | ) | 108,796 | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES
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Proceeds from the sale of common stock
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337,125 | -- | ||||||
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Payments on notes payable –related parties
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(35,904 | ) | -- | |||||
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
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301,221 | -- | ||||||
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Effect of exchange rate changes on cash
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18,416 | (758 | ) | |||||
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Net increase in cash
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145,765 | 108,038 | ||||||
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Cash, beginning of period
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365,415 | 122,053 | ||||||
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Cash, end of period
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$ | 511,180 | 230,091 | |||||
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SUPPLEMENTAL CASH FLOWS INFORMATION
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Interest paid
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$ | 21,920 | $ | -- | ||||
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Income taxes paid
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$ | -- | $ | -- | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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SKKYNET CLOUD SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Skkynet Cloud Systems, Inc. (“Skkynet” or “the Company”) is a newly-formed Nevada corporation headquartered in Toronto, Canada. Skkynet operates its business through its wholly-owned subsidiary Cogent Real-Time Systems, Inc. (Cogent). 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.
In March 2012, we completed the acquisition of all of the issued and outstanding shares of common stock of Cogent from Sakura Software Inc. and Benford Consultancy Inc. in exchange for a total of thirty million (30,000,000) restricted shares of our common stock, as a result of which Cogent became our wholly-owned subsidiary. As part of the exchange transaction we also issued 5,000 Series A Preferred shares to Sakura Software and Benford Consultancy. Prior to the closing of the exchange transaction, we did not have any operating revenues. At the acquisition closing, Cogent’s business consisted primarily of providing connectivity and data acquisition to a wide variety of industrial and office hardware and software products, and then making that data available over a network using industry-standard protocols. Cogent currently markets its products and services primarily to manufacturers in industrial processes and financial services companies.
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 (SEC), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s October 31, 2013 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, as reported on Form 10-K, have been omitted.
NOTE 2 - RELATED PARTY TRANSACTIONS
On July 31, 2012, Andrew Thomas, Shizuka Thomas and Paul Benford converted the salary they had accrued through our subsidiary through January 31, 2012 to notes payable due from that subsidiary. The notes mature on April 29, 2015 and bear an interest rate of 6% per annum on the outstanding balance. Interest payments are due quarterly commencing October 30, 2012. On January 31, 2014 the Company paid $35,904 in principal and $21,920 in interest to the note holders. As of January 31, 2014 the outstanding amounts on the notes payable were $161,530 as noted below:
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Note balance as of:
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January 31,
2014
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October 31,
2013
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Andrew Thomas
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$ | 48,980 | $ | 59,572 | ||||
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Paul Benford
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$ | 79,617 | $ | 97,545 | ||||
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Shizuka Thomas
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$ | 32,933 | $ | 40,317 | ||||
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Total
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$ | 161,530 | $ | 197,434 | ||||
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On January 1, 2012 and April 15, 2012 the Company and its subsidiary entered into employment agreements with four of its officers and directors. As a result of these agreements the Company has accrued compensation for each of the individuals. As of January 31, 2014 the accrued liability for compensation was $85,813.
As of January 31, 2014 and October 31, 2013 the Company had the following outstanding accrued liabilities due to related parties:
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As of
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January 31,
2014
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October 31,
2013
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Accrued salaries
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66,813 | 90,808 | ||||||
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Accrued interest
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- | 18,064 | ||||||
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Accounts payable
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52,432 | |||||||
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Consulting fees
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19,000 | 35,000 | ||||||
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Total accrued liabilities
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$ | 85,813 | $ | 196,304 | ||||
NOTE 3 - EQUITY
On January 14, 2014 the Company sold 510,000 shares of restricted common stock to eight individuals with a value of $0.725 per share for $337,125 in cash and a stock receivable of $32,625.
As of January 31, 2014 the Company held a stock receivable from one subscriber for $32,625. On February 3, 2014 the subscription was paid in full.
NOTE 4 - OPTIONS
On November 1, 2013 the Company issued 185,000 options with an exercise price of $0.55 per share to an officer of the Company.
On December 14, 2013 the Company issued 15,000 options with an exercise price of $0.85 per share to two independent directors and a consultant of the Company.
On January 13, 2014 the Company issued 580,000 options with an exercise price of $0.88 per share to four officers of the Company.
The Company has elected to expense the options over the life of the option as stock based compensation. As of January 31, 2014 the Company expensed $139,424 for the quarter. The unrecognized future balance to be expensed over the term of the options is $485,475.
The following sets forth the options granted and outstanding as of October 31, 2013:
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Options
Granted
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Total
Outstanding
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Number
Exercisable
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Number
Exercised
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Aggregate Intrinsic
Value
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3,835,000
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3,835,000
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1,377,000
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--
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$
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4,244,350
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NOTE 5 - DEFERRED REVENUE
The Company receives part of its revenue from the sale of software support. The revenue received is for one year of support from the date of the support sale. The Company defers the revenue for the future periods in which it is obligated to perform the support service. AS of January 31, 2014 the Company had deferred revenue of $66,046.
NOTE 6 - SUBSEQUENT EVENT
On February 3, 2014 the Company received full payment of the stock subscription receivable of $32,625
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Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Skkynet’s actual results could differ materially from those set forth on the forward looking statements as a result of the risks set forth in Skkynet’s filings with the Securities and Exchange Commission, general economic conditions, and changes in the assumptions used in making such forward looking statements.
OVERVIEW
The Company operates its business through its wholly-owned subsidiary Cogent Real-Time Systems, Inc. (Cogent). The Company has taken the existing business lines of Cogent and integrated these with Cloud based systems.
