PART I.  FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

B-SCADA, INC.

BALANCE SHEETS

See the accompanying notes to financial statements.

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B-SCADA, INC.

STATEMENTS OF OPERATIONS [UNAUDITED]

See the accompanying notes to financial statements.

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B-SCADA, INC.

STATEMENTS OF CASH FLOWS [UNAUDITED]

See the accompanying notes to financial statements.

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B-SCADA, INC.

NOTES TO FINANCIAL STATEMENTS [UNAUDITED]

JULY 31, 2014

(1)  Nature of Business and Basis of Presentation

B-Scada, Inc. (“B-Scada”, the “Company”, “we” or “us”), a Delaware corporation, was originally formed under the name Firefly Learning, Inc. in May 2001. In October, 2005, pursuant to an exchange agreement, we acquired all of the issued and outstanding shares of capital stock of Mobiform Software, Ltd. (“Mobiform Canada”), a Canadian corporation, in exchange for 14,299,593 shares of our common stock and changed our name to Mobiform Software, Inc.  Effective September 14, 2010, Mobiform Canada was dissolved.  On October 19, 2012, we changed our name to B-Scada, Inc.

B-Scada is in the business of developing software products for the visualization and monitoring of data in heavy industry. Our HMI (Human Machine Interface) software and SCADA (Supervisory Control and Data Acquisition) products are utilized in manufacturing, power and utilities, petro chemical, emissions monitoring, building automation and other fields of business.  B-Scada also licenses portions of its technology for use in the products of smaller software firms and Fortune 500 companies. Our products are marketed and sold globally and offered through a sales channel of system integrators and resellers.

(2)  Summary of Significant Accounting Policies

Our other accounting policies are set forth in Note 2 to our audited financial statements included in our October 31, 2013 Form 10K.

Unaudited Interim Statements - The accompanying unaudited interim financial statements as of July 31, 2014, and for the nine months ended July 31, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted for interim financial statement presentation and in accordance with the instructions to Form 10-Q.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation.  In the opinion of management, the financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of July 31, 2014 and the results of operations for the three and nine months ended July 31, 2014 and 2013 and cash flows for the nine months ended July 31, 2014 and 2013.  The results of operations for the nine months ended July 31, 2014 are not necessarily indicative of the results to be expected for the full year.

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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents - We consider all highly liquid investments, with a maturity of three months or less when purchased, to be cash equivalents.

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B-SCADA, INC.

NOTES TO FINANCIAL STATEMENTS [UNAUDITED]

JULY 31, 2014

(2)  Summary of Significant Accounting Policies (continued)

Revenue Recognition - Our revenues are recognized in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 985-605 “Revenue Recognition” for the software industry.  Revenue from the sale of software licenses is recognized when standardized software modules are delivered to and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectability is probable.  Revenue from software maintenance contracts and Application Service Provider (“ASP”) services are recognized ratably over the lives of the contracts.  Revenue from professional services is recognized when the service is provided.

We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements).  When vendor-specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements.  VSOE of fair value is established by the price charged when that element is sold separately.  For maintenance and support, VSOE of fair value is established by renewal rates, when they are sold separately.  For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.

Reclassification - Certain fiscal 2013 amounts in the statement of operations have been reclassified to conform to fiscal 2014 presentation.

Subsequent Events - The Company evaluated subsequent events, which are events or transactions that occurred after July 31, 2014 through the date of the issuance of the accompanying financial statements.

(3)  New Authoritative Accounting Guidance

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  The amendments in the ASU will be applied using one of two retrospective methods. The effective date will be the first quarter of our fiscal year ended October 31, 2018. We have not determined the potential effects on our financial statements.

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying financial statements.

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B-SCADA, INC.

NOTES TO FINANCIAL STATEMENTS [UNAUDITED]

JULY 31, 2014

(4)  Property and Equipment

Property and equipment consists of the following:

(5)  Intangible Assets

The intangible asset consists of the following:

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B-SCADA, INC.

