ITEM 1 DESCRIPTION OF BUSINESS
SUMMARY OF CORPORATE HISTORY
Superclick, Inc. (“Superclick” or the “Company”) was founded on June 3, 1999 as a holding company with the primary objective of acquisitions.
Pursuant to a share purchase (the “Share Purchase Agreement”) agreement dated October 7, 2003, Superclick, Inc. completed an acquisition of Superclick Networks, Inc. The acquisition was accounted for as a recapitalization effected by a reverse merger, wherein Superclick Networks, Inc. is considered the acquirer for accounting and financial reporting purposes. The pre-merger assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized. The accumulated deficit of Superclick Networks, Inc. has been brought forward, and common stock and additional paid-in-capital of the combined company have been retroactively restated to give effect to the exchange rates as set forth in the merger agreement.
Superclick Networks, Inc. (“SNI”) was organized on August 24, 2000, in Montreal, Quebec, Canada. SNI is a software development company in the business of providing and installing broadband high speed Internet connection equipment in hotels on a worldwide basis, and 24/7/365 customer support at it’s Montreal-based call center.
On October 6, 2003, Superclick, Inc. amended its articles of incorporation by changing the name of the Company from Grand Prix Sports, Inc. to Superclick, Inc.
Pursuant to the Share Purchase Agreement, Superclick acquired 100% of the issued and outstanding shares of SNI from its shareholders. In consideration for acquiring all of SNI’s shares Superclick issued to SNI’s shareholders 14,025,800 shares of Superclick, Inc.’s common stock. As a result of the acquisition, the former shareholders of SNI held immediately after the acquisition 71.7% of the issued and outstanding shares of the Subsidiary’s common stock. The remaining 28.3% was held by Superclick, Inc.’s shareholders. In addition, and pursuant to the Share Purchase Agreement, Superclick changed its year-end to October 31 to coincide with the year-end of SNI. In October, the Company also retroactively affected a 1 for 6 common stock split and retroactively assigned $0.0006 par value to common stock where no value had been previously stated. All share and per share amounts shown in these financial statements reflect the stock split for all periods presented.
The Company emerged from the development stage during the year ended October 31, 2005. The primary objective is to continue to globally expand the installed room base and to provide 24/7/365 customer support. At present, the Company has installed its IP management products in approximately 120,000 rooms.
In order to manage existing operations we will rely on the working capital generated by the Company’s operations as well as to seek additional debt or equity financing. However, there can be no assurance that any such additional financing will be available on terms, in amounts, or at timing acceptable to us, if available at all.
BUSINESS
Superclick provides IP-based data management solutions via its SIMS™ (“Superclick Internet Management System”) supported by a 24/7/365 customer support center to the hospitality market. SIMS™ is Linux-based software, typically referred to as Visitor-Based Networking (VBN) software, which manages the provisioning, and administration of Internet access over private and local area networks (“LANS”).
We market and install SIMS™ as part of a turnkey hardware and software deployment for our customers and also provide guest service support through our 24/7/365 helpdesk. SIMS™ is typically deployed with hardware, which provides High Speed Internet Access (HSIA) via Ethernet, DSL, WiFi or in combination. Our SIMS™ platform has been successfully deployed in approximately 575 hotels throughout North America, Europe and the Caribbean.
Our customers include the Fairmont Raffles Hotels, Four Seasons Hotels Limited, Commonwealth Hospitality Group, InterContinental Hotels Group, Mandarin Oriental Hospitality Group, Candlewood Suites, Staybridge Suites, Comfort Inn, Crowne Plaza, Doubletree, Fairfield Inn, Four Points by Sheraton, Hampton Inn & Suites, Hilton, Holiday Inn, Hampton Inn, JW Marriott, Novotel, Quality Suites, Radisson, Residence Inn, Sheraton, Westin and Wyndham.
Business Model
Our current business model is to provide our customers with a turnkey installation of a SIMS™-based HSIA system. Customers purchase the hardware, software and installation services outright, retaining control of how the service is marketed to guests and other users, as well as any associated revenue charged. This component of our business model provides us with one-time revenue.
We also provide customers with 24/7/365 guest support services through toll-free access to our Montreal-based helpdesk. This service carries a flat fee on a per-room, per-year basis. As customers are added to our client-list, the customer support revenue grows accordingly. This provides the Company with a second source of revenue, which is recurring.
In addition, we continue to develop a suite of “IP (Internet Protocol) services” with revenue generating applications that allow customers in select markets with the ability to leverage their Internet infrastructure to increase revenues and increase their potential return on investment. We are able to create revenue sharing arrangements with hotels based on these applications, creating yet another potential revenue stream to its business model.
COMPETITION
Most of our business is awarded by hoteliers and property management companies through competitive procurements. The Internet management services industry is highly competitive and many of our competitors are larger and have greater financial resources than we do. We obtain much of our business on the basis of proposals to new and existing customers. Competition usually centers on successful past performance, technical capability, management, and price.
