UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

---

 

(Mark One)

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the Quarterly Period Ended September 30, 2014

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-54083

 

CLONE ALGO INC.

(Exact name of registrant as specified in its charter)

 

Nevada		27-3183663
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

3225 McLeod Drive, Suite 100, Las Vegas, NV 89121

(Address of principal executive offices)(Zip Code)

 

702-871-8535

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☐    No þ

  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☐    No þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	þ

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐    No þ

 

As of February 12, 2015, the registrant had 708,142,662 shares of its common stock outstanding.

 

 

 

CLONE ALGO INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

SEPTEMBER 30, 2014

 

TABLE OF CONTENTS

 

		PAGE
PART I - FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II - OTHER INFORMATION		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosure	23
Item 5.	Other Information	24
Item 6.	Exhibits	24
SIGNATURES		25

  

 

PART I – FINANCIAL INFORMATION

 

Item 1 - Financial Statements

 

CLONE ALGO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2014				March 31, 2014
ASSETS		(Unaudited)
Current assets
Cash and cash equivalent		$	7,226,734			$	6,991,013
Accounts receivable			4,630,318				1,504,060
Accounts receivable - related parties			-				603,520
Due from related parties			3,178,945				-
Prepaid expenses and other current assets			30,086				13,200
Total current assets			15,066,083				9,111,793
Property and equipment			79,890				88,964
Total Assets		$	15,145,973			$	9,200,757
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities		$	95,609			$	420,303
Other current liabilities			-				2,500,000
Customer deposits			1,532,500				-
Due to related parties			870,428				3,296,214
Note payable - related party, current portion			8,749,974				13,942,652
Note payable - current portion			8,875,000				9,165,128
Total current liabilities			20,123,511				29,324,297
Note payable to related party, net of discount of $23,004,172 at September 30, 2014 and $25,591,098 at March 31, 2014			66,995,828				80,466,250
Note payable, net of discount of $2,103,175 at September 30, 2014 and $2,639,788 at March 31, 2014			8,646,825				9,695,084
Total Liabilities			95,766,164				119,485,631
Commitment and contingencies
Stockholders' equity (deficit)
Clone Algo, Inc. and Subsidiaries Stockholders' Equity (Deficit)
Preferred stock; $0.001 par value; 200,000,000 shares authorized; 150,000,000 shares and 0 shares issued and outstanding at September 30, 2014 and March 31, 2014			150,000				150,000
Common stock; $0.001 par value; 750,000,000 shares authorized; 697,646,696 shares and 695,000,000 shares issued and outstanding at September 30, 2014 and March 31, 2014			697,647				695,000
Additional paid-in capital			22,541,496				1,370,575
Stock payable			4,266,824				6,984,364
Accumulated earnings (deficit)			(73,493,764	)			(79,401,832	)
Total Clone Algo Inc. and subsidiaries stockholders' equity			(45,837,797	)			(70,201,893	)
Non-controlling interest in consolidated subsidiary			(34,782,394	)			(40,082,981	)
Total Liabilities and Stockholders' Equity (Deficit)		$	15,145,973			$	9,200,757

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the Three Months Ended September 30,								For the Six Months Ended September 30,
		2014				2013				2014				2013
Revenues
Licensing fees		$	7,504,572			$	-			$	16,047,478			$	-
Licensing fees - related parties			2,227,500				-				4,252,500				-
Total revenues			9,732,072				-				20,299,978
Cost of revenues			3,600,000				-				7,200,000				-
Gross profit			6,132,072				-				13,099,978				-
Operating expenses
Depreciation and amortization			4,586				-				9,074				-
Selling, general and administrative			296,668				7,452				751,120				14,152
Total operating expenses			301,254				7,452				760,194				14,152
Income (Loss) from operations			5,830,818				(7,452	)			12,339,784				(14,152	)
Other income and (expense)
Interest income			16				-				547				-
Interest expense			(1,561,770	)			-				(3,123,539	)			-
Realized gain (loss) on investments			(8,136	)			-				(8,136	)			-
Total other income and (expense)			(1,569,891	)			-				(3,131,129	)			-
Income from operations before income tax			4,260,928				(7,452	)			9,208,656				-
Provision for income taxes			-				-				-				-
Net income (loss) applicable to common stock before allocation to noncontrolling interest			4,260,928				(7,452	)			9,208,656				(14,152	)
Less: net income attributable to noncontrolling interest			1,526,882				-				3,300,587				-
Net income (loss) attributable to Clone Algo, Inc. common stock		$	2,734,045			$	(7,452	)		$	5,908,068			$	(14,152	)
Basic and diluted net income (loss) per common share applicable to Clone Algo, Inc. common stock		$	0.00			$	(0.00	)		$	0.01			$	(0.01	)
Weighted average common shares outstanding - basic and diluted			697,646,696				2,000,000				697,202,689				2,000,000