NOTES TO FINANCIAL STATEMENTS [UNAUDITED]

JULY 31, 2014

(6)  Mortgage Payable

In February 2014, we purchased a new office facility and incurred a mortgage in the amount of $127,500 payable to the seller of the property.  The balance is payable over 7 years in monthly payments of $1,802 which include interest at 5% per annum.  The outstanding mortgage balance at July 31, 2014 is $122,385.  

Future maturities of long-term debt as of July 31, 2014 are as follows:

(7)  Stockholders’ Equity

We are authorized to issue 100,000,000 shares of common stock, par value $0.0001 per share and 5,000,000 shares of preferred stock, par value $0.0001 per share.  At July 31, 2014 there were 24,819,172 common shares issued and outstanding.  

On March 6, 2014, the holder of the warrant to purchase 300,000 shares of Company common stock elected to exercise the warrant through a cashless exercise, as defined in the warrant agreement.  At the time of exercise, the applicable market value of our common stock was $0.40 and as a result we issued 232,500 shares of Company common stock in full settlement of the warrant.

The following table summarizes the warrants activity:

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B-SCADA, INC.

NOTES TO FINANCIAL STATEMENTS [UNAUDITED]

JULY 31, 2014

(7)  Stockholders’ Equity (continued)

The following table summarizes information about stock warrants outstanding as of October 31, 2013:

At July 31, 2014, there are no outstanding warrants.  At October 31, 2013, the weighted-average exercise price of all warrants was $0.09 and the weighted-average remaining contractual life was 1.25 years.

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B-SCADA, INC.

NOTES TO FINANCIAL STATEMENTS [UNAUDITED]

JULY 31, 2014

(8)  Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the three and nine months ended July 31, 2013 (there were no dilutive securities in the three and nine months ended July 31, 2014):

(9)  Income Taxes

The income tax expense (benefit) differs from the amount computed by applying the United States statutory corporate income tax rate as follows:

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B-SCADA, INC.

NOTES TO FINANCIAL STATEMENTS [UNAUDITED]

JULY 31, 2014

(9)  Income Taxes (continued)

The components of deferred tax assets (liabilities) at July 31, 2014 and October 31, 2013 are as follows:

Net operating loss carry forwards for tax purposes were approximately $2.9 million at October 31, 2013.  A substantial portion of these losses begin to expire in fiscal 2028; all losses expire in fiscal 2030.  Tax benefits of operating loss carry forwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carry forward period, and other circumstances.

From our inception through October 31, 2012, we had established a full valuation allowance on our deferred tax asset because of a lack of sufficient positive evidence to support its realization.  At October 31, 2013, based on its evaluation of the positive and negative evidence, management determined that the Company would utilize a portion of its net operating loss carry forwards in future periods and that it was "more likely than not" that it would utilize a portion of its deferred tax assets. The positive evidence evaluated as of October 31, 2013 consists of (i) our increased revenues, including the signing of several long term licensing agreements which run through fiscal 2019; (ii) our positive earnings, beginning in fiscal 2011 and increasing in each of fiscal 2012 and 2013; (iii) our ability to maintain operating costs as we have grown revenues; (iv) the utilization of net operating loss carry forwards in the last three fiscal years. The negative evidence evaluated as of October 31, 2013 consists of (i) our history of operating losses from inception through fiscal 2010; (ii) the possibility that a licensing agreement is cancelled or that non licensing revenues will decline; (iii) the possibility that our operating costs will increase. As a result, management elected to reduce the Company's deferred tax asset valuation allowance by $406,744 as of October 31, 2013.

Overall the valuation allowance decreased by approximately $115,000 and $462,000 in the nine months ended July 31, 2014 and the year ended October 31, 2013, respectively.

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B-SCADA, INC.