We have many competitors that contend for the same customers. They are competent, experienced and range in size from several hundred of thousands of dollars in annual revenue to several million of dollars in annual revenue. Many of our competitors also have significantly greater resources than we do. Approximately 50% of our revenue is based on one time installation type sales and we continue to look at ways to improve our recurring revenue model through service and customer support. We have achieved a level of trust with each of our clients that is comfortable, but not secure. We recognize that our niche areas are desirable to other professional service firms, and we continuously seek to improve within these niches rather than expanding to new areas.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We believe that our intellectual property is important to our success, and we try to protect it as described above and through the maintenance of trade secrets. We feel that name brand recognition will make our products and services stand out and become the recognized name in our industry. However, the steps we take to protect our intellectual property may be inadequate. Unauthorized parties may try to disclose, obtain or use our proprietary information, which could harm our business. Others may claim that we have violated their proprietary rights or infringed on their intellectual property. Any such claims could subject us to significant liability for damages and invalidate our proprietary rights. Any efforts to protect or defend our rights could be time-consuming and costly. Other parties may also independently develop similar or competing technology.
RISK FACTORS
Interested persons should carefully consider the risks described below in evaluating the Company. Additional risks and uncertainties not presently known to us, or that we currently consider immaterial, may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock would likely decline.
We may be subject to indemnification obligations to our customers related to patent infringement suits brought by separate vendors in our industry against some of our customers.
We have been made aware that several companies providing public Internet access have been named in a lawsuit brought by a party claiming patent infringement. We have not been named in this action, although some companies that have been named are our customers. We have provided indemnification in our service contracts to several of these customers. We believe that it is too early to determine whether we have any exposure, but we have retained and consulted legal counsel to maintain a vigilant and proactive posture. We are actively discussing with our counsel ways that we can limit our potential liability. We are not defendants to this suit, nor have we retained litigation counsel on the matter. We will continue to monitor the situation. If we are named in the suit, it will require us to incur legal expenses, which will have a negative impact on our profitability. This in turn, may have a negative impact on our stock price.
Risks Related To Our Business:
Our revenue and operating results may fluctuate significantly from quarter to quarter, and fluctuations in operating results could cause its stock price to decline.
Our revenue and operating results may vary significantly from quarter-to-quarter due to a number of factors. In future quarters, operating results may be below the expectations of public market analysis or investors, and the price of its common stock may decline. Factors that could cause quarterly fluctuations include:
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the beginning and ending of significant contracts during a quarter;
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the number, size and scope of the installation contracts;
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maintenance contracts can create variations in revenue levels and may cause fluctuations in quarterly results;
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fluctuations in demand for services resulting from budget cuts, project delays, cyclical downturns or similar events, including the recent economic downturn;
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the possibility and subsequent duration of conflicts involving the United States military could cause delays in program operations related to our hospitality clients by reducing travel;
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clients' decisions to divert resources to other projects, which may limit clients' resources that would otherwise be allocated to solutions that we provide;
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recessionary pressures in the United States may reduce the level of travel for business and leisure, which may, in turn limit our clients’ resources that would otherwise be allocated to solutions that we provide;
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reductions in the prices of services offered by competitors; and
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because a significant portion of expenses are relatively fixed, a variation in the number of installations or the timing of the initiation or the completion of client contracts may cause significant variations in operating results from quarter-to-quarter and could result in losses.
Any inability to adequately retain or protect our employees, customer relationships and proprietary technology could harm our ability to compete.
Our future success and ability to compete depends in part upon our employees, customer relationships, proprietary technology and trademarks, which we attempt to protect with a combination of patent, copyright, trademark and trade secret claims, as well as with our confidentiality procedures and contractual provisions. These legal protections afford only limited protection and are time-consuming and expensive to obtain and/or maintain. Further, despite our efforts, we may be unable to prevent third parties from soliciting our employees or customers or infringing upon or misappropriating our intellectual property.
Our employees, customer relationships and intellectual property may not be adequate to provide us with a competitive advantage or to prevent competitors from entering the markets for our products and services. Additionally, our competitors could independently develop non-infringing technologies that are competitive with, and equivalent or superior to, our technology. Monitoring infringement and/or misappropriation of intellectual property can be difficult, and there is no guarantee that we would detect any infringement or misappropriation of our proprietary rights.
Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations. The departure of certain key personnel could harm the financial condition of the Company.
Sandro Natale, one of our founders and our current CEO, is intimately involved in our business and has day-to-day relationships with critical customers. Mr Natale is also critical to our product development.
We may not be able to afford additional staff to supplement these key personnel. Competition for highly skilled business, product development, technical and other personnel is intense, and there can be no assurance that we will be successful in recruiting new personnel or in retaining our existing personnel. A failure on our part to retain the services of key personnel could have a material adverse effect on our operating results and financial condition. We do not maintain key man life insurance on any of our employees.
A third party has asserted that we and our customers are infringing on its intellectual property. Whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, which could harm our business.
