SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

  

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2020

 

OR

 

☐     TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ____________.

 

Commission File Number 000-54747

 

SKKYNET CLOUD SYSTEMS INC.

(Exact name of registrant as specified in its charter)

 

Nevada		45-3757848
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

2233 Argentia Road Suite 306. Mississauga, Ontario, Canada L5N 2X7

(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: ☒     No: ☐

 

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: ☐

 

Indicate by check mark whether the Company is a large accelerated filer, an accelerated file, non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer	☐	Accelerated filed	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐     No ☒

 

As September 14, 2020, there were 51,576,122 shares of Common Stock of the issuer outstanding.

 

 

			Page
PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements		4
	Consolidated Balance Sheets as of July 31, 2020 (Unaudited) and October 31, 2019		4
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended July 31, 2020 and 2019 (Unaudited)		5
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended July 31and 2019 (Unaudited)		6
	Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2020 and 2019 (Unaudited)		7
	Notes to Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		15
Item 4.	Controls and Procedures		15
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings		17
Item 1A.	Risk Factors		17
Item 2.	Sales of Equity Securities and Use of Proceeds		17
Item 3.	Defaults upon Senior Securities		17
Item 4.	Mine Safety Information		17
Item 5.	Other Information		17
Item 6.	Exhibits		18
Signatures			19

 

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 establish a global market, 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 to subsequently 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

 

		July 31, 2020				October 31, 2019
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	796,869			$	700,410
Accounts receivable			138,621				146,277
Prepaid expenses			4,247				10,690
Total current assets			939,737				857,377
Property and equipment, net of accumulated depreciation of $81,846 and $81,653 respectively			12,705				8,469
Right of use lease asset			47,359				--
Total Assets		$	999,801			$	865,846
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	56,129			$	96,979
Accrued liabilities – related party			--				76,821
Deferred revenue			128,418				111,732
Current portion of operating lease liability			20,980				--
Total current liabilities			205,527				285,532
Long Term Liability
Loan payable			29,842				--
Operating lease liability- net of current portion			26,379				--
Total liabilities			261,748				285,532
Commitment and contingencies			--				--
Stockholders’ Equity:
Preferred stock: $0.001 par value, 5,000,000 shares authorized, 5,000 shares issued and outstanding, respectively			5				5
Series B Preferred convertible stock: $.0.001 par value, 500,000 shares authorized, 193,661 issued and outstanding, respectively			193,661				193,661
Common stock: $0.001 par value, 70,000,000 shares authorized, 51,576,122 shares issued and outstanding, respectively			51,577				51,577
Additional paid-in capital			6,354,529				6,192,476
Accumulative other comprehensive income			53,768				65,472
Accumulated deficit			(5,915,487	)			(5,922,877	)
Total stockholders’ equity			738,053				580,314
Total Liabilities and Stockholders’ Equity		$	999,801			$	865,846

 

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 AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		Three Months Ended  July 31,								Nine Months Ended  July 31,
		2020				2019				2020				2019
Revenue		$	316,918			$	337,587			$	1,155,443			$	973,400
Cost of goods			--				275				1,214				275
Gross profit			316,918				337,312				1,154,229				973,125
Operating Expenses:
General and administrative expenses			371,006				378,841				1,201,131				1,410,493
Depreciation			604				120				1,831				359
Income (loss) from operations			(54,692	)			(41,649	)			(48,733	)			(437,727	)
Other Income (expense):
Loss on settlement of liabilities			--				--				--				(11,233	)
Other income (expense)			29,671				--				29,671				(2,099	)
Currency exchange			(35,763	)			(17,229	)			10,539				1,603
Total other income (expense)			(6,092	)			(17,229	)			40,210				(11,729	)
Income (loss) before taxes			(60,784	)			(58,878	)			(8,423	)			(449,456	)
Income tax recovery			--				30.399				15,913				30,399
Income (loss) from continuing operations			(60,784	)			(28,479	)			7,390				(419,057	)
Loss from discontinued operations							(16,261	)			--				(58,867	)
Net income (loss)			(60,784	)			(44,740	)			7,390				(477,924	)
Preferred dividends			(2,905	)			(2,905	)			(8,715	)			(8,715	)
Net income (loss) to common shareholders			(63,689	)			(47,645	)			(1,325	)			(468,639	)
Foreign currency translation adjustment			29,186				23,128				(11,704	)			53,949
Comprehensive income (loss)		$	(34,503	)		$	(24,517	)		$	(13,029	)		$	(432,690	)
Net income (loss) per common share from continuing operations-basic		$	0.00			$	(0.00	)		$	0.00			$	(0.01	)
Net income (loss) per common share from discontinued operations-basic			--			$	(0.00	)			--			$	(0.00	)
Net income (loss) per common share from continuing operations-diluted		$	0.00			$	(0.00	)		$	0.00			$	(0.01	)
Net income (loss) per common share from discontinued operations- diluted			--			$	(0.00	)			--			$	(0.00	)
Net income (loss) per share to common shareholders		$	0.00			$	(0.01	)		$	0.00			$	(0.01	)
Weighted average common shares outstanding -basic			51,576,122				51,488,022				51,576,122				51,404,689
Weighted average common shares outstanding - diluted			59,493,772				51,488,022				59,493,772				51,414,689