NOTES TO FINANCIAL STATEMENTS [UNAUDITED]

JULY 31, 2014

(10)  Commitments and Contingencies

Lease

We leased office space in Crystal River, Florida, on a month to month basis through April 30, 2014 when we relocated to the new office facility we purchased. The lease terms were a fixed monthly payment of $2,000 plus our share of certain allocated utilities (not to exceed $2,000 per month) as defined in the agreement. Rental expense, including allocated utilities, for the nine months ended July 31, 2014 and 2013 amounted to approximately $18,000 and $25,000, respectively.

(11)  Subsequent Events

Effective as of August 6, 2014, we entered into a Stock Purchase Agreement with Yorkmont Capital Partners, L.P. (“Yorkmont”) pursuant to which Yorkmont purchased 2,424,242 shares of our common stock for an aggregate purchase price of $800,000 ($0.33 per share).

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our results of operations should be read together with our financial statements and the related notes, included elsewhere in this report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involves unknown risks and uncertainties. Examples of forward-looking statements include: projections of capital expenditures, competitive pressures, revenues, growth prospects, product development, financial resources and other financial matters. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or the negative of such terms, or other comparable terminology. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this quarterly report on Form 10-Q.

Executive Summary

Since 2003, our experience in building and deploying HMI (Human Machine Interface) and SCADA (Supervisor Control and Data Acquisition) Systems has given us a unique perspective and insight into new data visualization possibilities with emerging technologies.

We specialize in the compelling visualization of real-time data. B-Scada has produced exceptional data visualization solutions for manufacturing, power and utilities, petro chemical, emissions monitoring, building automation and other fields of business making use of HMI and SCADA software products.

Our in-house expertise and experience has provided us the opportunity to partner with companies from various vertical markets, and assist them in developing custom solutions that meet their specific needs. Our goal is to help our clients transfer their real-time production and operational data into actionable information through graphically-compelling, functional, and intuitive user interfaces.

Overall Strategic Goals

Our goal is to become a leading supplier of HMI and SCADA systems to industry. Using some of the best talent in the industry, we build our monitoring systems in house and sell them into various vertical markets worldwide including building automation, petro chemical, transportation, electricity distribution and EPA emissions monitoring. Smaller firms and Fortune 500 companies have recognized the talent of our technical staff and the unique capabilities of our technology. This has given us the ability to license portions of our technology to other companies to use in their software systems.

Products and Services

Our technology team has extensive experience in software design and development and has designed, built and delivered, over the years, world-class software solutions for numerous vertical markets. In addition to software development, we also derive income from consulting services, graphic design and contract development that we offer hand in hand with our software solutions.

Product Description

‘Status Machine Edition’ was released in January 2009 as an industrial control and monitoring application for heavy industry and manufacturing. 'Status Enterprise' is a supervisory level version of Machine Edition which was released in January 2014.

The Status products fall into the category of a SCADA (Supervisory Control and Data Acquisition) or HMI (Human Machine Interface) software application.

The Status family of products are a powerful data visualization software package that allows the user to create highly graphical screens and connect the controls on the screens to real-time data. The screens can then be published and viewed by anyone within the company or from the web.

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Status has built-in connectivity to real-time OPC (Open Process Control) data (including OPCUA (Unified Architecture)) and can very easily be extended to bind to other types of data. OPC data is primarily used in the manufacturing and process control industries. The market appeal for Status is its ability to connect to a variety of OPC servers and display real-time data from hundreds of data sources.

We have attracted a number of resellers and system integrators that are now promoting and using the Status product line in commercial settings. We believe that this will result in greater sales and distribution of our software through retail outlets and to original equipment manufacturers (“OEM”s). We are also targeting potential customers to offer customized applications to meet their industry requirements.   Status Machine Edition is now being used to monitor one of the largest subway systems in the world in Seoul, South Korea. Status Machine Edition monitors building automation performance in pharmaceutical manufacturing facilities, electricity distribution, mining equipment and furniture manufacturing. Status Machine Edition and Status Enterprise are used in various monitoring applications in numerous verticals in the United States and around the world in numerous countries including Germany, Sweden, Taiwan, Kuwait, Malaysia, Chile, Canada, United Kingdom, Italy, Turkey, South Africa, Russia and France.

