Skkynet Cloud Systems Inc

SKKYNET CLOUD SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS

Skkynet Cloud Systems, Inc. (“Skkynet”, the “Company”), a Nevada Corporation headquartered in Toronto, Canada was formed on August 31, 2011. Skkynet operates it business through its wholly-owned subsidiaries Cogent Real-Time Systems, Inc. (Cogent)(Canada), 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.

In March 2012, we completed the acquisition of all of the issued and outstanding shares of common stock of Cogent from Sakura Software Inc. and Benford Consultancy Inc. in exchange for a total of thirty million (30,000,000) restricted shares of our common stock, as a result of which Cogent became our wholly-owned subsidiary. As part of the exchange transaction, we also issued 5,000 Series A Preferred share to Sakura Software and Benford Consultancy. Prior to the closing of the exchange transaction, we did not have any operating revenues and we had nineteen million (19,000,000) shares outstanding and $8,720 of net assets. This transaction was accounted for as a reverse merger and recapitalization. At the acquisition closing, Cogent’s business consisted primarily of providing connectivity and data acquisition to a wide variety of industrial and office hardware and software products, and then making that data available over a network using industry-standard protocols. Cogent currently markets its products and services primarily to manufacturers in industrial processes and financial services companies.

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 requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.

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) and Skkynet Inc (US). All material intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Cash deposits are insured up to US$250,000 in US banks and CDN$100,000 in Canadian banks. The concentration of the Company’s cash deposits at times may exceed the insured amount, leaving the Company exposed to a credit risk on it deposits.

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:

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.

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:

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. As of October 31, 2023 and 2022 the deferred revenue was $360,170 and $281,615, respectively.

Accounts Receivable

Accounts Receivable are carried at face value less any provisions for uncollectible accounts considered necessary. Accounts receivable include receivables from customers that have received software and support from the Company. Bad debt expense is a recognition of uncollectable receivables based on past years’ experience and management’s estimate of likely losses for the year. No allowance for bad debt was considered necessary for the years ended October 31, 2023 and October 31, 2022, respectively. However, the Company expensed $18,712 in bad debt for the year ending in 2023 compared to the recovery of $1,914 during the same period in 2022.

Advertising

Advertising costs are expensed as incurred. Advertising expenses for the years ended October 31, 2023 and 2022 were $425,972 and $479,041, respectively.

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 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.

Impairment of Long-lived Assets

The Company reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical-cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset. Fair value is estimated based upon either discounted cash flow analysis or estimated salvage value.

Basic and Diluted Net Loss Per Share

Basic and diluted net income per share calculations are calculated on the basis of the weighted average number of common shares outstanding during the year. They include the dilutive effect of common stock equivalents in years with net income. For the years ended October 31, 2023 and 20228,073,450 and 6,632,450 respectively, of potentially issuable shares of common stock from stock options have been included in the calculations.

Income Taxes

Income taxes are provided in accordance with Accounting Standards Codification (“ASC”), Topic 740 Accounting for Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Income taxes for subsidiaries Cogent Real-Time Systems are subject to the tax statutes in their country of domicile which is Canada.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with the fair value recognition provision of the Financial Accounting Standards Board(“FASB”) Accounting Standards Codification (“ASC”) No 718. The Company issues restricted stock to employees and consultants for their services. Cost of these transactions are measured at fair value of the equity instrument issued at the date of grant. These shares are considered fully vested and the fair market value is recognized as the expense in the period granted. The Company recognized consulting expense and a corresponding increase to the additional paid in capital related to the stock issued for services. For agreements requiring future services the consulting expense is to be recognized ratably over the requisite service period.

Related Parties

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.”

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments- Credit Losses (Topic 326)". The Change in this announcement requires immediate recognition of management’s estimates of current expected losses (CELC). Under the prior model, losses were recognized only as the incurred. The amendment was effective for smaller reporting Companies for the fiscal years beginning after December 15, 2022. The Company is reviewing the standard on its financial reporting based on the Company’s experience requiring prepayment for it services.

