The accompanying 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, 2012. 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, 2013 are not necessarily indicative of the results that
can be expected for the year ending September 30, 2013.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2013 AND 2012
(Unaudited)
NOTE 1- DESCRIPTION OF
BUSINESS
Cloud Medical Doctor Software Corporation
(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.
In the year ended September 30, 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 the year ended September 30, 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 and 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, 2013 are not necessarily indicative of the results that may be expected for the year ending September 30, 2013.
Notes to the unaudited interim financial statements that would substantially duplicate the disclosures contained in the audited
financial statements for the year ended September 30, 2012 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, 2012 included within the Company’s
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, 2013 of $26,267,542
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, 2013, cash and cash equivalents
include cash on hand and cash in the bank and the FDIC insures these deposits up to $250,000.
Impairment of Long-Lived Assets
Long-lived assets are 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 acquired software technologies are reviewed annually for impairment.
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, 2013 and September 30, 2012 for assets measured at fair value on a recurring basis:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
At June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary Technology
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
879,076
|
|
|
$
|
879,076
|
|
Total Proprietary Technology
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
879,076
|
|
|
$
|
879,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary Technology
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,022,591
|
|
|
$
|
1,022,591
|
|
Total Proprietary Technology
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,022,591
|
|
|
$
|
1,022,591
|
|
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, 2013
and 2012, 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 June 30, 2013, 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. In the first year and each year thereafter, the software is purchased and installed the purchaser
will 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 a transaction occurs:
|
·
|
Electronic Remittance Advise $0.35 Electronic
remittance transaction fee;
|
|
·
|
Paper Claim
s
$1
.
00
Pa
p
er
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 had not received any transaction
revenues in the nine months ended June 30, 2013.
Cost of License, and Subscriptions 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 license-based royalties during the nine months ended June 30, 2013 and 2012.
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, 2013 and 2012.
The amortization of acquired technology
for products acquired through business combinations are considered as the cost of revenues. The acquired software technologies
are amortized over their useful lives of 5 years
Sales Commissions
The Company pays commissions, including
sales bonuses, to the direct sales force related to revenue transactions under sales compensation plans which are established annually.
The commission payments are typically paid in full in the month or quarter following execution of the customer contracts. The Company
paid commissions of $10,000 and $28,028 for the three months ended June 30, 2013 and 2012, respectively. The Company paid commissions
of $50,260 and $53,205 for the nine months ended June 30, 2013 and 2012, respectively.
Research
and Development and Software Development Costs
Capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on our product development process, technological feasibility
is established 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. The Company recorded research and development costs of $58,044 and
$55,000 for the three months ended June 30, 2013 and 2012, respectively. The Company recorded research and development costs of
$153,044 and $97,000 for the nine months ended June 30, 2013 and 2012, 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 Income (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, 2013 and 2012, 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.
Subsequent Events
The Company has evaluated all transactions
occurring between the nine months ended June 30, 2013, through the date of issuance of the financial statements for subsequent
event disclosure.
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 – SOFTWARE
The following is a detail of software at June
30, 2013 and September 30, 2012:
|
|
June 30,
2013
|
|
September 30,
2012
|
Source Code License
|
|
$
|
2,500
|
|
|
$
|
2,500
|
|
Software License
|
|
|
1,200,106
|
|
|
|
1,200,106
|
|
EMR Certification
|
|
|
23,000
|
|
|
|
—
|
|
Encryption Software Code
|
|
|
15,800
|
|
|
|
—
|
|
Acquisition of Doctor’s Network of America
|
|
|
10,000
|
|
|
|
4,000
|
|
Total intangible assets
|
|
|
1,251,406
|
|
|
|
1,206,106
|
|
Accumulated amortization of intangible assets
|
|
|
(362,330
|
)
|
|
|
(180,015
|
)
|
Impairment of assets
|
|
|
(10,000
|
)
|
|
|
(4,000
|
)
|
Total intangible assets
|
|
$
|
879,076
|
|
|
$
|
1,022,591
|
|
The Company’s software was placed into
service starting in the second quarter of fiscal year ended September 30, 2012. The amortization expense was $182,315 and $120,010
for the nine months ended June 30, 2013 and 2012, respectively. The Company recognized a $6,000 and $4,000 impairment of Doctors
Network of America (“DNA”) operating in Flowood, Mississippi during the nine months ended June 30, 2013 and the year
ended September 30, 2012, respectively. The Company is currently in litigation with the sellers of DNA relating to the collection
of certain medical billings owed to the Company. As a result of the litigation, the Company deemed the investment to be impaired.
