UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended September 30, 2014

OR

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

EXCHANGE ACT OF 1934

 

For the transition period from N/A to N/A

Commission File Number: 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 of Incorporation		IRS Employer Identification No.

  

1291 Galleria Drive, Suite 200

Henderson, NV 89014

(Address of principal executive offices)

 

(702) 818-9011

(Issuer’s telephone number)

 

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.01 par value per share

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [x] No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [x] No

 

Indicate by check mark whether the registrant (1) has 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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non–Accelerated filer	[ ]	Small 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 [x] No

 

Aggregate market value of the voting stock held by non-affiliates: $4,234,374 as based on the closing price of the stock on December 18, 2014 (the last business day of the Registrant’s prior second fiscal quarter). The voting stock held by non-affiliates on that date consisted of 173,995,712 shares of common stock.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of December 18, 2014, there were 283,473,722 shares of common stock, par value $0.01, and 4,000,000 shares of preferred stock, par value $0.01, issued and outstanding.

 

Documents Incorporated by Reference: None 

Cloud Medical Doctor Software Corporation

FORM 10-K ANNUAL REPORT

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2014 and 2013

TABLE OF CONTENTS

 

PART I
ITEM 1.		BUSINESS		2
ITEM 1A.		RISK FACTORS		11
ITEM 1B.		UNRESOLVED STAFF COMMENTS		16
ITEM 2.		PROPERTIES		16
ITEM 3.		LEGAL PROCEEDINGS		16
ITEM 4.		REMOVED AND RESERVED		17
PART II
ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		18
ITEM 6.		SELECTED FINANCIAL DATA		21
ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		22
ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28
ITEM 8.		CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		29
ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		49
ITEM 9A.		CONTROLS AND PROCEDURES		49
ITEM 9B.		OTHER INFORMATION		49
PART III
ITEM 10.		DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE		50
ITEM 11.		EXECUTIVE COMPENSATION		52
ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		54
ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		56
ITEM 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES		56
PART IV
ITEM 15.		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		57
		SIGNATURES		58

 

CERTIFICATIONS

 

Exhibit 31 – Management certifications 79-75

 

Exhibit 32 – Sarbanes-Oxley Act 81-80

Special Note Regarding Forward-Looking Statements

 

Some of our statements under "Business," "Properties," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations,"" the Notes to Financial Statements and elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to certain events, risks and uncertainties that may be outside our control. Some of these forward-looking statements include statements of:

 

·		management's plans, objectives and budgets for its future operations and future economic performance;
·		capital budget and future capital requirements;
·		meeting future capital needs;
·		realization of any deferred tax assets;
·		the level of future expenditures;
·		impact of recent accounting pronouncements;
·		the outcome of regulatory and litigation matters;
·		the assumptions described in this report underlying such forward-looking statements; and
·		Actual results and developments may materially differ from those expressed in or implied by such statements due to a number of factors, including:

o		those described in the context of such forward-looking statements;
o		future service costs;
o		changes in our incentive plans;
o		the markets of our domestic operations;
o		the impact of competitive products and pricing;
o		the political, social and economic climate in which we conduct operations; and
o		the risk factors described in other documents and reports filed with the Securities and Exchange Commission.

 

In some cases, forward-looking statements are identified by terminology such as "may," "will," "should," "could," "would," "expects," "plans," "intends," "anticipates," "believes," "estimates," "approximates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology.

 

Although we believe that the expectations reflected in these forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of such statements and is under no duty to update any of the forward-looking statements after the date of this report.

PART I

 

ITEM 1. BUSINESS.

 

General

 

The financial statements presented in this report are of Cloud Medical Doctor Software Corporation, a Texas corporation. When the terms “Cloud”, the “Company,” “we,” “us” or “our” are used in this document, those terms refer to Cloud Medical Doctor Software Corporation.

 

Our Company

 

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.

 

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. CipherLoc is an entirely new approach to the problem of encryption and it consists of both a Polymorphic Cipher Engine (software) and a Polymorphic Hardware Engine. The Polymorphic Cipher Engine and the Polymorphic Hardware Engine platforms are designed to work together, but, are actually mutually exclusive of each other and can be used separately in a multitude of divergent ways. The Company currently is selling this encryption technology to commercial users that are in need of Polymorphic encryption technology to protect their members.

 

Item 1. Description of Business

 

CipherLoc™ “To Defeat the Attacker” Software Product

 

CipherLoc™ is the first truly Polymorphic Cipher Engine that can be used in commercial, security sensitive applications and is far more secure than any cipher by itself. This PKPA Engine eliminates replay attacks because the cipher morphs quickly over time. It also rejects data access and injection, false commands, and data alteration. All such methods are keys to cyber intrusion, spoofing, and electronic attacks. CipherLoc™ is one facet of a layered defense in depth protection plan for any organization. Cost effective and easy to use, the CipherLoc™ Polymorphic Cipher Engine provides an electronic gate that restricts access to vital assets, production facilities, and distribution systems that comprise the backbone of today’s electronics based organizations.

This morphing cipher engine features low latency, minimal memory requirements, and small size. It is able to morph, or change at least 3,000 times per second. This is a cipher that gets stronger as technology improves rather than easier to break. While no measure cures all problems, CipherLoc™ will protect communications, networks and electronic assets better than any other cipher currently available, and just as well as the One Time Pad (OTP) without the prohibitive expense and time latency associated with the OTP.

What is a “Polymorphic Cipher”?

 

A polymorphic cipher has the ability to change an encryption to another method of encryption or key on the fly and is more commonly known as a “mutating” cipher. Polymorphic ciphers are a revolutionary idea based on the information content in a message rather than the difficulty of the key. Using advanced set theory and information theory, this encryption method does not rely exclusively on large keys and complicated permutation/obscuring techniques. This makes the algorithm faster, thus, allowing cipher changes to occur VERY quickly, and requires less memory than other encryptions. Polymorphic changes take place at a rate no slower than the effective “unicity distance” (that certain amount of information needed in order to decrypt an encrypted message) of the cipher, more frequently than enough information can be collected to break the code. Most other ciphers are easily broken as hardware gets faster because it is easier to check all possible keys in the cipher key space. However, if a polymorphic cipher is implemented properly, the speed of the encryption will increase as the hardware gets faster. Thus, unlike other ciphers, this type of software becomes safer as computers get faster.

 

CipherLoc™ - Key Facts:

 

1.

CipherLoc™ was created as an advance Polymorphic Key Progression Algorithm (“PKPA”) cipher engine that achieves essentially the same security as a One Time Pad (“OTP”), the most secure cipher known, without all of the disadvantages.

2.

CipherLoc™ will eliminate dependence on a single type of cipher.

3.

The estimated number of keys is greater than 2.5x101500 per second. Even then the person breaking the cipher must know EVERY bit that crosses the network during the transmission period. At 100 Mbps transmission rates, this means recording a GB of information to analyze every 10 seconds.

4.

CipherLoc™ works on all operating systems and for all computing environments. More than just an obscuring algorithm, CipherLoc™ extends security without expending additional resources. It is the pinnacle of cipher technology.

5.

CipherLoc™ works using the information content of the message.

6.

CipherLoc™ prevents a cryptographer from getting enough information to recover data.

7.

CipherLoc™ keys are randomized from network traffic.

8.

CipherLoc™ prevents replay attacks because improperly encrypted messages are rejected.

9.

CipherLoc™ can use any (and all) ciphers that are peer reviewed and judged to be strong.

10.

CipherLoc™ changes block size randomly.

11.

Keys change at over 3,000 changes per second (“cps”).

12.

CipherLoc™ gets stronger with hardware and software advances.

13.

CipherLoc™ can be keyed to local or global entropy for additional security.

14.

CipherLoc™ has no need for key distribution (like an OTP) since keys are electronically determined.

15.

CipherLoc™ messages are always different. Repeating messages does not result in the same encrypted text and the same letters in different slots encrypt differently.

16.  CipherLoc™ can be used at Layers 2-7 of the OSI Protocol Stack or within user applications. It can be run as an independent program and added as a module to the program it secures. Operation is transparent to the end user. No new transmission protocol is needed because CipherLoc™ works on the contents of the packets and does not provide a “chosen plaintext” scenario for analysis.   17.  CipherLoc™ is achievable in hardware, software, or a mix of the two.   18.  CipherLoc™ is ideal for internet and private networks.   19.  CipherLoc™ works extremely well for Real Time Operating Systems and control systems.   20. CipherLoc™ automated key generation from a randomized source means that even if the first key is compromised the next key is not formed until the network provides the data. This prevents the so-called “rubber-hose” attack.