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the Six Months Ended September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) attributable to Clone Algo, Inc. common stock		$	5,908,068			$	(14,152	)
Net income attributable to noncontrolling interest			3,300,587				-
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			9,074				-
Amortization of debt discount			3,123,539				-
Changes in operating assets and liabilities:
Accounts receivable			(3,126,258	)			-
Accounts receivable - related party			603,520				-
Due from related parties			(3,178,945	)			-
Prepaid expense			(16,886	)			-
Accounts payable and accrued liabilities			(324,694	)			9,069
Other current liabilities			(2,500,000	)			-
Customer deposits			1,532,500				-
Accounts payable - related party			(2,425,786	)			5,083
Net cash provided by operating activities			2,904,719				-
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities			-				-
CASH FLOWS FROM FINANCING ACTIVITIES
Noncontrolling interest in Clone Algo Pte Ltd			2,000,000				-
Proceeds from sale of common stock, net			18,456,028				-
Cash paid for note payable to related party			(21,250,026	)			-
Cash paid for note payable			(1,875,000	)			-
Net cash used in financing activities			(2,668,998	)			-
NET INCREASE IN CASH AND CASH EQUIVALENTS			235,721				-
CASH AND CASH EQUIVALENTS, AT THE BEGINNING OF THE PERIOD			6,991,013				-
CASH AND CASH EQUIVALENTS, AT THE END OF THE PERIOD		$	7,226,734			$	-
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Interest paid		$	-			$	-
Income taxes paid		$	-			$	-

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

As used herein and except as otherwise noted, the term “Company”, “it(s)”, “our”, “us”, “we” and “CAI” shall mean Clone Algo Inc., a Nevada corporation and Subsidiaries.

 

Clone Algo, Inc. (the “Company”) was incorporated in Nevada on February 22, 2010 as a "blank check" company under the name of Corridor Ventures I Acquisition Corp. On January 8, 2014, Niraj Goel, an investor, acquired 99% ownership interest in the Company by purchasing from the former shareholders, 193,000,000 shares of common stock for $193,000 cash.  This resulted in a change of control and the executive officers and directors of the Company resigned from their positions. Niraj Goel became the Company’s new President, Chief Executive Officer, Chief Financial Officer, and a sole Director. Additionally, on that same date, the Company changed its name to Clone Algo, Inc. 

 

On March 7, 2014, the Company formed an entity Clone Algo Pte Ltd. in Singapore (“Singapore Subsidiary”) of which the Company has a 65% ownership interest through the ownership of 4,875,000 shares of common stock. Algo Markets Limited, a Malaysia limited liability company (“Algo Markets”), is a wholly-owned subsidiary of the Singapore Subsidiary and is the subsidiary through which the Company conducts its business. The 35% noncontrolling interest or 2,625,000 shares of Singapore Subsidiary were purchased by Niraj Goel, the Company's former Chief Executive Officer for $2,625,000.

 

On May 21, 2014, Niraj Goel resigned from his position as President, Chief Executive Officer, and Chief Financial Officer of the Company and Nitin Damodaran was appointed as the Company’s Chief Executive Officer and Interim Chief Financial Officer.

 

Clone Algo Inc. is a technology company specializing in developing algorithms based on artificial intelligence and operates social investment networks. The Company ushers the social trading revolution and helps the users create passive income by cloning algorithms which automatically trade forex, shares, gold and CFDs to the account holder’s brokerage account.

 

The accompanying interim consolidated financial statements are unaudited, but in the opinion of management of the Company, contain all adjustments, which include normal recurring adjustments and business acquisition adjustments, necessary to present fairly the financial position at September 30, 2014, and the results of operations and cash flows for the six months ended September 30, 2014. The balance sheet at March 31, 2014 is derived from the Company’s audited financial statements.

 

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto contained in the Company’s 2014 Annual Report filed with the Securities and Exchange Commission on Form 10-K on November 21, 2014.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following summary of significant accounting policies of the Company is presented to assist in the understanding of the Company’s unaudited financial statements. The unaudited consolidated financial statements and notes are the representation of the Company’s management who is responsible for their integrity and objectivity. The unaudited consolidated financial statements of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission for interim financial information.

  

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) and the hierarchy of Generally Accepted Accounting Principles.

 

Principles of Consolidation

The unaudited consolidated financial statements of the Company include the accounts of the Company, its 65% owned subsidiary Clone Algo Pte Ltd., a Singapore entity, and Algo Markets, a Malaysia entity, a 100% owned subsidiary of Clone Algo Pte Ltd. All significant intercompany balances and transactions have been eliminated in the consolidation.

 

Use of Estimates

The preparation of unaudited consolidated financial statements in conformity with 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 date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

Noncontrolling Interests

The Company accounts for its less than 100% interest in consolidated subsidiaries in accordance with Financial Accounting Standards Board – Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” for the accounting for noncontrolling interests. The guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements as opposed to mezzanine equity. This guidance also changes the way the consolidated statement of operations is presented by requiring net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of net income attributable to the parent and to the noncontrolling interest. This guidance requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. For all periods in which a consolidated balance sheet is presented, the Company reported all amounts due to minority shareholders to a new line item, “noncontrolling interests,” which is included in stockholders’ equity. Additionally, in the statement of operations, the Company displays, below net income on the face of the statement of operations, the portion of consolidated net income or loss that is attributable to the controlling and noncontrolling interests.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

Cash and Cash Equivalents

The Company considers all cash on hand, cash depository accounts held at brokers not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents. At September 30, 2014 and March 31, 2014, the Company has $0 and $0 of cash equivalents.

 

Fair value of Financial Instruments and Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The Company’s financial instruments consist principally of cash and cash equivalents, amounts receivable, accounts payable, notes payable, and amounts due to related parties. Pursuant to ASC 820, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments, the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The Company believes that the recorded values of all of the other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations. The Company does not hold any investments that are available-for-sale.