Source Code License
On August 14, 2012, the Company, through
a comprehensive agreement with MediSouth, LLC, (“MediSouth”) has purchased a complete source code license and will
integrate and enhance this feature set as part of its Cloud-MD Office product suite.
The License Agreement requires the following:
a)
|
|
That Me
diS
outh wi
l
l pro
v
ide
the Company
w
it
h
a
ll s
o
f
t
w
are updates for the license within 5 working days of
MediSouth
i
mplementin
g
th
o
se s
a
me soft
w
are updates in its own production version of the license
.
|
b)
|
|
The Company has the right to modify the software
c
ontained in
t
he
li
cense to meet
it
s operat
i
onal needs.
|
c
)
|
|
The Company
sha
l
l
p
rovide to MediSouth
,
with the permission of each affected
Company
cl
i
e
nt
,
t
he de
-
i
dent
i
fied purchasing data which is any data that would identify a patient such as social security numbers, date of birth, health condition, among others that it collects as a result of the Company’s clients utili
z
ing t
he
embedded Medical Supplies and Pharmaceutical Inventory
M
anagemen
t f
un
ctio
n
a
lit
y
pro
v
ided b
y
the license
.
|
e
)
|
|
MediSouth shall recei
v
e 100
,
000 shares of the Company’s non-dilutable
,
common
s
toc
k
with a on
e (1
)
y
e
a
r tradin
g
restriction.
|
f)
|
|
The Company
may not sell the license, transfe
r
the license
,
allow an
y
o
t
he
r
e
n
ti
ty
to
us
e
the
l
i
c
en
s
e
as pa
rt
o
f that entit
y
'
s software application o
r t
ransf
er an
y r
i
ght
s
t
o a
not
h
e
r p
a
r
t
y t
o
u
se
the
l
icen
s
e s
e
pa
r
atel
y
from the Company’s
p
roducts in
w
hi
ch
t
h
e
lic
e
nse i
s
embedded
.
|
The fair value of the consideration
and the assets acquired is based on the aggregate value of the 100,000 shares of common stock issued in exchange for the software.
The total fair value on August 14, 2012 was $2,500.
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 and 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
|
|
Encryption Software Code
On November 21, 2012, the Company purchased
from CipherSmith, LLC 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 Company issued 500,004 shares of its common stock as payment for 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 of the shares of common stock issued on the date of grant was $15,800.
Doctors Network of America
On June 22, 2012, the Company entered
into an acquisition agreement that closed on March 16, 2013. The Company agreed to acquire DNA in Flowood, Mississippi from
Krooss Medical Management Systems, LLC (“Krooss”) for 500,000 shares of common stock. As of September 30, 2012, only
200,000 shares of common stock were issued as a deposit, which was valued at $4,000 based on the market value on the date of grant.
At the closing of the transaction on March 16, 2013, the Company issued an additional 300,000 shares of common stock which were
valued at $6,000 based on the market value on the date of grant.
Subsequent to the transaction closing
on March 16, 2013, the sellers refused to pay for medical billing process transaction fees in accordance with their contracts in
the amount of approximately $200,000. The Company and the sellers are currently in litigation over the disputed transaction fees
of $200,000. The Company has recorded an impairment of the acquired asset in the amount of $6,000 and $4,000 for the nine months
ended June 30, 2013 and the year ended September 30, 2012, respectively.
NOTE 6- DISCONTINUED OPERATIONS
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, this business was 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.
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.
