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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 August 31, 2014

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________ to _________________

 

Commission File No.: 000-54440

 

CLOUD SECURITY CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada

 

 27-4479356

(State or other jurisdiction of

incorporation or organization)

 

 (I.R.S. Employer

 Identification No.)

 

4590 MacArthur Blvd, Suite 500

Newport Beach, CA 92660

 (Address of principal executive offices) 

 

Issuer’s telephone number: (866) 250-2999

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed 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 x   No ¨

 

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 x   No ¨

 

Indicate by check mark whether the registrant is a large 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

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x

 

As of August 31, 2014, 101,670,586 shares of our common stock were outstanding.

 

 

 

CLOUD SECURITY CORPORATION

 

FORM 10-Q

 

August 31, 2014

 

TABLE OF CONTENTS

 

    Page  

PART I-- FINANCIAL INFORMATION

   
     

Item 1.

Financial Statements

 

3

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   

10

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

   

12

 

Item 4

Control and Procedures

   

13

 
       

PART II-- OTHER INFORMATION

       
       

Item 1

Legal Proceedings

   

14

 

Item 1A

Risk Factors

   

14

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

   

14

 

Item 3.

Defaults Upon Senior Securities

   

14

 

Item 4.

Mine Safety Disclosures

   

14

 

Item 5.

Other Information

   

14

 

Item 6.

Exhibits

   

16

 
       

SIGNATURES

   

16

 

 

 
2

 

PART I –FINANCIAL INFORMATION

 

Item I. Financial Statements.

 

CLOUD SECURITY CORPORATION

BALANCE SHEETS

 

    August 31,
2014
   

February 28,
2014

 
  (Unaudited)     (Audited)  

Current assets:

 

 

 

 

Cash

 

$

68

   

$

22

 

Deposit

   

175

     

175

 

TOTAL ASSETS

 

$

243

   

$

197

 
                 

LIABILITIES AND STOCKHOLDERS' DEFICIT

               

Current liabilities:

               

Accounts payable

 

$

46,661

   

$

78,916

 

Accrued payroll and related payroll taxes

   

73,650

     

20,650

 

Related party advances

   

63,200

     

51,000

 

Total liabilities

   

183,511

     

150,566

 
                 

Commitments and contingencies

               
                 

Stockholders' deficit:

               

Preferred stock, $0.001 par value, 10,000,000 shares authorized; none issued and outstanding at August 31, 2014 and February 28, 2014, respectively

   

-

     

-

 

Common stock, $0.001 par value, 190,000,000 shares authorized; 103,295,586 and 101,483,086 issued; 101,670,586 and 99,858,086 shares outstanding at August 31, 2014 and February 28, 2014, respectively

   

101,671

     

99,858

 

Additional paid-in capital

   

1,252,890

     

1,171,453

 

Accumulated deficit

   

(1,537,829

)

   

(1,421,680

)

Total stockholders' deficit

   

(183,268

)

   

(150,369

)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

 

$

243

   

$

197

 

 

 
3

 

CLOUD SECURITY CORPORATION

STATEMENTS OF OPERATIONS

(unaudited)

 

    For the Three Months Ended August 31, 2014     For the Three Months Ended August 31, 2013     For the Six
Months Ended
August 31, 2014
    For the Six
Months Ended
August 31, 2013
 

Revenue

 

$

-

   

$

-

   

$

-

   

$

-

 
                               

Research and development

   

-

     

53,750

     

-

     

237,604

 

General and administrative

   

75,488

     

95,033

     

116,149

     

182,058

 
                               

Loss before provision for income taxes

 

(75,488

)

 

(148,783

)

   

(116,149

     

(419,662

 
                               

Provision for income taxes

   

-

     

818

     

-

     

818

 
                               

Net loss

 

(75,488

)

 

(149,601

)

 

$

(116,149

   

$

(420,480

 
                               

Weighted average shares basic and diluted

   

101,192,325

     

97,342,663

     

100,856,388

     