There is considerable patent and other intellectual property development activity in the networking field and public Internet access industry. Our success depends, in part, upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, own or claim to own intellectual property relating to our industry and may have substantially larger and broader patent portfolios than we do. We expect that networking and public Internet access-related intellectual property, including ours, will be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products and breadth of services in different industry segments expands and overlaps.
We have been named in a complaint by a competitor alleging that we and our customers are infringing on certain of its patents.
We believe we have meritorious defenses to these allegations. Our counsel has contacted counsel for the other party to discuss these allegations. Responding to and defending against claims may cause us to incur significant expense and divert the time and efforts of our management and employees. Successful assertion of such claims could require that we pay substantial damages or ongoing royalty payments, prevent us from selling our products and services, damage our reputation, or require that we comply with other unfavorable terms, any of which could materially harm our business. In addition, we may decide to pay substantial settlement costs in connection with any claim or litigation, whether or not successfully asserted.
Litigation with respect to intellectual property rights in the networking and Internet access industries is not uncommon and can often involve patent holding companies who have little or no product revenue and against whom our own patents may provide little or no deterrence. As our customers increasingly demand that we indemnify them broadly from all damages and losses resulting from intellectual property litigation against them, we may also be obligated to indemnify our customers or business partners in connection with any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be required to enter into royalty, license or other agreements. We may not be able to obtain these agreements on terms acceptable to us or at all. We may have to incur substantial cost in re-designing our products and services to avoid infringement claims. In addition, disputes regarding our intellectual property rights may dissuade potential customers from purchasing such products and services. As such, third-party claims with respect to intellectual property may reduce sales of our products and services, and may have a material and adverse effect on our business.
The market in which we compete is intensely competitive and actions by competitors could render our services less competitive, causing revenue and income to decline.
The ability to compete depends on a number of factors outside of our control, including:
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the prices at which others offer competitive systems, including aggressive price competition and discounting on individual contracts, which may become increasingly prevalent due to worsening economic conditions;
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the ability of competitors to undertake more extensive marketing campaigns;
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the extent, if any, to which competitors develop proprietary offerings that improve their ability to compete;
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the ability of our customers to supply the solutions themselves; and
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the extent of competitors' responsiveness to customer needs.
We may not be able to compete effectively on these or other factors. If we are unable to compete effectively, market position, and therefore revenue and profitability, would decline.
The uncertain environment in the lodging industry and the economy will continue to impact our financial results and growth.
The present economic slowdown and the uncertainty over its breadth, depth and duration have left it unclear whether the lodging industry’s growth environment during the past few years will continue. Many economists have reported that the U.S. economy is in a recession. Recent substantial increases in transportation fuel costs, increases in air and ground travel costs and decreases in airline capacity that could stem from higher fuel costs, could also reduce demand for our customers’ hotel rooms which could result in lower demand for our solutions. Accordingly, our financial results and growth could be harmed if the economic slowdown continues for a significant period or becomes worse, or it transportation costs remain at current high levels for an extended period or increase further.
International business exposes our company to various foreign requirements, which could interfere with business or operations and could result in increased expenses and declining profitability.
International operations create special risks, including:
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statutory requirements, which may impair our ability to expatriate foreign profits to help fund domestic operations;
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greater difficulties in managing and supplying turnkey installation at foreign locations;
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cultural differences that adversely affect utilization;
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unexpected changes in trading policies, legal and regulatory requirements, tariffs and other foreign taxes;
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greater difficulties in enforcing agreements with clients and collecting accounts receivable;
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the tax system of foreign countries, which may tax our foreign income at higher rates than in the United States and may subject foreign earnings to withholding requirements or tariffs, exchange controls or other restrictions;
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legal requirements and regulations of various foreign countries, which may make compliance by us with such laws and regulations difficult and may make enforcement of our intellectual property rights more difficult; and
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fluctuations in currency exchange rates, which may affect demand for our products and services and may adversely affect the profitability in United States dollars of services provided by us in foreign markets where payment for its products and services is made in the local currency; and general economic conditions in the foreign countries into which we sell, which could have an adverse impact on its earnings from operations in those countries.
If we and/or our product offerings fail to perform effectively, our reputation, and therefore our competitive position and financial performance, could be harmed.
Many of our new installation opportunities come from existing clients or from referrals by existing clients. Therefore, growth is dependent on our reputation and on client satisfaction. The failure to provide solutions or perform services that meet a client's expectations may damage our reputation and harm its ability to attract new business. Damage to our reputation arising from client dissatisfaction could therefore harm financial performance.
The inability to protect intellectual property could harm our competitive position and financial performance.
Despite efforts to protect proprietary rights from unauthorized use or disclosure, parties, including former employees or consultants, may attempt to disclose, obtain or use our solutions or technologies. The steps we have taken may not prevent misappropriation of solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect proprietary rights as fully as in the United States. Unauthorized disclosure of proprietary information could make our solutions and technologies available to others and harm our competitive position.
There are risks associated with our planned growth.