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 22023-07 “Improvements to Reportable Segment Disclosure (Topic 280)".The change in this announcement requires more detailed profit and loss reporting by business segments used by the Company to determine the allocation of assets. This Amendment is effective for fiscal years beginning after December 15, 2023 and interim periods within the fiscal years beginning after December 15, 2024. The Company is presently evaluating the pronouncement to determine if it will have an impact on the Company’s financial statements.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at October 31, 2023 and 2022:

Depreciation expense totaled $2,447 and $2,563 for the years ended October 31, 2023 and 2022, respectively.

NOTE 4 - INCOME TAXES

The Company follows Accounting Standards Codification 740, Accounting for Income Taxes. During 2009, there was a change in control of the Company.

Under section 382 of the Internal Revenue Code such a change in control negates much of the tax loss carry forward and deferred income tax. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes, and (b) net operating loss carry forwards. For federal income tax purposes, the Company uses the accrual basis of accounting, the same that is used for financial reporting purposes.

The Company’s deferred tax assets for the U.S. parent company and its US subsidiary consisted of the following as of October 31, 2023, and 2022:

The US companies had a net income of $294,562 and $163,772 for the years ended October 31, 2023 and 2022, respectively. As of October 31, 2023, the US Companies had a net operating loss carry forward of $2,008,102 which can be used to offset future taxable income. Beginning December 31, 2022, 80% of the qualified net operating loss can be carried forward and applied against future net income.

A reconciliation of income taxes at the federal statutory rate to amounts provided for the years ended October 31, 2023 and 2022 is as follows:

The US Companies, due to their losses, have not filed US Corporate tax returns and are subject to examination back to October 31, 2012.

The Company’s deferred tax assets for the Canadian subsidiary companies consisted of the following as of October 31, 2023, and 2022:

The Canadian Companies had net loss of $404,055 and $147,658 for the years ended October 31, 2023 and 2022, respectively. As of October 31, 2023, the Company had a net operating loss carry forward of $610,763 which can be used to offset future taxable income. The carry forwards will begin to expire in 2038, or twenty years after the loss is first incurred, if not used prior to that date.

A reconciliation of income taxes at the federal statutory rate to amounts provided for the years ended October 31, 2023 and 2022 is as follows:

The Canadian Companies have filed corporate tax returns through October 31, 2023 and returns since 2015 are open to examination.

During the years ended October 31, 2023 and 2022 Cogent received tax refunds of $29,897 and $38,743, respectively. The refunds are received under a scientific research and development program.

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 February 4, 2022, the Company granted 37,500 options to three directors and four Company personnel. . The Company calculated a fair value of the options of $11,267 using the Black Scholes option pricing model with computed volatility of 185.85%, risk-free interest rate of 1.80%, expected dividend yield 0%, stock price at measurement date of $0.32 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.

On March 14, 2022, the Company granted 3,750 options to three directors. The Company calculated a fair value of the options of $786 using the Black Scholes option pricing model with computed volatility of 185.85%, risk-free interest rate of 1.80%, expected dividend yield 0%, stock price at measurement date of $0.21 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.

On July 1, 2022, the Company granted 200,000 options to 2 consultants. The Company calculated a fair value of the options of $27,922 using the Black Scholes option pricing model with computed volatility of 188%, risk-free interest rate of 1%, expected dividend yield 0%, stock price at measurement date of $0.14 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.

On December 7, 2022 the Company granted 100,000 options to an officer, 7,500 to three directors and 130,000 options to 4 employees. The Company calculated a fair value of the options of $53,128 using the Black Scholes option pricing model with computed volatility of 192%, risk-free interest rate of 4.42%, expected dividend yield 0%, stock price at measurement date of $0.22 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.

On August 21, 2023, the Company granted 1,517,250 options to 13 employees, three directors and 5 officers. Of the options granted, 313,750 were granted for options cancelled, leaving a net increase of options granted for the year ended October 31, 2023 of 1,203,500. The Company calculated a fair value of the options of $271,063 using the Black Scholes option pricing model with computed volatility of 166.24%, risk-free interest rate of 4.42%, expected dividend yield 0%, stock price at measurement date of $0.18 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.