97,333,832

 

Weighted average basic and diluted loss per common share

 

$

(0.00

)

 

$

(0.00

)

 

$

(0.00

   

$

(0.00

 

 

 
4

 

CLOUD SECURITY CORPORATION

STATEMENTS OF CASH FLOWS

(unaudited)

 

    For the Six
Months Ended
    For the Six
Months Ended
 
    August 31, 2014     August 31, 2013  

Cash flows from operating activities:

       

Net loss

 

$

(116,149

)

 

$

(420,480

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Contributed services

   

-

     

13,200

 

Stock compensation

   

34,500

     

189,750

 

Changes in operating assets and liabilities:

               

Accounts payable

   

16,495

     

22,438

 

Accrued liabilities

   

53,000

     

(3,000

Net cash used in operating activities

   

(12,154

)

   

(198,092

)

                 

Cash flows from financing activities:

               

Proceeds from contribution agreement

   

-

     

129,500

 

Proceeds from related party advances

   

12,200

     

-

 

Net cash provided by financing activities

   

12,200

     

129,500

 
                 

Net change in cash

   

46

     

(68,592

)

Cash, beginning of period

   

22

     

87,281

 

Cash, end of period

 

$

68

   

$

18,689

 
                 

Supplemental disclosures of cash flow information

               

Cash paid during the period for:

               

Interest

 

$

-

   

$

-

 

Taxes

 

$

-

   

$

-

 
                 

Non-cash investing and financing activities:

               

Contributed services

 

$

48,750

   

$

13,200

 

 

 
5

 

CLOUD SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

 

Note 1 – Organization and Business

 

Cloud Security Corporation, formerly Accend Media, (the “Company”) was incorporated in the State of Nevada on December 20, 2010. On May 22, 2012, the Company merged with Cloud Star Corporation (“Cloud Star”), a privately held Nevada corporation incorporated on October 17, 2011 headquartered in California. Cloud Star’s Chief Executive Officer assigned its rights and interests in technology named “The VirtualKey Desktop Solution” (the “MyComputerKey”) and additional cloud security technology products which were transferred to the Company in connection with the merger. Following the merger, the Company conducts the business of Cloud Star and changed its name from “Accend Media” to “Cloud Star Corporation”. On May 28, 2013, the Company changed its corporate name to “Cloud Security Corporation”. The Merger was accounted for as a reverse acquisition with Cloud Star being treated as the acquirer for accounting purposes. Accordingly, for all periods presented herein, the financial statements of Cloud Star have been adopted as the historical financial statements of the Company known as a change in reporting entity. Accordingly, Cloud Star’s October 17, 2011 formation date is considered the date of “Inception” in the financial statements.

 

The Company’s principal business has been the software development of the MyComputerKey. The Company is currently developing the software infrastructure and interface for MyComputerKey, Phase 1 (version 3) of MyComputerKey and additional cloud computing security applications.

 

The MyComputerKey provides a simple and secure platform for enterprise customers and government agencies of all sizes to access their desktop infrastructure through the internet often referred to as the “cloud”. The product offers a person access to their desktop from any location, at any time, with no configuration requirements and no administration effort. A user inserts the MyComputerKey into a personal computer or “PC” or Mac USB port to gain instant access directly to their desktop that is familiar and pre-configured to their business needs. The user’s own desktop image with a standardized operating system, business and productivity applications, and related security safeguards is available from any corporate or remote site. The Company is also focusing on integrating security software features to its existing product, as well as other features in an effort to expand its product offerings. The Company recently filed another patent related to cloud computing security and intends to continue expanding it’s this cloud computing security product line in addition to other types of internet security.

 

Merger

 

As discussed above, on May 22, 2012, Cloud Star merged into Accend Media. This merger did not involve the issuance of any new shares by Accend Media, as the former control shareholder, Scott Gerardi of Accend Media exchanged the majority of his shares in exchange for an employment agreement. Prior to the merger, Accend Media effectuated a five-for-one forward stock split on May 7, 2012. Following the merger, the Company changed its name from Accend Media to Cloud Star Corporation. Prior to this period, Accend Media generated limited revenues from internet lead generation and marketing landing pages. Subsequent to the merger, Accend Media discontinued its business plan.