  

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

 

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SKKYNET CLOUD SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED APRIL 30, 2020 AND 2019

(Unaudited)

 

																																		Accumulated
																		Series B Preferred								Additional								Other				Total
		Common Stock								Preferred Stock								Convertible Stock								Paid-In				Accumulated				Comprehensive				Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Loss (Income)				Equity
Balance at October 31, 2018			51,363,022			$	51,364				5,000			$	5				193,661			$	193,661			$	5,832,725			$	(5,347,023	)		$	(74,643	)		$	656,089
Stock option expense			--				--				--				--				--				--				59,844				--				--				59,844
Change due to currency translation			--				--				--				--				--				--				--				--				(8,746	)			(8,746	)
Net loss			--				--				--				--				--				--				--				(154,312	)			--				(154,312	)
Balance at January 31, 2019			51,363,022				51,364				5,000				5				193,661				193,661				5,892,569				(5,501,335	)			(83,389	)			552,875
Common stock issued for options			125,000				125																				4,950												5,075
Stock option expense			--				--				--				--				--				--				215,476				--								215,476
Stock options issued for accrued liabilities- related parties																											55,933												55,933
Change due to currency translation			--				--				---				--				--				--				--				--				39,567				39,567
Net loss			--				--				--				--				--				--				--				(278,872	)			--				(278,872	)
Balance at April 30, 2019			51,488,022				51,489				5,000				5				193,661				193,661				6,168,928				(5,780,207	)			(43,822	)			590,054
Stock option expenses			--				--				--				--				--				--				43,095				--				--				43,095
Change due to currency translation			--				--				--				--				--				--				--				--				23,128				23,128
Net loss			--				--				--				--				--				---				--				(44,740	)			--				(44,740	)
Balance at July 31, 2019			51,488,022			$	51,489				5,000			$	5				193,661			$	193,661			$	6,212,023			$	(5,824,947	)		$	(20,694	)		$	611,537
Balance at October 31, 2019			51,576,122			$	51,577				5,000			$	5				193,661			$	193,661			$	6,192,476			$	(5,922,877	)		$	65,472			$	580,314
Stock option expense			--				---				--				--				--				--				67,285				--				--				67,285
Change due to currency translation			--				--				--				--				--				--				--				--				(5,649	)			(5,649	)
Net loss		----					--				---				--				--				--				--				(8,481	)			--				(8,481	)
Balance at January 31, 2020			51,576,122				51,577				5,000				5				193,661				193,661				6,259,761				(5,931,358	)			59,823				633,469
Stock option expense			--				--				--				--				--				--				47,384				--				--				47,384
Change due to currency translation			--				--				--				--				--				--				--				--				(35,241	)			(35,241	)
Net income			--				--				--				--				--				--				--				76,655				--				76,655
Balance at April 30, 2020			51,576,122				51,577				5,000				5				193,661				193,661			$	6,307,145			$	(5,854,703	)		$	24,582			$	722,267
Stock option expense			--				--				--				--				--				--				47,384				--				--				47,384
Change due to currency translation			--				--				--				--				--				--				--				--				29,186				29,186
Net income			--				--				--				--				--				--				--				(60,784	)			--				(60,784	)
Balance at July 31, 2020			51,576,122			$	51,577				5,000			$	5				193,661			$	193,661			$	6,354,529			$	(5,915,487	)		$	53,768			$	738,053