The Company has elected to amortize the options over the vesting period of the option as stock-based compensation. During the year ended October 31, 2023, the Company expensed $98,667 for options. The unrecognized future balance to be expensed over the term of the options is $293,326.

During the year ended October 31, 2022, five officers and directors exercised 1,567,700 options in exchange for 1,567,700 shares of common stock with an exercise value of $1,568.

The number of outstanding options as of year ended October 31, 2023 was 8,073,450

The following sets forth the options granted and outstanding as of October 31, 2023:

NOTE 6 - 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 license 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 payment have been made as of October 31, 2022.

During the year ended October 31, 2022, five officers and directors exercised 1,567,700 options for 1,567,700 shares of common stock with an exercise value of $1,568.

During the years ended October 31, 2023 and 2022 the Company recognized but did not pay dividends of $11,620 each year. As of the year ended October 31, 2023, the total amount of dividends due to the preferred shareholders was $95,865.

During the year ended October 31, 2023, the Company granted 300,000 options to three officers in lieu of payment of accrued salaries of $57,788.

During the year ended October 31, 2023 the Company granted two officers 280,000 options and three directors 22,500 options.

During the year ended October 31, 2023, Ms. Shizuka Thomas, wife of Mr. Andrew S. Thomas, was paid $40,035 for services as a Japanese business manager and translator.

As of October 31, 2023, and 2022 the Company had the following outstanding accrued liabilities due to related parties:

NOTE 7 - MAJOR CUSTOMERS

The Company sells to their end-user customers both directly and through resellers. Nine (9) resellers accounted for 50% of sales in fiscal 2023 and seven (7) resellers accounted for 51% of sales in fiscal 2022. 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. No reseller has exclusivity in their territory. In fiscal 2023, no end user customers were responsible for more than 10% of our revenues and thirty-one (31) end user customers were responsible for approximately 50% of gross revenue. In fiscal 2022, no end user customer was responsible for more than 10% of revenue and twenty-seven (27) end user customers were responsible for approximately 50% of gross revenue.

NOTE 8 - REVENUE BY PRODUCT LINES AND GEOGRAPHIC AREAS

The Company revenue by product line during the years ended October 31, 2023 and 2022 was as follows:

The Company sells its products on a worldwide basis. During the years ended October 31, 2023 and 2022 the Company’s revenue resulted in the following amounts geographically:

NOTE 9 - COMMITMENTS AND CONTINGENCIES

The Company leased 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 terminated on July 31, 2022 and was not renewed. The Company pays CDN $290 per month, on a month per month basis, for the use of an address at the location.

NOTE 10 - LOAN PAYABLE

On April 30, 2020, the Company’s subsidiary Cogent Systems issued a two year note for US$30,032 (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 note was repaid as of October 31, 2022.

On December 15, 2020, the Company’s subsidiary Cogent Systems issued a two year note for US$15,678 (CDN $20,000) 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. As of October 31, 2023, both notes balance due was zero.

NOTE 11 - EQUITY

The Company’s authorized shares of common stock is 70,000,000 with a par value of $0.001. as of October 31, 2023 the total shares outstanding were 53,143,822.

The Company’s authorized shares of preferred stock is 5,000,000 with a par value of $0.001. On March 31, 2012 the Company issued 5,000 shares of Series A preferred stock at $0.001 per share with a value of $5 as founders to two related parties. The preferred shares contain certain voting rights allowing the holders of the shares to elect a majority of the Board of Directors until December 31, 2016 at which time the rights expired.

On July 31, 2015, the Company authorized 500,000 shares of Series B preferred with a par value of $0.001 per share and an annual dividend of 6% of the stated value of the Company. As of October 31, 2023 the number of outstanding shares of Series B was 193,661 with accrued dividends of $95,865. The preferred shares may be convertible into common stock by dividing the state price of the preferred shares by the VWAP value of the common stock on July 31, 2015.

During year ended October 31, 2022, five officers and directors exercised 1,567,700 options for 1,567,700 shares of common stock with an exercise value of $1,568.

NOTE 12 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events to determine events occurring after October 31, 2023 through the filing of this report that would have a material impact on the Company’s financial results or require disclosure and have determined none exist.