 

On March 1, 2013, the Company entered into a joint venture agreement/development and collaboration agreement (“JV Agreement”) with App Ventures LTD (“App Ventures”), a Hong Kong Private Limited Liability Company, to jointly develop and market a software product for the field of mobile security until the project is completed. Cloud Security is in the business of developing and marketing information technology services and software including solutions for secured remote access to computers and web application security and mobile security solutions. App Ventures is in the business of developing and marketing software solutions for web application security and mobile security. The JV Agreement, which was later terminated as discussed below, provided for sharing revenues generated based on a determination of the value of the combined technology, whereby the Company would derive 25% to 75% of the benefit, by a select committee.

 

 
6

 

On December 3, 2013, the Company entered into a transfer agreement with App Ventures whereby App Ventures agreed to transfer all of its right, title and interest in and to that certain patent application (U.S. Serial Number 61/832.534) titled “System and Methods for One-Time Password Generation on a Mobile Computing Device” for process and methods for one-time password generation on mobile computing devices (the “Patent’). The JV Agreement terminated upon closing of the transfer agreement effective February 28, 2014.

 

On December 3, 2013, the Company entered into a distribution agreement with App Ventures pursuant to which App Ventures granted us the exclusive right to distribute, market, sell and promote all its sensor technology products with a secure communication framework that detects web-based attached on web apps and websites under the“App Fence” and AppSecure” brand name. See Note 5—Stockholders’ Equity—Common Stock Transactions, for further discussion.

 

The Company completed Phase 1 (Version 3) of the MyComputerKey product in the year ended February 28, 2014 and are continuing its beta test for such product. Additional capital is required in order to acquire the source code developed by the third party developers retained to complete the project. Management is currently in negotiations with these developers to resolve and restructure the original contract.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited interim financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities Exchange Commission. Certain information and disclosures normally included in the annual financial statements prepared in accordance with the accounting principles generally accepted in the Unites States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. These interim financial statements should be read in conjunction with the historical financial statements and related notes thereto of the Company filed with the Securities and Exchange Commission including our Annual Report on Form 10-K for the fiscal year ended February 28, 2014. The results of operations for the six months ended August 31, 2014 are not necessarily indicative of the results that may be expected for the full year.

 

Going Concern Considerations and Management’s Plans

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern. The Company has no revenues, has incurred net losses and has an accumulated deficit of $1,537,829 as of August 31, 2014. The Company currently has limited liquidity and limited access to capital. These factors raise substantial doubt about our ability to continue as a going concern. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

 

Management anticipates the Company will be dependent, for the foreseeable future, on additional capital to fund further development of our infrastructure and to fund operations until such time we have sufficient revenues to meet our cost structure. Additional capital is required in order to acquire source code developed by consultants retained to complete the project and to ultimately launch its anticipated products in the marketplace. In light of management’s efforts, there are no assurances that the Company will be successful in obtaining sufficient capital to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 
7

 

Risks and Uncertainties

 

We have a limited operating history and have not commenced planned principal operations.

 

Our business and operations are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy. A host of factors beyond our control could cause fluctuations in these conditions, including the political environment and acts or threats of war or terrorism. Adverse developments in these general business and economic conditions, including through recession, downturn or otherwise, could have a material adverse effect on our financial condition and our results of operations.

 

We currently have no sales, marketing or distribution capabilities. Therefore, to commercialize its products, we expect to collaborate with third parties to perform these functions. We have no experience in developing, training or managing a sales force and will incur substantial additional expenses if it decides to market any of its future products directly. Developing a marketing and sales force is also time consuming and could delay launch of our future products. In addition, we will compete with many companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against these companies. While the product has been beta tested by three companies in the business-to-business market; the mass consumer market, including direct and indirect channels has not been tested.