We have limited assets available to rely upon for adjusting to business variations and for growing new businesses. Should we look for new funding to assist in the acquisition of other profitable businesses, it is uncertain whether such funds will be available. If we are to grow and expand our operations, we will need to raise significant amounts of additional capital. There can be no assurance that we will be successful in raising a sufficient amount of additional capital, or if we are successful, that we will be able to raise capital on reasonable terms. If we do raise additional capital, our existing shareholders may incur substantial and immediate dilution.
The sales cycle for our products is lengthy and unpredictable.
The sales cycle between an initial customer contact and execution of a contract or license agreement with a customer, or purchase of our products, can vary widely. Initially, we must educate our customers about the potential applications and benefits association with our products. In addition, changes in our customers’ budgets, or the priority they assign to control network administration and development could also affect the sales cycle.
Due to our foreign client installations in Canada, the Caribbean and Europe, we are exposed to transaction adjustments with respect to foreign currency.
Our functional currency is the United States dollar. However, our operating functional currency is the Canadian Dollar. Under United States dollar functional currency, the financial statements of foreign subsidiaries are re-measured from the recording currency to the United States dollar. The resulting re-measurement adjustment has been recorded as separate component of stockholder’s equity. We believe that operating under United States dollar functional currency, combined with transacting business in countries with traditionally stable currencies mitigates the effect of any near-term foreign currency transaction adjustments on our financial position, results of operations and cash flows.
We have not engaged in foreign currency hedging transactions nor do we have any derivative financial instruments. However, going forward, we will assess the need to enter into hedging transactions to limit its risk due to fluctuations in exchange rates.
Risks Relating To Our Common Stock:
There is a limited market for our common stock.
Our common stock is traded in the Over-the-Counter Bulletin Board market. This may cause delays in the timing of transactions, reductions in the number and quality of securities analysts' reporting on us, and the extent of our coverage in the media. Trading in our common stock has been sporadic, and at present, there is a limited market for it. There can be no assurance that a stronger market will develop. Even if such a market does develop, it may not be sustained.
Shareholders may suffer dilution upon the exercise of outstanding options.
As of October 31, 2009, we had exercisable stock options outstanding to purchase 13,852,356 shares of common stock. To the extent such options are exercised there will be further dilution. In addition, in the event that any future financing should be in the form of securities convertible into, or exchangeable for, equity securities, investors may experience additional dilution upon the conversion or exchange of such securities.
Future sales of our common stock by existing shareholders under Rule 144 could decrease the trading price of our common stock.
As of October 31, 2009, a total of 10,299,344 shares of our outstanding common stock were "restricted securities" and could be sold in the public markets only in compliance with Rule 144 adopted under the Securities Act of 1933 or other applicable exemptions from registration. As of February 15, 2008, Rule 144 was amended to provide that a person who is not affiliated with the issuer, holding restricted securities for a period of six months may thereafter sell those securities, if the issuer is current with its reporting requirements. Persons who are not affiliated with the issuer and who have held their restricted securities for at least one year are not subject to any limitations. Possible or actual sales of our common stock by present shareholders under Rule 144 could have a depressive effect on the price of our common stock.
Our common stock is subject to "penny stock" rules.
Our common stock is classified as a penny stock by the Securities and Exchange Commission. This classification severely and adversely affects the market liquidity for our common stock. The Commission has adopted Rule 15g-9, which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must (i) obtain financial information and investment experience objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form, sets forth (i) the basis on which the broker or dealer made the suitability determination and (ii) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stocks in public offerings and secondary trading and about the commissions payable to the broker-dealer and registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
ITEM 2
ITEM 2 PROPERTIES
Our research and development activities and administrative offices are located in Montreal, Quebec, Canada. Superclick, Inc. does not own any real property. The following information presents certain information about our leased properties:
ITEM
LEGAL PROCEEDINGS
Subsequent to year end the Company was named as a defendant by Nomadix, Inc. in a complaint for patent infringement of certain U.S. patents. The matter has just been brought forth and is early in its process and it is not possible to reasonably determine the outcome of this complaint. The Company has been monitoring this situation closely and believes it has meritorious defenses to the claims. Accordingly, it is not possible, to assess whether or not the Company needs to reserve for a potential settlement.
ITEM
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the OTC Bulletin Board under the symbol "SPCK.OB". The following table lists the high and low closing price for our common stock as quoted on the OTC Bulletin Board during each quarter within the last two fiscal years.
These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
On December 24, 2009, the closing price was $0.12 for our stock.
Holders
Excluding equity held through CEDE, there are approximately one thousand one hundred ninety-five (1,195) holders of record of common equity as of December 14,
Dividends
We have not declared any dividends on our common stock during the last three fiscal years and we do not expect to declare dividends in the foreseeable future since we intend to utilize our earnings, if any, to finance our future growth, including possible acquisitions.
Transfer Agent
The Transfer Agent and Registrar for our common stock is First American Stock Transfer. Its address is 706 East Bell Road, Suite 202, Phoenix, AZ, 85022 and its telephone number at that location is 602-485-1346.