21.

CipherLoc™ is infinitely configurable and mathematically provably secure. It allows you to have security as good as a government without the same cost and vast array of equipment.

CipherLoc™ - Development

 

CipherLoc™ is not a static product and because of its very nature will always be a “work-in-progress” so that it can always be one step ahead of contemporary hacking approaches. The CipherLoc™ initial proof-of-concept was done in conjunction with a major U.S. university recognized for its excellence in security instruction and research by the US Government. Today’s CipherLoc™ team consists of several PhD’s (math, computer science, electrical engineering and statistics), elite professors, one of whom is a Fulbright Scholar, graduate students and commercial software developers specializing in operating systems, networking and security. Collectively the development team has specialties and experience in computer science, information theory, ciphers, cryptography, set theory, tactical and strategic electronic warfare, wireless communications, networking, control systems, communications electronics, commercial telecommunications and military telecommunications. Members of the team have worked for some of the largest and most admired engineering companies in existence, have military security expertise, have designed security programs, audited utilities and other infrastructure facilities, designed legal chain of custody applications, created anti-piracy and HIPAA (defined below) programs, protected credit card information, and worked in defense industries. Cooperative research takes place at several different universities with innovative cyber security programs. Each professor leads research teams composed of specially selected researchers specializing in cutting edge mathematics and cryptography techniques for randomization and decryption. Both are used to simplify encryption algorithms and proactively “attack the hack.” The goal is to make hackers react to attacking methods in the cipher rather than to react to new attack methodologies used by the hackers. Members of the research and development team have published papers and books on cryptography and set theory, are Critical Infrastructure Protection (“CIP”) certified, are developing university programs in cyber security, and are considered experts in the field of cryptography.

Cloud Doctor Medical Software Corporation

 

In 2011, Cloud 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 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.

 

Products and Services

 

Cloud-MD™ Software Products

 

Our applications and platforms provide real value to the individual clinician making their job easier, while at the same time benefiting other players in the health care system continuum. Cloud-MD™ has differentiated itself by using the Software as a Service (“SaaS”) Cloud Computing based business model in order to:

 

-

Lower software and hardware startup cost for providers

·

Lower per patient visit cost

·

Lower IT maintenance and support cost for providers

·

Lower days in account receivable

·

Increase practice revenue per patient

·

Lower costs for Cloud-MD™ while preserving high-value, high-margin aspects of the acquisition models for CloudMD™

·

Provide a solution that makes it extremely unlikely that customers will leave for other software systems or billing services

·

Offer data mining of the extremely valuable data that is captured by Cloud-MD™ software

·

Offer a software solution suitable for both independent medical providers or medical billing companies desiring a Meaningful Use certified product with a feature set designed for billing companies

·

Build a business model designed for fast growth and high profitability

Physician financial and clinical systems are rapidly evolving and are the main driving force to meet a heightened demand for a growing need to increase efficiencies so physicians can make better patient care and profitability decisions. Cloud-MD™’s interoperable systems optimize the physician’s ability to increase revenues, increase efficiencies, lower costs, and increase profitability.   This business process management within healthcare is better known as Revenue Cycle Management (RCM) and has the following major components:

 

Cloud-MD™ Office is a fully INTEGRATED and INTEROPERABLE suite of SaaS products and medical practice services that provide the flexibility to address the ever changing business and production requirements within a medical practice setting. Physicians and their management teams prefer to have interoperable systems and services delivered by one company that also provides the installation, training, and support of those systems.

 

By combining an interoperable suite of systems, billing management and other services, Cloud-MD™ Office can help to increase the physician’s profitability and office efficiency by electronically: (1) documenting patient encounters; (2) automatically coding those encounters with a billing logic that is designed to maximize income; (3) analyzing the financial and clinical performance of the practice; (4) notifying the physician. By reducing paper based errors, increasing speed and accuracy of collections, and improving operational decision making, Cloud-MD™ enables the physician to improve their performance and their financial position.

 

Physicians use a multitude of products and services in their daily operations. Cloud-MD™ Office offers products and services to physicians that meet HIPAA, 5010, ICD-10 and Meaningful Use criteria and include, but are not limited to, the following:

 

1.

Cloud-MD™ Electronic Medical Records (“EMR”) Cloud-MD™’s EMR software can also help streamline coding and billing, appointment scheduling, prescription writing – and ultimately patient safety.

2.

Cloud-MD™ Business Intelligence (“BI”) dashboard tool for physician practices is being developed internally for both clinical and financial applications. Business Intelligence is used to analyze the financial health of the practice and proactively address trends. Cloud-MD™’s BI has been in development for the past two years and is currently in Beta testing. The product utilizes dashboards to provide a visual display of the practice’s business health, with over 20 Key Performance Indicators (“KPI”). By streamlining these functions, the physician can better focus on having a more profitable practice. Test markets have widely applauded the product.

3.

Practice Management (“PM”) Software, out of all of the different kinds of medical software available, PM is the system that is most useful to every physician on a daily basis. The main reason: it is the only system that generates income from the medical services provided to patients. In addition, while some programs are designed to facilitate surgical procedures or help doctors make more accurate diagnoses, practice management programs deal with organizing the ins and outs of the daily occurrences in a medical office.

4.

Revenue Cycle Management (“RCM”) Software consists of a suite of capabilities that will help a physician’s practice identify and prevent revenue cycle losses. RCM facilitates the efficient performance of the complex financial and administrative transaction processes that healthcare groups face every day. The Cloud-MD™ solution is EHNAC, HDX, ANSI HL 7, EDI and ASP/Cloud Computing model compliant and delivered through a HIPAA secure, high-performance, high-volume web portal. Components of the Revenue Cycle Management solution include:

a.

Cloud-MD™ Claims Manager provides the most advanced and efficient Claim Lifecycle Management Solutions for all of a practice’s insurance claims during every step of the processing cycle, ensuring you receive every dollar to which you are entitled. The Claims Manager significantly improves the way physicians communicate with payers, optimize revenue capture, shorten payment cycle time, improve operational efficiencies, collect additional revenue and better manage their revenue stream and resources.

b.

Cloud-MD™ Real-Time Insurance Eligibility Verification improves practice profitability by solving the problems with eligibility verification, the cause of three out of four insurance denials. With real-time access to approximately all electronically accessible plans, the Cloud-MD™ Eligibility Verification and Benefit Inquiry permits a provider to determine if a patient is currently eligible for coverage from a payer.

c.

Cloud-MD™ Patient Credit is a totally new concept in patient collections for the HealthCare Provider - it shifts the burden of lost revenue from the provider to the patient. It utilizes a proven system for managing the collection process from the moment of creation of the debt through the final payment, all without costing the provider any money or resources. It fully automates the payment process and benefits include: Increased Collections; Reduced A/R; Reduced Patient Bad Debt; Reduced Patient Billing Expenses; No Collection Calls; Expedites Cash Flow.

d.

Cloud-MD™ e-Payment Solution offers multiple ways to process Credit, Debit and Check transactions. It offers the lowest rates for merchant processing through either a credit card point of sale terminal or through our Virtual e-terminal. It will accept all of the major Credit and Debit cards so that you can provide more payment options to your patients.

e.

Cloud-MD™ Billing Services stands out from the crowd of medical billing companies. Cloud-MD™ Billing Services offers a complete medical billing solution, offers best-of-breed technology, an air tight medical billing process, actionable reporting and broad experience and can work its clients' medical billing systems. Cloud-MD™ Billing Services is a major component of Revenue Cycle Management and will assist physicians in maximizing their revenues as they see patients. Physicians typically pay more than they should for billing – either internal or outside services. Because Cloud-MD™ can combine the Company systems and processes within the billing company; we can quickly reduce expenses of the operation and increase profitability of the physician’s practice.

5.

Patient Health Information Exchange (“PHI”) offers a new concept in referrals management, physician-to-physician communications and physician-to-patient communications. With complete HIPAA compliant security and use of already familiar electronic tools such as an Electronic Medical Records (“EMR”)/Electronic Health Records (“EHR”), email or a FAX machine, Patient Health Information can be easily and securely transmitted and retrieved by only the intended parties.