The Company closed the acquisition with the final payment
for DNA on March 16, 2013. Subsequent to the transaction closing, the sellers refused to pay the transaction fees for medical billing
contracts that were processed. The Company filed a lawsuit against the sellers for Breach of Contract among other things in June
of 2013. During that time, the Company believes the sellers began contacting all billing contract holders and interfered with the
acquisition of all the assets from the transaction. Consequently, the accompanying consolidated financial statements reflect the
assets, liabilities and operations of DNA as net assets of discontinued operations, net liabilities of discontinued operations
and results from discontinued operations.
Details of the classifications for net assets, liabilities
and operations are shown below.
|
|
June 30,
2013
|
|
September 30,
2012
|
Net assets of discontinued operations:
|
|
|
|
|
Accounts receivable
|
|
$
|
16,701
|
|
|
$
|
—
|
|
Net assets of discontinued operations
|
|
$
|
16,701
|
|
|
$
|
—
|
|
|
|
June 30,
2013
|
|
September 30,
2012
|
Net liabilities of discontinued operations:
|
|
|
|
|
Accounts payable
|
|
$
|
15,601
|
|
|
$
|
—
|
|
Net liabilities of discontinued operations
|
|
$
|
15,601
|
|
|
$
|
—
|
|
|
|
Three Months Ended
June 30,
|
|
|
2013
|
|
2012
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
266,246
|
|
|
$
|
—
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
Operating expenses
|
|
|
265,108
|
|
|
|
—
|
|
Interest expense
|
|
|
—
|
|
|
|
(4,467
|
)
|
Gain from write-off of debt
|
|
|
—
|
|
|
|
4,467
|
|
Income from discontinued operations
|
|
$
|
1,138
|
|
|
$
|
—
|
|
|
|
Nine Months Ended
June 30,
|
|
|
2013
|
|
2012
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
267,146
|
|
|
$
|
—
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
Operating expenses
|
|
|
(266,046
|
)
|
|
|
—
|
|
Interest expense
|
|
|
—
|
|
|
|
(13,401
|
)
|
Gain from write-off of debt
|
|
|
58,984
|
|
|
|
337,269
|
|
Income from discontinued operations
|
|
$
|
60,084
|
|
|
$
|
323,868
|
|
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 amortized
over term of the note, which is approximately 60 months, and are included in the statement of operations as offering costs. Management
received a legal opinion and determined that this note is unenforceable and has been written off during the fiscal year ended September
30, 2012 (See Note 7 – Debt Mitigation Program).
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 1
st
. Management received a legal opinion and determined this note is unenforceable
and has been written off during the fiscal year ended September 30, 2012 (See Note 7 – Debt Mitigation Program).
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 which have
expired unexercised. The note had an approximate maturity date of June 15, 2006. Management received a legal opinion and determined
this note is unenforceable and has been written off during the fiscal year ended September 30, 2012 (See Note 7 – Debt
Mitigation Program).
On May 31, 2006, we secured a short-term
loan of $20,000 from a shareholder. The loan carried 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 was 12%. The transaction also included
100,000 warrants to purchase our common stock at $0.036 at any time before May 31, 2009 which expired unexercised. The note had
a maturity date of July 10, 2006. Management received a legal opinion and determined this note is unenforceable and has been
written off during the fiscal year ended September 30, 2012 (See Note 7 – Debt Mitigation Program).
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 nine months ended June 30, 2013 and year ended September 30, 2012, the Company
recognized a gain on the write-off of liabilities in the amount of $58,984 and $410,482 from third party liabilities, respectively,
which was recorded in income from discontinued operations, and additional paid-in capital of $0 and $1,163,109 for related party
liabilities, respectively. 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,
|
|
September 30,
|
|
|
2013
|
|
2012
|
Debt Mitigation Program:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
58,984
|
|
|
$
|
66,281
|
|
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
|
|
|
—
|
|
|
|
227,083
|
|
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
|
|
$
|
58,984
|
|
|
$
|
1,573,591
|
|
Gain on write-off of debt
|
|
$
|
(58,984
|
)
|
|
$
|
(410,483
|
)
|
Additional paid-in capital (1)
|
|
$
|
—
|
|
|
$
|
(1,163,108
|
)
|
(1)
|
|
All amounts that were owed to related parties in prior years were recorded to paid-in-capital.
|
NOTE 8 –
COMMITMENT AND CONTINGENCIES
Rent expense for the nine months ended
June 30, 2013 and 2012 was $0 for both periods.