 

Intangible Assets

Intangible assets arising from an acquisition are periodically assessed for impairment. Accordingly, the Company reviews the carrying value of intangible assets quarterly to determine whether impairment, as measured by fair market value, may exist. Specifically, intangible assets impairment is determined using a two-step process. The first step of the intangible asset impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, then the intangible assets of the reporting unit are not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

The second step of the impairment test compares the implied fair value of the reporting unit's intangible assets with their carrying amount. If the carrying amount of the reporting unit's intangible assets exceeds their implied fair value, then an impairment loss is recognized in an amount equal to that excess. Patents, intellectual property and trademarks are capitalized at their historical cost and are amortized over their estimated useful lives of ten years.

 

Variable Interest Entity

The Company follows the guidelines in FASB Codification of ASC 810 “Consolidation” which indicates "a legal entity that is deemed to be a business need not be evaluated by a reporting entity to determine if the legal entity is a Variable Interest Entity (“VIE")” unless any one of four conditions exist:

 

●

The reporting entity, its related parties, or both participated significantly in the design or redesign of the legal entity;

 

●

The legal entity is designed so that substantially all of its activities involve or are conducted on behalf of the reporting entity;

 

●

The reporting entity and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated;

 

●

The activities of the legal entity are primarily related to the securitizations or other forms of asset-backed financings or single

 

A VIE is an entity that either (a) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (b) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. If we determine that we have operating power and the obligation to absorb losses or receive benefits, we consolidate the VIE as the primary beneficiary, and if not, we do not consolidate. The Company has not identified any VIEs as of September 30, 2014.

 

Revenue Recognition

The Company recognizes revenues when persuasive evidence of an arrangement exists; delivery has occurred; price is fixed or determinable; and collectability of the related receivable is reasonably assured. The Company closely follows the provisions of ASC 605 “Revenue Recognition”, which includes the guidelines of Staff Accounting Bulletin No. 104.

 

The Company's main source of revenue is from the licensing fees that brokers, distributors, hedge funds, and banks pay for licensing our Clone Algo Applications based on the type of trading in which their customers (our users) are engaged in.  Each user has multiple accounts running different algorithms for different asset classes.

 

Earnings (Loss) Per Common Share

The Company computes net earnings (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted net earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

 

As of September 30, 2014 and March 31, 2014, there were 1,500,000,000 potentially dilutive common shares outstanding during the period all of which pertain to the 150,000,000 series A preferred shares outstanding which are convertible, at the holder’s option, into ten (10) shares of the Company’s common stock.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

Income Taxes

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company follows the provisions of ASC 740-10, “Accounting for Uncertain Income Tax Positions.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

Business Segments

The Company operates in one segment and therefore, segment information is not presented.

 

Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its unaudited consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable consist of:

 

		Amount
Balance - March 31, 2014		$	1,504,060
Invoices billed			16,047,478
			15,551,538
Collections received			(12,921,220	)
Ending balance – September 30, 2014 (Unaudited)		$	4,630,318

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

Accounts receivable are comprised of uncollateralized customer obligations due under normal trade terms requiring payment within 60 days from the invoice date. The carrying amount of accounts receivable is reviewed periodically for collectability. If management determines that collection is unlikely, an allowance is recorded that reflects management’s best estimate of the amounts that will not be collected. Management reviews each accounts receivable balance that exceeds 60 days from the invoice date and, based on an assessment of creditworthiness, estimates the portion, if any, of the balance that will not be collected. As of September 30, 2014 and March 31, 2014, the Company did not record a reserve for doubtful accounts.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

Due from Related Parties

 

As of September 30, 2014, the Company has a balance due from Dragon Holdings AG in the amount of $588. Dragon Holdings AG’s majority shareholder and non-executive chairman is Mr. Niraj Goel, who is also a majority shareholder in the Company.

 

The Company, at times, takes advantage of saving fees as a result of currency exchange, and requests its customers to send payments directly to its vendors. During the six months ended September 30, 2014, five customers of the Company wire-transferred their payments totaling $10,472,000 in settlement of their obligations directly to Dragon Malaysia. As of September 30, 2014, payments from customers to Dragon Malaysia were in aggregate greater than the obligations owed to Dragon Malaysia by the Company for infrastructure fees, which resulted in a due from Dragon Malaysia in the amount of $2,894,972. Dragon Malaysia Limited is a wholly-owned subsidiary of Dragon Holdings AG, of which Mr. Niraj Goel, a majority shareholder of the Company, is a non-executive Chairman and a majority shareholder.

 

As of September 30, 2014, the Company has advanced $283,384 to an entity that is majority owned by Niraj Goel, our majority shareholder. The advance to the related entity is non-interest bearing and due on demand.

 

As of September 30, 2014 and March 31, 2014, the Company has an aggregate balance due from related parties of $3,178,945 and $0, respectively.

 

Due to Related Parties

 

As of September 30, 2014 and March 31, 2014, the Company is obligated to pay in the ordinary course of business $85,386 and $0, respectively, to a related entity that is majority owned by Niraj Goel.

 

The Company’s former Chief Executive Officer, a related party, has advanced funds to the Company from time to time in order to support the working capital requirements of the Company. As of September 30, 2014 and March 31, 2014, $7,542 and $34,957 remained due to the related party for advances. All funds advanced by the former Chief Executive Officer are unsecured, bear no interest, and are due upon demand.

 

For the three months and six months ended September 30, 2014, the Company rendered technology services to an entity controlled by the former Chief Executive Officer through a 17% indirect ownership. The Company recorded $2,227,500 and $4,252,500 in revenues from this entity for the three months and six months ended September 30, 2014, which approximated 23% and 21% of the total revenues for such periods. The Company has received $5,030,000 from this related party for the six months ended September 30, 2014, and has recorded the excess payment of $777,500 received from the related parties as a customer deposit in the accompanying financial statements as of September 30, 2014.