Equity Compensation Plans
The 2004 Incentive Stock Option Plan
On April 8, 2004, the Board of Directors of the Company adopted the 2004 Incentive Stock Option Plan. This Plan is a plan for key Employees (including officers and employee directors) and Consultants of the Company and its Affiliates and is intended to advance the best interests of the Company, its Affiliates, and its stockholders by providing those persons who have substantial responsibility for the management and growth of the Company and its Affiliates with additional incentives and an opportunity to obtain or increase their proprietary interest in the Company, thereby encouraging them to continue in the employ of the Company or any of its Affiliates.
The total number of shares of Stock set aside for Awards may be granted under the Plan is 2,000,000 shares. The Company may issue each of the following under this Plan: Incentive Option, Nonqualified Option, Stock Appreciation Right, Restricted Stock Award or Performance Stock Award The Plan was effective April 9, 2004 (the "Effective Date"), provided that within one year of the Effective Date, the Plan shall have been approved by at least a majority vote of stockholders. No Incentive Option, Nonqualified Option, Stock Appreciation Right, Restricted Stock Award or Performance Stock Award shall be granted pursuant to the Plan ten years after the Effective Date.
During the year ended October 31, 2005, the Board of Directors authorized an increase in the shares allotted under the plan to 3,500,000 shares.
During the year ended October 31, 2006, the Board of Directors authorized an increase in the shares allotted under the Plan to 30,000,000 shares. Also, during fiscal year 2006, 111,667 options were canceled due to employee terminations, 376,250 options that were out-of-the-money at $0.50 and $0.60 were exchanged for new options at $0.05 to purchase 15,523,750 shares and no options were exercised. The balance of options outstanding at the end of the year was 16,732,148. The Company granted 15,900,000 fully vested options to employees on October 30, 2006 and valued the options utilizing the Black Scholes Option Pricing Model with the following inputs: Risk-free interest rate 4.67%, Volatility 37% (here we used the standard deviation of closing share prices from November 1, 2002 through October 30, 2006, or 4 years), duration of 4 years, strike price of $.05, which yielded a per share fair market value of $.0179. The Company recognized $285,078 of compensation expense related to the 15,900,000 grants and $83,551 for previously granted options bringing the total recognized option related compensation expense for the fiscal year ended October 31, 2006 to $368,629. The Company has recorded compensation expense of $767,017 through October 31, 2006.
During the year ended October 31, 2007, 490,000 options were exercised resulting in $24,500 to the company and the issuance of 490,000 shares of common stock. An additional 230,000 options were exercised on October 31, 2007 resulting in $11,500 received with shares issued in four tranches of 57,500 per month subsequent to the fiscal year ended October 31, 2007. Also, during the year, the Company canceled 1,549,792 options (874,792 options due to employee terminations and 675,000 voluntary cancellations from upper management).
During the year ended October 31, 2008, no options were canceled or granted. 740,000 shares of common stock were issued pursuant to option exercises, including 1) 230,000 shares issued pursuant to prior year option exercises, and; 2) 510,000 shares issued pursuant to options exercised during 2008 which resulted in $25,500 to the company. No other option activity occurred.
During the year ended October 31, 2009, 100,000 options were canceled and none were granted or exercised.
The following table summarizes the Company's stock option activity for the year ended October 31, 2009:
2004 Superclick, Inc. Non-Employee Director's Stock Incentive Plan
On December 31, 2003, the Board of Directors of the Company adopted the 2004 Superclick, Inc. Non-Employee Director's Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of Options, Restricted Stock, and/or Deferred Stock to an Awardee. The total number of shares of Common Stock which may be awarded under the Plan is 1,500,000. If any awarded shares are forfeited, they become available for future issuance. An annual aggregate limit of 300,000 shares (including Options, Restricted Stock, and Deferred Stock) is set for any individual Director.
The Stock Incentive Plan has a duration of ten years commencing on January 1, 2004. Awardees are defined as director to whom an award is made. An eligible director is any person who on the date of grant is a member of the Board of Directors of the Company and is not an employee of the Company or of any Subsidiary. Stock Options are non-qualified right-to-buy Options for the purchase of Common Stock of the Company. The term of each Option shall be ten years from the Date of Grant. The Option Price shall be the Fair Market Value of Superclick, Inc. Common Stock on the date the Option is granted. Under no circumstances shall any Option vest in less than one year from the date of grant. Shares purchased upon exercise of an Option must be paid for in full at the time of exercise either in cash or with currently owned shares. Neither the Committee on Directors and Governance nor the Board of Directors may re-price any Option that is less than the option exercise price. Restricted Stock is Common Stock of the Company restricted as to sale in such fashion as the Committee on Directors and Governance shall determine. Prior to the lifting of the restrictions, the Awardee will be entitled to receive dividends from and to vote the shares of Restricted Stock.
Common Stock
Private Placement and Warrant Activity
In August of 2005, we issued $2,250,000 of convertible debentures with 965,997 warrants attached. These warrants were canceled pursuant to a settlement agreement dated January 23, 2009 whereby the Company made a $726,079 settlement payment in full satisfaction of our outstanding debentures.