The Company provides software and related systems and facilities to collect process and distribute real-time information over a network. This capability allows the customers to both locally and remotely manage, supervise and control industrial processes and financial information systems. By using this software and where requested by a client, our web based assets, this gives clients and their customers (to the extent relevant) the ability and the tools to observe and interact with these processes and services in real-time as they are underway and to give them the power to analyze, alter, stop or otherwise influence these activities to conform to their plans.
RESULTS OF OPERATIONS
For the three month periods ending January 31, 2014, revenues were $287,049 and for the same period in 2013, revenue was $155,016, respectively. Revenue increases for the three month period ending January 31, 2014 over the three month period ended January 31, 2013 are the result of increased sales to customers and the addition of new customers. The Company hired a full time marketing officer to concentrate on the marketing of its software.
General and administrative expense increased to $383,363 for the three months ended January 31, 2014 from $255,088 for the same period in 2013. The increase in general and administrative expenses was due to the option expensed for the quarter of $139,424 compared to none in 2013. Other general and administrative expenses were lower in 2014 compared to 2013.
For the three periods ending January 31, 2014 the Company posted an operating loss of $96,836 compared to an operation loss of $102,388 for the same period in 2013, The decrease in operating loss of $5,552 was due primarily to the increase in sales of $132,033 along with the reduction in expenses of $11,150 and reduced direct expenses of $1,785 offset by the stock based compensation booked for the option expenses of $139,424. The increase in sales has a significant direct impact on operating profit.
Other expenses for the three month periods ending January 31, 2014 were $3,088 compared to other income of $82,224 for the same period in 2013. Other expenses were comprised of interest of $3,088. This compares to a tax refund of $86,081 received in the same period in 2013 and interest expense of $3,857 in 2013.
A net loss of $99,923 was recorded for the three month periods ending January 31, 2014 compared to a net loss of $20,164 for the same period in 2013. The loss can be attributed to added employee costs in 2014 compared to 2013.
9
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2014, Skkynet had current assets of $736,244 and current liabilities of $180,003, resulting in working capital of $556,241 and a current ratio of 4.09:1. Accumulated deficit as of January 31, 2014 was $743,988.
Net cash used in operations for the three months ending January 31, 2014 was $(173,872) compared to net cash provided of $108,796 for the same period in 2013. Net cash used in operations increased due primarily to an increase in the net loss of $79,759, an increase in accounts receivable of $103,633 and a decrease in accounts payable of $116,914. These were offset by stock based compensation for valuing options of $139,424 and deferred revenue of $6,734.
There were no investing activities in the periods ended January 31, 2014 and 2013.
Net cash provided in financing activities during the three months ended January 31, 2014 was $301,221 compared to net cash provided of zero for the same period in 2013. The change was due to the sale of common stock of $369,750 less the subscription receivable of $32,625, offset by the reduction of notes payable to related parties of $35,904.
Our existing capital may not be sufficient to meet Skkynet‘s cash needs, however our shareholders deficit changed to shareholders equity of $401,202 and our cash on hand increased from $365,415 as of October 31, 2013 to $511,180 at quarter end of January 31, 2014. In addition our working capital increased as of January 31, 2014 to $556,241 from $164,038 as of October 31, 2013 or an increase of $392,203.
EMPLOYEES
As of January 31, 2013, Skkynet employed 9 consultants and employees.
OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, Skkynet is not required to provide information required under this Item.
ITEM 4: CONTROLS AND PROCEDURES
This report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 under the Securities Exchange Act of 1934 (the "Exchange Act"). See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Financial Officer, to allow timely decisions regarding required disclosures.
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In connection with the preparation of this report, our management, under the supervision and with participation of our Principal Executive Officer and Principal Financial Officer (the “Certifying Officers”) conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2014. Based on that evaluation, our management concluded that there is a material weakness in our disclosure controls and procedures over financial reporting. The material weakness results from a lack of written procedures which effectively documents the proper procedures and descriptions of the duties of all persons involved in the disclosure controls of the Company. The Company hopes to implement plans to document the procedures and internal controls of the Company. A material weakness is a deficiency, or a combination of control deficiencies, in disclosure control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. This does not include an evaluation by the Company’s registered public accounting firm regarding the Company’s internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our management believes that the Unaudited Financial Statements included herein present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented.
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PART II – OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
None
ITEM 1A: RISK FACTORS.
There have been no material changes to Skkynet’s risk factors as previously disclosed in our most recent 10-K filing for the year ending October 31, 2013.
ITEM 2: SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On January 14, 2014 the Company sold 510,000 shares of restricted common stock to eight individuals with a value of $0.725 per share for $369,750 in cash.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4: MINE SAFETY INFORMATION.
None
ITEM 5: OTHER INFORMATION.
None
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ITEM 6: EXHIBITS.
| EXHIBIT 31.1 | Certification of Principal Executive Officer | |
| EXHIBIT 31.2 | Certification of Principal Financial Officer | |
| EXHIBIT 32.1 | Certification of Compliance to Sarbanes-Oxley | |
| EXHIBIT 32.2 | Certification of Compliance to Sarbanes-Oxley |
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101.INS **
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XBRL Instance Document
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101.SCH **
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XBRL Taxonomy Extension Schema Document
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101.CAL **
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF **
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB **
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE **
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XBRL Taxonomy Extension Presentation Linkbase Document
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_______________
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SKKYNET CLOUD SYSTEMS INC.
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Date: March 7, 2014
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By:
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/s/ Andrew Thomas
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Andrew Thomas, CEO
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| By: | /s/ Lowell Holden | ||
| Lowell Holden, CFO | |||
14