Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012 |
| o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
For the transition period from N/A to N/A |
Commission File No. 000-28745
Cloud Medical Doctor Software Corporation
(Name of small business issuer as specified in its charter)
(formerly National Scientific Corporation)
| Texas | 86-0837077 |
| ( State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1291 Galleria Drive, Suite 200
Henderson, NV 89014
(Address of principal executive offices) (Zip Code)
(702) 818-9011
Registrant’s telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non–Accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at January 3, 2014 | |
| Common stock, $0.01 par value | 215,029,216 |
CLOUD MEDICAL DOCTOR SOFTWARE CORPORATION
INDEX TO FORM 10-Q FILING
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2012 AND 2011
| PAGE | ||||
| PART I - FINANCIAL INFORMATION | ||||
| Item 1. | Condensed Financial Statements (Unaudited) | 1 | ||
| Condensed Balance Sheets | 2 | |||
| Condensed Statements of Operations | 3 | |||
| Condensed Statements of Cash Flows | 4 | |||
| Notes to Condensed Financial Statements | 5 | |||
| Item 2. | Management Discussion & Analysis of Financial Condition and Results of Operations | 20 | ||
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 23 | ||
| Item 4. | Controls and Procedures | 23 | ||
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| PART II - OTHER INFORMATION | ||||
| Item 1. | Legal Proceedings | 25 | ||
| Item 1A. | Risk Factors | 25 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 25 | ||
| Item 3. | Defaults Upon Senior Securities | 28 | ||
| Item 4. | Mining Safety Disclosures | 28 | ||
| Item 5 | Other information | 28 | ||
| Item 6. | Exhibits | 29 | ||
| CERTIFICATIONS | ||||
FINANCIAL INFORMATION
The accompanying reviewed interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2011. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the nine months ended June 30, 2012 are not necessarily indicative of the results that can be expected for the year ending September 30, 2012.
CLOUD MEDICAL DOCTOR SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2012 AND 2011
NOTE 1- DESCRIPTION OF BUSINESS
Cloud Medical Doctor Software Corporation (the “Company”, or “Cloud-MD”) was incorporated in Texas on June 22, 1953 as American Mortgage Company. On May 16, 1996, the Company changed its name to National Scientific Corporation. On April 3, 2012, the Company changed its name to Cloud Medical Doctor Software Corporation.
In 2011, Cloud-MD introduced the Cloud-MD Office, a “Cloud Based”, 5010 ready and ICD-10 compliant, fully integrated and interoperable suite of medical software and services, designed by experienced healthcare analysts and programmers for healthcare providers, that produces “Actionable Information” to help Independent Physician Practices, New Care Delivery Models (ACO), Healthcare Systems and Billing Services optimize a wide range of business processes resulting in Increased Profits, Higher Quality, Greater Efficiency, Noticeable Cost Reductions and Better Patient Care. Current software product offerings include Practice Management, Electronic Medical Records, Revenue Management, Patient Financial Solutions, Medical and Pharmaceutical Supply Management, Claims Management and PHI Exchange.
In 2012, Cloud-MD launched Cloud-MD Billing Services which provides management of medical claims from posting physician charges and payments into our medical billing software. The software uses a continuous insurance claim follow-up system to track and research all rejected or denied medical claims; a Comprehensive Reporting module that includes monthly financial statements sent to our clients so they can see how their practice is performing and a variety of detailed reports giving our clients the necessary information and tools used to assist in the increased production which leads to more profit; and patient account inquiries & support to assist patients with their billing and insurance questions.
NOTE 2 – BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending September 30, 2012. Notes to the unaudited interim financial statements that would substantially duplicate the disclosures contained in the audited financial statements for fiscal year 2011 have been omitted; this report should be read in conjunction with the audited financial statements and the footnotes thereto for the fiscal year ended September 30, 2011 included within its Form 10-K as filed with the Securities and Exchange Commission.
NOTE 3 - GOING CONCERN ISSUES
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has an accumulated deficit at June 30, 2012 of $25,822,999 and needs additional cash to maintain its operations.
These factors raise doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s continued existence is dependent upon management’s ability to develop profitable operations, continued contributions from the Company’s executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company’s products and business.
NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates. The Company’s most significant estimates relate to the valuation of its proprietary technology and its valuation of its common stock.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At June 30, 2012, cash and cash equivalents include cash on hand and cash in the bank. The FDIC insures these deposits up to $250,000.
Impairment of Long-Lived Assets
Long-lived assets are being evaluated for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The identifiable intangibles are amortized over their useful lives of 5 years and are reviewed annually for impairment. Management has addressed the acquisition of Doctors Network of America and has impaired the entire asset of $4,000.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
Fair value is focused on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Within the measurement of fair value, the use of market-based information is prioritized over entity specific information and a three-level hierarchy for fair value measurements is used based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
| • | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; liabilities in active markets; | |
| • | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; or directly or indirectly including inputs in markets that are not considered to be active; | |
| • | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement |
The following table summarizes fair value measurements by level at June 30, 2012 and September 30, 2011 for assets measured at fair value on a recurring basis:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||
| At June 30, 2012 | ||||||||||||||
| Proprietary Technology | 1,140,101 | 1,140,101 | ||||||||||||
| Total Proprietary Technology | 1,140,101 | 1,140,101 | ||||||||||||
| At September 30, 2011 | ||||||||||||||
| Proprietary Technology | 1,200,106 | 1,200,106 | ||||||||||||
| Total Proprietary Technology | 1,200,106 | 1,200,106 | ||||||||||||
Accounts Receivable and Allowance for Uncollectible Accounts
Substantially all of the Company’s accounts receivable balance is related to trade receivables. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company will maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for services. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped in categories by the number of days the balance is past due, and the estimated loss is calculated as a percentage of the total category based upon past history. Account balances are charged against the allowance when it is probable the receivable will not be recovered. As of June 30, 2012 and 2011, the Company had no valuation allowance for the Company’s accounts receivable.
Income Taxes
The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
The Company uses the two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At March 31, 2012, the Company did not record any liabilities for uncertain tax positions.
Revenue Recognition
License revenue consists principally of revenue earned under software license agreements. The Company sells its software to a medical practitioner for direct payment or through a third party leasing company for direct payment to the Company. The third party lease agreement is a non-recourse debt and the Company is not responsible for the default of the medical practitioner. License revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the software has been electronically delivered, the license fee is fixed or is measured on a paid user basis; and collection of the resulting receivable is probable. When contracts contain multiple elements wherein Vendor-Specific Objective Evidence (“VSOE”) exists for all undelivered elements, we account for the delivered elements in accordance with the “Residual Method.”
VSOE of fair value for maintenance and support is established by a stated renewal rate, if substantive, included in the license arrangement or rates charged in stand-alone sales of maintenance and support. Revenue from subscription license agreements, which include software, rights to unspecified future products and maintenance, is recognized ratably over the term of the subscription period.
Provided all other revenue criteria are met, the upfront, minimum, non-refundable license fees from customers are generally recognized upon delivery and on-going royalty fees are generally recognized upon reports of new licenses issued. If there is significant uncertainty about the project completion or receipt of payment for professional services, revenue is deferred until the uncertainty is sufficiently resolved. VSOE of fair value of services is based upon stand-alone sales of those services.
Subscription revenue is generated from bandwidth and information storage. The first year and each year thereafter, the software purchased and installed requires the purchaser to pay an annual fee of $1,200, $1,500, $1,800, and $2,400, respectively. Subscription revenue is recognized ratably over the term of the agreement.