 

As of September 30, 2014 and March 31, 2014, the Company has an aggregate balance due to related parties of $870,428 and $3,296,214, respectively.

 

Intellectual Property Purchase Agreement

 

On March 10, 2014, Algo Markets entered into an intellectual property purchase agreement between Algo Markets and Dragon Malaysia Limited, a wholly-owned subsidiary of Dragon Holdings AG, of which Mr. Niraj Goel is a non-executive Chairman and a majority shareholder, for purchase of intellectual property for $128,000,000. The Company is indebted to Dragon Malaysia Limited pursuant to a promissory note of $120,000,000 (See Note 5) of which $98,749,974 remains unpaid as of September 30, 2014 for the acquisition cost of intellectual property.

 

Licensing Agreement

 

The Company currently utilizes Dragon Malaysia’s risk management software, data center usage, technical personnel and licenses pursuant to an agreement dated March 22, 2014, and agreed to pay a fixed minimum monthly infrastructure fee of $1,200,000. The Company recorded infrastructure expense of $3,600,000 and $7,200,000 as cost of revenues for the three months and six months ended September 30, 2014.Dragon Malaysia Limited is a wholly-owned subsidiary of Dragon Holdings AG, of which Mr. Niraj Goel, a majority shareholder of the Company, is a non-executive Chairman and a majority shareholder.

 

The Company’s 65% owned subsidiary Clone Algo Pte Ltd. has only one Board Member/Director, Niraj Goel, who is also the majority shareholder in Clone Algo, Inc. The remaining 35% of Clone Algo Pte Ltd. is owned by Niraj Goel.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

NOTE 5 – NOTE PAYABLE – RELATED PARTY

 

Note payable to related party consists of:

 

		September 30, 2014				March 31, 2014
		(Unaudited)
Note payable – related party, principal balance of $120,000,000, payable in sixty (60) monthly installments of $2,000,000 each, starting May 30, 2014 (P/Note 1)		$	98,749,974			$	120,000,000
Less: debt discount			(23,004,172	)			(25,591,098	)
Note payable – related party, net of discount			75,745,802				94,408,902
Less: current portion			(8,749,974	)			(13,942,652	)
Note payable – related party, long term		$	66,995,828			$	80,466,250

 

On March 10, 2014, Algo Markets entered into an IP Purchase Agreement with a related party, pursuant to which the IP Seller sold the intellectual property to Algo Markets for $128,000,000, payable $8,000,000 in cash at the closing, and $120,000,000 in (60) equal monthly installments starting in May 2014. The Company paid $4,740,000 cash at the closing and recorded the remaining balance of $3,260,000 as other current liability at March 31, 2014.

 

Pursuant to the terms of P/Note 1, the payments to related party are subject to Earn out period of 10 years beginning April 1, 2014 to March 21, 2023. Earn out will be settled on a yearly basis. Earn out means an amount in cash equal to the amount determined pursuant to one, but only one, of the following clauses:

 

a) If in any 12 months period April 1 to March 31, earnings before interest, taxes, depreciation and amortization (“EBITDA”) is equal to or the Earn out Period is equal to or less than $10,000,000, Zero Dollars;

 

b) If in any 12 months period April 1 to March 31, EBITDA is equal to or the Earn out Period is greater than $10,000,000 but less than $40,000,000, an amount equal to $25,000,000 plus the product of (X) 2.5 and (Y) the amount by which EBITDA exceeds $10,000,000;

 

c) If in any 12 months period April 1 to March 31, EBITDA is equal to or the Earn out Period is equal to or greater than $40,000,001, an amount equal to $50,000,000  plus the product of (X) 2.5 and (Y) the amount by which EBITDA exceeds $40,000,001;

 

In connection with the issuance of the Note 1, the Company has recorded an imputed interest on the note payable at the annual interest rate of 10% over the term of the Note. As a result, the Company recorded a debt discount in the amount of $25,869,262 on Note 1 which is being amortized to interest expense over the life of the P/Note 1 (Sixty months). The Company has recorded interest expense of $1,293,463 and $2,586,926 related to the amortization of debt discount related to P/Note 1 for the three months and six months ended September 30, 2014. The Company did not have Note 1 for the comparable periods in 2013.

 

The Company has paid $24,510,026 towards the note payable to related party as of September 30, 2014.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

Commitments (excluding the clause of Earn out) as of March 31:		Amount
2015		$	12,000,000
2016 to 2019			86,749,974
Total		$	98,749,974

 

NOTE 6 – NOTE PAYABLE

 

Note payable consists of:
		September 30, 2014				March 31, 2014
		(Unaudited)
Note payable, principal balance of $21,500,000, to a third party, payable in 10 equal quarterly payments of $2,150,000, starting April 30, 2014 (P/Note 2)		$	19,625,000			$	21,500,000
Less: debt discount			(2,103,175	)			(2,639,788	)
Note payable, net of discount			17,521,825				18,860,212
Less: current portion			(8,875,000	)			(9,165,128	)
Note payable, long term		$	8,646,825			$	9,695,084

 

On March 10, 2014, Algo Markets entered into an asset purchase agreement with a third party, pursuant to which the seller sold 12 algorithms related to online financial markets trading for $24,000,000. Algo Markets agreed to pay $2,500,000 to the seller at closing and the remaining balance of $21,500,000 is payable in ten (10) equal quarterly installments of $2,150,000 each, starting April 30, 2014 (P/Note 2).  For the six months ended September 30, 2014, the Company paid $4,375,000 to the third party, of which $2,500,000 was due to the third party at the closing in March 2014 and was recorded as other current liability as of March 31, 2014, and $1,875,000 was paid towards the note payable.