   

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)

 

		For the Nine Months Ended July 31,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	7,390			$	(477,924	)
Loss from discontinued operations			--				58,867
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation			1,831				359
Option based compensation			162,053				318,415
Loss on settlement of accrued liabilities							11,233
Non-cash lease expense			15,510				--
Changes in operating assets and liabilities:
Accounts receivable			7,656				37,998
Accounts payable and accrued expenses			(40,850	)			27,396
Accrued liabilities – related parties			(76,821	)			(15,269	)
Prepaid expenses and other assets			6,443				(13,094	)
Operating lease liability			(15,510	)			--
Deferred income			16,686				53,008
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			84,388				989
NET CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loan			28,717				--
Proceeds from the exercise of options			--				5,075
NET CASH PROVIDED BY FINANCING ACTIVITIES			28,717				5,075
DISCONTINUED OPERATIONS
Net cash provided by operating activities			--				(27,014	)
Net cash used in discontinued operations			--				(27,014	)
Effect of exchange rate changes on cash and cash equivalents			(16,646	)			51,089
Net increase (decrease) in cash and cash equivalents			96,459				30,139
Cash and cash equivalents, beginning of period			700,410				670,827
Cash and cash equivalents, end of period		$	796,869			$	700,966
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid		$	--			$	--
Income taxes paid		$	--			$	--
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capitalization of right to use asset and operating liability		$	62,869			$	--
Conversion of accrued compensation to equity- related parties		$	--			$	44,700

      

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

 

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SKKYNET CLOUD SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

Skkynet Cloud Systems, Inc. (“Skkynet” or “the Company”) is a Nevada corporation formed on August 31, 2011 and headquartered in Toronto, Canada. Skkynet operates its business through its wholly-owned subsidiaries Cogent Real-Time Systems, Inc. (“Cogent”), Skkynet Corp. (Canada) and Skkynet, Inc. (USA). Skkynet was formed primarily for the purpose of taking the existing business lines of Cogent and its current and future customers and integrating these businesses with cloud based systems. We also intend to expand the areas of business activity to which the kinds of products and services we provide are applied.

 

The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s October 31, 2019 Annual Report on form 10-K filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the consolidated financial statements for the most recent fiscal year end October 31, 2019 as reported on Form 10-K, have been omitted.

 

On August 1, 2019, the Company disposed of its wholly owned subsidiary Skkynet Japan which represented a strategic shift in the Company’s operations. The assets and liabilities have been accounted for as discontinued operations in the Company’s consolidated balance sheets for the periods presented. The operating results related to this subsidiary have been included in discontinued operations in the Company’s consolidated statements of operations and comprehensive loss for all periods presented.

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the periods. The extent to which the COVID-19 pandemic may directly or indirectly impact our business, financial condition, and results of operations is highly uncertain and subject to change. We considered the potential impact of the COVID-19 pandemic on our estimates and assumptions and there was not a material impact to our consolidated financial statements as of and for the nine months ended July 31, 2020. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term.

 

Principles of Consolidation

 

The consolidated financial statements of the Company include the Company and its wholly-owned subsidiaries Cogent Real Time Systems, Inc (Canada), Skkynet Corp. (Canada), Skkynet Inc (US) and the discontinued operations of Skynet Japan (formally NiC Corporation) (Japan) that was sold on August 1, 2019. All material intercompany balances and transactions have been eliminated.

 

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Revenue recognition

 

In April 2016, the FASB issued ASU 2016–10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments are intended to render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606.

 

ASC Topic 606 prescribes a new five-step model entities should follow in order to recognize revenue in accordance with the core principle. These five steps are:

 

	1.	Identify the contract(s) with a customer.
	2	Identify the performance obligations in the contract.
	3	Determine the transaction price.
	4.	Allocate the transaction price to the performance obligations in the contract.
	5.	Recognize revenue when (or as) the entity satisfied the performance obligations.

 

Effective November 1, 2018, the Company implemented the transition using the modified retrospective method of transition. Under this method the determination date of open contracts which could affect any adjustments was November 1, 2018. The open contracts at the time period are the unfulfilled portions of the maintenance contracts. Based on the cut off treatment of the recognition of revenue on the open contracts being determined at the end of the previous period and being no changes in the open obligation requirements, the Company has determined that there are no adjustments in the value of the revenue recognized from these contracts.