Stock Issued for Debt Repayment
During the year ended October 31, 2008, the Company issued 1,996,585 shares of common stock, including 1,846,182 shares in exchange for $200,135 of debenture principle and 150,403 shares of in exchange for $16,342 of accrued interest related to our debentures.
During the year ended October 31, 2009, the Company did not issue any stock in repayment of debt.
Stock issued for Services
During the year ended October 31, 2008, the Company issued 384,122 shares of common stock in exchange for director services. Of the 384,122 shares, 1) 141,656 shares were issued for services performed in fiscal year 2007 which expense of $19,832 was recognized in our fiscal year ending October 31, 2007, and; 2) 242,466 shares were issued for services valued at $34,645. The Company has accrued $18,000 to common stock payable for director services performed. We anticipate the issuance of common stock for these services during our first fiscal quarter of 2009.
During the year ended October 31, 2009, the Company issued 75,000 shares of common stock in exchange for director services. The shares were issued for services performed in fiscal year 2008 which expense of $9,000 was recognized in our fiscal year ending October 31, 2008. Also, the Company issued 300,000 irrevocable restricted shares of common stock in exchange for investor relations services valued at fair market value of $0.18 per share or $54,000.
Stock Options
On October 30, 2006 the Board of Directors increased the employee stock option pool established by the employee stock option plan to 30,000,000 from 3,500,000.
During the year ended October 31, 2008, no options were canceled or granted. 740,000 shares of common stock were issued pursuant to option exercises, including 1) 230,000 shares issued pursuant to prior year option exercises, and; 2) 510,000 shares issued pursuant to options exercised during 2008 which resulted in $25,500 to the company. No other option activity occurred.
During the year ended October 31, 2009, 100,000 options were canceled, and none were granted or exercised.
Warrants
At October 31, 2009 the Company had no warrants outstanding. The 965,997 warrants related to the convertible debentures which entitled the holder thereof the right to purchase one common share for each warrant were canceled as a result of the debenture settlement. No other warrant activity occurred during 2009.
ITEM
SELECTED FINANCIAL DATA
Smaller reporting companies:
A registrant that qualifies as a smaller reporting company, as defined by §229.10(f)(1), is not required to provide the information required by this Item.
ITEM
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain financial information and statements regarding our operations and financial prospects of a forward-looking nature. Although these statements accurately reflect management's current understanding and beliefs, we caution you that certain important factors may affect our actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to be made in this prospectus. For this purpose, any statements contained in this prospectus which are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as, "may", "intend", "expect", "believe", "anticipate", "could", "estimate", "plan" or "continue" or the negative variations of those words or comparable terminology are intended to identify forward-looking statements. There can be no assurance of any kind that such forward-looking information and statements will be reflective in any way of our actual future operations and/or financial results, and any of such information and statements should not be relied upon either in whole or in part in connection with any decision to invest in the shares.
The following discussion should be read in conjunction with our Consolidated Financial Statements and the notes thereto and the other information included in this Annual Report on Form 10-K.
Overview
We derive the majority of our revenue from the installation of our Superclick Internet Access Management System (SIMS™) and from revenue generated from our call center. Support fees are tied to the number of rooms serviced in a client’s property. Due to our reliance on installations, variations in revenue levels may cause fluctuations in quarterly results. Factors such as a client's commitment to providing internet access to their guests, general economic and industry conditions and other issues could affect our revenue and earnings.
In addition to our North American operations, we have installations and contracts in Europe and the Caribbean. With the exception of Canadian operations, the majority of transactions in other regions are denominated using the United States dollar. However, some of our transactions are in Canadian dollars; therefore, we are exposed to currency fluctuation risks.
We continue to develop our product offering and IP management solutions, listening carefully to our customers to determine development paths that most directly meet their needs. Superclick emerged from the development stage during the fiscal year ended October 31, 2005.
Critical Accounting Policies
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 amounts of assets, liabilities, revenues and expenses reported in the accompanying financial statements and related footnotes. We base our estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors. Actual results may differ from these estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions. In consultation with our Board of Directors, we have identified six accounting principles that we believe are key to an understanding of our financial statements. These important accounting policies require management's most difficult, subjective judgments.
Revenue Recognition
Revenue from the sale of Internet high speed connection equipment and installation is recognized when the earning process is complete and the risk and rewards of ownership have transferred to the customer, which is considered to have occurred after the delivery and installation of the equipment to the customer.
Maintenance and support revenue is recognized ratably over the maintenance term. First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Estimated fair values of ongoing maintenance and support obligations are based on separate sales of renewals to other customers or upon renewal rates quoted in the contracts. For such arrangements with multiple obligations, we allocate revenue to each component of the arrangement based on the estimated fair value of the undelivered elements. Fair value of services, such as consulting or training, is based upon separate sales of these services. At times, we may enter into multiple-customer contracts in which we allocate revenue based on the number of specified users at each customer, and recognizes revenue upon customer acceptance and satisfying the other applicable conditions of the above described accounting policy.