Status Enterprise provides greater scalability, data modeling and support for HTML 5 and mobile devices. We do not expect this offering to start contributing to revenue growth until the end of 2014 or beginning of 2015, as the sales cycles for SCADA products is often several months or more.

Consulting

In addition to sales of the Status products, we generate revenue by providing consulting services to companies that wish to extend and customize our technology. We provide .Net development and screen design services. We also offer training and graphic design services and produce 3D models of equipment and machinery for use in mimics.

Technology Licensing  

In addition to selling our own software products, we also license the technology we have developed to other software companies. Long-term licenses to multinational software companies are a major part of our business.  The lead time for our engineers to work with theirs in developing successful integration of our software with their future products is fairly long - from nine months to two years - but the result is a multiyear high revenue license providing substantial income for us for years to come.  We have several such agreements in place with Fortune 500 companies, and numerous agreements with smaller firms.

The products developed using B-Scada’s technology include industrial automation solutions, medical applications for use in hospitals, smart grid, building automation and line of business applications. The relationships established through licensing are very strategic and may lead to acquisitions to prevent competitive companies from having the same strategic benefits.

Growth Strategy

B-Scada software can collect vital information of what is happening with the system it is monitoring. This data can be very valuable for such activities as scheduling, predictive maintenance and manufacturing execution as well as providing for real-time business process management data to executive-level personnel. Our growth strategy is to grow our software offerings beyond SCADA and provide a more complete and valuable offering to our customers. These additional software products may be developed in house as the company grows, or added through a business acquisition. Additional capital may be needed to finance such an acquisition, either through debt or equity public or private offerings. There is no assurance that we will be able to raise capital in an amount necessary to finance such acquisition or on acceptable terms.

Revenue Strategy

We are currently generating revenues by licensing portions of our technology to different software companies, technology they use in their software products. These are long term arrangements providing consistent annual revenue to B-Scada. We also sell our SCADA software products to system integrators and commercial customers for visually monitoring and archiving their industrial data. Often, we are asked to provide technical expertise in the form of software development, graphics design and consulting services along with the software we provide our customers.

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We currently sell our products directly over the Internet from our website and through resellers to end users and system integrators.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Though we evaluate our estimates and assumptions on an ongoing basis, our actual results may differ from these estimates.

Certain of our accounting policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s subjective judgments are described below to facilitate a better understanding of our business activities. We base our judgments on our experience and assumptions that we believe are reasonable and applicable under the circumstances.

Revenue Recognition - Our revenues are recognized in accordance with FASB ASC Topic 985-605 “Revenue Recognition” for the software industry.  Revenue from the sale of software licenses is recognized when standardized software modules are delivered to and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectability is probable.  Revenue from software maintenance contracts and Application Service Provider (“ASP”) services are recognized ratably over the lives of the contracts.  Revenue from professional services is recognized when the service is provided.

We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements).  When vendor-specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements.  VSOE of fair value is established by the price charged when that element is sold separately.  For maintenance and support, VSOE of fair value is established by renewal rates, when they are sold separately.  For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.

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Results of Operations

Comparison of the Three Months Ended July 31, 2014 and 2013

The following tables set forth, for the periods indicated, certain items from the statements of operations along with a comparative analysis of ratios of costs and expenses to revenues.

Revenues

Our revenues for the three months ended July 31, 2014 amounted to $574,315 compared to fiscal 2013 revenues of $340,144, an increase of approximately $234,000 (69%). In fiscal 2014, we had increases in technology licensing and support revenues of $248,000 which were offset by a decline in commercial software revenues of $14,000. We entered into two new long-term licensing agreements at the end of the first quarter of fiscal 2013.  In fiscal 2014, customer development services from these customers accounted for most of the increase in technology licensing and support revenues. We continue to implement our strategic goals to generate increased revenues from the sales of our products and services, which accounted for the balance of our revenue growth.  Service revenues include revenues from fees charged for the implementation of our software products and training of customers in the use of such products. We are currently selling our software over the internet and are marketing our products and services to companies which may want to license or joint venture some of our software applications.