 

The Company has four revenue streams, each of which the revenue is recognized in accordance to the five steps included in Topic 606. The revenue streams are:

 

	1.	Sale of software direct to the end customer
	2.	Sale of software through distributors and channel partners
	3.	Maintenance support services
	4.	Cloud services

 

Revenue for the sale of software both directly to end users and through the distributor and channel partners is recognized upon delivery of the software and code required for the customer to install the software.

 

Maintenance support services are recognized as revenue on a straight-line basis over the service period of the arrangement. Revenue from cloud services is recognized over time (typically, on a monthly basis) as service is provided. Payments received in advance of services being rendered are recorded as deferred revenue and recognized to revenue when earned.

 

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Property and equipment

 

Property and equipment are carried at the cost of acquisition and depreciated over the estimated useful lives of the assets. Costs associated with repair and maintenance is expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency of our property and equipment are capitalized and depreciated over the remaining life of the related asset. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets.

 

Foreign currency translation

 

The Company’s reporting currency is in U.S. dollars. The functional currency of the Company’s foreign operations is their local currency. The financial statements of the Company’s subsidiaries in Canada and Japan are translated to U.S. dollars in accordance with ASC 830-30, “Foreign Currency Translation”. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date while the income statement accounts are translated using the average exchange rate for the year. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)". The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees are required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company has adopted the new accounting pronouncement and recorded a right to use asset and operating lease liability of $68,584 as of November 1, 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The adoption of the policy did not have a cumulative impact on retained earnings.

 

NOTE 3- REVENUE RECOGNITION

 

As part of the revenue recognition reporting, the Company reports revenue by product line and geographic area. During the nine-month periods ended July 31, 2020 and 2019 the revenue by product line is as follows:

 

Category		Percentage				2020				Percentage				2019
Product sales			69	%			797,967				71	%			689,220
Support			30	%			346,505				29	%			284,180
Cloud & Other			1	%			10,971				--				--
Total			100	%			1,155,443				100	%			973,400

 

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The Company sells its products on a worldwide basis. During the nine-month periods ended July 31, 2020 and 2019 the Company’s geographic concentration of revenue is as follows:

 

Area		Percentage				2020				Percentage				2019
North America			46	%			417,279				40	%			391,389
Europe			35	%			398,546				42	%			406,095
Asia			13	%			152,730				8	%			79,803
South America			4	%			50,188				3	%			34,023
Middle East- Africa/Other			12	%			136,700				7	%			62,090
Total			100	%			1,155,443				100	%			973,400

 

NOTE 4- RELATED PARTY TRANSACTIONS

 

Sakura Software, a corporation owned by our CEO and Chairman of the Board of Directors, Andrew S. Thomas, and Benford Consultancy, a corporation owned by our COO and a member of our Board of Directors, Paul Benford, own, respectively, 72.34% and 27.66% of the issued and outstanding shares of Real Innovations International LLC, (“Real Innovations”) a corporation organized under the laws of Nevis, West Indies. In March 2012, Cogent, our operating subsidiary, assigned all of its intellectual property including the pending patent applications for its real-time data transmission and display technology (the “IP”) to Real Innovations under an assignment of intellectual property agreement (the “Assignment Agreement”). In return for the assignment Real Innovations required a one-time payment of $30,000 to Cogent. Cogent elected to forgo the payment allowing Real Innovations to offset future expenses against the payment. There is no ongoing royalty payment or other form of compensation from Real Innovations to Cogent under the Assignment Agreement.

 

Real Innovations, in turn, entered into a master intellectual property license agreement (the “License Agreement”) with Cogent for all of the same IP. Under the License Agreement Real Innovations granted a royalty-free license in perpetuity to Cogent for the use and exploitation of the IP in return for which Cogent agreed to: (i) pay all operating expenses of Real Innovations incurred in connection with the continued prosecution of pending patent applications and others that may be prepared; (ii) prosecute all claims for infringement of the IP; (iii) defend and indemnify Real Innovations from and against all claims of infringement of the IP asserted by third parties against Real Innovations, Cogent or our Company; (iv) purchase liability insurance in favor of Real Innovations for this purpose. Under the termination provision of the licenses agreement, there is no unilateral right of termination. Termination may occur by mutual consent of the parities, the Company ceasing doing business, by breach by the Company or by the Company failing to maintain the license and the support to prosecute and protect the license under applicable laws.