6.

Information Security (“IS”) offers CipherLoc™, the most comprehensive security coverage available and easily complies with HIPAA guidelines. CipherLoc™ is a patent pending, state-of-the-art Polymorphic Cipher Engine that was created as an advance Polymorphic Key Progression Algorithm (“PKPA”) cipher engine. CipherLoc™ is an industry changing, ground breaking and innovative solution for making all digital communications virtually impenetrable, thus, giving any corporation or individual the capability to achieve virtually the same security offered by a One Time Pad (OTP), the most secure cipher solution known, without all of the disadvantages. The CipherLoc™

7.

Healthcare Inventory Management (“IM”) is a sophisticated, yet easy-to-use, solution for inventory management and product acquisition as well as a resource for accessing detailed, actionable information about specific product usage in order to help streamline current processes and procedures to manage the costs and complexities of the internal inventory cycle of a healthcare business.

8.

Practice Optimization Consulting is an audit based service performed on the individual practice in order to make recommendations on ways to improve efficiencies and increase revenues. Our team of experts will analyze how your practice functions and looks at your specific systems and needs. Based on our findings, we will help you develop a program that will improve the efficiency of your practice, leading to higher profits.

9.

Cloud MD Cross Border Verticals provides ancillary income to its members and will provide physician members the opportunity to increase their personal revenue by receiving dividends from the Company for buying goods and services they are required to have. As mentioned earlier, physicians indirectly control 50 – 60% of all healthcare spending. Cloud MD Cross Border Verticals gives the physician the opportunity to benefit financially from this type of spending.

10.

Company Owned Services offers opportunities for physicians to potentially share in the revenue generated by the various divisions of the company.

11.

Recurring Income Opportunities from various third party vendors like insurance purchases or group supply purchases will be negotiated and made available to share among the Cloud MD members.

 

Cloud-MD™ software products are fully integrated, designed as cloud based computing solutions deployed using the following architectural and physical models:

 

We have already attracted physician investors and have already begun the process of developing our “Cross Border Verticals” initiative which includes services such as Inventory Management of medical supplies and pharmaceuticals as well as program development for a Concierge Medicine initiative.

 

In addition, we are in negotiations with several major healthcare and healthcare solution providers, cumulatively representing several thousand medical providers, to offer a variety of products and services.

 

The Market and Industry

 

CipherLoc™ Marketing

 

A new concentration of risks in the cloud is driving the creation of new threat vectors. These new threats, in turn, create uncertainty about the Internet-fueled growth plans of Intel, Google, Microsoft, Yahoo, Apple, Facebook, AT&T, Verizon and just about any tech hardware, software or services company you care to name.

 

The market for CipherLoc™ spans the entire spectrum of digital communications and covers every industry across the globe. Potential licenses for the CipherLoc™ family of encryption technology are in the 100’s of millions of client licenses.

 

Cloud-MD™ Marketing

 

CloudMD participates in the rapidly growing US Healthcare industry, which is expected to grow from nearly $2.0 trillion today to approximately $2.9 trillion in the next 2-5 years. Research by The American Medical Association, The Gartner Group, Datamonitor and Forrester Research and others makes it clear that healthcare provider spending has been growing annually since 2005 and is expected to continue growing through 2016, led by the IT services segment, whose annual growth rate is expected to be 6.6% compound annual growth rate.

Recent industry changes have added many challenges and complexities to the business of the medical practice (EHR transition, Patient Protection and Affordable Care Act (“PPACA”), HIPAA revisions, Accountable Care Organizations (“ACO”), ICD-10, Electronic Prescribing “eRX”, Physician Quality Reporting Solutions “PQRS”, declining reimbursement rates, increased patient payment responsibility, etc.). As such, many practices have started to reevaluate the idea of partnering with a professional medical billing or revenue cycle management firm as a possible resource for addressing some of the challenges.

 

As medical practices evaluate the option of outsourcing the medical billing functions verses performing the process internally, the related cost of each option should be considered. The analysis involves more than simply comparing the billing firm fee to the salary of internal billing staff. A proper analysis can illustrate a substantial price difference between the two options.

 

When evaluating the cost of performing billing and reimbursement functions internally, a practice should quantify: 1) salary and wages; 2) benefits; 3) training costs; 4) space / real estate / opportunity costs; 5) EDI costs; 6) patient statement costs; 7) office equipment; 8) office supplies; 9) communication costs; 10) theft/embezzlement; 11) billing errors.

 

The fees for outsourcing are typically in the 6% - 9% range - less than the fees the practice may incur to perform billing in house. Furthermore, the cost of medical billing errors can be very expensive to the average medical practice.

 

If a medical billing firm can cause even a slight increase in the quality of the medical billing process, the practice may realize a double benefit in the form of increased revenue as well as decreased total overhead expenses.

 

Billing firms (i.e. Cloud-MD) can afford to charge less because of economies of scale.

 

Furthermore, if the billing firm is able to collect more for the practice, the cost as a percentage of total collections can be less because total collections have increased.

 

Given the recent increase in industry complexities, the partner billing firm can also be used as an additional resource helpful for addressing or assisting with new rules and regulations.

 

Cloud-MD™ has products and services that participate in this ever expanding market and the size of the market is growing as other expenses incurred by healthcare providers rise over time.

 

REGULATIONS

 

HIPAA - General Information

 

The Administrative Simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”, Title II) require the Department of Health and Human Services (HHS) to adopt national standards for electronic health care transactions and national identifiers for providers, health plans, and employers. To date, the implementation of HIPAA standards has increased the use of electronic data interchange. Provisions under the Affordable Care Act of 2010 will further these increases and include requirements to adopt:

 

·

operating rules for each of the HIPAA covered transactions

·

a unique, standard Health Plan Identifier (“HPID”)

·

a standard and operating rules for electronic funds transfer (“EFT”) and electronic remittance advice (“RA”) and claims attachments.

In addition, health plans will be required to certify their compliance. The Act provides for substantial penalties for failures to certify or comply with the new standards and operating rules.

 

For more information regarding HIPAA including additional provisions under the Patient Protections and Affordable Care Act (Affordable Care Act or “ACA”) of 2010, go to the "Related Links Outside CMS".

Related LinksPrivate and Community Cloud IaaS and PaaS Infrastructure v1.0, Published February 1, 2013

 

Private and Community Cloud IaaS and PaaS Infrastructure Supplement defines the enterprise-wide standard architecture for building, configuring, and deploying Infrastructure-as-a-Service (“IaaS”) and Platform-as-a-Service (“PaaS”) Cloud Infrastructure. An effective cloud infrastructure enhances productivity by providing a standards-based platform to securely manage the full system life cycle from initial provisioning through eventual retirement and de-provisioning of virtual resources, including virtual machines, storage, and networks.

 

This TRA supplement defines terminology and presents the business rules for use of IaaS and PaaS in private and community clouds at Center for Medicare and Medicaid Services (“CMS”). The document describes the essential characteristics of Cloud services, including on-demand service, resource pooling, rapid elasticity, and measured services, and how these services operate within the CMS multi-zone architecture. This supplement also presents guidance about planning for and deploying IaaS and PaaS-based applications that meet the expectations of CMS and its stakeholders.

 

Release Management Supplement, v1.0, Published June 28, 2013

 

This CMS Technical Reference Architecture – Release Management Supplement, Version 1.0 complements the CMS TRA by providing rules and engineering guidance for developing, testing, and hosting CMS distributed systems and business applications within the agency’s data center Development, Test, Implementation, and Production Processing environments.

 

This supplement provides the rules governing the support and use of CMS data center environments for the conduct of pre-approved, scheduled Development, Validation Testing, and Implementation Testing of distributed CMS systems, infrastructure, and business applications.

 

The CMS Chief Technology Officer authorizes and approves the publication of the Release Management Supplement and its contents. This supplement augments and aligns with the CMS TRA Foundation 3.0, and CMS will update it on an as-needed basis.

 

Personnel

 

As of the date of this report, we have fifteen full-time employees.

 

WHERE YOU CAN FIND MORE INFORMATION

 

You are advised to read this Form 10-K 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 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.