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Operating Expenses

Technology licensing and support costs and commercial software costs consist primarily of payroll and related expenses. Technology licensing and support costs amounted to $53,742 in the three months ended July 31, 2014 compared to $39,566 in the three months ended July 31, 2013 an increase of $14,176 (36%). Commercial software costs amounted to $52,667 in the three months ended July 31, 2014 compared to $38,699 in the three months ended July 31, 2013 an increase of $13,968 (36%). These increased costs result from our adding personnel to service our new business as well as the anticipated business from the release of Status Enterprise in January 2014.

As a percentage of technology licensing and support revenues the related costs decreased to 11% in fiscal 2014 as compared to 16% of such revenues in fiscal 2013. Commercial software costs were 69% of commercial software revenues in fiscal 2014 compared to 43% in fiscal 2013. This was a result of our decrease in such revenues in fiscal 2014. Overall these costs represented 19% of revenues this period compared to 23% of fiscal 2013 revenues.

Sales and marketing costs have increased to $81,879 in the three months ended July 31, 2014 from $49,624 in the three months ended July 31, 2013, an increase of $32,255 (65%). Payroll and related costs increased to $36,160 from $26,481 and advertising and marketing increased to $29,001 from $14,713. As operations continue to improve we have increased our sales and marketing budget since we believe it is necessary to market our products and services in order to accomplish our plan for revenue growth.  

Research and development costs increased to $6,853 in the three months ended July 31, 2014 from $4,870 in the three months ended July 31, 2013, an increase of $1,983 (41%). Research and development payroll and related costs increase as we continuously work on new features for our products.

General and administrative costs increased to $192,764 in the three months ended July 31, 2014 from $125,305 in the three months ended July 31, 2013, an increase of $67,459 (54%). The increase was primarily related to increases in payroll and related costs, which increased to $113,380 from $83,632, repairs and maintenance, which increased $5,606, and professional and consulting fees, which increased $29,303. The increases in payroll and professional and consulting fees result from increased costs to administer our business as it continues to grow and to properly maintain the financial records necessary for our periodic filings which are required as a public company. The increased repairs and maintenance costs, which should be non-recurring, relate primarily to the relocation to our new office facility in April 2014.  These relocation cost increases were offset by a related decrease in rent expense of $9,032.

Depreciation expense increased to $3,672 in the three months ended July 31, 2014 from $1,307 in the three months ended July 31, 2013 primarily due to the purchase of and improvements made to our new office facility.

Other Income and Expenses

Other income and expenses in the three months ended July 31, 2014 consists of interest expense of $1,562 net of interest income of $377 and interest expense of $2,833 in the three months ended July 31, 2013.

Interest expense decreased from $2,833 in the three months ended July 31, 2013 to $1,562 in the three months ended July 31, 2014.  We paid off both our promissory notes with our CEO ($164,173) and the convertible debenture ($50,000) during fiscal 2013.  In the three months ended July 31, 2014, we incurred interest expense from the mortgage payable on our new office facility.

Income Tax Benefit

Prior to the year ended October 31, 2013 the deferred tax asset arising from pre-tax losses had been fully reserved as we were not able to determine that it was more likely than not that we would be able to realize the tax benefits in the future. Based on our evaluation of the positive and negative evidence at October 31, 2013, management determined that the Company would utilize a portion of its net operating loss carry forwards in future periods and that it was "more likely than not" that it would utilize a portion of its deferred tax assets. As a result, management elected to reduce the Company's deferred tax asset valuation allowance by $406,744 as of October 31, 2013. Based on current operations, it is estimated that no further adjustment is necessary at July 31, 2014, but management will review each period to determine if additional reductions to the valuation allowance are warranted and adjust accordingly.  