Accounts receivable
Accounts receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. We evaluate receivables outstanding greater than ninety days on a regular basis for potential reserve.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined on a first-in, first-out method or market. Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, such as discontinued products, and records necessary provisions to reduce such inventories to net realizable value.
Income taxes
Provisions for income taxes are based on taxes payable or refundable for the current period and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
When accounting for Uncertainty in Income Taxes, first, the tax position is evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company underwent a change of control for income tax purposes on October 8, 2003 according to Section 381 of the Internal Revenue Code. The Company's utilization of U.S. Federal net operating losses will be limited in accordance to Section 381 rules. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Foreign Currency Translation
The financial statements of our Canadian subsidiary are measured using the Canadian dollar as the functional currency. Assets, liabilities and equity accounts of the company are translated at exchange rates as of the balance sheet date or historical acquisition date, depending on the nature of the account. Revenues and expenses are translated at average rates of exchange in effect during the period. The resulting cumulative translation adjustments have been recorded as a separate component of stockholders' equity. The financial statements are presented in United States of America dollars.
Results of Operations
Twelve Months Ended October 31, 2009 and 2008
Revenue
During the year ended October 31, 2009, revenue increased $926,219 or 13.7% to $7,689,086 compared to $6,762,867 for the year ended October 31, 2008. The favorable sales variances were incurred in both revenue streams. Compared to the previous year, net service revenue which includes installation revenue increased 4.4% to $3,924,024 and services revenue which includes guest support services increased 25.3% to $3,765,062. The Superclick solution continues to receive strong validation from new clients and existing clients. Along with year over year increases in net sales, the Company was able to secure support contracts not only with new customers but successfully renew services with existing clients.
Gross Profit
Gross profit for the year ended October 31, 2009 increased by $629,130 or 18.8% to $3,973,858 compared to $3,344,728 for the year ended October 31, 2008. Gross margin for the current year was 51.7% compared to 49.5% the previous year. Gross profit outperformed sales growth as revenue increased 13.7% but the gross profit increased 18.8%. The Company continues to deploy and service new and existing installations in a manner that is both effective and efficient resulting in continued strength in margins. All deployments are supervised by our own team of engineers, minimizing the need for outsourced services which has proven to be efficient. The Company owns and operates its own call center, which is located in Montreal, hence retaining full control over margins.
Selling, General and Administrative
For the years ended October 31, 2009 and 2008, selling, general and administrative expenses were $1,868,656 and $1,258,848, respectively. The $609,808 or 48.4% increase in SG&A was primarily due to losses resulting from a decrease in the value of the US dollar relative to the Canadian dollar ($518,349) and increases in other various costs.
Research and Development
For the years ended October 31, 2009 and 2008, research and development expense was $217,211 and $183,408, respectively. The $33,803 or 18.4% year-over-year increase was mainly due to increases in human resources to further solidify our solutions.
Income from operations
Income from operations for the year ended October 31, 2009 was $1,845,665 or 24.0% of net revenue compared to $1,840,843 or 27.2% of net revenue for the year ended October 31, 2008, a $4,822 or 0.3% increase.
Other Income and Expense
Interest income for the years ended October 31, 2009 and 2008 was $584 and $12,323, respectively.
Interest expense for the years ended October 31, 2009 and 2008 was $31,689 and $162,623, respectively. Interest expense represents interest incurred on the debenture and on a note payable to one of the former shareholders of Hotel Net LLC. The decrease in interest expense is due to only one month of debenture interest in 2009 compared to 12 months in 2008. All debt has been paid as of October 31, 2009.
During the years ended October 31, 2009 and 2008, the Company recognized a gain on the forgiveness of debt of $89,297 and $8,846, respectively. $79,970 of the current year’s gain was the result of a negotiated decrease in repayment amount for the debenture in exchange for the settlement of the balance. The remainder of the gain was due to a reduction in the amounts agreed to be paid on three Hotel Net notes in exchange for early settlement.
During the years ended October 31, 2009 and 2008, we recognized a derivative gain of $0 and $17,963, respectively, related to the warrants which were issued in connection with the convertible debentures. The warrants were canceled when the debenture was paid in January 2009.
Total other income and expense for the year ended October 31, 2009 was income of $58,192 compared to expense of $123,491 the previous year.
Net Income
The net income before income taxes for the year ended October 31, 2009 was $1,903,857 or 24.8% of net revenue representing an improvement of $186,505 or 10.9% compared to $1,717,352 or 25.4% of net revenue during the year ended October 31, 2008. The Company recorded $611,732 in income tax expense during the year ended October 31, 2009 compared to $157,175 in 2008. As a result, net income for the year ended October 31, 2009 was $1,292,125 or 16.8% of revenue and $268,052 or 17.2% lower compared net income of $1,560,177, or 23.1% of revenue for 2008.