 

In an effort to keep our stockholders and the public informed about our business, we may make “forward-looking statements.” Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. As indicated previously, forward-looking statements are often identified by words, “will”, “may”, “should”, “continue”, “anticipate”, “believe”, “expect”, “plan”, “forecast”, “project”, “estimate”, “intend” and words of similar nature. Forward-looking statements generally include statements containing:

 

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projections about accounting and finances;

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plans and objectives for the future;

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projections or estimates about assumptions relating to our performance; or

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our opinions, views or beliefs about the effects of current or future events, circumstances or performance.

You should view those statements with caution. Those statements are not guarantees of future performance, circumstances or events. They are based on facts and circumstances known to us as of the date the statements are made. All phases of our business are subject to uncertainties, risks and other influences, many of which we do not control. Any of these factors either alone or taken together, could have a material adverse effect on us and could change whether any forward-looking statement ultimately turns out to be true. Additionally, we assume no obligation to update any forward-looking statement as a result of future events, circumstances or developments.

 

ITEM 2. RISK FACTORS

 

Outlined below are some of the risks that we believe could affect our business and financial statements. An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K, before investing in our common stock. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to lose all or part of your investment.

 

The report of our independent registered public accounting firm contains explanatory language that substantial doubt exists about our ability to continue as a going concern.

 

The independent auditor’s report on our financial statements for the year ended September 30, 2014 contains explanatory language that substantial doubt exists about our ability to continue as a going concern. We have an accumulated deficit at September 30, 2014 of $28,255,726 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. If we are unable to obtain sufficient financing in the near term or achieve profitability, then we would, in all likelihood, experience severe liquidity problems and may have to curtail or cease our operations altogether. If we curtail our operations or cease our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.

 

Because we are quoted on the OTC Markets formerly known as “Pinks Sheets” instead of an exchange or national quotation system, our investors may have a tougher time selling their stock or experience negative volatility on the market price of our stock.

 

Our common stock is traded on the OTCBB “OTC Markets”. The OTCBB “OTC Markets” is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that trade on the OTCBB “OTC Markets” as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.

 

We depend significantly upon the continued involvement of our present management.

 

The Company’s success depends significantly upon the involvement of our present management, who is in charge of our strategic planning and operations. We may need to attract and retain additional talented individuals in order to carry out our business objectives. The competition for individuals with expertise in this industry could be intense and there are no assurances that these individuals will be available to us.

Our common stock is subject to penny stock regulation.

 

Our shares are subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as the "penny stock" rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act. The Commission generally defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the Commission; authorized for quotation on the NASDAQ Stock Market; issued by a registered investment company; excluded from the definition on the basis of price (at least $5.00 per share) or the registrant's net tangible assets; or exempted from the definition by the Commission. Since our shares are deemed to be "penny stock", trading in the shares will be subject to additional sales practice requirements on broker/dealers who sell penny stock to persons other than established customers and accredited investors.

 

Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management.

 

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated there under, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

 

The Company’s directors and officers may control the outcome of most matters submitted to a vote of shareholders.

 

Our directors and officers control 21.21% of the issued and outstanding common shares of the Company. They also control 100% of the supermajority convertible preferred Series A shares which allows the officers and directors to vote 150 common shares for each preferred share they hold, which is 600,000,000 common shares. The Series C Preferred shareholders may also have the right to convert those shares to common shares once they have sent notice to the Board of Directors. There are no Series C Preferred shares authorized.

 

Also, the officers and directors have changes in control provisions that allows for the full payment of salary and stock in case the company is taken over by a third party. In addition to the ability of these directors and officers of the Company to vote shares represent a significant majority of the total voting power of the Company’s common shares.  (See the officers’ employment agreements).

 

Under Texas law, common shares of the Company owned by the officers and directors may be voted in a manner in which those votes are determined by the two directors, Michael De La Garza and Pamela J. Thompson. Those directors, should they choose to act together, will be able to control substantially all matters affecting the Company, and block a number of matters relating to any potential change of control of the Company.  See Item 12–Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Risks Relating To Our Industry

 

There are substantial inherent risks in attempting to commercialize new technological applications, and, as a result, we may not be able to successfully develop products or technology for commercial use.

 

Our company conducts ongoing development on our medical billing software. Our product development team is working on developing technology and products in various stages. Software development requires significant amounts of capital and takes an extremely long time to reach commercial viability, if at all. During the development of our software, we may experience technological barriers that we may be unable to overcome. Because of these uncertainties, it is possible that none of our product candidates will be successfully developed.

The cloud-based computing model presents execution and competitive risks.

 

Our competitors are rapidly developing and deploying cloud-based services for consumers and business customers. Pricing and delivery models are evolving. Devices and form factors influence how users access services in the cloud. We are devoting significant resources to develop our own competing cloud-based software plus services strategies. While we believe our expertise, investments in infrastructure, and the breadth of our cloud-based services provides us with a strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful. In addition to software development costs, we are incurring costs to build and maintain infrastructure to support cloud computing services. These costs may reduce the operating margins we have previously achieved. Whether we are successful in this new business model depends on our execution in a number of areas, including:

 

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continuing to innovate and bring to market compelling cloud-based experiences that generate increasing traffic and market share;

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maintaining the utility, compatibility and performance of our cloud-based services on the growing array of computing devices, including smartphones, handheld computers, netbooks, tablets and television set top devices; and

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continuing to enhance the attractiveness of our cloud platforms to third-party developers.

 

We face intense competition.

 

We continue to experience intense competition across all markets for our products and services. Our competitors range in size from Fortune 100 companies to small, specialized single-product businesses and open source community-based projects. Although we believe the breadth of our businesses and product portfolio is a competitive advantage, our competitors that are focused on narrower product lines may be more effective in devoting technical, marketing, and financial resources to compete with us. In addition, barriers to entry in our businesses generally are low and products, once developed, can be distributed broadly and quickly at relatively low cost. Open source software vendors are devoting considerable efforts to developing software that mimics the features and functionality of our products. In response to competition, we continue to develop versions of our products with basic functionality that are sold at lower prices than the standard versions. These competitive pressures may result in decreased sales volumes, price reductions, and/or increased operating costs, such as for marketing and sales incentives, resulting in lower revenue, gross margins, and operating income.

 

We may not be able to protect our source code from copying if there is an unauthorized disclosure of source code.

 

Source code, the detailed program commands for our operating systems and other software programs, is critical to our business. Although we license portions of our application and operating system source code to a number of licensees, we take significant measures to protect the secrecy of large portions of our source code. If an unauthorized disclosure of a significant portion of our source code occurs, we could potentially lose future trade secret protection for that source code. This could make it easier for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins. Unauthorized disclosure of source code also could increase the security risks described in the next paragraph.

 

Security vulnerabilities in our products and services could lead to reduced revenues or to liability claims. Maintaining the security of computers and computer networks is a critical issue for us and our customers. Hackers develop and deploy viruses, worms, and other malicious software programs that attack our products and gain access to our networks and data centers. Although this is an industry-wide problem that affects computers across all platforms, it affects our products in particular because hackers tend to focus their efforts on the most popular operating systems and programs and we expect them to continue to do so. We devote significant resources to address security vulnerabilities through:

 

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engineering more secure products and services;

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enhancing security and reliability features in our products and services;

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helping our customers make the best use of our products and services to protect against computer viruses and other attacks;

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improving the deployment of software updates to address security vulnerabilities;

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investing in mitigation technologies that help to secure customers from attacks even when such software updates are not deployed; and

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providing customers online automated security tools, published security guidance, and security software such as firewalls and anti-virus software.

 

The cost of these steps could reduce our operating margins. Despite these efforts, actual or perceived security vulnerabilities in our products could lead some customers to seek to return products, to reduce or delay future purchases, or to use competing products. Customers may also increase their expenditures on protecting their existing computer systems from attack, which could delay adoption of new technologies. Any of these actions by customers could adversely affect our revenue. In addition, if third parties gain access to our networks or data centers they could obtain and exploit confidential business information and harm our competitive position.

 

Our business depends on our ability to attract and retain talented employees.

 

Our business is based on successfully attracting and retaining talented employees. The market for highly skilled workers and leaders in our industry is extremely competitive. We are limited in our ability to recruit internationally by restrictive domestic immigration laws. If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.

 

Delays in product development schedules may adversely affect our revenues.