 

We do not own any manufacturing facilities and we intend to contract out its manufacturing needs. Accordingly, if any of its proposed products become available for widespread sale, we may not be able to arrange for the manufacture of such product in sufficient quantities at an acceptable cost, or at all, which could materially adversely affect its future prospects.

 

Our industry is characterized by rapid changes in technology and customer demands. As a result, our products may quickly become obsolete and unmarketable. Our future success will depend on its ability to adapt to technological advances, anticipate customer demands, develop new products and enhance our current products on a timely and cost-effective basis. Further, our products must remain competitive with those of other companies with substantially greater resources. We may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new products or enhanced versions of existing products. Also, we may not be able to adapt new or enhanced products to emerging industry standards, and our new products may not be favorably received.

 

Basic Loss per Common Share

 

Basic loss per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net loss available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. As of August 31, 2014 and August 31, 2013, the Company had no shares of potentially dilutive shares that have been excluded from the diluted loss per share computations as they would be antidilutive for the periods presented.

 

New Accounting Pronouncements

 

In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. The Company adopted ASU 2014-10 during the quarter ended August 31, 2014, thereby no longer presenting or disclosing any information required by Topic 915.

 

The Company reviewed all recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC and they did not or are not believed by management to have a material impact on the Company's present or future financial statements. 

 

 
8

 

Note 3 – Commitments and Contingencies

 

Operating Lease

 

On November 26, 2012, the Company entered into an operating lease with a company related to a Director of Cloud Security for its corporate office on a month to month basis for $650 per month. The rent has decreased to $125 per month effective in January 2014. There is a $175 deposit with the related entity recorded on the accompanying balance sheet due to prepayment of rents.

 

Payroll

 

The Company has processed compensation to its chief executive officer as an independent contractor under Form 1099 instead of processing it as payroll under Form W-2. The Company intended to start processing its payroll under Form W-2 in the first or second fiscal quarter of 2013; however, such was not processed due to lack of liquidity considerations. The Company does not expect that any fees or penalties incurred as a result will cause significant misreporting of our financial condition and results of operations.

 

The Company has not filed income tax returns since 2010. We expect to file these income tax returns in the near future. We are subject to the minimum California franchise taxes of $800 per year, plus penalties and interest for 2012 through 2014.

 

Note 4 – Related Party Advances

 

During the six months period ended August 31, 2014, Safa Movassaghi, the CEO and Director of the company advanced $200 to the Company to fund operations. Previously, Leeword Ventures, a company controlled by our director, Walter Greeves, has advanced $63,000 to the Company to fund operations. As of August 31, 2014, $63,200 has been recorded as a related party advances due on demand. The advances do not incur interest.

  

Note 5 – Stockholders’ Deficit

 

Authorizations and Designations

 

The Company is authorized to issue 190,000,000 shares of its $0.001 par value common stock and 10,000,000 shares of its $ 0.001 par value preferred stock. As of August 31, 2014 and February 28, 2014, no preferred stock has been issued.

 

Common Stock Transactions

 

On March 17, 2014, the Company issued 812,500 shares of common stock valued at $48,750 in consideration of $48,750 in legal services in accounts payable under the Plan discussed below.

 

On July 14, 2014, the Company issued 1,000,000 shares of common stock valued at $34,500 in consideration of $34,500 in legal services under the Plan discussed below.

 

Contributed Capital

 

During the six months ended August 31, 2014 and 2013, Leeward Ventures contributed $0 and $67,500 to the Company for 0 and 675,000 shares, respectively, at $0.10 per share under a $500,000 subscription agreement to purchase 5,000,000 shares from an existing shareholder. As a result, no new shares were or will be issued by the Company. Under the agreement, $90,129 is remaining to be funded. If there is an unfunded amount under the agreement, any shares held related to such will be returned to the Company.