Net Income (Loss) Per Common Share
For the years ended October 31, 2009, the net income per common share basic was $0.03 and $0.02 fully diluted, compared to $0.04 basic and $0.02 fully diluted for the year ended October 31, 2008. The basic and fully diluted weighted average shares for the current fiscal year end was 45,134,205 and 58,986,561, respectively. The basic and fully diluted weighted average shares for the year ended October 31, 2008 was 43,795,492 and 74,879,672, respectively.
FINANCIAL CONDITION
From inception to October 31, 2009, we have incurred an accumulated deficit of $4,595,719. This loss has been incurred through a combination of professional fees and expenses supporting our plans to acquire synergistic businesses as well as past operating losses. However, in the current year we have experienced organic growth resulting in a larger customer base. Net revenue has grown 13.7% producing a net profit margin after taxes of 16.8%.
From inception through 2007, we financed our operations primarily through debt and equity financing. However, during the past two fiscal years we have repaid all prior debts and financed our operations through operating earnings. During the year ended October 31, 2009 we had a net increase in cash of $1,410,538. Total cash resources as of October 31, 2009 was $2,192,058 compared with $781,520 at October 31, 2008.
Our available working capital and capital requirements will depend upon numerous factors, including the deployment and sale of Internet access management solutions, the timing and cost of expanding into new markets, the cost of developing competitive technologies, changes in our existing collaborative and licensing relationships, the resources that we devote to developing new products and commercializing capabilities, the status of our competitors, our ability to establish collaborative arrangements with other organizations, and our ability to attract and retain key employees.
The Company's Liquidity Plan
The Company generates cash flow from operations. Net income for the year ended October 31, 2009 was $1,292,125 compared to $1,560,177 for the year ended October 31, 2008 and the operations provided $2,009,223 of cash compared to $771,728 for the year ended October 31, 2008.
During the year ended October 31, 2009 and 2008, the Company financed operations solely with cash generated through sales and the collection of its accounts receivable.
The Hotel Net LLC notes matured on January 1, 2007. Four of the five notes were canceled and replaced with new notes that did not accrue interest and mature December 31, 2009. The remaining note was renegotiated down in exchange for being paid off. During 2009, the Company paid $203,317 in satisfaction of all Hotel Net note holders. All notes have been paid in full as at October 31, 2009.
During the year ended October 31, 2008, we issued 1,996,585 shares of Common Stock in exchange for $216,477 of debt principle and accrued interest of our convertible debentures.
During the year ended October 31, 2008, we issued 384,122 shares of Common Stock to our directors in exchange for services performed, including 1) 141,656 which was expensed in 2007 and payable at October 31, 2007 valued at $19,832, and; 2) 242,466 for 2008 services valued at $34,645.
On January 23, 2009, the Company made a $726,079 settlement payment in full satisfaction of all outstanding debentures. This payment was in addition to other principle payments of $41,588 made during the quarter. The holder of our debentures accepted 90% of the outstanding principle and interest in full satisfaction resulting in a gain to the Company of $79,970.
Our need to raise additional equity or debt financing and our ability to generate cash flow from operations will depend on its future performance and our ability to successfully implement business and growth strategies. Our performance will also be affected by prevailing economic conditions. Many of these factors are beyond our control. If future cash flows and capital resources are insufficient to meet our commitments, we may be forced to reduce or delay activities and capital expenditures or obtain additional equity capital. In the event that we are unable to do so, we may be left without sufficient liquidity.
Off-Balance Sheet Arrangements
At October 31, 2009 we had no obligations that would qualify to be disclosed as off-balance sheet arrangements.
Contractual Obligations
Operating lease obligations: Operating lease obligations consist of office rental commitment for our offices in Montréal, Québec, Canada. On October 1, 2009 we renewed a lease for office space in Montréal. The lease extends through September 30, 2014 at a rate of $4,695 per month.
At October 31, 2009, our contractual obligations under this lease were as follows:
Item 7A
Item 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Exchange Rates
A majority of our revenue, expense, and capital purchasing activities are transacted in and exposed to the Canadian dollar and changes in the currency exchange rate. We do not use derivative financial instruments to manage currency exchange rate risk. Realized gains and losses resulting from the settlement of accounts in the foreign currency are recorded to operating income during the period incurred with changes due to conversion of the financial statements of our Canadian subsidiary are recorded to shareholder’s equity. During the year ended October 31, 2009 and 2008, the Company realized a loss of $240,483 and a gain of $277,866, respectively or a net gain over the past two years of $37,383 related to the settlement of accounts in foreign currency. Based on the historical realized gain, and favorable exchange rate trends, management does not intend to initiate a hedging program.
Inflation
Although our operations are influenced by general economic conditions, we do not believe inflation had a material effect on the results of operations during the year ended October 31, 2009. However, there can be no assurance our business will not be affected by inflation in the future.
ITEM
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is submitted as a separate section of this Form 10-K. See CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
ITEM
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no reportable events of the type described in Item 304(a)(1)(iv) of Regulation S-B.
ITEM 9A