 

The development of software products is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our increasing focus on cloud-based software plus services also presents new and complex development issues. Significant delays in new product or service releases or significant problems in creating new products or services could adversely affect our revenue.

 

Acquisitions and joint ventures may have an adverse effect on our business.

 

We expect to continue making acquisitions or entering into joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we don't realize a satisfactory return on our investment, or that we experience difficulty in the integration of new employees, business systems, and technology, or diversion of management's attention from our other businesses. These events could harm our operating results or financial condition.

 

Risks Related to our Securities

 

The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price or at all.

 

Many factors could cause the market price of our common stock to rise and fall, including:

 

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actual or anticipated variations in our quarterly results of operations;

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changes in market valuations of companies in our industry;

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changes in expectations of future financial performance;

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fluctuations in stock market prices and volumes;

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issuances of dilutive common stock or other securities in the future;

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the addition or departure of key personnel;

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announcements by us or our competitors of acquisitions, investments or strategic alliances; and

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it is possible that the proceeds from sales of our common stock may not equal or exceed the prices you paid for the shares after including the costs and fees of making the sales

 

Substantial sales of our common stock, or the perception that such sales might occur, could depress the market price of our common stock.

 

We cannot predict whether future issuances of our common stock or resale in the open market will decrease the market price of our common stock. The consequence of any such issuances or resale of our common stock on our market price may be increased as a result of the fact that our common stock is thinly, or infrequently, traded. The exercise of any options, or the vesting of any restricted stock that we may grant to directors, executive officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of our common stock, may decrease the market price of our common stock.

 

Holders of our common stock have a risk of potential dilution if we issue additional shares of common stock in the future.

 

Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our common stock, the future issuance of additional shares of our common stock would cause immediate, and potentially substantial, dilution to the net tangible book value of those shares of common stock that are issued and outstanding immediately prior to such transaction. Any future decrease in the net tangible book value of our issued and outstanding shares could have a material adverse effect on the market value of our shares.

 

We do not intend to pay cash dividends to our stockholders, so you will not receive any return on your investment in our Company prior to selling your interest in the Company.

 

The Company has never paid any cash dividends to our stockholders. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. As a result, you will not receive any return on your investment prior to selling your shares in our Company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our Company.

 

Certain shares of our common stock are restricted from immediate resale. The lapse of those restrictions, coupled with the sale of the related shares in the market, or the market’s expectation of such sales, could result in an immediate and substantial decline in the market price of our common stock.

 

Most of our shares of common stock are restricted from immediate resale in the public market. The restricted shares are restricted in accordance with Rule 144, which states that if unregistered, restricted securities are to be sold, a minimum of one year must elapse between the later of the date of acquisition of the securities from the issuer or from an affiliate of the issuer, and any resale of those securities in reliance on Rule 144. The Rule 144 restrictive legend remains on the stock until the holder of the stock holds the stock for longer than six months (unless an affiliate) and meets the other requirements of Rule 144 to have the restriction removed. The sale or resale of those shares in the public market, or the market’s expectation of such sales, may result in an immediate and substantial decline in the market price of our shares. Such a decline will adversely affect our investors, and make it more difficult for us to raise additional funds through equity offerings in the future.

 

Our common stock is subject to restrictions on sales by broker-dealers and penny stock rules, which may be detrimental to investors.

 

Our common stock is subject to Rules 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and “accredited investors” (as defined in Rule 501(a) of the Securities Act). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of our common stock.

Additionally, our common stock is subject to SEC regulations applicable to “penny stocks.” Penny stocks include any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock; a disclosure schedule proscribed by the SEC relating to the penny stock market must be delivered by a broker-dealer to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for our common stock. The regulations also require that monthly statements be sent to holders of a penny stock that disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.

 

Our Articles of Incorporation allow us to sell preferred stock without shareholder approval.

 

Our Board of Directors has the authority to issue up to 4,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any additional vote or action by our shareholders. The rights of the holders of the common stock will be subject to, and could be materially adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. For example we could issue preferred stock that has superior rights to dividends or is convertible into shares of common stock. This might adversely affect the market price of the common stock.

 

If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures.

 

Because of the nature of our contracts, at times we commit resources to projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer payments may require us to make a working capital investment. If a customer defaults in making their payments on a project in which we have devoted resources, it could have a material negative effect on our results of operations.

 

If we do not effectively manage our growth, our existing infrastructure may become strained, and we may be unable to increase revenue growth.

 

Our past growth that we have experienced, and in the future may experience, may provide challenges to our organization, requiring us to expand our personnel and our operations. Future growth may strain our infrastructure, operations and other managerial and operating resources. If our business resources become strained, our earnings may be adversely affected and we may be unable to increase revenue growth. Further, we may undertake contractual commitments that exceed our labor resources, which could also adversely affect our earnings and our ability to increase revenue growth.

 

SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer.

 

ITEM 2. PROPERTIES

 

Starting in January 2012, the Company began sharing an office with a shareholder at 1291 Galleria Drive, Suite 200, Henderson, Nevada 89014. The office is at no cost to the Company.

 

ITEM 3. LEGAL PROCEEDINGS

 

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.

 

On July 5, 2013, the Company filed a complaint against Krooss Medical Management Systems, LLC, William F. Krooss and Marie W. Krooss ( the “Defendants”) in the United States District Court, District of Nevada Case No. 2013-CV-01187-ABG-VCF for the collection of approximately $200,000 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 they expected the Company to continue to bill for them. The Complaint includes causes of action for Breach of the Permanent Asset Transfer and Purchase Agreement (“PTAPA”), Breach of Billing and Collections Contracts, Negligence, Breach of the Duty of Good Faith and Fair Dealing, Tortious Interference with Business Relations, Fraud, and 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.

 

On September 22, 2013 Case No. 13-1372 was remanded to Chancery Court of Ranking County, Mississippi Case No. 3:13CV507-HTW-LRA.

 

On June 23, 2014, Orhan Ilercil, MD, Mississippi Brain and Spine PLLC filed a Complaint in County Court of Rankin County Mississippi. This matter is a collection matter where as Dr. Ilercil owes the Company over $30,000 in unpaid billing fees. The Plaintiff claims there is a defect in the billing software.

 

This litigation is a collection matter of unpaid fees by the Defendants and the Company denies the allegations (Breach of the 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, and 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 discontinued operations in DNA-Cloud in Mississippi as the Company believes the Defendants have interfered with the billing contracts purchased which is one of the causes of action in the Complaint, among others. The Company believes many of the contracts have been terminated due to the interference by the Defendants, and DNA-Cloud has not been able to expand the business because of the reputation of the Defendants in Jackson, Mississippi and the surrounding area.

 

ITEM 4. REMOVED AND RESERVED

PART II

 

ITEM 5. MARKET FOR REGISTANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Cloud’s common stock is traded in the over-the-counter market, and quoted in the National Association of Securities Dealers Inter-dealer Quotation System (“Electronic Bulletin Board) and can be accessed on the Internet at OTCmarkets.com under the symbol “NSCT.”

 

At September 30, 2014, there were 283,473,722 shares of common stock of Cloud outstanding and there were in excess of 916 shareholders of record of the Company’s common stock.

 

The following table sets forth for the periods indicated the high and low bid quotations for Cloud’s common stock. These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown or commission and may not represent actual transactions.

 

Periods		High			Low
Fiscal Year 2014
First Quarter (October – December  2013)		$	0.025		$	0.0155
Second Quarter (January  – March 2014)		$	0.0329		$	0.0232
Third Quarter (April - June 2014)		$	0.08		$	0.02609
Fourth Quarter (July – September  2014)		$	0.025		$	0.0221
Fiscal Year 2013
First Quarter (October – December  2012)		$	0.04		$	0.02
Second Quarter (January  – March 2013)		$	0.04		$	0.03
Third Quarter (April - June 2013)		$	0.04		$	0.02
Fourth Quarter (July – September  2013)		$	0.04		$	0.02

 

Dividends

 

We may never pay any dividends to our shareholders. We did not declare any dividends for the year ended September 30, 2014. Our Board of Directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.

 

Transfer Agent

 

Cloud’s Transfer Agent and Registrar for the common stock is Pacific Stock Transfer located in Las Vegas, Nevada.