 

Under the License Agreement, Messrs. Andrew S. Thomas and Paul Benford will benefit indirectly from their indirect ownership of all of the shares of Real Innovations to the extent of any such payments or other undertakings by Cogent on behalf of Real Innovations, but the exact amount of these benefits cannot be determined at this time. No payments have been made as of July 31, 2020.

 

As of July 31, 2020, and October 31, 2019, the Company had the following outstanding accrued liabilities due to related parties:

 

As of		July 31, 2020				October 31, 2019
Accrued liabilities		$	---			$	55,378
Accrued commissions		$	---				21,443
Total accrued liabilities		$	---			$	76,821

 

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NOTE 5 – OPTIONS

 

The Company, under its 2012 Stock Option Plan, issues options to various officers, directors, and consultants. The options vest in equal annual installments over a five-year period with the first 20% vested when the options are granted. All of the options are exercisable at a purchase price based on the last trading price of the Company’s common stock.

 

On December 12, 2019, the Company issued 336,250 options: 120,000 to two officers, 11,250 to three independent directors and 205,000 to six employees and consultants. The options are exercisable into common stock of the Company at $0.59 per share. The Company calculated a fair value of the options of $132,673 using the Black Scholes option pricing model with computed volatility of 207%, risk-free interest rate of 2%, expected dividend yield 0%, stock price at measurement date of $0.39 and the expected term of ten years. The options are expensed over a five-year period with 20% upon issuance and 20% for the first and each subsequent year.

 

During the nine month period ended July 31, 2020, the Company recognized $162,053 of option expense. The unrecognized future balance to be expensed over the term of the options is $507,367.

 

The following sets forth the options granted and outstanding as of July 31, 2020:

 

		Options				Weighted Average Exercise price				Weighted Average Remaining Contract Life				Granted Options Exercisable				Intrinsic value
Outstanding at October 31, 2019			7,581,400				0.13				7.19				5,470,540			$	1,827,117
Granted			336,250				0.56				9.75				--				--
Exercised			--				--				--				--				--
Forfeited/Expired by termination			--				--				--				--				-
Outstanding at July 31, 2020			7,917,650				0.15				6.31				5,838,550			$	3,627,845

 

NOTE 6 - LEASE

 

The Company leases office space located at 2233 Argentia Road Suite 306 Mississauga, Ontario Canada L5N 2X7. During May 2017, the Company signed a 5-year lease for the Company’s office being effective on August 1, 2017 through July 31, 2022. The lease is for approximately 2,210 square feet of office space with a base monthly rental cost including common area charges of $2,369.

 

The yearly rental obligations including the lease agreements are as follows:

 

Fiscal Year
2020 (three months remaining)		$	7,108
2021			28,428
2022			21,321
Total lease payments			56,857
Less present value discount			(9,498	)
			47,359
Less operating lease short term			(20,980	)
Operating lease liability, long term		$	26,379

 

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Under the new standards the lease has been determined to be a right to use operating lease and is recognized based on the present value of the lease payments over the lease term at the commencement date which upon adoption of ASC 842 was determined to be $62,869 which is presented in the consolidated balance sheet as an asset labeled “right to use lease asset” offset by a liability labeled “operating lease liability”. The amount was determined as the net present value of the lease over a 30-month period using an 8% interest rate as the incremental borrowing cost. During the nine months ended July 31, 2020, amortization of the right of use lease was $15,510 and the liability was reduced by $15,510.

 

NOTE 7- DISCONTINUED OPERATIONS

 

On August 1, 2019, the Company disposed its wholly owned subsidiary Skkynet Japan by entering into a share purchase agreement with the former owners. The following table presents the breakdown of the results of operations related to the discontinued operations for the three and nine months ended July 31, 2019:

  

		Three Months				Nine Months
		2019				2019
Revenue included in discontinued operations		$	41,277			$	106,661
Operating costs and expenses included in discontinued operations
Cost of goods sold			5,913				16,227
General and administrative cost			51,625				149,301
Net loss from Discontinued operations			(16,261	)			(58,867	)
Net loss per share of discontinued operations basic & diluted		$	(0.00	)		$	(0.00	)