Transaction revenue is generated from the following services and recognized when transaction occurs:
| · | Electronic Remittance Advise $0.35 Electronic remittance transaction fee; | |
| · | Paper Claims $1.00 Paper claim fee; | |
| · | Carrier Direct $0.16 Carrier direct fee; | |
| · | Fast Forward $0.35 Fast forward transaction fee; and, | |
| · | Patient Credit $2.50 Automatic Debit processing per transaction paid by the patient |
The Company has not incurred any transaction revenues in the nine months ended June 30, 2012.
Cost of License, and Subscription Revenues
Cost of license revenue is primarily comprised of the license-based royalties to third parties and production and distribution costs for initial product licenses. No costs were incurred for royalties during the nine months ended June 30, 2012 and 2011.
Cost of subscription revenue is primarily comprised of the costs associated with the customer support personnel that provide maintenance, enhancement and support services to customers. No costs were incurred for customer support during the nine months ended June 30, 2012 and 2011.
The amortization of acquired technology for products acquired through business combinations are considered as the cost of revenues.
Sales Commissions
The Company pays commissions, including sales bonuses, to the direct sales force related to revenue transactions under sales compensation plans established annually. The commission payments are typically recorded in the month upon following execution of the customer contracts when revenues are recognized. The Company paid commissions of $53,205 and $0 for the nine months ended June 30, 2012 and 2011, respectively.
Research and Development and Software Development Costs
Capitalization of certain software development costs are recorded after the determination of technological feasibility. Based on our product development process, technological feasibility is determined upon the completion of a working model. To date, costs incurred by us from the completion of the working model to the point at which the product is ready for general release have been insignificant. Accordingly, we have charged all such costs to research and development expense in the period incurred. Our research and development costs for the nine months ended June 30, 2012 and 2011 were $97,000 and $55,500, respectively.
Share-Based Compensation
The Company measures the cost of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Compensation cost is recognized over the vesting or requisite service period.
Basic and Diluted Net Loss per Common Share
Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. As of June 30, 2012 and 2011, the Company had no potentially dilutive instruments outstanding.
Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive as a result of the net loss.
Concentration of Credit Risk
All of the Company’s cash and cash equivalents are maintained in regional and national financial institutions. The Company has exposure to credit risk to the extent that its cash and cash equivalents exceed amounts covered by the U.S. federal deposit insurance; however, the Company has not experienced any losses in such accounts. In management’s opinion, the capitalization and operating history of the financial institutions are such that the likelihood of material loss is remote.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentations.
Subsequent Events
The Company has evaluated all transactions occurring between the nine months ended June 30, 2012, through the date of issuance of the financial statements for subsequent event.
Recent Accounting Pronouncements
No accounting standards or interpretations issued recently are expected to a have a material impact on the Company’s financial position, operations or cash flows.
NOTE 5 – PROPRIETARY TECHNOLOGY
The following is a detail of intangible assets at June 30, 2012 and September 31, 2011:
| 2012 | 2011 | |||||||
| Acquisition of Doctors Network of America | $ | 4,000 | $ | — | ||||
| Software License | 1,200,106 | 1,200,106 | ||||||
| Total intangible assets | 1,204,106 | 1,200,106 | ||||||
| Accumulated amortization of intangible assets (charged to cost of sales) | (120,010 | ) | — | |||||
| Impairment of assets | (4,000 | ) | — | |||||
| Total proprietary technology, net | $ | 1,080,096 | $ | 1,200,106 | ||||
The Company recognized a $4,000 impairment of long lived assets as of June 30, 2012. The Company’s proprietary technology was placed into service starting in the second quarter of fiscal 2012. The amortization expense was $120,010 and $0 for the three and nine months ended June 30, 2012 and 2011, respectively.
Software License
On January 2, 2011, the Company entered into an asset purchase agreement with certain private companies owned by Michael de la Garza (“MDLG”), the Company’s CEO, whereby the Company acquired the rights to proprietary medical billing and practice management software developed by the private companies.
The Company issued a $1,200,106 convertible promissory note with an 8% interest rate which is convertible into common stock of the Company at a price to be determined later in exchange for the purchase of the software. The note matures on April 30,
2021.
In October 2011, the Company issued Absolute Medical Software Systems, LLC an entity owned by MDLG, 30,000,000 shares of common stock in full payment of this promissory note and interest accrued as of the date of conversion. The market price per share on the date of grant was $0.008 per share. No gain or loss was recorded on the conversion of the convertible promissory note.
The Company has determined that due to the voting rights of the Preferred A shares owned by MDLG, that the transaction occurred between parties under common control. Accordingly, the Company has determined that the cost basis of the software acquired should become the cost basis of the Company.
| Cost Basis for assets acquired under Common Control | Cost Basis | |||
| Cost basis of Consideration: | ||||
| Absolute Medical Software Systems LLC development costs from inception | $ | 1,011,222 | ||
| Impairment of software on September 10, 2008 to value | (11,222 | ) | ||
| Total Value at September 10, 2008 | $ | 1,000,000 | ||
| Software Update to Operate on Cloud Based Platform | ||||
| Absolute Medical Software Systems LLC development costs | $ | 200,106 | ||
| Total Cost Basis at January 1, 2011 | $ | 1,200,106 | ||
Doctors Network of America
On June 22, 2012 the Company entered into an acquisition agreement that ultimately closed on March 16, 2013. The Company agreed to acquire Doctors Network of America in Flowood, Mississippi for 500,000 shares of common stock. As of June 21, 2012, only 200,000 shares were issued as a deposit. The value of the shares on the date of grant was $4,000 and was recorded as a deposit on acquisition. Immediately after the transaction was closed the sellers refused to pay for medical billing process transaction fees in accordance with their contracts. The Company and the sellers are currently in litigation over the disputed transaction fees. Accordingly, as of June 30, 2012, the Company has impaired the full value of the deposit.
NOTE 6- DISCONTINUED OPERATIONS
The Company discontinued the Mobile DVR and Location Products on February 4, 2010. The product required that most of our customers require monitoring and/or tracking of a person or object, and reporting this information back to a central location. The product was primarily used in school systems to track students boarding and exiting school buses for the safety of the students.
The Company’s former Board of Directors believed that it was in the best interest of the Company to discontinue the business operation of the GPS operational device business. In 2011, the assets were transferred to National Scientific, LLC, a company owned by the Company’s prior CEO, by prior management in which the Company’s former CEO was to pay $100,000 plus 2% of revenues for that technology. The former officer never paid the required compensation. The Company’s new management recorded the activities associated with the transferred assets as discontinued operations.
Accordingly, the Company reclassified the assets, liabilities and operations related to its GPS operational device business as discontinued operations. Consequently, the accompanying financial statements reflect the assets, liabilities and operations of the GPS operational device business as net assets of discontinued operations, net liabilities of discontinued operations and results from discontinued operations. As of June 30, 2012 and September 30, 2011, the Company did not have any net assets related to the GPS operational device business.