 

Recent sales of Unregistered Securities

 

For Period November 1, 2014 through December 29, 2014

 

None

 

Fiscal Year Ended September 30, 2014

 

Stock Issued for Cash

 

During the year ended September 30, 2014, the Company issued 187,000 shares of common stock for $37,000 in net cash proceeds as follows:

Date				Number of Shares				Proceeds
	October 21, 2013				25,000			$	5,000
	January 12, 2014				10,000				10,000
	September 3, 2014				152,000				22,000
	Total				187,000			$	37,000

 

Stock Issued in Connection with Software Licensing and Subscription Agreements

 

During the year ended September 30, 2014, the Company issued 220,000 shares of common stock valued at $5,700 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.

 

Date				Number of Shares				Fair Value
	December 4, 2013				120,000			$	3,600
	February 21, 2014				100,000				2,100
	Total				220,000			$	5,700

 

Stock Issued for Assets Acquisition

 

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 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 issued because the shares were lost during delivery to the shareholders.

 

Stock Issued for Services

 

During the year ended September 30, 2014, the Company issued 68,242,506 shares of common stock as compensation. The fair values of the shares were a total of $1,625,118 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
	March 5, 2014				31,750,000		$	666,750		Compensation to officers
	April 3, 2014				5,000			116		Compensation for legal services
	April 21, 2014				1,392,506			34,227		Compensation for CipherLoc consultants
	April 22, 2014				7,000,000			138,600		Marketing agreement with Hemp, Inc.
	May 3, 2014				5,000			115		Compensation for legal services
	May 5, 2014				50,000			1,150		Compensation for marketing services
	May 6, 2014				25,000,000			605,000		Compensation to a sales consultant
	June 3, 2014				5,000			111		Compensation for legal services
	July 7, 2014				35,000			1,750		Compensation for CipherLoc consultants
	September 3, 2014				3,000,000			177,300		Compensation for marketing services
	Total				68,242,506		$	1,625,119

In June 2014, the Company entered into a consulting agreement with Gawk, Inc. This agreement required the issuance of 3,000,000 common shares and Gawk had agreed to assist the Company in seeking additional purchasers of CipherLoc Encryption Technology within the entertainment industry.

 

Fiscal Year Ended September 30, 2013

 

During the year ended September 30, 2013, the Company issued 217,500 shares of common stock for $143,000 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
	April 17, 2013				20,000				20,000
	August 26, 2013				20,000				2,000
	Total				217,500			$	143,000

 

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 Krooss.

 

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 (“DNA”) 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 for consulting services.

 

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.

 

Common Stock

 

On April 11, 2011, the Company amended its articles of incorporation to increase the authorized shares to 650,000,000 shares, at $0.01 par value. There were 283,473,722 shares issued and outstanding as of September 30, 2014. The holders of our common stock are entitled to receive such dividends, if any, as may be declared by our board of directors from time to time out of legally available funds. The dividend rights of our common stock are junior to any preferential dividend rights of any outstanding shares of preferred stock. The holders of our common stock also are entitled to receive distributions upon our liquidation, dissolution or winding up of our assets that are legally available for distribution, after payment of all debt and other liabilities and distribution in full of preferential amounts, if any, to be distributed to holders of our preferred stock.

 

The holders of our common stock are not entitled to preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of any series of preferred stock that we may designate and issue in the future.

 

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, 2014. 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 that 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.

 

The issuance of preferred stock by our board of directors could adversely affect the rights of holders of the common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. See “Risk Factors” above.

 

Warrants and Options

 

All warrants and options issued have expired.

 

ITEM 6. SELECTED FINANCIAL DATA

 

This Item is not required for smaller reporting companies and the company has elected to omit this information.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.

 

Business

 

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 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.

 

On February 4, 2010, the prior Board members, Mr. Michael Grollman and Mr. Greg Szabo, voted to discontinue and wind down the operation of the Company's Mobile DVR and Location Products business. These Company assets were transferred to a Limited Liability Company named NSC Labs, LLC controlled and owned by Mr. Grollman. Mr. Grollman and NSC Labs, LLC agreed to pay the Company 2% of future revenues and $100,000. However, neither Mr. Grollman nor NSC Labs, LLC have paid any consideration for this transaction. The Company discontinued these operations in 2011.

 

On November 19, 2010, the prior management of the Company was terminated and a new management team began working on operations related to the Company’s medical billing software. In fiscal 2011, the year of termination of prior management, the new management team deemed that the above transaction transferring prior operations to NSC Labs, LLC was transacted in full and final settlement of the liabilities owed to the former management. Since the transaction was related to the former management team, who had the ability to affect the terms and outcomes of the liabilities, the settlement of the liabilities 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.

 

In August of 2014 the Company purchased Evolution Software Technology that has a updated front end software package that complements our back office software. The Company has tested this software and programmed a bridge with the new software to implement this new cloud technology.

 

The Future for CipherLoc™

 

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. The CipherLoc Polymorphic Hardware Engine has a current patent and is fully developed and ready for use.

 

CipherLoc is different from the historical Digital Cyber Security Solutions as it incorporates polymorphism which is the ability to change an encryption to another method of encryption or key on the fly. Polymorphic ciphers are more commonly known as “mutating” ciphers.

 

Polymorphic ciphers are an idea based on the information content in a message rather than the difficulty of the key. Using advanced set theory and information theory, this encryption method does not rely exclusively on large keys and complicated permutation/obscuring techniques. This makes the algorithm faster and requires less memory than other encryptions. A polymorphic cipher solves both asset intrusion and electronic attack problems.

 

Our business strategy includes the sales of our encryption technology for commercial use to credit card companies, investment companies, retailers, among others. We have internally tested our demonstration model with success and we have used this demonstration software to show potential buyers of its powerful security encryption technology. The digital cipher and encryption market offers seemingly endless opportunity. The Company is presently discussing licensing agreements with several large corporations that are in need of this software to protect their customers, passwords, websites and other devices that require data security.

 

Strategic Alliances

 

The Company entered into a consulting agreement with Hemp, Inc. The agreement requires Hemp to provide introductions, products, financing contacts, and other significant business opportunities to the Company. The principles of Hemp, Inc. have had a long term relationship with the CEO of Gawk, Inc. (“Gawk”) which facilitated in our first sale of our CipherLoc Encryption Technology.

Presently the entertainment industry has one of the highest pirated assets and is in need for advance encryption technology to protect those assets. Accordingly, the Company has entered into consulting agreements to facilitate introductions with entertainment industry participants.

 

On June 28, 2014, the Company entered into a consulting agreement with Gawk. This agreement was to help facilitate introductions by Gawk to the Company from their list of contacts in the entertainment industry. Through our relationship with Gawk, Inc. and its CEO we believe they will be instrumental in future introductions for the sale of our CipherLoc Encryption Technology.

 

On June 27, 2014, the Company entered into an investor relations and consulting agreement with BCMG Entertainment, Inc. (“BCMG”). The agreement provides for BCMG to introduce the Company to participants in the entertainment industry. BCMG also has experience in market awareness which the Company can benefit from through this alliance.

 

On July 22, 2014 the Company entered into a consulting service agreement with Vindonnus Group/Alerce Global LLC. This agreement will provide marketing and sales strategies for the sale of CipherLoc our encryption technology. As compensation for the consulting services and sales, the consultant will receive 1,000,000 warrants exercised price of $1.00 with a three-year life for each $10,000,000 in annualized sales directly attributed to the Consultants efforts and subject to the terms and condition of the Agreement. This Agreement will help increase our sales and marketing of our CipherLoc Encryption Technology. On December 22, 2014 this contract was terminated due to a lack of ability to provide services as outlined in the agreement.

 

Significant Accounting Policies

 

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:

 

Revenue Recognition

 

Medical Licensing Agreement

 

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 Advice $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 revenue in the years ended September 30, 2014 or 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. The Company has not incurred any costs of license revenue in the years ended September 30, 2014 or 2013.

 

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. The Company has not incurred any costs of subscription revenue in the years ended September 30, 2014 or 2013.

 

The amortization of acquired technology for products acquired through business combinations are considered as cost of revenues. The acquired technology is amortized using the straight-line method over five years. The Company recognized $244,620 and $243,470 of amortization expense during the years ended September 30, 2014 and 2013, respectively.

 

CipherLoc Licensing Agreement

 

License revenue consists also of revenue earned under the CipherLoc License Agreement. 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.