 

NOTE 8 – MAJOR CUSTOMERS

 

The Company sells to their end-user customers both directly and through resellers. Two resellers accounted for 35% of sales (19% and 16% individually) in the three-month period ended July 31, 2020 and two resellers accounted for 33% of sales in the same period in 2019. Four resellers accounted for 46% of sales in the nine-month period ended July 31, 2020 and four resellers accounted for 49% of sales in the same period in 2019. In the three-month period ended July 31, 2020, no end user customers were responsible for more than 10% of revenue. In the same period in 2019 no user customers were responsible for more than 10% of revenue. In the nine-month period ended July 31, 2020, no end user customers were responsible for more than 10% of our revenues. In the same period in 2019, no end user customers were responsible for more than 10% of our sales. The Company maintains all the information on their end user customers, and should a reseller discontinue operations, the Company can sell directly to the end user.

 

NOTE 9-LOAN PAYABLE

 

On April 30, 2020, the Company’s subsidiary Cogent Systems issued a two year note for US$28,717 (CDN $40,000) under the Canadian Emergency Business Account (CEBA). The CEBA provides interest free loans to small businesses to help cover operating costs during a period when their revenues may have been reduced due to the impact of COVID-19. The loan is subject to zero interest and 25% of the amount will be forgiven if 75% of the loan amount is repaid on or before December 31, 2022. The Company has the option to extend the term of the loan for another 3 years subject to an annual interest of 5% on any balance remaining

 

NOTE 10 – SUBSEQUENT EVENT

 

The Company has evaluated subsequent events to determine events occurring after July 31, 2020 through September 14, 2020 that would have a material impact on the Company’s financial results or require disclosure and have determined none exist other than those noted above in this footnote.

       

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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

 

Skkynet is a Nevada corporation headquartered in Mississauga, Canada. Skkynet operates three different lines of business through its wholly-owned subsidiaries Cogent Real-Time Systems, Inc. (“Cogent”), Skkynet, Inc. (“Skkynet (USA)”), and Skkynet Corp. (“Skkynet (Canada. Skkynet was established to enhance Cogent’s existing business lines through the integration of Cloud-based systems, and to deliver a Software-as-a-Service (“SaaS”) product targeting the Industrial Internet of Things (“IoT”) market, now referred to by the terms “Industry 4.0” and “Industrial Internet Consortium”.

 

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, when requested by a client, our web based assets, our clients and their customers (to the extent relevant) are given 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.

 

The results of operations reflect the adjustments of the three and nine months periods in 2019 for discontinued operations. Discontinued operations are not part of the results of operations in this section.

 

The occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations. A pandemic typically results in social distancing, travel bans, and quarantine. This may limit access to our, customers, management, support staff and professional advisors. As the Company’s operations, delivery of software and support has been virtual for years with delivery through the internet, we do not anticipate a significant impact on our operations or financial condition, except an initial reduction for the sale for our software.

 

RESULTS OF OPERATIONS

 

For the three and nine month periods ended July 31, 2020, revenue was $316,918 and $1,155,443 compared to $337,587 and $973,400 for the same period in 2019. Revenue increased for the nine month period ended July 31, 2020 over the same period in 2019 by 18.7%. The increase in revenue for the nine month period ended July 31, 2020 is attributed to higher sales by Cogent. The Company has recently increased its investment in sales and marketing which has contributed to the increase in Cogent’s sales.

 

General and administrative expense was $371,006 and $1,201,131 for the three and nine month periods ended July 31, 2020 compared to $378,841 and $1,410,493 for the same period in 2019. The decrease in general and administrative expenses for the three and nine-month periods ended July 31, 2020 resulted from lower option expenses in 2020 over 2019 due to as well as reduced travel and conventions presenting the software.

 

For the three and nine month periods ended July 31, 2020, the Company reported an operating losses of $54,692 and $48,733 compared to operating losses from continuing operations of $41,694 and $427,727 for the same periods in 2019. The change in operating loss during the three- and nine-month periods ended July 31, 2019 was due to reduced expenses in 2020 compared to 2019.

 

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Other income and expense for the three and nine-month periods ended July 31, 2020, includes other expense of $6,092 and other income of $40,210 compared to other expense of $17,229 and $11,729 for the same periods in 2019. The amount in both periods were due primarily to the effect of currency exchange offset by other income of $29,671 in 2020.