 

2014 Stock Incentive Plan

 

On January 27, 2014, the Board of Directors adopted the 2014 Stock Incentive Plan (the “Plan”). The plan provides for the grant, at the discretion of the Compensation Committee of the Board of Directors, of stock awards, of common stock, restricted stock, awards of common stock, or stock options to purchase common stock of the Company, with a maximum of 15,000,000 shares. As of August 31, 2014, 13,187,500 shares are available for issuance under the Plan.

 

 
9

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

 

CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS “FORM 10-Q”), CONSTITUTE “FORWARD LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE “REFORM ACT”). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS “BELIEVES”“EXPECTS”“MAY”“SHOULD”, OR “ANTICIPATES”, OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF CLOUD SECURITY CORP. (THE COMPANY“WE”“US” OR “OUR”) TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO AUGUST 31, 2014

 

Overview of Current Operations

 

We were formed by the filing of Articles of Incorporation with the Secretary of State of the State of Nevada on December 20, 2010, originally as Accend Media. On or about May 22, 2012, Accend Media, and Cloud Star Corporation, a privately-held Nevada corporation headquartered in California, entered into an Acquisition Agreement andPlan of Merger. Prior to the merger, Accend Media effectuated a five-for-one forward stock split on May 7, 2012. We changed our corporate name to Cloud Star Corporation upon consummation of the merger on May 23, 2012. On May 28, 2013, we changed our corporate name to Cloud Security Corporation. The Merger was accounted for as a reverse acquisition with Cloud Star being treated as the acquirer for accounting purposes. Accordingly, for all periods presented in this Report, the financial statements of Cloud Star have been adopted as the historical financial statements of the Company known as a change in reporting entity. Accordingly, Cloud Star’s October 17, 2011 formation date is considered the date of “Inception” in the financial statements.

 

We are a development stage security and information access technology software company that delivers immediate information with ease and secure access to computer desktops and other consumer electronic devices from remote locations.

 

Our flagship product, MyComputerKeyTM is a proprietary, patent-pending technology that provides a secure multi-factor validation and authentication system for cloud-based infrastructures and protects data accessed from remote locations worldwide. We completed Phase 1 (Version 3) of the MyComputerKey product in the year ended February 28, 2014 and are continuing our beta test for such product. Additional capital is required in order to acquire the source code developed by the third party developers retained to complete the project. Management is currently in negotiations with these developers to resolve and restructure the original contract. Our next phase for this product will be to complete the front-end gui design prior to release. We also intend to develop an APP version of this product for mobile devices (MyMobileKey) and tablets (MyTabletKey).

 

RESULTS OF OPERATIONS 

Three Months Ended 

We had no revenues in the three months ended August 31, 2014 or 2013. We incurred research and development expenses of $0 in the three months ended August 31, 2014 as compared to research and development expenses of $53,750 in the three months ended August 31, 2013. Our general and administrative expenses decreased to $75,488 in the three months ended August 31, 2014 compared to $148,783 in the three months ended August 31, 2013.

Six Months Ended

We had no revenues in the six months ended August 31, 2014 or 2013. We incurred research and development expenses of $0 in the six months ended August 31, 2014 as compared to research and development expenses of $237,604 in the six months ended August 31, 2013. Our general and administrative expenses decreased to $116,149 in the six months ended August 31, 2014 compared to $182,058 in the six months ended August 31, 2013.

 
10

 

Summary of any product research and development that we will perform for the term of our plan of operation.

 

We will continue development of multiple versions of our MyComputerKey product, including an APP version for mobile phones and tablets.

 

Expected purchase or sale of plant and significant equipment

 

We do not anticipate the purchase or sale of any plant or significant equipment; as such items are not required by us at this time.

 

Significant changes in the number of employees

 

As of August 31, 2014 we had one employee who also serves as our sole officer and is a director. We are dependent upon our officers and directors for our future business development. As our operations expand we anticipate the need to hire additional employees, consultants and professionals; however, the exact number is not quantifiable at this time.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of August 31, 2014, we had cash and cash equivalents of $243 and a working capital deficit of $183,268 as compared to cash and cash equivalents of $197 and working capital deficit of $150,369 as of February 28, 2014.