 

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.

During the year ended September 30, 2013, the Company wrote-off accounts receivable of approximately $200,000. These accounts receivable were from billing services performed in Doctors Network of America (“DNA”), subsequent to our acquisition of the company from Krooss Medical Management Systems, LLC (“Krooss”) during the year ended September 30, 2013. These amounts were deemed uncollectible due to our pending litigation with Krooss, and were recorded in loss from discontinued operations.

 

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. The Black-Scholes option-pricing model is used to estimate the fair value of options or warrants granted. There were no option or warrants issued by the Company during the years ended September 30, 2014 and 2013.

 

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. The Company has 4,000,000 preferred shares that can be converted subject to the limitation of the Company’s authorized shares at 1 preferred share for 150 common shares. The conversion can only take place with the approval of the Board of Directors. At September 30, 2014, the preferred shares could be converted into 600,000,000 of common shares resulting in dilution of common shareholders. The preferred shares are anti-dilutive due to the losses the Company had incurred for the periods ended September 30, 2014 and 2013.

 

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.  

 

RESULTS OF OPERATIONS

 

Fiscal Year Ended September 30, 2014, Compared to Fiscal Year Ended September 30, 2013

 

Revenue increased to $1,339,155 from $516,868 for the years ended September 30, 2014 and 2013, respectively. Our revenue increased by $1,125,000 as a result of sales of our CipherLoc product in June 2014. Sales of our medical billing software in 2014 consisted of 1 software unit compared to 10 software units in 2013.

 

Cost of revenue increased to $240,270 from $243,470 for the years ended September 30, 2014 and 2013, respectively. Our cost of services increased due to cost of computer equipment purchased by the Company for sales of $3,200.

 

General and administrative expenses increased to $2,810,757 from $714,266 for the years ended September 30, 2014 and 2013, respectively. The increases in general and administrative expenses are primarily related to the salaries of management and costs of accounting.

 

Research and development costs decreased to $37,729 from $208,895 for the years ended September 30, 2014 and 2013, respectively. Our research and development decrease is related to our purchase of the now front office interface from Evolution Software Technologies and the reduction of our computer programmers to maintain our software until another required compliance update from Affordable Care Act.

 

Impairment of assets decreased to $0 from $6,000 for the years ended September 30, 2014 and 2013, respectively. We impaired the purchase of the DNA operations in Mississippi that was discontinued in 2013 due to the pending litigation with Krooss.

 

Interest expenses increased to $2,430 from $392 for the years ended September 30, 2014 and 2013, respectively. Our interest expense increased as a result of our use of credit cards for travel and our two lines of credit with Chase and Mutual of Omaha.

The Company discontinued its operations related to DNA in Mississippi during the year ended September 30, 2013. As a result, the Company recorded income from discontinued operations from DNA of $38,570 and $23,628 for years ended September 30, 2014, and 2013, respectively. See “Note 6 - Discontinued Operations” to the accompanying Consolidated 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. At September 30, 2014, the Company had cash of $545,650.

 

We have an accumulated deficit at September 30, 2014 of $28,255,726 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 raising 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.

 

Sources of Cash

 

The Company has a revolving line of credit with Chase Bank with a balance as of September 30, 2014 in the amount of $0 and a borrowing limit of $50,000. We have previously received advances from our Chief Executive Officer which we have used to help fund our operations.

 

In November 2013, the Company entered into a revolving line of credit with Mutual of Omaha for a line of credit at a 5.00% interest rate which renews annually. The outstanding balance as of September 30, 2014 is $53,612 and our borrowing limit is $65,000.

 

We believe that our existing cash and investment balances, our available revolving credit facility, our ability to issue new debt instruments, and cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements. Our strategy emphasizes organic growth through internal innovation and will be complemented by acquisitions that fit strategically and meet specific internal profitability hurdles.

 

Uses of Cash

 

Our revolving lines of credit renew annually and we make significant principal payments to those lines to assure that they remain an open line of credit.

 

Cash Flow

 

The following table summarizes, for the periods indicated, selected items in our Consolidated Statements of Cash Flows:

 

		Year Ended September 30,
		2014				2013
Net cash provided by (used in):
Operating activities		$	481,247			$	(136,711	)
Investing activities			(25,000	)			(11,500	)
Financing activities			80,816				105,442

Operating Activities

 

Our cash provided by (used in) operating activities was $481,247 and ($136,711) for the years ended September 30, 2014 and 2013, respectively. The increase in cash provided by operations was primarily attributable to the increase of revenue generated by our CipherLoc segment.

 

Investing Activities

 

Our cash used in investing operating activities was $25,000 and $11,500 for the years ended September 30, 2014 and 2013, respectively. The increase in cash used in investing activities was primarily attributable to the Company purchasing intangible assets to enhance its medical billing segment during the year ended September 30, 2014.

 

Financing Activities

 

Cash provided by financing activities was $80,816 and $105,442 for the years ended September 30, 2014 and 2013, respectively. We received cash from the sale of our common stock of $37,000 and $143,000 for the years ended September 30, 2014 and 2013, respectively. During the year ended September 30, 2014, we received $103,529 from our lines of credit, and repaid our lines of credit of $59,713. We also received $8,299 in advances from our officer, and repaid $8,299 to our officer. During the year ended September 30, 2013, we received $11,144 from our Chase line of credit, repaid the Chase line of credit of $23,111, and repaid our advances from our officer of $31,000.

 

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.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not hold any derivative instruments and do not engage in any hedging activities.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

 

CLOUD MEDICAL DOCTOR SOFTWARE CORPORATION

 

TABLE OF CONTENTS		Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			30
FINANCIAL STATEMENTS:
Consolidated Balance Sheets at September 30, 2014 and 2013			31
Consolidated Statements of Operations for the years ended September 30, 2014 and 2013			32
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2014 and 2013			33
Consolidated Statements of Cash Flows for the years ended September 30, 2014 and 2013			34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors of
Cloud Medical Doctor Software Corporation
(Formerly National Scientific Corporation)
Henderson, Nevada

 

We have audited the accompanying consolidated balance sheets of Cloud Medical Doctor Software Corporation as of September 30, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. Cloud Medical Doctor Software Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cloud Medical Doctor Software Corporation as of September 30, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that Cloud Medical Doctor Software Corporation will continue as a going concern. As discussed in Note 3 to the financial statements, Cloud Medical Doctor Software Corporation has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ GBH CPAs, PC

GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
December 29, 2014

CLOUD MEDICAL DOCTOR SOFTWARE CORPORATION
(Formerly National Scientific Corporation)
CONSOLIDATED BALANCE SHEETS
		September 30,
		2014				2013
ASSETS
CURRENT ASSETS:
Cash		$	545,650			$	8,587
Accounts receivable			1,006				8,338
Assets attributable to discontinued operations			6,887				—
Total current assets			553,543				16,925
Proprietary technology, net			604,301				817,921
TOTAL ASSETS		$	1,157,844			$	834,846
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities		$	649,452			$	361,994
Liabilities attributable to discontinued operations			18				35,356
Lines of credit			53,612				9,796
Stock payable			7,000				—
Total current liabilities			710,082				407,146
TOTAL LIABILITIES			710,082				407,146
COMMITMENTS AND CONTINGENCIES			—				—
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 4,000,000 shares authorized; 4,000,000 issued and outstanding as of September 30, 2014 and 2013			40,000				40,000
Common stock, $0.01 par value, 650,000,000 shares authorized; 283,473,722 and 214,624,216 issued and outstanding as of September 30, 2014 and 2013, respectively			2,834,737				2,146,242
Additional paid-in capital			25,828,751				24,783,723
Accumulated deficit			(28,255,726	)			(26,542,265	)
Total stockholders' equity			447,762				427,700
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	1,157,844			$	834,846
The accompanying notes are an integral part of these consolidated financial statements.