 

Net loss of $60,784 and net income of $7,390 was reported for the three and nine month periods ended July 31, 2020, compared to a net loss from continuing operations of $28,479 and a loss from discontinued operations of $16,261 for the three month period and a net loss from continuing operations of $419,057 and a loss from discontinued operations of $58,867 in 2019 for the nine month period. The net income for the nine month periods in 2020 is attributed to higher sales in 2020 compared to the same period in 2019

 

The Company reported comprehensive loss of $33,916, and $13,029 for the three and nine month periods ended July 31, 2020 compared to a comprehensive loss of $24,517 and $432,690 for the same periods in 2019. The comprehensive loss is an adjustment to net loss with accrued preferred stock dividends and foreign currency translation adjustments along with taxes taken into account.

  

LIQUIDITY AND CAPITAL RESOURCES

 

At July 31, 2020, Skkynet had current assets of $939,737 and current liabilities of $205,527, resulting in working capital of $734,210. Accumulated deficit, as of July 31, 2020, was $5,915,487 with total shareholders’ equity of $738,053.

 

Net cash provided by operating activities for the nine month period ended July 31, 2020, was $84,388 compared to net cash used in operating activities of $989 for the same period in 2019.

 

The increase in cash provided by operating activities for the nine month period ended July 31, 2020 over the same period in 2019 was primarily due to income of $7,390 for the nine months ended July 31, 2020 compared to a net loss of $477,924 for the same period in 2019.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no 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.

 

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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.

  

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of July 31, 2020 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework- 2013. Based on its evaluation, our management concluded that there are material weaknesses in our internal control over financial reporting. We lack full time personnel in accounting and financial staff to sufficiently monitor and process financial transactions in an efficient and timely manner. Our history of losses has severely limited our budget to hire and train enough accounting and financial personnel needed to adequately provide this function. Consequently, we lacked sufficient technical expertise, reporting standards and written policies and procedures along with a lack of a formal review process which includes multiple layers of review. A material weakness is a deficiency, or a combination of control deficiencies, in internal 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.

 

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

 

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

 

The occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations. A pandemic typically results in social distancing, travel bans, and quarantine. This may limit access to our, customers, management, support staff and professional advisors. As the Company’s operations, delivery of software and support has been virtual for years with delivery through the internet, we do not anticipate a significant impact on our operations or financial condition, except an initial reduction for the sale for our software.

 

ITEM 2: SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

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 of the Registrant pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 31.2		Certification of Principal Financial Officer of the Registrant pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1		Certification of Principal Executive Officer of the Registrant pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 32.2		Certification of Principal Financial Officer of the Registrant pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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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.

 

 

	SKKYNET CLOUD SYSTEMS INC.
Date: September 14, 2020	By:	/s/ Andrew Thomas
		Andrew Thomas,
		Chief Executive Officer
		(Duly Authorized, Principal Executive Officer)
	By:	/s/ Lowell Holden
		Lowell Holden,
		Chief Financial Officer
		(Duly Authorized Principal Financial Officer)

   

1 Skkynet Cloud Systems, Inc. Reports 01/24/2013 - 10-K 02/11/2014 - 10-K 02/09/2015 - 10-K 02/16/2016 - 10-K 02/14/2017 - 10-K 02/13/2018 - 10-K 02/13/2020 - 10-K 02/09/2021 - 10-K 03/18/2013 - 10-Q 06/04/2013 - 10-Q 09/06/2013 - 10-Q 03/07/2014 - 10-Q 06/10/2014 - 10-Q 09/10/2014 - 10-Q 03/20/2015 - 10-Q 06/15/2015 - 10-Q 09/14/2015 - 10-Q 03/16/2016 - 10-Q 06/06/2016 - 10-Q 09/13/2016 - 10-Q 03/14/2017 - 10-Q 06/14/2017 - 10-Q 09/14/2017 - 10-Q 03/15/2018 - 10-Q 06/14/2018 - 10-Q 09/18/2018 - 10-Q 03/23/2020 - 10-Q 06/10/2020 - 10-Q 09/14/2020 - 10-Q 03/08/2021 - 10-Q 06/14/2021 - 10-Q 09/13/2021 - 10-Q