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Net Income

Net income in the three months ended July 31, 2014 totaled $181,553 compared to net income of $77,940 in the three months ended July 31, 2013, an increase of $103,613 (133%) as discussed above.

Results of Operations

Comparison of the Nine Months Ended July 31, 2014 and 2013

The following tables set forth, for the periods indicated, certain items from the statements of operations along with a comparative analysis of ratios of costs and expenses to revenues.

Revenues

Our revenues for the nine months ended July 31, 2014 amounted to $1,417,861 compared to fiscal 2013 revenues of $1,055,031, an increase of approximately $363,000 (34%). In fiscal 2014, we had increases in technology licensing and support revenues of $443,000 which were offset by a decline in commercial software revenues of $80,000. We entered into two new long-term licensing agreements at the end of the first quarter of fiscal 2013.  In fiscal 2014, custom development services from these customers accounted for most of the increase in technology licensing and support revenues.

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Although we had an overall decline in commercial software revenues, product licensing revenue increased 33% to $84,127 and represents 38% of commercial software revenue in fiscal 2014 as compared to 21% in fiscal 2013. Commercial software consulting revenues declined 38% to $127,675 and we currently anticipate that these revenues will decrease in the fourth quarter of fiscal 2014 and early fiscal 2015 if we are unable to enter into new contracts as projects with two of our larger customers are completed.

Microsoft abandoned the future development of Microsoft Silverlight which was used in leveraging Status Machine sales as it was utilized for remote monitoring for process control. This created a negative perception in the marketplace and directly resulted in lost opportunities of Status Machine Edition sales.  This also negatively impact support fees as 90% of our Status Machine Edition sales were for the Silverlight web solution.

In an effort to combat the situation, B-Scada has heavily promoted Status Enterprise as a replacement for those that are seeking remote monitoring capabilities.  Status Enterprise uses the highly-adopted HTML 5 which is used in all smart devices such as IPads, IPhones, Androids and Blackberry.  

Since the initial release of Status Enterprise at the end of January 2014 we have had 23 public presentations with a total of 100 attendees.  This is a 200% increase when compared to Status Machine Edition. Of the 100 attendees 3 have become customers thus far with 20 more in the pipeline.  Using those numbers we can roughly project that 1 out of 4 webinar attendees will eventually become a customer.  This is very exciting as Status Enterprise has only been on the market since the beginning of February 2014.   Compared to Status Machine Edition, Status Enterprise is having a much more positive impact in its first year of release.

Status Enterprise offers an advantage not available with Machine Edition in that the customer has the opportunity to subscribe annually rather than pay for the license one time.  Status Enterprise support is being pushed heavily as there are new modules under development that we anticipate customers will want.  As a very powerful and complex product compared to Machine Edition, purchasing support for Status Enterprise will be beneficial to the customer.

We continue to implement our strategic goals to generate increased revenues from the sales of our products and services, which accounted for the balance of our revenue growth.  Service revenues include revenues from fees charged for the implementation of our software products and training of customers in the use of such products. We are currently selling our software over the internet and are marketing our products and services to companies which may want to license or joint venture some of our software applications.

Operating Expenses

Technology licensing and support costs and commercial software costs consist primarily of payroll and related expenses. Technology licensing and support costs amounted to $134,435 in the nine months ended July 31, 2014 compared to $99,495 in the nine months ended July 31, 2013 an increase of $34,940 (35%). Commercial software costs amounted to $150,189 in the nine months ended July 31, 2014 compared to $111,102 in the nine months ended July 31, 2013 an increase of $39,087 (35%). These increased costs result from our adding personnel to service our new business as well as the anticipated business from the release of Status Enterprise in January 2014.

As a percentage of technology licensing and support revenues the related costs were 11% of such revenues in fiscal 2014 and 13% in fiscal 2013. Commercial software costs were 67% of commercial software revenues in fiscal 2014 compared to 37% in fiscal 2013. This was a result of our decrease in such revenues in fiscal 2014. Overall these costs represented 20% of revenues this period and fiscal 2013.