 

We had total liabilities of $183,511 as of August 31, 2014, consisting of current liabilities, which included $46,661 of accounts payable, $73,650 of accrued payroll and $63,200 in related party advances.

 

We had a total stockholders’ deficit of $183,268 as of August 31, 2014, and an accumulated deficit as of August 31, 2014 of $1,537,829.

 

We had no cash provided by investing activities for the six months ended August 31, 2014.

 

We had $12,200 of cash provided by financing activities in the six months ended August 31, 2014, consisting of related party advances.

 

Since inception, we have processed compensation to our chief executive officer as an independent contractor under Form 1099 instead of processing it as payroll under Form W-2. We intend to start processing our payroll under Form W-2 in the first or second fiscal quarter of 2013. We do not expect that any fees or penalties incurred as a result will cause any meaningful or significant misreporting of our financial condition and results of operations for the year ended February 28, 2014 or going forward.

 

Additional capital is required in order to acquire the source code developed by the third party developers retained to complete the MyComputerKey project Management is currently in negotiations with these developers to resolve and restructure the original contract.

 

 
11

 

Since we have no liquidity and have suffered losses, we depend to a great degree on the ability to attract external financing in order to conduct our business activities and expand our operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. If we are unable to raise additional capital from conventional sources, including increases in related party and non-related party loans and/or additional sales of stock, we may be forced to curtail or cease our operations. Even if we are able to continue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results, including our inability to acquire the source code for Phase 1 (Version 3) of our MyComputerKey product. We have no commitments to provide us with financing in the future, other than described above. Our independent registered public accounting firm included an explanatory paragraph raising substantial doubt about the Company’s ability to continue as a going concern.

 

Notwithstanding, we anticipate generating losses and therefore may be unable to continue operations in the future. We anticipate that we will require additional capital in order to grow its business by increasing headcount and its budget for 2013-2014. We may use a combination of equity and/or debt instruments to funds its growth strategy or enter into a strategic arrangement with a third party.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Critical Accounting Policies and Estimates

 

Software Development Costs/Research and Development

 

We expense costs for research and development. When we develop our software, we comply with Accounting Standards Codification (ASC) 985-20 “Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”, which requires that we expenses costs of development until technological feasibility is achieved. Such is achieved when complete Alpha testing of the product.

 

Recent Pronouncements

 

In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. The Company adopted ASU 2014-10 during the quarter ended August 31, 2014, thereby no longer presenting or disclosing any information required by Topic 915.

 

Off-Balance Sheet Arrangements

 

None.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

 

 
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ITEM 4 – CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of August 31, 2014, our disclosure controls and procedures are designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures were not effective because of the "material weaknesses" related to (i) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements. The Company is continuing to take steps to remediate these weaknesses as described in further detail under "Management Plan to Remediate Material Weaknesses" in the Company’s Annual Report on Form 10-K for the year ended February 28, 2014.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended August 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

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. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 
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PART II: OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

None.

 

ITEM 1A – RISK FACTORS

 

See Risk Factors set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2014.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3 – DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION

 

None.

 

 
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ITEM 6 – EXHIBITS

 

Item No.

 

Description

 

Method of Filing

 

 

 

31.1

 

Certification of Safa Movassaghi pursuant to Rule 13a-14(a)

 

Filed herewith.

 

 

 

32.1

 

Chief Executive Officer and Chief Financial Officer Certification pursuant o 18 U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

 

Filed herewith.

 

 

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T

Filed herewith.

 

 
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SIGNATURES

 

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

 

 

CLOUD SECURITY CORPORATION

 

   

Date: October 20, 2014

 

/s/ Safa Movassaghi 

 

 

Safa Movassaghi

 

 

President, Chief Executive Officer and Chief Financial Officer

 

 

(Principal Executive Officer and Principal Accounting Officer)

 

 

 

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