 

In connection with the issuance of the P/Note 2, the Company has recorded an imputed interest on the note payable at the annual interest rate of 10% over the term of the Note 2. As a result, the Company recorded a debt discount in the amount of $2,683,063 on Note 2 which is being amortized to interest expense over the life of the P/Note 2. The Company has recorded interest expense of $268,306 and $536,613 related to the amortization of debt discount related to the Note 2 for the three months and six months ended September 30, 2014. The Company did not have Note 2 for the comparable periods in 2013.

 

Commitments as of March 31,:		Amount
2015		$	4,300,000
2016 to 2017			15,325,000
Total		$	19,625,000

 

NOTE 7 - STOCKHOLDERS’ EQUITY

 

The Company’s capitalization at September 30, 2014 was 200,000,000 authorized shares of preferred stock, and 750,000,000 authorized shares of common stock, both with a par value of $0.001 per share.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

Preferred Stock

The Company has 150,000,000 shares of Series A Preferred Stock issued and outstanding as of September 30, 2014, issued to Niraj Goel, the Company’s non-executive director. Each share of Series A Preferred Stock is convertible, at the holder’s option, into ten (10) shares of the Company’s common stock, and each share of Series A Preferred Stock entitles the holder to fifty (50) votes for every one vote a holder of one share of the Company’s common stock. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary for each share of Series A Preferred Stock, the Holders shall not be entitled to receive any amount out of the assets, whether capital or surplus, of the Corporation.

 

Common Stock

Between April 1, 2014 and September 30, 2014, the Company received cash of $18,456,028 from foreign investors under private placement subscription agreements for the purchase of its $0.001 par value common stock at a purchase price of $8.00 per share.  The offering was part of a larger funding effort which continued through May of 2014, at which time the Company received subscriptions for a total of $40,000,000 through the sale of 5,000,000 shares of its $0.001 par value common stock at a purchase price of $8.00 per share. The Company has issued 2,646,696 shares of common stock during the six months ended September 30, 2014. The Company had received cash of $6,984,364 as of March 31, 2014 for stock subscriptions and did not issue any shares as of March 31, 2014. Common shares for receipt of cash for stock subscriptions of $4,266,824 remain unissued as of September 30, 2014 and the value of consideration received are recorded as stock payable at September 30, 2014.

 

On April 9, 2014 and April 14, 2014, the Company received $695,000 and $1,600,000, respectively, from Niraj Goel for the purchase of 2,295,000 shares of Clone Algo Pte Ltd. These shares were issued and outstanding as of March 31, 2014.

 

On May 19, 2014, our 65% owned subsidiary, Clone Algo Pte Ltd., issued an additional 2,000,000 shares of its common stock to Niraj Goel for $2,000,000 cash. During the six months ended September 30, 2014, Clone Algo Pte Ltd. issued an additional 3,714,286 shares of its common stock to our parent company, Clone Algo, Inc. for $3,714,286 cash.

 

The sale and the issuance of the shares were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), Rule 506 of Regulation D promulgated under the Securities Act (“Regulation D”) and/or Regulation S promulgated under the Securities Act (“Regulation S”).  Management made this determination based on the representations of each Purchaser which included, in pertinent part, that each such Purchaser was (a) an “accredited investor” within the meaning of Rule 501 of Regulation D, (b) a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act or (c) not a “U.S. person” as that term is defined in Rule 902(k) of Regulation S and upon such further representations from each Purchaser that (i) such Purchaser is acquiring the securities for his, her or its own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act, (ii) the Purchaser agrees not to sell or otherwise transfer the purchased shares unless they are registered under the Securities Act and any applicable state securities laws, or an exemption or exemptions from such registration are available, (iii) the Purchaser has knowledge and experience in financial and business matters such that he, she or it is capable of evaluating the merits and risks of an investment in us, (iv) the Purchaser had access to all of our documents, records, and books pertaining to the investment and was provided the opportunity to ask questions and receive answers regarding the terms and conditions of the offering and to obtain any additional information which we possessed or were able to acquire without unreasonable effort and expense, and (v) the Purchaser has no need for the liquidity in its investment in us and could afford the complete loss of such investment. In addition, there was no general solicitation or advertising for securities issued in reliance upon Regulation D.

 

 

CLONE ALGO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

 

As a result of such stock issuances, the Company has 697,646,696 shares of common stock issued and outstanding as of September 30, 2014.

 

Equity Compensation Plan

The Company has adopted the 2014 Officers’ Stock Plan on March 17, 2014, but has not granted any stock options at this time.

 

NOTE 8 – CONCENTRATIONS 

 

During the three months and six months ended September 30, 2014, six customers accounted for approximately 98% and 90% of the total revenues earned by the Company. The Company did not earn any revenues for the three months and six months ended September 30, 2013.

 

As of September 30, 2014, the Company has $6,984,871 of cash investments held in a foreign account.

 

NOTE 9 – SUBSEQUENT EVENTS

 

Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855 – Subsequent Events and has determined that no other material subsequent events exists other than listed below:

 

On December 19, 2014, Algo Markets Limited and Dragon Malaysia entered into an agreement to settle $80 million of Dragon Malaysia’s debt by issuance of 10,000,000 shares of the Company’s common stock valued at $8 per share. The Company issued 10,000,000 shares to Dragon Malaysia on January 29, 2015.