Sales and marketing costs have increased to $254,054 in the nine months ended July 31, 2014 from $167,032 in the nine months ended July 31, 2013, an increase of $87,022 (52%). Payroll and related costs increased to $144,467 from $106,902 and advertising and marketing increased to $65,983 from $38,945. As operations continue to improve we have increased our sales and marketing budget since we believe it is necessary to market our products and services in order to accomplish our plan for revenue growth.  

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Research and development costs increased to $87,450 in the nine months ended July 31, 2014 from $64,727 in the nine months ended July 31, 2013, an increase of $22,723 (35%). Research and development payroll and related costs increased as we worked on the release of our new product, Status Enterprise, and new features.

General and administrative costs increased to $428,751 in the nine months ended July 31, 2014 from $281,327 in the nine months ended July 31, 2013, an increase of $147,424 (52%). The increase was primarily related to increases in payroll and related costs, which increased to $230,454 from $170,523, repairs and maintenance, which increased $19,471, and professional and consulting fees, which increased $41,890. The increases in payroll and professional and consulting fees result from increased costs to administer our business as it continues to grow and to properly maintain the financial records necessary for our periodic filings which are required as a public company. The increased repairs and maintenance costs, which should be non-recurring, relate primarily to the relocation to our new office facility in April 2014.  These relocation cost increases were offset by a related decrease in rent expense of $7,478.

Depreciation expense increased to $7,752 in the nine months ended July 31, 2014 form $3,851 in the nine months ended July 31, 2013 primarily due to the purchase of and improvements to our new office facility.

Other Income and Expenses

Other income and expenses in the nine months ended July 31, 2014 consists of interest expense of $2,355 net of interest income of $891 and interest expense of $10,230 in the nine months ended July 31, 2013.

Interest expense decreased from $10,230 in the nine months ended July 31, 2013 to $2,355 in the nine months ended July 31, 2014 as we paid off both our promissory notes with our CEO ($164,173) and the convertible debenture ($50,000) during fiscal 2013.  Beginning in In April 2014, we incurred interest expense from the mortgage payable on our new office facility.

Income Tax Benefit

Prior to the year ended October 31, 2013 the deferred tax asset arising from pre-tax losses had been fully reserved as we were not able to determine that it was more likely than not that we would be able to realize the tax benefits in the future. Based on our evaluation of the positive and negative evidence at October 31, 2013, management determined that the Company would utilize a portion of its net operating loss carry forwards in future periods and that it was "more likely than not" that it would utilize a portion of its deferred tax assets. As a result, management elected to reduce the Company's deferred tax asset valuation allowance by $406,744 as of October 31, 2013. Based on current operations, it is estimated that no further adjustment is necessary at July 31, 2014, but management will review each period to determine if additional reductions to the valuation allowance are warranted and adjust accordingly.  

Net Income

Net income in the nine months ended July 31, 2014 totaled $353,766 compared to net income of $317,267 in the nine months ended July 31, 2013, an increase of $36,499 (12%) as discussed above.

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Liquidity and Capital Resources

We currently fund our operations through sales of our products and services.

At July 31, 2014, we had cash and cash equivalents of $748,591 compared to $252,571 at October 31, 2013. The increase of $496,020 is primarily attributable to cash generated from operations reduced by acquisition costs of long-lived assets.

In August 2014, we entered into a Stock Purchase Agreement with Yorkmont Capital Partners, L.P. and received $800,000 from the sale of 2,424,242 shares of our common stock at $0.33 per share.

Cash Flows

Net cash provided by operating activities amounted to $591,990 and $595,092 in the nine months ended July 31, 2014 and 2013, respectively. Net cash from operations remained comparative with that of the prior period as we anticipate that revenue growth from Status Enterprise will begin in the latter part of 2014 or early 2015.

In fiscal 2014 and 2013, cash was used for investing activities for the acquisition of property and equipment in the amount of $90,855 and $6,870, respectively.