Details of the classifications for net liabilities and operations are shown below.
| June 30, 2012 | September 30, 2011 | |||||||
| Net liabilities of discontinued operations: | ||||||||
| Accounts payable and accrued expenses | $ | — | $ | 169,176 | ||||
| Disputed salaries & vacation of former officers | — | 968,645 | ||||||
| Disputed salary – former employee | — | 20,256 | ||||||
| Disputed payroll taxes for back pay of former officers | — | 84,701 | ||||||
| Disputed interest | — | 209,215 | ||||||
| Interest expenses | — | 42,137 | ||||||
| Former officer note payable at 8% interest rate | — | 59,704 | ||||||
| Shareholders demand note payable at 12% | — | 11,625 | ||||||
| Shareholders demand note payable at 12% | — | 20,000 | ||||||
| Unsecured note payable at 8% interest due November 2010 interest payments in default at 9/30/2009 | — | 175,000 | ||||||
| Note discount | — | — | ||||||
| Net liabilities of discontinued operations | $ | — | $ | 1,760,459 | ||||
| Three Months Ended June 30 | ||||||||
| 2012 | 2011 | |||||||
| Discontinued operations: | ||||||||
| Revenues | $ | — | $ | — | ||||
| Cost of sales | — | — | ||||||
| Operating expenses | — | — | ||||||
| Interest expense | (4,467 | ) | (4,506 | ) | ||||
| Gain from write off of debt | 4,467 | — | ||||||
| Gain (Loss) from Discontinued Operations | $ | — | $ | (4,726 | ) | |||
| Nine months Ended June 30 | ||||||||
| 2012 | 2011 | |||||||
| Discontinued operations: | ||||||||
| Revenues | $ | — | $ | — | ||||
| Cost of sales | — | — | ||||||
| Operating expenses | — | — | ||||||
| Interest expense | (13,401 | ) | (11,583 | ) | ||||
| Gain from write off of debt | 337,269 | — | ||||||
| Gain (Loss) from Discontinued Operations | $ | 323,868 | $ | (7,077 | ) | |||
Commitments and contingencies that were discontinued as a result of the transfer of the assets to National Scientific LLC as follows:
On November 1, 2005, the Company entered into a financing program with Strategic Working Capital Fund, LP. The terms of this program included a five-year note payable at maturity in November 2010 for $175,000, at an annual interest rate of 8%. Interest was due and payable semi-annually on May 1st and November 1st for each year in which the note is outstanding The transaction also included 1,200,000 restricted common shares and a conversion/exchange option to convert the principal amount and any unpaid interest of the Note into common shares at a per share conversion price of $0.0525. These shares included weighted average anti-dilution provisions, as well as piggyback registration rights. Additionally, the note had various put and call rights, and has a right to early payment under certain conditions after 2 years. The 1,200,000 restricted common shares were recorded at $0.043, which was the five-day average market closing price of our stock. The note and common stock were issued with a debt discount of $51,600 and a beneficial conversion feature of $9,933. The discount and beneficial conversion feature are being amortized to interest expense over the term of the note, which is approximately 60 months. The issuance of the shares resulted in deferred financing costs of $24,000. The deferred financing costs were being amortized over the term of the note, which is approximately 60 months, and are included in the statement of operations as offering costs. This note has been in default since 2009.
On February 24, 2005, March 28, 2005, May 2, 2005, and May 27, 2005, the Company’s former Chairman Michael Grollman made personal loans to the Company totaling $159,000 to assist it with working capital needs. The loans are evidenced by a demand note that provides for repayment within five business days of a demand notice from Mr. Grollman, with interest of 6% compounded annually from June 1, 2005. These loans were secured by an interest in the copyrights in the Company’s iBus software and designs. During the three months ended September 30, 2007, these loans were paid down by $11,000. As of September 30, 2007, these loans had a balance outstanding of $148,000 and the interest rate going forward was adjusted to 8% compounded annually from October 1, 2007. On September 30, 2007, the Company converted unpaid interest of $13,300 on demand notes payable to Michael Grollman into a new demand note of $13,300 that provided for repayment within five business days of a demand notice from Mr. Grollman, with interest of 8% compounded annually on October 1st. This note has been in default since 2009.
On April 27, 2006, the Company secured a short-term loan of $16,625 from a shareholder. The loan carries an origination/placement fee of $500 and has a perfectible security interest a) prior to delivery in any assets purchased for the fulfillment of a customer’s order dated March 16, 2006, and b) in any receivable resulting from the fulfillment of the customer’s purchase order. The interest rate on the loan was 12%. The transaction also included 100,000 warrants to purchase our common stock at $0.036 at any time before April 27, 2009. The note had an approximate maturity date of June 15, 2006. This note has been in default since 2009.
On May 31, 2006, we secured a short-term loan of $20,000 from a shareholder. The loan carries an origination/placement fee of $500 and has a perfectible security interest a) prior to delivery in any assets purchased for the fulfillment of Clover Park, WA’s order and b) in any receivable resulting from the fulfillment of the Clover Park purchase order. The interest rate on the loan is 12%. The transaction also included 100,000 warrants to purchase our common stock at $0.036 at any time before May 31, 2009. The note had a maturity date of July 10, 2006. This note has been in default since 2009
NOTE 7 – DEBT MITIGATION PROGRAM
The Company determined that the statute of limitations for certain of the Company’s creditors to enforce collection of any amounts they might be owed has now elapsed. Based on the determinations and findings, during the nine months ended June 30, 2012, the Company wrote off $1,560,081 in creditor liabilities which were all previously included in current liabilities in the accompanying balance sheet. As a result of this write-off, the Company recognized a gain on the write off of liabilities in the amount of $337,269 for third party liabilities, which was recorded in discontinued operations, and additional paid-in capital of $1,222,812 for related party liabilities. The Company will continue to conduct this analysis going forward and write off obligations when such obligations are no longer enforceable based on applicable law.
The following liabilities, through the opinion of legal counsel, were determined by the Company as unenforceable.
| June 30, 2012 | ||||
| Debt Mitigation Program: | ||||
| Accounts payable and accrued expenses | $ | 311,405 | ||
| Disputed salaries & vacation of former officers | 968,645 | |||
| Disputed salary – former employee | 20,256 | |||
| Disputed payroll taxes for back pay of former officers | 84,701 | |||
| Disputed interest | 73,406 | |||
| Shareholders demand note payable at 12% | 11,625 | |||
| Shareholders demand note payable at 12% | 20,000 | |||
| Unsecured note payable at 8% interest due in November 2010, interest payments in default | 175,000 | |||
| Total debt mitigation program | $ | 1,560,081 | ||
| Gain on write off of debt | $ | (337,269 | ) | |
| Additional paid-in capital (1) | $ | 1,222,812 | ||
| (1) | All amounts that were owed to related parties in prior years were recorded to paid-in-capital. |
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Rent expense for the nine months ended June 30, 2012 and 2011 was $0.
The Company has issued shares to new investors since January 2, 2011, that have an anti-reverse split common stock clause if the Company reverses the common stock. The reverse split of common stock is determined by management but must be approved by the Financial Industry Regulation Authority (“FINRA”). Presently FINRA has denied the Company the right to reverse split the common stock until all Securities and Exchange Commission filings are current and at that point and time the Company will submit a request to FINRA to execute a reverse split of the common stock of the Company. The current investors holding anti-reverse split stock will allow them to hold the same number of shares of common stock as status quo after the reverse split. The anti-reverse split common stock is only for stock subject to reverse split and once the reverse split is completed the stock will be held with regular stockholders as the Company proceeds forward.
As discussed in Note 7, the Company has written off $1,560,081 in accounts payable, accrued liabilities and notes payable based on the opinion of legal counsel. However, the related creditors could make a claim in the future in regards to these liabilities.
NOTE 9– RELATED PARTY TRANSACTIONS
During the year ended September 30, 2011 the Company issued 15,000,000 common shares to new management and valued the shares using the trading price of the common stock of $0.007 on the date of grant. The stock was recorded at fair value as compensation expense of $105,000.