 

On January 29, 2015, the Company issued 495,966 shares of common stock to two shareholders from whom the Company had received $3,967,728 in cash pursuant to the private placement offering (See Note 7). This amount is recorded as stock payable as of September 30, 2014.

 

The Company received an additional $345,141 of cash for stock subscriptions as of February 12, 2015.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate.

 

Plan of Operations

  

On January 8, 2014, Niraj Goel, an investor, acquired 99% ownership interest in the Company by purchasing from the former shareholders, 193,000,000 shares of common stock for $193,000 cash. This resulted in change of control and the executive officers and directors of the Company resigned from their positions. Niraj Goel became the Company’s new President, Chief Executive Officer, Chief Financial Officer, and a sole Director. Additionally, on that same date, the Company changed its name to Clone Algo, Inc. On May 21, 2014, Niraj Goel resigned from his position as President, Chief Executive Officer, and Chief Financial Officer of the Company.

 

Clone Algo began its substantive operations in March 2014 by acquiring intellectual property and algorithms, and developing algorithms, mobile apps (as well as desktop software) in four different areas – financial markets trading, insurance, hotel booking, and retail banking. We have released the Clone Algo App Suite of products which had approximately 6,000 users as of February 12, 2015.

 

Our marketing strategy is based on licensing the use of our products business-to-business through distributors, brokers, asset managers, and banks. We are in the process of expanding our geographical reach by opening newer offices in various time zones and hiring additional marketing staff.

 

We are a technology company specializing in developing algorithms based on artificial intelligence and operate social investment networks. The Company ushers the social trading revolution and helps the users create passive income by cloning algorithms which automatically trade forex, shares, gold and computational fluid dynamics (CFDs) to the account holder’s brokerage account. Our development efforts have been focused primarily on the development and marketing of our algorithms. In addition, to date we have limited operating history for investors to evaluate the potential of our business development. We have commenced limited operations and our proposed business plan is not yet fully operational. We are finalizing our business plan and have obtained our twelve customers in a span of four and one-half months.

 

Results of Operations

 

Comparison of the three months and six months ended September 30, 2014 and 2013

 

Revenues

For the three months and six months ended September 30, 2014, revenues increased to $9,732,072 and $20,299,978 compared to $0 for the same comparable periods in 2013. Revenues are generated by the Company charging licensing and technology fees to brokers, distributors, banks and hedge funds and related parties, (collectively referred to as “Customers”). The Company has acquired the rights to sell the technology pursuant to the Dragon Tradebook Risk Management & Trade Infrastructure Non Exclusive Software Distribution Agreement (the “Agreement”) with Dragon Malaysia Limited (“Dragon Malaysia”) and the Asset Purchase Agreement with Zentrum Limited. The Company charged licensing and technology fees to a related party and recorded revenues of $2,227,500 and $4,252,500 for the three months and six months ended September 30, 2014.

 

 

The licenses provide the software platform which allows Customers to use our back-end intellectual property and software to facilitate trades. The Company executed Service and Distribution Agreements with twelve (12) Customers (brokers, distributors, hedge fund managers, etc. one (1) of which was a related party) for a period from April 1, 2014 to September 30, 2014, whereby the Company charged a fixed licensing/technology fee. The services offered and license fees charged to its Customers are based upon the account size of funds and trade volumes, i.e. less than $100,000 or greater than $100,000. The Company recognizes revenues over the licensing service period included in the Service and Distribution Agreement with its Customers.

 

Cost of Revenue and Gross Margins

Cost of revenue consists entirely of infrastructure fees paid to Dragon Malaysia pursuant to a TradeBook Risk Management & Trade Infrastructure Non Exclusive Software Distribution Agreement, executed on March 22, 2014. The infrastructure fees recorded for the three months and six months ended September 30, 2014 was $3,600,000 and $7,200,000 as compared to $0 for the same comparable periods in 2013. The infrastructure fees comprised of Dragon Malaysia’s server platform consisting of computer hardware, software, computer infrastructure and networking between the Company and its customers, all system administration and housekeeping, system monitoring and associated support. The Company currently utilizes Dragon’s risk management software, data center usage, technical personnel and licenses by paying a minimum monthly fixed fee of $1,200,000. Minimum fees are determined by the usage of the server resources and are accountable against traded volume.

 

As a result of the Company’s activities and operations, the gross margin for the three months and six months ended September 30, 2014, was approximately 63% and 65%, respectively. As the Company’s business matures and sales increase, the Company will recruit its own software/technical personnel to manage its own server platform, data centers, all computer hardware, software, computer infrastructure and servers. The Company will purchase the licenses to use software to make its computer infrastructure and data centers fully operational and efficient. This will result in an increase in operating costs initially and our gross margins will be reduced significantly. However, as the Company’s business picks up and revenues increase, and infrastructure and data centers become fully operational, we anticipate our gross margins to increase.

 

Operating Expenses

Operating expenses for the three months and six months ended September 30, 2014 were $301,254 and $760,194, and for the same comparable period of 2013 were$7,452 and $14,152, respectively. Operating expenses increased by $293,802 and $746,042 for the three months and six months ended September 30, 2014 when compared to the previous comparable periods primarily due to (i) increase in depreciation expense of $4,586 and $9,074, (ii) increase in commissions of $8,667 and $141,637, (iii) increase in payroll of $153,334 and $270,356, (iv) increase in travel expense of $9,388 and $73,513, (v) increase in rent of $10,900 and $29,450, and (vi) increase in professional fees of $90,407 and $173,534 resulting from professional services incurred in connection with the audit, consulting, legal and reporting requirements of being a public company.