In fiscal 2014 and 2013, cash was used for financing activities as follows:  In fiscal 2014 we purchased a new office facility and incurred a mortgage payable of $127,500, of which we paid $5,115 in principal in the nine months ended July 31, 2014.  We relocated in the second quarter of fiscal 2014.  In fiscal 2013, we paid promissory notes owed to our CEO in the amount of $73,673.

We believe that our cash on hand at July 31, 2014 and our revenue commitments will be sufficient to fund our operations for at least the next 12 months. We have signed significant licensing agreements and continue to market our products and services in accordance with our strategic business plan. There is no assurance that the income generated from these and future agreements will meet our working capital requirements, or that we will be able to sign significant agreements in the future.

Deferred Tax Asset Valuation Allowance

Accounting standards require that we assess whether a valuation allowance should be established against our deferred tax asset based on the consideration of all available evidence using a "more likely than not" standard. In making such judgments, we considered both positive and negative evidence as well as other factors which may impact future operating results. From our inception through October 31, 2012, we had established a full valuation allowance on our deferred tax asset because of a lack of sufficient positive evidence to support its realization.  At October 31, 2013, based on its evaluation of the positive and negative evidence, management determined that the Company would utilize a portion of its net operating loss carry forwards in future periods and that it was "more likely than not" that it would utilize a portion of its deferred tax assets. The positive evidence evaluated as of October 31, 2013 consists of (i) our increased revenues, including the signing of several long term licensing agreements which run through fiscal 2019; (ii) our positive earnings, beginning in fiscal 2011 and increasing in each of fiscal 2012 and 2013; (iii) our ability to maintain operating costs as we have grown revenues; (iv) the utilization of net operating loss carry forwards in the last three fiscal years. The negative evidence evaluated as of October 31, 2013 consists of (i) our history of operating losses from inception through fiscal 2010; (ii) the possibility that a licensing agreement is cancelled or that non licensing revenues will decline; (iii) the possibility that our operating costs will increase. As a result, management elected to reduce the Company's deferred tax asset valuation allowance by $406,744 as of October 31, 2013.

Overall the valuation allowance decreased by approximately $115,000 and $462,000 in the nine months ended July 31, 2014 and the year ended October 31, 2013, respectively.

Contractual Obligations

Not Applicable

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Off-Balance Sheet Arrangements

As of July 31, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  The amendments in the ASU will be applied using one of two retrospective methods. The effective date will be the first quarter of our fiscal year ended October 31, 2018. We have not determined the potential effects on our financial statements.

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying financial statements.

Quantitative and Qualitative Disclosure about Market Risk

Interest Rate Risk

Not Applicable

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ITEM 4.  CONTROLS AND PROCEDURES

(a)  Evaluation of disclosure controls and procedures

The Company’s management, with the participation of the Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  Based on this evaluation, the CEO and CFO concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

(b)  Management’s Assessment of Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of our internal control over financial reporting as of July 31, 2014.  In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The objective of this assessment is to determine whether our internal control over financial reporting was effective as of July 31, 2014.  Based on our assessment utilizing the criteria issued by COSO, management has concluded that our internal control over financial reporting was not effective as of July 31, 2014.  Management’s assessment identified the following material weaknesses:

·

As of July 31, 2014, there were insufficient written policies and procedures to insure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements.

·

As of July 31, 2014, there was a lack of segregation of duties, in that we only had one person performing all accounting-related duties.

·

As of July 31, 2014, there were no independent directors and no independent audit committee.

We continue to evaluate the effectiveness of internal controls and procedures on an on-going basis.  We will address these concerns in time, taking into consideration the Company’s size and its available resources.

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES

We did not issue any equity securities during the period covered by this report that were not registered under the Securities Act, except as follows:

On March 6, 2014, the holder of the warrant to purchase 300,000 shares of Company common stock elected to exercise the warrant through a cashless exercise, as defined in the warrant agreement. As a result, the Company issued 232,500 shares of common stock in full settlement of the warrant.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable

ITEM 6.    EXHIBITS

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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