In April 2011 the Company issued 4,000,000 common shares to new management and valued the shares using the trading price of the common stock of $0.0095 on the date of grant. The stock was recorded at fair value as compensation expense of $38,000.
On October 15, 2011 the Company issued 30,000,000 common shares to the CEO as the conversion of the debt issued in the principal amount of $1,200,106. See Note 5.
During the nine months ended June 30, 2012 and 2011, the CEO advanced the Company cash of $33,462 and $147,416, respectively. The Company repaid $148,654 and $0 of the advances in the nine months ended June 30, 2012 and 2011, respectively. The advances from the CEO are due on demand and do not accrue interest. As of June 30, 2012 and the year ended September 30, 2011, the amount owed to the CEO for advances was $65,604 and $180,796, respectively.
NOTE 10 - EQUITY
On April 11, 2011, the Company amended its Articles of Incorporation to increase the authorized common shares to 650,000,000 shares and 4,000,000 preferred shares at a par value of $0.01.
Nine months ended June 30, 2012
During nine months ended June 30, 2012 the Company issued 190,000 shares of common stock for $68,000 in net proceeds as follows:
| Date | Number of Shares | Value | ||||||||
| October 15, 2011 | 25,000 | $ | 5,000 | |||||||
| December 29, 2011 | 100,000 | $ | 50,000 | |||||||
| June 21, 2012 | 65,000 | $ | 13,000 | |||||||
On October 15, 2011, the Company issued 30,000,000 shares of common stock for the conversion of debt from our CEO in the principal amount of $1,200,106.
On December 15, 2011, the Company issued 18,000 shares of common stock for services rendered by professionals and recorded expense based upon the market price of $0.0102 and expensed $184 as consulting fees.
The Company issued 941,333 shares of common stock to third parties that have purchased our medical billing software at the market price of the common stock of ranging from $0.015 to $0.03. The Company and recorded $19,301 as a reduction to revenue for the value of the shares issued.
The Company issued 200,000 shares of common stock on June 21, 2012 to Krooss Medical Management in accordance with the acquisition agreement for Doctors Network of America and recorded it at the market price of the common shares of $0.020 and as an investment in Krooss Medical Management of $4,000.
On June 21, 2012, the Company issued 1,000 shares of common stock for services rendered by professionals and recorded the expenses based upon the market price of $0.02 and expensed $20 as consulting fees.
The Company issued 100,000 shares of common stock to MediSouth LLC in accordance with the acquisition agreement and recorded it at the market price of the common shares of $0.025 and as an investment in MediSouth LLC of $2,500.
Fiscal Year Ended September 30, 2011
On January 2, 2011, the Company issued 15,000,000 shares of common stock to new management, valued at the market price of the common stock of $0.007 on the date of grant. The shares were recorded as compensation expense of $105,000.
On September 12, 2011, the Company sold 250,000 shares of common stock for $25,000 in net cash proceeds.
Preferred Stock
The Company has authorized 4,000,000 shares of preferred stock, at $0.01 par value. The Corporation established and designates the rights and preferences of a Series A Preferred Stock, and reserve 4,000,000 shares of preferred stock against its issuance, such rights, preferences and designations. Each share of the Preferred Stock shall has 150 votes on all matters presented to be voted by the holders of our common stock.
All 4,000,000 shares of preferred stock that have been issued to our CEO & CFO on April 11, 2011 valued at the trading price of the common stock of $0.0095 and were recorded as an expense of $38,000.
NOTE 11 – STOCK-BASED COMPENSATION
Options
The prior board of directors adopted the 2000 Stock Option Plan effective January 1, 2001. Our stockholders formally approved the 2000 Stock Option Plan on February 14, 2001. The 2000 Stock Option plan terminated in accordance with the plan provisions on December 1, 2010. The current Board of Directors did not extend the Stock Option Plan, allowing it to terminate.
There were no options outstanding for the nine months ended June 30, 2012 and 2011, respectively.
Warrants
The Company values all warrants using the Black-Scholes option-pricing model. Critical assumptions for the Black-Scholes option-pricing model include the market value of the stock price at the time of issuance, the risk-free interest rate corresponding to the term of the warrant, the volatility of the Company’s stock price, dividend yield on the common stock, as well as the exercise price and term of the warrant. The warrants are not subject to any form of vesting schedule and, therefore, are exercisable by the holders anytime at their discretion during the life of the warrant. No discounts were applied to the valuation determined by the Black-Scholes option-pricing model.
During the nine months ended June 30, 2012 and 2011, no awards were granted, no share purchase warrants were exercised, and no warrants were forfeited.
Summary of warrant activity for the nine months ended June 30, 2012 and 2011 is presented below:
| Number of Shares Granted | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||||
| September 30, 2010 | 2,308,497 | $ | 0.10 | .38 | — | |||||||||||||
| Grants | — | — | ||||||||||||||||
| Expired | (2,308,497 | ) | — | |||||||||||||||
| September 30, 2011 | — | $ | — | $ | — | $ | — | |||||||||||
| Grants | — | |||||||||||||||||
| Expired | — | |||||||||||||||||
| September 30, 2012 | — | $ | — | $ | — | $ | — | |||||||||||
NOTE 12 – SUBSEQUENT EVENTS
On November 21, 2012, the Company, through a purchase agreement with CipherSmith, LLC, purchased a complete source code, intellectual property rights, all computer software or algorithm licensed or sold under CipherSmith, and appropriate copy rights, patents, mask works, trademarks, service marks, internet domain names or world wide web URS. The fair value of the consideration and the assets acquired is based on the aggregate fair value of the 500,004 shares of common stock issued in exchange for the software. The total fair value on the date of grant was $15,800.
On June 22, 2012, the Company entered into an acquisition agreement that ultimately closed on March 16, 2013. The Company acquired Doctors Network of America in Flowood, Mississippi for 500,000 common shares. The acquisition was valued at $10,000 based on the trading price of the stock on the date of grant. As of September 30, 2012, 200,000 shares were issued which were valued at $4,000 and recorded as a deposit on the acquisition. The fair value of the consideration and the assets acquired is based on the aggregate fair value of the common stock issued in exchange for the software. The total fair value on the date of grant was $10,000.
Immediately after the transaction was closed the sellers refused to pay for medical billing process transaction fees in accordance with their contracts. The Company and the sellers are currently in litigation over the disputed transaction fees of approximately $200,000. The Company has recorded an impairment of the acquired asset in the amount of $4,000 for 2012 and $6,000 for the year ended September 30, 2013.
In October, 2013, the Company through a purchase agreement (the “Asset Purchase Agreement”) the year ended September 30, with Antree Systems Limited has purchased a complete source code, intellectual property rights, all computer software, patents, or formulas, algorithm licensed or sold under a project known as Compass Rose and appropriate copyrights, patents, mask works, trademarks,, service marks, internet domain names and world wide web URS. The fair value of the consideration and the assets acquired is based on the fair value of the 40,000 shares of common stock issued in exchange for the software. The total fair value on the date of grant was $6,000.
In November 2013, the Company entered into a revolving line of credit with Mutual of Omaha for a line of credit in the amount of $65,000.
On December 17, 2013 the Company amended its Articles of Incorporation that gave the right to the holders of Preferred A shares to convert 1 share of Convertible Preferred A shares to 150 Common Shares of the Company. The holders of the Preferred A shares can convert the shares upon proper notice to the Board of Directors. Presently the holders of the Preferred A shares have not sent notice to the Board of Directors.