 

Other Income and Expense

Other income and expense for the three months and six months ended September 30, 2014 were $1,569,891 and $3,131,129, compared to $0 and $0 for the same comparable periods in 2013. Other income and expense primarily consisted of interest expense of $1,561,769 and $3,123,539 for the three months and six months ended September 30, 2014 offsetting interest income of $16 and $547 for the same periods. The Company recorded an imputed interest expense of $1,561,769 and $3,123,589 related to the amortization of debt discounts on two promissory notes for its purchase of intellectual property for the three months and six months ended September 30, 2014. In addition, the Company recorded a realized loss of $8,136 and $8,136 on investments for the three months and six months ended September 30, 2014. The Company realized a loss in using its own developed algorithms for investing in foreign currency transactions. The Company did not invest in foreign exchange transactions in the comparable periods in 2013.

 

Noncontrolling Interest

The Company accounted for its 65% owned subsidiary Clone Algo Pte Ltd. and reported net income attributable to a noncontrolling interest of $1,526,882 and $3,300,587 for the three months and six months ended September 30, 2014. On May 19, 2014, Clone Algo Pte Ltd. issued an additional 2,000,000 shares of its common stock to Niraj Goel for $2,000,000 cash. As a result, the noncontrolling interest in Clone Algo Pte Ltd. was reduced to $34,782,394 as of September 30, 2014. The Company did not have a noncontrolling interest in a subsidiary in 2013.

 

 

Net Income

The Company recorded a net income of $5,908,068 for the six months ended September 30, 2014, compared to a net loss of $14,152 for the same comparable period in 2013. The increase in income was primarily due to the increase in revenues and gross margin and control on operating expense for the six months ended September 30, 2014.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $7,226,734 at September 30, 2014 compared to $6,991,013 at March 31, 2014. Management expects the Company’s expenses will continue to increase during the foreseeable future as a result of increased operational expenses and the development of additional algorithms and apps. The Company anticipates generating licensing and technology revenues over the next twelve months, however, it may be dependent on the proceeds from future debt or equity investments to sustain its operations and implement its business plan. If the Company is unable to raise sufficient capital, it will be required to delay or forego some portion of its business plan, which may have an effect on its anticipated results from operations and financial condition. There is no assurance that the Company will be able to obtain necessary amounts of capital or that its estimates of capital requirements will prove to be accurate.

 

The Company presently does not have any significant credit available, bank financing or other external sources of liquidity. Its current operations have been a source of liquidity, however, the Company will need to obtain additional capital in order to expand its operations and continue being profitable. In order to obtain capital, the Company may need to sell additional shares of its common stock or borrow funds from private lenders. There can be no assurance that it will be successful in obtaining additional funding.

 

To the extent that the Company has raised additional capital through the sale of equity, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on the Company’s operations. Regardless of whether the cash assets prove to be inadequate to meet the Company’s operational needs, it may seek to compensate providers of services by issuance of stock in lieu of cash, which may also result in dilution to existing shareholders. Even if the Company is able to raise the funds required, it is possible that it could incur unexpected costs and expenses, fail to collect significant amounts owed, or experience unexpected cash requirements that would force the Company to seek alternative financing.

 

Management has been successful in the past in raising capital, however, no assurance can be given that these sources of financing will continue to be available to us and/or that demand for our equity/debt instruments will be sufficient to meet our capital needs, or that financing will be available on terms favorable to us. If funding is insufficient at any time in the future, the Company may not be able to take advantage of business opportunities or respond to competitive pressures, or may be required to reduce the scope of its planned service development and marketing efforts, any of which could have a negative impact on our business and operating results.

 

Operating activities

Net cash flows provided by operating activities was $2,904,719 for the six months ended September 30, 2014 which resulted primarily due to our net income of $5,908,068, income attributable to noncontrolling interest of $3,300,587, depreciation of $9,074, amortization of debt discount of $3,123,539, increase in accounts receivable of $3,126,258, decrease in accounts receivable from related party of $603,520, increase in due from related party of $3,178,945, increase in prepaid expense and other current assets of $16,886, decrease in accounts payable and accrued liabilities of $324,694, decrease in other current liabilities of $2,500,000, increase in customer deposit of $1,532,500, and decrease in due to related parties of $2,425,786.

 

Investing activities

Net cash flows used in investing activities was $0 for the six months ended September 30, 2014.

 

 

Financing activities

Net cash flows used in financing activities for the six months ended September 30, 2014 was $2,668,998. Net cash used in financing activities was primarily attributable to the cash proceeds of $2,000,000 received from noncontrolling interest, cash proceeds of $18,456,028 received from the sale of common stock and common stock subscriptions, cash paid for note payable to a related party of $21,250,026 and cash paid for note payable of $1,875,000.

 

The Company continues to use traditional and/or debt financing as well as sales of its common stock to provide the capital for its business operations.

 

As a result of the above activities, the Company recorded a net increase in cash of $235,721 for the six months ended September 30, 2014. As reflected in the unaudited consolidated financial statements, the Company has an accumulated deficit of $73,493,764 as of September 30, 2014 and has available cash of $7,226,734 as of September 30, 2014 to meet its current obligations.  

 

Off Balance Sheet Arrangements

 

We do not have any 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, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements which we have prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We have identified the following accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our actual results could differ from these estimates and such differences could be material.