The Company
has issued shares to new investors since January 2, 2011, that have an anti-reverse common stock split clause if the Company reverse
splits the common stock. The reverse split of common stock is determined by management but must be approved by 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 have the right to hold the same number of shares of common stock as status quo after the reverse split. The anti-reverse split
common stock protection is only for stock subject to reverse split and once the Company declares a reverse split and it is completed,
the anti-reverse split protection will be terminate and shareholders that received anti-reverse split stock will be held with regular
stockholders as the Company proceeds forward. In accordance with the anti-reverse split provision, no further shares will be issued
to the anti-reverse split shareholders once the reverse split is approved and completed.
As discussed
in Note 7, the Company has written off $58,984 and $1,573,591 in accounts payable, accrued liabilities and notes payable based
on the opinion of legal counsel for the nine months ended June 30, 2013 and the year ended September 30, 2012. However, the related
creditors could make a claim in the future in regards to these liabilities.
NOTE 9– RELATED PARTY TRANSACTIONS
On October 15, 2011, the Company issued
30,000,000 shares of common stock to Absolute Medical Software Systems, LLC, an entity owned by MDLG, in full payment of the promissory
note and interest accrued in the principal amount of $1,200,106, 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 repaid $25,591 and $148,654of
the advances from the Company’s CEO in the nine months ended June 30, 2013 and 2012, respectively. The advances from the
CEO are due on demand and do not accrue interest. As of June 30, 2013 and September 30, 2012, the amount owed to the CEO for advances
was $0 and $25,591, respectively.
NOTE 10 - EQUITY
As of June 30, 2013, the Company was
authorized to issue 650,000,000 common shares and 4,000,000 preferred shares at a par value of $0.01.
Nine Months Ended June 30, 2013
Stock Issued for Cash
During the nine months ended June 30, 2013,
the Company issued 197,500 shares of common stock for $141,000 in net cash 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
|
|
|
March 31, 2013
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
March 27, 2013
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
Total
|
|
|
|
197,500
|
|
|
$
|
141,000
|
|
Stock Issued in Connection with Software
Licensing and Subscription Agreements
During the nine months ended June 30, 2013,
the Company issued 400,000 shares of common stock valued at $12,313 based on the market price on the date of grant, to
customers, in regards to the purchase of software from the Company in accordance with the Software Licensing and Subscription Agreements.
The fair values of the shares issued were recorded as a reduction of software revenue recognized during the three months ended
June 30, 2013.
Date
|
|
Number of Shares
|
|
Fair Value
|
|
October 14, 2012
|
|
|
|
50,000
|
|
|
$
|
1,300
|
|
|
December 6, 2012
|
|
|
|
100,000
|
|
|
|
2,800
|
|
|
March 12, 2013
|
|
|
|
50,000
|
|
|
|
1,750
|
|
|
March 21, 2013
|
|
|
|
50,000
|
|
|
|
1,750
|
|
|
March 21, 2013
|
|
|
|
50,000
|
|
|
|
1,750
|
|
|
April 17, 2013
|
|
|
|
25,000
|
|
|
|
838
|
|
|
April 17, 2013
|
|
|
|
50,000
|
|
|
|
1,675
|
|
|
June 26, 2013
|
|
|
|
25,000
|
|
|
|
450
|
|
|
Total
|
|
|
|
400,000
|
|
|
$
|
12,313
|
|
Stock Issued for Services
During the nine months ended June 30, 2013,
the Company issued 945,500 shares of common stock as compensation. The fair values of the shares were a total of $31,829 and were
recorded at the market price on the date of grant. The issuances of stock were as follows:
Date
|
|
Number of Shares
|
|
Fair Value
|
|
Description of Services
|
|
October 14, 2012
|
|
|
|
10,000
|
|
|
$
|
260
|
|
|
Commission
|
|
December 6, 2012
|
|
|
|
100,000
|
|
|
|
2,800
|
|
|
Compensation
|
|
March 12, 2013
|
|
|
|
50,000
|
|
|
|
1,750
|
|
|
Consulting
|
|
March 21, 2013
|
|
|
|
167,000
|
|
|
|
5,845
|
|
|
Compensation
|
|
March 21, 2013
|
|
|
|
500,000
|
|
|
|
17,500
|
|
|
Compensation
|
|
April 17, 2013
|
|
|
|
78,500
|
|
|
|
2,630
|
|
|
Compensation
|
|
May 1, 2013
|
|
|
|
20,000
|
|
|
|
522
|
|
|
Programming
|
|
May 10, 2013
|
|
|
|
20,000
|
|
|
|
522
|
|
|
Programming
|
|
Total
|
|
|
|
945,500
|
|
|
$
|
31,829
|
|
|
|
Stock Issued for Assets Acquisition
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.