Stock issuances
Fiscal Year Ended September 30, 2014
In October 2013, the Company issued 25,000 shares of common stock for cash of $5,000.
In October 2013, the Company issued 160,000 shares of common stock to Antree Systems Ltd and 40,000 shares of common stock to Michael Anthony in accordance with the Asset Purchase Agreement. These shares were valued at $6,000 based on the market price on the date of grant.
In November 2013, the Company issued 180,000 shares of common stock as replacement shares for the 160,000 shares of common stock issued to Antree Systems Ltd and 20,000 shares of common stock to Kimberly Ilicerl. The Company intends to cancel these replacement shares because the shares were lost when delivered to Antree Systems. The Company replaced those lost shares and will cancel the shares that were lost when delivered to Ireland the office of Antree Systems.
Fiscal Year Ended September 30, 2013
During year ended September 30, 2013, the Company issued 217,500 shares of common stock for $143,000 in net proceeds as follows:
| Date | Number of Shares | Proceeds | ||||||||
| October 14, 2012 | 20,000 | $ | 20,000 | |||||||
| October 14, 2012 | 15,000 | $ | 3,000 | |||||||
| October 14, 2012 | 18,750 | $ | 2,500 | |||||||
| October 14, 2012 | 18,750 | $ | 2,500 | |||||||
| December 6, 2012 | 15,000 | $ | 3,000 | |||||||
| March 12, 2013 | 20,000 | $ | 20,000 | |||||||
| March 12, 2013 | 20,000 | $ | 20,000 | |||||||
| April 17, 2013 | 20,000 | $ | 20,000 | |||||||
| August 26, 2013 | 20,000 | $ | 2,000 | |||||||
In October 2012, the Company issued 50,000 shares of common stock valued at $1,300 based on the market price on the date of grant, in conjunction with the sale of medical software. The Company also issued 10,000 shares of common stock valued at $260 based on the market price on the date of grant, as commission payments to the Krooss Family Trust LLP.
On December 6, 2012, the Company issued 100,000 shares of common stock valued at $2,800 based on the market price on the date of grant, for the sale of medical software and 100,000 shares of common stock valued at $2,800 based on the market price on the date of grant for consulting services.
On March 12, 2013, the Company issued 50,000 shares of common stock valued at $1,750 based on the market price on the date of grant, for the sale of medical software and 50,000 shares of common stock valued at $1,750 based on the market price on the date of grant for consulting services.
On March 21, 2013, the Company issued 100,000 shares of common stock valued at $3,500 based on the market price on the date of grant, for the purchase of software in accordance with the Software Licensing and Subscription Agreements.
On March 21, 2013, the Company issued 667,000 shares of common stock valued at $23,345 based on the market price on the date of grant, to Krooss Family Trust LLP for compensation for salaries for the entire year of 2013.
On April 17, 2013, the Company issued 300,000 shares of common stock valued at $6,000 based on the market price on the date of grant, to Krooss Family Trust LLP for the acquisition of Doctors Network of America in Flowood, Mississippi and all of the assets of that company. On April 17, 2013 the Company issued 78,500 to Krooss Family Trust LLP for compensation in accordance with the DNA acquisition agreement and the shares of common stock valued at $2,630 based on the market price on the date of grant, for the software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
On April 17, 2013, the Company issued 75,000 shares of common stock valued at $2,513 based on the market price on the date of grant, for the software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
On May 1, 2013, the Company issued 20,000 shares of common stock valued at $522 based on the market price on the date of grant, for programming consulting services.
On May 10, 2013, the Company issued 20,000 shares of common stock valued at $522 based on the market price on the date of grant, for programming consulting services.
On June 26, 2013, the Company issued 25,000 shares of common stock valued at $450 based on the market price on the date of grant, for software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
On August 26, 2013, the Company issued 100,000 shares of common stock valued at $1,800 based on the market price on the date of grant, to two software sales personnel located in California.
On September 30, 2013, the Company issued 120,000 shares of common stock valued at $3,000 based on the market price on the date of grant, for programming consulting services.
On September 30, 2013, the Company issued 50,000 shares of common stock valued at $1,250 based on the market price on the date of grant, for software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
During year ended September 30, 2013, the Company issued 500,004 shares of common stock for the acquisition of CipherSmith software. Those shares were valued at $15,800 based on the market price on the dates of grant.
Three Months Ended September 30, 2012
On July 15, 2012, the Company issued 100,000 shares of common stock valued at $2,500 based on the market price on the date of grant, for software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
On August 9, 2012, the Company issued 335,000 shares of common stock valued at $10,050 based on the market price on the date of grant, for software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
On September 9, 2012, the Company issued 14,000 shares of common stock for services rendered by professionals and recorded the expenses based upon the market price of $0.03 and expensed $420 as consulting fees.
Employment Agreements
The Company entered into an employment agreement with its Chief Executive Officer on January 1, 2013. The employment agreement will expire on January 1, 2018 and shall automatically renew for another 5 years unless terminated in accordance with the provisions of the employment agreement. The employment agreement provides for:
| i. | A monthly salary of $20,833 subject to an annual increase of 10% and consistent with the Company policy applicable to other senior executives and officers and approval by the Board of Directors. |
| ii. | A cash bonus of 25% of his annual base salary each year if the Company reaches the following milestones (none of which were attained in 2013): |
| a. | The Company posts annual gross revenues on a consolidated basis of at least $5,000,000; |
| b. | The Company's earnings before the deduction of income taxes and amortization expenses (“EBITA”), including cash extraordinary items but before officer's bonuses, on a consolidated basis for any year is at least $1,000,000; or the completion of the delinquent SEC filings for five (5) years through September 30, 2013 or the Company obtains FINRA approval for any reverse stock splits. |
| iii. | The issuance of shares equal to 1% of the then issued and outstanding shares of the Company annually, which will be issued in 2013. |
| iv. | The issuance of common stock on each anniversary date of the employment agreement of 5,000,000 shares and issuance of common stock for every acquisition granting 5,000,000 shares for DNA, 5,000,000 shares for CipherSmith, LLC, and 1,000,000 shares for MediSouth, LLC. |
| v. | An automobile allowance of $1,500 per month. |
| vi. | A medical insurance allowance of $1,500 per month. |
| vii. | In the event the Executive's employment is terminated without cause, he will receive the entire contract remaining on the agreement. |
The Company entered into an employment agreement with its Chief Financial Officer on January 1, 2013. The employment agreement will expire January 1, 2018 and shall automatically renew for another 5 years unless terminated in accordance with the provisions of the employment agreement. The employment agreement provides for:
| i. | A monthly salary of $12,500 per month subject to an annual increase of 10% per year and consistent with the Company policy applicable to other senior executives and officers and approval by the Board of Directors. |
| ii. | A cash bonus of 25% of his annual base salary each year if the Company reaches the following milestones (none of which were attained in 2013): |
| a. | The Company posts annual gross revenues on a consolidated basis of at least $5,000,000; |
| b. | The Company's earnings before the deduction of income taxes and amortization expenses (“EBITA”), including cash extraordinary items but before officer's bonuses, on a consolidated basis for any year is at least $1,000,000; or the completion of the delinquent SEC filings for five (5) years through September 30, 2013, or the Company obtains FINRA approval for any reverse stock splits. |
| iii. | The issuance of shares equal to 1% of the then issued and outstanding shares of the Company annually, which will be issued in 2013. |
| iv. | The issuance of common stock on each anniversary date of the Employment Agreement of 5,000,000 shares and issuance of common stock for every acquisition granting 3,000,000 shares for DNA, 3,000,000 shares for Cipher Smith, LLC, and 750,000 for MediSouth, LLC. |
| v. | An automobile allowance of $1,000 per month. |
| vi. | A medical insurance allowance of $1,500 per month. |
| vii. | In the event the Executive's employment is terminated without cause he will receive the entire contract remaining on the agreement. |
In this Quarterly Report on Form 10-Q, “Company,” “our company,” “us,” and “our” refer to Cloud Medical Doctor Software Corporation and its subsidiaries, unless the context requires otherwise.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Management’s Discussion and Analysis contains various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, delayed payments of accounts receivables, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.