 

While our significant accounting policies are described in more detail in Note 2 of our financial statements for the period ended September 30, 2014, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

 

Cash and Cash Equivalents

For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents.

 

Revenue Recognition

The Company recognizes revenues when persuasive evidence of an arrangement exists; delivery has occurred; price is fixed or determinable; and collectability of the related receivable is reasonably assured. The Company closely follows the provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) 605 “Revenue Recognition”, which includes the guidelines of Staff Accounting Bulletin No. 104.

 

The Company's main source of revenue is from the licensing fees that brokers, distributors, hedge funds, and banks pay for licensing our Clone Algo Applications based on the type of trading in which their customers (our users) are engaged in.  Each user has multiple accounts running different algorithms for different asset classes.

 

Earnings (Loss) Per Common Share

The Company computes net earnings (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted net earnings per share (“EPS”) on the face of the income statement.

 

 

Basic EPS is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.

 

Variable Interest Entity

The Company follows the guidelines in FASB Codification of ASC 810 “Consolidation” which indicates "a legal entity that is deemed to be a business need not be evaluated by a reporting entity to determine if the legal entity is a Variable Interest Entity (“VIE")” unless any one of four conditions exist:

 

●

The reporting entity, its related parties, or both participated significantly in the design or redesign of the legal entity;

 

●

The legal entity is designed so that substantially all of its activities involve or are conducted on behalf of the reporting entity;

 

●

The reporting entity and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated;

 

●

The activities of the legal entity are primarily related to the securitizations or other forms of asset-backed financings or single

 

A VIE is an entity that either (a) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (b) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. If we determine that we have operating power and the obligation to absorb losses or receive benefits, we consolidate the VIE as the primary beneficiary, and if not, we do not consolidate. The Company has not identified any VIEs as of September 30, 2014.

 

Income Taxes

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. The Company follows the provisions of ASC 740-10, “Accounting for Uncertain Income Tax Positions.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable because we are a smaller reporting company.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer, Nitin Damodaran, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are not effective as of September 30, 2014 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure for the reason described below.

 

 

Because of our limited operations, we have a small number of employees which prohibits a segregation of duties. In addition, we lack a formal audit committee with a financial expert. As we grow and expand our operations, we will engage additional employees and experts as needed. However, there can be no assurance that our operations will expand.

 

Changes in Internal Control over Financial Reporting

 

Management regularly reviews our system of internal control over financial reporting and makes changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new and more efficient systems, consolidating activities, and migrating processes.

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

Item 1A. Risk Factors

 

Not required for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Between July 1, 2014 and September 30, 2014, the Company received cash of $2,511,482 from foreign investors under private placement subscription agreements for the purchase of its $0.001 par value common stock at a purchase price of $8.00 per share.  The offering was part of a larger funding effort which continued through May of 2014, at which time the Company received subscriptions for a total of $40,000,000 through the sale of 5,000,000 shares of its $0.001 par value common stock at a purchase price of $8.00 per share. As of September 30, 2014, the subscription documents were completed for all 5,000,000 shares. The Company has received $22,722,852 cash from the offering as of June 30, 2014 and issued the stock for that cash. Investors paid $4,266,824 as of September 30, 2014 that was received and recorded as subscription receivables because the Company has not yet issued the stock for that cash.

 

The shares of common stock in these offerings were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), Rule 506 of Regulation D promulgated under the Securities Act (“Regulation D”) and/or Regulation S promulgated under the Securities Act (“Regulation S”).  We made this determination based on the representations of each Purchaser which included, in pertinent part, that each such Purchaser was (a) an “accredited investor” within the meaning of Rule 501 of Regulation D, (b) a “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act or (c) not a “U.S. person” as that term is defined in Rule 902(k) of Regulation S and upon such further representations from each Purchaser that (i) such Purchaser is acquiring the securities for his, her or its own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act, (ii) the Purchaser agrees not to sell or otherwise transfer the purchased shares unless they are registered under the Securities Act and any applicable state securities laws, or an exemption or exemptions from such registration are available, (iii) the Purchaser has knowledge and experience in financial and business matters such that he, she or it is capable of evaluating the merits and risks of an investment in us, (iv) the Purchaser had access to all of our documents, records, and books pertaining to the investment and was provided the opportunity to ask questions and receive answers regarding the terms and conditions of the offering and to obtain any additional information which we possessed or were able to acquire without unreasonable effort and expense, and (v) the Purchaser has no need for the liquidity in its investment in us and could afford the complete loss of such investment. In addition, there was no general solicitation or advertising for securities issued in reliance upon Regulation D.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.		Description
31.1*		Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer and Principal Financial, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS*		XBRL Instance Document		Filed herewith
101.SCH*		XBRL Taxonomy Schema		Filed herewith
101.CAL*		XBRL Taxonomy Calculation Linkbase		Filed herewith
101.DEF*		XBRL Taxonomy Definition Linkbase		Filed herewith
101.LAB*		XBRL Taxonomy Label Linkbase		Filed herewith
101.PRE*		XBRL Taxonomy Presentation Linkbase		Filed herewith

 

* Filed herewith.

 

**In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.

 

 

SIGNATURES

 

Pursuant to 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.

 

Date: February 12, 2015

 

Clone Algo Inc.
/s/ Nitin Damodaran
Name: Nitin Damodaran
Chief Executive Officer and Chief Financial Officer
(Duly Authorized Officer, Principal Executive Officer and Principal Financial Officer)

  

 

 

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