During the nine months ended June 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.
Nine Month Ended June 30, 2012
Stock Issued for Cash
During the nine months ended June 30, 2012,
the Company issued 190,000 shares of common stock for proceeds of $68,000 as follows:
Date
|
|
Number of Shares
|
|
Proceeds
|
|
October 15, 2011
|
|
|
|
25,000
|
|
|
$
|
5,000
|
|
|
December 29, 2011
|
|
|
|
100,000
|
|
|
|
50,000
|
|
|
June 21, 2012
|
|
|
|
65,000
|
|
|
|
13,000
|
|
|
Total
|
|
|
|
190,000
|
|
|
$
|
68,000
|
|
Stock Issued in Connection with Software
Licensing and Subscription Agreements
During the nine months ended June 30, 2012,
the Company issued 606,333 shares of common stock valued at $9,251 based on the market price on the date of grant, to
customers, in regards to the purchase of software from the Company in accordance with the Software Licensing and Subscription Agreements.
The fair values of the shares issued were recorded as a reduction of software revenue recognized during the nine months ended June
30, 2012.
Date
|
|
Number of Shares
|
|
Fair Value
|
|
December 29, 2011
|
|
|
|
100,000
|
|
|
$
|
1,150
|
|
|
May 29, 2012
|
|
|
|
25,000
|
|
|
|
400
|
|
|
May 29, 2012
|
|
|
|
50,000
|
|
|
|
800
|
|
|
May 29, 2012
|
|
|
|
100,000
|
|
|
|
1,600
|
|
|
May 29, 2012
|
|
|
|
150,000
|
|
|
|
2,400
|
|
|
May 29, 2012
|
|
|
|
181,333
|
|
|
|
2,901
|
|
|
Total
|
|
|
|
606,333
|
|
|
$
|
9,251
|
|
Stock Issued for Services
During the nine months ended June 30, 2012,
the Company issued 19,000 shares of common stock for compensation. The fair values of the shares were a total of $204 and were
recorded at the market price on the date of grant. The issuances of stock were as follows:
Date
|
|
Number of Shares
|
|
Fair Value
|
|
Description of Services
|
|
December 5, 2011
|
|
|
|
8,000
|
|
|
$
|
82
|
|
|
Legal services
|
|
December 5, 2011
|
|
|
|
10,000
|
|
|
|
102
|
|
|
Advisory service
|
|
June 21, 2012
|
|
|
|
1,000
|
|
|
|
20
|
|
|
Commission
|
|
Total
|
|
|
|
19,000
|
|
|
$
|
204
|
|
|
|
Stock Issued for Debt Settlement
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.
Stock Issued for Assets Acquisition
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 $0.02 and as an investment in Krooss Medical Management of $4,000.
Preferred Stock
The Company has authorized 4,000,000 shares
of preferred stock, at $0.01 par value and 4,000,000 are issued and outstanding as of September 30, 2013. Each share of the Preferred
Stock 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 have been granted to our CEO & CFO on November 30, 2010 and issued on April 11, 2012 which was valued at the trading
price of the common stock of $0.0095 and recorded as an expense of $38,000.