In addition, the foregoing factors may affect generally our business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.
Our Company
The Company was incorporated in Texas on June 22, 1953 as American Mortgage Company. On May 16, 1996, the Company changed its name to National Scientific Corporation. On April 3, 2012, the Company changed its name to Cloud Medical Doctor Software Corporation. During 1996, the Company acquired the operations of Eden Systems, Inc. (Eden) as a wholly owned subsidiary. Eden was engaged in water treatment and the retailing of cleaning products. Eden’s operations were sold on October 1, 1997. From September 30, 1997 through the year ended September 30, 2001, we aimed our efforts in the research and development of semiconductor proprietary technology and processes and in raising capital to fund its operations and research. Beginning in calendar 2002, we focused our efforts on the development, acquisition, enhancement and marketing of location device technologies. Our revenue was derived from sales of electronic devices, recognized as the product is delivered.
On February 4, 2010, the prior Board members Mr. Michael Grollman and Mr. Greg Szabo, voted to discontinue and wind down the operations of the Company's Mobile DVR and Location Products business and operate these remaining Company assets in a Limited Liability Company named NSC Labs, LLC, a company controlled and owned by Mr. Grollman. Mr. Grollman and NSC Labs, LLC entered into an agreement to pay the Company $100,000 plus 2% of revenues. As of this filing, neither Mr. Grollman nor NSC Labs, LLC have paid the specified consideration for this transaction. Accordingly, the transaction has not been recorded in the accounting records of the Company. The Company discontinued these operations in 2011.
On November 19, 2010, the prior management was terminated and new management began working on operations related to the Company’s medical billing software. In fiscal 2011, the year of termination of prior management, new management deemed that the above transaction transferring prior operations to NSC Labs, LLC was transacted in full and final settlement of the liabilities to former management including those captioned as “disputed accrued expenses – related party” on the Balance Sheet Since the transaction was related to former management who had the ability to affect the terms and outcomes of the liabilities, the transaction has been subsequently recorded as an increase to additional paid in capital.
The Future for Cloud-MD™
Our business strategy includes the acquisition of successful billing companies in strategic markets, the acquisition or licensing of useful emerging technologies and the direct sale to physicians of Cloud-MD™ Office software licenses.
On the Medical Software and Billing Services side of the equation, Cloud-MD™ has already begun the sale of software licenses and the acquisition of billing companies with the purchase of Doctors Network of America, LLC and is currently in final negotiations with two others billing companies in Texas and we are currently in talks with another medical software company to acquire their software assets and customer base.
Our model is effective because we offer:
| · | Software For Life – Buy One Time | |
| · | Evergreen Product - Support, Maintenance and Upgrades Included With User License | |
| · | Physician Ownership Opportunity – Stock Award With Purchase Of License | |
| · | Cloud-MD™ is Publicly Traded NSCT.PK | |
| · | Patented Auto Post Feature - To Eliminate Need For Manual Posting of Electronic Remittance Advice (835) By Staff | |
| · | Multiple Opportunities to Recover Investment (Meaningful Use Dollars, Stock Award Option, IRS Section 179, Lower Employee and Maintenance Cost) | |
| · | State-Of-The-Art Claims Editing and Real-Time Eligibility - Increase Collections and Reduce Days in A/R | |
| · | Cloud Based Technology- IPAD, IPHONE, ANDROID, GOOGLE, WINDOWS for Anytime and Anywhere Availability and Eliminates Catastrophic Loss of Data |
As we move forward building on our current platforms and strengths and gaining significant momentum in acquisitions, capabilities and revenue streams, it is important for Cloud-MD™ to augment its portfolio of capabilities with solutions that complement those offerings currently available. With the addition of a pending acquisition, we will add another dimension to our Cloud-MD™ Office and Billing Services offering that will offer a secure mechanism for providers to exchange patient PHI without the need to have all of the providers on a common EMR platform, but will integrate with our EMR in a manner that offers prospective large clients such as hospitals, ACO’s, etc. the functionality of an Electronic Health Interchange without the huge costs and overhead. In addition, we have recently developed enhanced capabilities within our Cloud-MD™ Office product offering that will offer superior solutions to hospitalists, nursing home practitioners and providers of home health services.
The Future for CipherLoc™
The digital cipher and encryption market offers seemingly endless opportunity. Our CipherLoc™ Polymorphic Cipher Engine is a ground-breaking; state-of-the-art Polymorphic Key Progression Algorithm (PKPA) based digital encryption solution that has wide-spread applicability throughout the commercial computer, communications and broadcasting industries as well as significant applicability in the government arena.
Results of Operations for the three and nine months ended June 30, 2012 and June 30, 2011
Revenue increased to $243,480 from $0 for the three months ended June 30, 2012 and 2011 as compared $460,165 and $0 for the nine months ended June 30, 2012 and 2011, respectively. Our revenue increased due to the commencement of our operations in medical billing contracts to health care providers.
Cost of revenue increased to $61,729 from $0 for the three months ended June 30, 2012 and 2011 as compared to $121,734 and $0 for the nine months ended June 30, 2012 and 2011, respectively. Our cost of sales increased due and the amortization of the intangible assets.
General and administrative expenses increased to $78,612 from $69,840 for the three months ended June 30, 2012 and 2011 as compared to $153,045 and $222,580 for the nine months ended June 30, 2012 and 2011, respectively. The changes in general and administrative expenses are related to the salaries of management and costs of accounting.
Research and development costs increased to $55,000 from $22,000 for the three months ended June 30, 2012 and 2011 as compared to $97,000 and $55,500 for the nine months ended June 30, 2012 and 2011, respectively. Our research and development increase is related to updates to our software required to be in compliance with the updated Affordable Care Act updated and other modifications.
Interest expenses decreased to $181 from $4,506 for the three months ended June 30, 2012 and 2011 as compared to $1,283 and $11,583 for the nine months ended June 30, 2012 and 2011, respectively. Our interest expense decreased as a result of the lower outstanding principal balance of our line of credit.
Gain on write off of debt was $337,269 and $0 for the nine months ended June 30, 2012 and 2011 respectively. The Company wrote off notes payable, accounts payable and accrued expenses previously classified as discontinued operations that had expired under the statute of limitations. Since the write-off was related to debt incurred related to discontinued operations, the gain has been recorded to discontinued operations.
We recorded a gain from discontinued operations of $0 and a $4,506 loss for the three months ended June 30, 2012 and 2011, respectively. We recorded $323,868 gain and a $11,583 loss from discontinued operations for the nine months ended June 30, 2012 and 2011, respectively. The Company is currently engaged in the medical billing operations. Until October 1, 2009, the Company’s sole sources of revenues were from GPS operational device business. The Company discontinued its GPS operational device business in February 2010 (See “Note 6 - Discontinued Operations” to the accompanying Financial Statements).
Liquidity and Capital Resources
We expect to incur substantial expenses and generate significant operating losses as we continue to grow our operations, as well as incur expenses related to operating as a public company and compliance with regulatory requirements.
We have an accumulated deficit at June 30, 2012 of $25,822,999 and need additional cash flows to maintain our operations. We depend on the continued contributions of our executive officers to finance our operations and need to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of our products and business. We expect our cash needs for the next 12 months to be $850,000 to fund our operations. The ability of the Company to continue its operations is dependent on the successful execution of management’s plans, which include expectations of raiding debt or equity based capital until such time that funds from operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with related parties to sustain the Company’s existence. There is no assurance that such funding, if required will be available to us or, if available, will be available upon terms favorable to us.
The Company had an outstanding balance on a line of credit with Chase Bank of $22,023 at June 30, 2012 and has received advances from our Chief Executive Officer of $65,604 which we have used to help fund our operations. The line of credit allows us to borrow up to $50,000 as a revolving line of credit.
Cash flows from operations. Our cash provided by (used in) operating activities were $225,742 and ($158,115) for the nine months ended June 30, 2012 and 2011, respectively. The increase in cash flows provided by operations was primarily attributable to the increase in revenues in 2012 as compared to the 2011 period.
Cash flows from financing activities. Cash (used in) provided by financing activities were ($69,704) and $155,518 for the nine months ended June 30, 2012 and 2011, respectively. We received cash from the sale of our common stock of $68,000 and $0 for the nine months ended June 30, 2012 and 2011, respectively. During the nine months ended June 30, 2012, we received advances from our CEO of $33,462 and repaid advances from our CEO of $148,654. During the nine months ended June 30, 2011, we received advances from our CEO of $7,663. During the nine months ended June 30, 2012, we repaid our Chase line of credit of $22,512. During the nine months ended June 30, 2011, we received proceeds from our line of credit of $8,102.
Off-Balance sheet arrangements
We have no off-balance sheet arrangements including arrangements that would affect the liquidity, capital resources, market risk support and credit risk support or other benefits.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly Report on Form 10-Q in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any derivative instruments and do not engage in any hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives. As required by SEC Rule 13a-15(b), our Chief Executive Officer and Principal Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective since the Company has been ineffective in filing timely.
Our Chief Executive Officer and Principal Financial Officer are responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our Chief Executive Officer and Principal Financial Officer have concluded that our internal control over financial reporting was not effective as of June 30, 2012. There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. The Company has been ineffective in the timely filing of the company’s quarterly filings.
The Company’s material weaknesses in financial reporting were:
| a. | The inability of the Company to prepare and file its financial statements timely due to its limited financial and personnel resources and delays in the Company’s ability to respond to SEC inquiries regarding financial and accounting presentation. Further, the Company is delinquent in filings for fiscal year ended 2012 through 2013. | |
| b. | There were no changes in our internal control over financial reporting that occurred during the nine months ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. | |
| c. | It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. |
OTHER INFORMATION
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
On July 5, 2013, the Company filed a complaint against Krooss Medical Management Systems, LLC, William F. Krooss and Marie W. Krooss in the United States District Court, District of Nevada Case No. 2013-CV-01187-ABG-VCF for the collection of $150,000 of unpaid medical billing fees that were seriously delinquent. After many attempts by the Company to begin collections, the Defendants refused to pay the outstanding balances, however expected the Company to continue to bill for them. The Complaint includes causes of action Breach of the PTAPA, Breach of Billing and Collections Contracts, Negligence, Breach of the Duty of Good Faith and Fair Dealing, Tortious Interference with Business Relations, Fraud, among other causes of action.
On August 13, 2013, Krooss Medical Management Systems et al filed a Complaint in Chancery Court of Rankin County, Mississippi Case No. 13-1372 as a strategy to keep the collection matter in Mississippi Chancery Court.
Case No. 13-1372 was remanded to the United States District Court, Southern District of Mississippi Jackson Division Case No. 3:13CV507-HTW-LRA.
This litigation is a collection matter of unpaid fees by the Defendants and the Company vehemently denies the allegations (Breach of the Permanent Transfer Asset Purchase Agreement (“PTAPA”), Rescission of the PTAPA, Breach of Billing and Collections Contracts, Negligence, Quantum Meruit, Restitution, and Estoppel, Breach of the Duty of Good Faith and Fair Dealing, Tortious Interference with Business Relations, among other causes of action) filed in Mississippi Chancery Court related to this collection matter. The Company does not expect the cost to litigate this matter to adversely affect the Company’s operations. However, the Company has reduced operations in DNA-Cloud in Mississippi as the sellers have interfered with the billing contracts purchased which is one of the causes of action in Complaint, among others. Many of the contracts have been terminated due to the interference by the sellers, and DNA-Cloud has not been able to expand the business because of the reputation of the sellers in Jackson, Mississippi and the surrounding area.
There were no material changes from the risk factors previously disclosed in Part II, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2011 during our nine months ended June 30, 2012.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SECURITIES
Fiscal Year Ended September 30, 2014
In October 2013, the Company issued 25,000 shares of common stock for cash of $5,000.
In October 2013, the Company issued 160,000 shares of common stock to Antree Systems Ltd and 40,000 shares of common stock to Michael Anthony in accordance with the Asset Purchase Agreement. These shares were valued at $6,000 based on the market price on the date of grant.
In November 2013, the Company issued 180,000 shares of common stock as replacement shares for the 160,000 shares of common stock issued to Antree Systems Ltd and 20,000 shares of common stock to Kimberly Ilicerl. The Company intends to cancel these replacement shares because the shares were lost when delivered to Antree Systems. The Company replaced those lost shares and will cancel the shares that were lost when delivered to Ireland the office of Antree Systems.
Fiscal Year Ended September 30, 2013
During year ended September 30, 2013, the Company issued 217,500 shares of common stock for $143,000 in net proceeds as follows:
| Date | Number of Shares | Value | ||||||||
| October 14, 2012 | 20,000 | $ | 20,000 | |||||||
| October 14, 2012 | 15,000 | $ | 3,000 | |||||||
| October 14, 2012 | 18,750 | $ | 2,500 | |||||||
| October 14, 2012 | 18,750 | $ | 2,500 | |||||||
| December 6, 2012 | 15,000 | $ | 3,000 | |||||||
| March 12, 2013 | 20,000 | $ | 20,000 | |||||||
| March 12, 2013 | 20,000 | $ | 20,000 | |||||||
| April 17, 2013 | 20,000 | $ | 20,000 | |||||||
| August 26, 2013 | 20,000 | $ | 2,000 | |||||||
In October 2012, the Company issued 50,000 shares of common stock valued at $1,300 based on the market price on the date of grant, in conjunction with the sale of medical software. The Company also issued 10,000 shares of common stock valued at $260 based on the market price on the date of grant, as commission payments to the Krooss Family Trust LLP.
On December 6, 2012, the Company issued 100,000 shares of common stock valued at $2,800 based on the market price on the date of grant, for the sale of medical software and 100,000 shares of common stock valued at $2,800 based on the market price on the date of grant for consulting services.
On March 12, 2013, the Company issued 50,000 shares of common stock valued at $1,750 based on the market price on the date of grant, for the sale of medical software and 50,000 shares of common stock valued at $1,750 based on the market price on the date of grant for consulting services.