NOTE 11 – SUBSEQUENT EVENTS
In October 2013, the Company through
a purchase agreement 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 uniform resource locators (“URLs”)
from Antree Systems Limited. The Company issued 200,000 shares of its common stock as consideration for the purchase. The fair
value of the consideration and the assets acquired is based on the fair value of the common stock issued in exchange for the software.
The total fair value, based on the market price on the date of grant, was $6,000. The Company evaluated this acquisition and determined
that it did not meet the definition of a significant business acquisition.
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 at 4.00% interest rate which
renews annually. As of January 10, 2014, the Company had borrowed $36,500.
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 and
approval of the Board of Directors. Presently, the holders of the Preferred A shares have not sent notice to the Board of Directors.
Stock issuances
Period from July 1, 2013 to September
30, 2013
Stock Issued for Cash
During the three months ended September 30,
2013, the Company issued 20,000 shares of common stock for $2,000 in net proceeds as follows:
Date
|
|
Number of Shares
|
|
Proceeds
|
|
August 26, 2013
|
|
|
|
20,000
|
|
|
$
|
2,000
|
|
|
Total
|
|
|
|
20,000
|
|
|
$
|
2,000
|
|
Stock Issued in Connection with Software
Licensing and Subscription Agreements
During the three months ended 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,
to customers, in regards to the purchase of software from the Company in accordance with the Software Licensing and Subscription
Agreements. The fair values of the shares issued were recorded against software revenue recognized during the year ended September
30, 2013.
Date
|
|
Number of Shares
|
|
Fair Value
|
|
September 30, 2013
|
|
|
|
50,000
|
|
|
$
|
1,250
|
|
|
Total
|
|
|
|
50,000
|
|
|
$
|
1,250
|
|
Stock Issued for Services
During the three months ended September 30,
2013, the Company issued 220,000 shares of common stock as compensation. The fair values of the shares were a total of $4,800 and
were recorded at the market price on the date of grant. The issuances of stock were as follows:
Date
|
|
Number of Shares
|
|
Fair Value
|
|
Description of Services
|
|
August 26, 2013
|
|
|
|
100,000
|
|
|
$
|
1,800
|
|
|
Software Sales
|
|
September 30, 2013
|
|
|
|
60,000
|
|
|
|
1,500
|
|
|
Programming
|
|
September 30, 2013
|
|
|
|
60,000
|
|
|
|
1,500
|
|
|
Programming
|
|
Total
|
|
|
|
220,000
|
|
|
$
|
4,800
|
|
|
|
Fiscal Year Ending September 30, 2014
In October 2013, the Company issued
25,000 shares of common stock for net cash proceeds of $5,000.
In October 2013, the Company issued
200,000 shares of common stock for purchase of assets from Antree Systems Limited. 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 Limited and
20,000 shares of common stock to Kimberly Ilicerl. The Company intends to cancel the original shares because the shares were lost
during delivery to Antree Systems. The Company replaced those lost shares and canceled the shares that were lost when delivered
to Ireland the office of Antree Systems.
On December 4, 2013, the Company issued
120,000 shares of common stock valued at $3,600 based on the market price on the date of grant, for the purchase of the
software licensing and subscription agreements.
On January 12, 2014, the Company issued
10,000 shares of common stock for net cash proceeds of $10,000.
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 greater of 3,000,000 restricted common shares, or 1% of the outstanding shares.
|
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 her annual base salary each year if the Company reaches the following milestones (none of which were attained in 2013):
|
a.
|
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The Company posts annual gross revenues on a consolidated basis of at least $5,000,000;
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b.
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The Company's 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.
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iii.
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The issuance of shares equal to greater of 3,000,000 restricted common shares, or 1% of the outstanding shares.
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iv.
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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 CipherSmith, LLC, and 750,000 shares for MediSouth, LLC.
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v.
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An automobile allowance of $1,000 per month.
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vi.
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A medical insurance allowance of $1,500 per month.
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vii.
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In the event the Executive's employment is terminated without cause, she will receive the entire contract remaining on the agreement.
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* * * * * * * * * * * *
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.