On March 21, 2013, the Company issued 100,000 shares of common stock valued at $3,500 based on the market price on the date of grant, for the purchase of software in the company in accordance with the Software Licensing and Subscription Agreements.
On March 21, 2013, the Company issued 667,000 shares of common stock valued at $23,345 based on the market price on the date of grant, to Krooss Family Trust LLP for compensation for the salaries for the entire year of 2013.
On April 17, 2013, the Company issued 300,000 shares of common stock valued at $6,000 based on the market price on the date of grant, to Krooss Family Trust LLP for the acquisition of Doctors Network of America in Flowood, Mississippi and all of the assets of that company. On April 17, 2013 the Company issued 78,500 to Krooss Family Trust LLP for compensation in accordance with the DNA acquisition agreement and the shares of common stock valued at $2,630 based on the market price on the date of grant, for the software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
On April 17, 2013, the Company issued 75,000 shares of common stock valued at $2,513 based on the market price on the date of grant, for the software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
On May 1, 2013, the Company issued 20,000 shares of common stock valued at $522 based on the market price on the date of grant, for programming consulting services.
On May 10, 2013, the Company issued 20,000 shares of common stock valued at $522 based on the market price on the date of grant, for programming consulting services.
On June 26, 2013, the Company issued 25,000 shares of common stock valued at $450 based on the market price on the date of grant, for software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
On August 26, 2013, the Company issued 100,000 shares of common stock valued at $1,800 based on the market price on the date of grant, to two software sales personnel located in California.
On September 30, 2013, the Company issued 120,000 shares of common stock valued at $3,000 based on the market price on the date of grant, for programming consulting services.
On September 30, 2013, the Company issued 50,000 shares of common stock valued at $1,250 based on the market price on the date of grant, for software investment in the Company in accordance with the Software Licensing and Subscription Agreements.
During year ended September 30, 2013, the Company issued 500,004 shares of common stock for the acquisition of CipherSmith software. Those shares were valued at $15,800 based on the market price on the dates of grant.
Fiscal Year Ended September 30, 2012
During year ended September 30, 2012, the Company issued 190,000 shares of common stock for $68,000 as follows:
| Date | Number of Shares | Value | ||||||||
| October 15, 2011 | 25,000 | $ | 5,000 | |||||||
| December 29, 2011 | 100,000 | $ | 50,000 | |||||||
| June 21, 2012 | 65,000 | $ | 13,000 | |||||||
On October 15, 2011, the Company issued 30,000,000 shares of common stock for the extinguishment of debt from our CEO in the principal amount of $1,200,106.
On December 15, 2011, the Company issued 18,000 shares of common stock for services rendered by professionals and recorded expense based upon the market price of $0.0102 and expensed $184 as consulting fees.
The Company issued 941,333 shares of common stock to third parties that have purchased our medical billing software at the market price of the common stock of ranging from $0.015 to $0.03. The Company and recorded $19,301 as a reduction to revenue for the value of the shares issued.
The Company issued 200,000 shares of common stock on June 21, 2012 to Krooss Medical Management in accordance with the acquisition agreement for Doctors Network of America and recorded it at the market price of the common shares of $0.020 and as an investment in Krooss Medical Management of $4,000.
On June 21, 2012, the Company issued 1,000 shares of common stock for services rendered by professionals and recorded the expenses based upon the market price of $0.02 and expensed $20 as consulting fees.
The Company issued 100,000 shares of common stock to MediSouth LLC in accordance with the acquisition agreement and recorded it at the market price of the common shares of $0.025 and as an investment in MediSouth LLC of $2,500.
On September 9, 2012, the Company issued 14,000 shares of common stock for services rendered by professionals and recorded the expenses based upon the market price of $0.03 and expensed $420 as consulting fees.
Fiscal Year Ended September 30, 2011
On January 2, 2011, the Company issued 15,000,000 shares of common stock, valued at the market price of the common stock of $0.007 on the date of grant. The shares were issued to new management and recorded as compensation expenses of $105,000.
On September 12, 2011, the Company sold 250,000 shares of common stock for $25,000 in net cash proceeds.
The offer and sale of such shares of our common stock were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933 (the “Securities Act”) and in Section 4(2) of the Securities Act, based on the following: (a) the investors confirmed to us that they were “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the period ended June 30, 2012.
ITEM 4. MINING SAFETY DISCLOSURES
N/A
There is no information with respect to which information is not otherwise called for by this form.
Exhibits filed herein for June 30, 2012
Exhibits
| 3.1 | Articles of Incorporation(1) | |||
| 3.2 | Bylaws(2) | |||
| 10.1 | Employment Agreement between National Scientific Corporation and Michael A. Grollman dated January 2001(4) | |||
| 10.2 | Employment Agreement between National Scientific Corporation and Graham L. Clark dated January 2003(6) | |||
| 10.3 | NSC Consulting Agreement dated August 2001, and Amendments dated August 2002 and July 2003, with Dr. El-Badawy El-Sharawy(6) | |||
| 10.4 | Amended and Restated 2000 Stock Option Plan(3) | |||
| 10.5 | Form of 2004 Stock Retainage Plan Agreement(6) | |||
| 10.6 | Agreement Regarding Management Consulting Services with Stanton Walker of New York dated May 2003(6) | |||
| 10.7 | Agreement Regarding Distribution and Marketing of Gotcha!® Child Safety Product and other products dated December 2002 with FutureCom Global, Inc. (6) | |||
| 10.8 | Purchase Order from Verify Systems, Inc, dated March 2003 for IBUS™ School Child Tracking Systems(5) | |||
| 10.9 | Letter of Understanding and Agreement dated April 2004 Regarding Sales and Distribution of Verify School safety products, and an Unlimited Software License with Anthony Grosso and CIS Services, LLC(6) | |||
| 10.10 | Letter of Intent from Positus, Inc. dba Bike & Cycle Trak, dated February 2003 for Design of Power Sports Tracking System(6) | |||
| 10.11 | Purchase Order from Positus, Inc. dba Bike & Cycle Trak, for Design of Power Sports Tracking System dated March 2003(6) | |||
| 10.12 | Employment agreement of Michael De La Garza(8) | |||
| 10.13 | Employment agreement of Pamela Thompson(8) | |||
| 14 | Code of Ethics(7) | |||
| 31 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act | |||
| 32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act |
____________
| (1) | Incorporated by reference to the Registrant’s Form 10-SB filed on or about January 3, 2000. |
| (2) | Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended March 31, 2001 and filed on or about May 15, 2001. |
| (3) | Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended December 31, 2000 and filed on or about February 14, 2001. |
| (4) | Incorporated by reference to the Registrant’s Form 10-KSB for the year ended September 30, 2000 and filed on or about December 19, 2000. |
| (5) | Incorporated by reference to the Registrant’s Form S-8 filed on or around June 3, 2003. |
| (6) | Incorporated by reference to the Registrant’s Form SB2 filed on or around June 24, 2004. |
| (7) | Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended June 30, 2004 and filed on or about August 16, 2004. |
| (8) | Incorporated by reference to the Registrant’s Form 10-K for the year ended September 30, 2011 and filed on or about October 10, 2013. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Registrant
Date: January 21, 2014 |
Cloud Medical Doctor Software Corporation
By: /s/ Michael De La Garza | |
| Michael De La Garza | ||
| Chief Executive Officer (Principal Executive Officer) | ||
Registrant
Date: January 21, 2014 |
Cloud Medical Doctor Software Corporation
By: /s/ Pamela Thompson | |
| Pamela Thompson | ||
| Principal Financial Officer |