CLOUD MEDICAL DOCTOR SOFTWARE CORPORATION
(Formerly National Scientific Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
		Year Ended
		September 30,
		2014				2013
REVENUE		$	1,339,155			$	516,868
COST OF REVENUES			240,270				243,470
GROSS PROFIT			1,098,885				273,398
OPERATING EXPENSES:
General and administrative			2,810,757				714,266
Research and development			37,729				208,895
Impairment of assets			—				6,000
Total operating expenses			2,848,486				929,161
OPERATING LOSS			(1,749,601	)			(655,763	)
OTHER (INCOME) AND EXPENSES
Interest expense			2,430				392
Gain on the disposal of assets			—				(1,353	)
Total other (income) expenses			2,430				(961	)
LOSS FROM CONTINUING OPERATIONS			(1,752,031	)			(654,802	)
INCOME FROM DISCONTINUED OPERATIONS			38,570				23,628
NET LOSS		$	(1,713,461	)		$	(631,174	)
NET LOSS PER COMMON SHARE - Basic and diluted:
Continuing operations		$	(0.01	)		$	(0.00	)
Discontinued operations		$	0.00			$	0.00
Total		$	(0.01	)		$	(0.00	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic and diluted			247,477,420				212,798,744
The accompanying notes are an integral part of these consolidated financial statements.

CLOUD MEDICAL DOCTOR SOFTWARE CORPORATION
(Formerly National Scientific Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
		Preferred Stock								Common Stock								Additional Paid-in				Accumulated
		Shares				Amount				Shares				Amount				Capital				Deficit				Total
SEPTEMBER 30, 2012			4,000,000			$	40,000				211,991,212			$	2,119,912			$	24,552,924			$	(25,911,091	)		$	801,745
Common stock issued for asset acquisition											300,000				3,000				3,000								6,000
Common stock issued for intangible asset acquisition											500,004				5,000				10,800								15,800
Common stock issued for the purchase of billing software											450,000				4,500				9,063								13,563
Common stock issued for consulting services											1,165,500				11,655				24,974								36,629
Common stock issued for cash											217,500				2,175				140,825								143,000
Write-off of related party debt																			42,137								42,137
Net loss																							(631,174	)			(631,174	)
SEPTEMBER 30, 2013			4,000,000			$	40,000				214,624,216			$	2,146,242			$	24,783,723			$	(26,542,265	)		$	427,700
Common stock issued for asset acquisition											200,000				2,000				4,000								6,000
Common stock issued to officers for services											31,750,000				317,500				349,250								666,750
Common stock issued for the purchase of billing software											220,000				2,200				3,500								5,700
Common stock issued for consulting services											36,492,506				364,925				593,444								958,369
Common stock issued for cash											187,000				1,870				35,130								37,000
Write-off of related party debt																			59,704								59,704
Net loss																							(1,713,461	)			(1,713,461	)
SEPTEMBER 30, 2014			4,000,000			$	40,000				283,473,722			$	2,834,737			$	25,828,751			$	(28,255,726	)		$	447,762
The accompanying notes are an integral part of these consolidated financial statements.

CLOUD MEDICAL DOCTOR SOFTWARE CORPORATION
(Formerly National Scientific Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
		Year Ended
		September 30,
		2014				2013
Net loss		$	(1,713,461	)		$	(631,174	)
Income from discontinued operations			(38,570	)			(23,628	)
Loss from continuing operations			(1,752,031	)			(654,802	)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization			244,620				243,470
Impairment of assets			—				6,000
Stock issued for compensation			1,625,119				36,629
Stock issued with licensing agreements			5,700				13,563
Changes in operating assets and liabilities:
Accounts receivable			7,332				(3,450	)
Accounts payable and accrued liabilities			343,507				221,879
Stock payable			7,000				—
Net cash provided by (used in) operating activities			481,247				(136,711	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible asset			(25,000	)			(11,500	)
Net cash used in operating activities			(25,000	)			(11,500	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from officer			8,299				5,409
Repayment of advances from officer			(8,299	)			(31,000	)
Proceeds from line of credit			103,529				11,144
Repayment of line of credit			(59,713	)			(23,111	)
Common stock issued for cash			37,000				143,000
Net cash provided by financing activities			80,816				105,442
INCREASE (DECREASE) IN CASH			537,063				(42,769	)
CASH, BEGINNING OF YEAR			8,587				51,356
CASH, END OF YEAR		$	545,650			$	8,587
CASH PAID FOR:
Interest		$	2,726			$	—
Taxes		$	—			$	—
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accrual of software acquisition costs		$	—			$	11,500
Write-off of debt - related parties		$	59,704			$	42,137
Common stock issued for investment in Doctors Network of America		$	—			$	6,000
Common stock issued for purchase of software		$	6,000			$	15,800
The accompanying notes are an integral part of these consolidated financial statements.

CLOUD MEDICAL DOCTOR SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2012

 

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.

 

During 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.

 

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. Since 2012, the Company has tested the software application and created a commercial product for distribution of its encryption technology. The Company is presently developing more applications for consumer usage in the future.

 

On September 1, 2014, the Company purchased Evolve Software for $25,000, which is a front office interface that complements our back office medical billing software. The Company has bridged the software to provide a more user friendly medical billing package for our customers.

 

NOTE 2 - BASIS OF PRESENTATION

 

Segment reporting change

 

With the placement into service of the Company’s encryption technology, the Company began a segment reporting structure to match the new operating structure and how the Company’s management views the business and allocates resources, beginning in the year ended September 30, 2014. Reclassifications of prior period financial information have been made to conform to the current period presentation. This change does not impact previously reported consolidated financial statements of the Company. See Note 12 for additional information on our segment reporting change.

 

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 contemplates continuation of the Company as a going concern. However, the Company has incurred losses from operations, has an accumulated deficit at September 30, 2014 of $28,255,726 and needs additional cash to maintain its operations.

These factors raise substantial 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 the valuation of its common stock.

 

In managements’ opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

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 September 30, 2014 and 2013, cash and cash equivalents include cash on hand and cash in the bank. The Company maintains its cash in accounts held by large, globally recognized banks which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures these deposits up to $250,000. At September 30, 2014, approximately $294,927 of the Company’s cash balance was uninsured. The Company has not experienced any losses in such accounts.

 

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.

 

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 defined as an exit price that would be received upon the 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 September 30, 2014 and 2013 for assets measured at fair value on a recurring basis:

 

		Level 1				Level 2				Level 3				Total
At September 30, 2014
Software development, net of amortization		$	—			$	—			$	604,301			$	604,301
Total Proprietary Technology		$	—			$	—			$	604,301			$	604,301
At September 30, 2013
Software development, net of amortization		$	—			$	—			$	817,921			$	817,921
Total Proprietary Technology		$	—			$	—			$	817,921			$	817,921

 

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 September 30, 2014 and 2013, the Company had no valuation allowance for the Company’s accounts receivable.

 

During the year ended September 30, 2013, the Company wrote-off accounts receivable of approximately $200,000. These accounts receivable were from billing services performed in DNA (“Doctors Network of America”), subsequent to our acquisition of the company from Krooss Medical Management Systems, LLC (“Krooss”) which was completed during the year ended September 30, 2013. These amounts were deemed uncollectible due to our pending litigation with Krooss, and were recorded in loss from discontinued operations.

 

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. The Company did not record any liabilities for uncertain tax positions for the years ended September 30, 2014 or 2013.

 

Revenue Recognition

 

Medical Licensing Agreement

 

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 Advice $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 had not received any transaction revenues in the years ended September 30, 2014 or 2013.

 

CipherLoc Licensing Agreement

 

License revenue also consists of revenue earned under a CipherLoc License Agreement. 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.

 

Cost of License and Subscriptions Revenue

 

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 years ended September 30, 2014 and 2013.

 

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 years ended September 30, 2014 and 2013.

 

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 five years.

 

Deferred Revenue

 

Deferred revenue result from fees billed to customers for which revenue has not yet been recognized or for which the conditions of the arrangement have been modified. The Company recognizes revenue to provide up-front capitalization to Cloud-MD for each provider added to the solution set. The Company also recognizes annual subscription fees for virtual servers and subscription and small usage fees and those revenues are based on a 48-month lease, Cloud-MD would amortize the revenue over the life of the agreement of 48 months. In addition, it features incremental monthly revenue, for the duration of the lease (48 months) based on fees assessed for transactions such as eligibility claims processing, etc.

  

The Company has deferred revenue of $0 as of September 30, 2014 and 2013.

 

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 accrued on the date of sale and paid in the month following execution of the customer contracts. The Company paid commissions of $37,000 and $62,060 for the years ended September 30, 2014 and 2013, 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 years ended September 30, 2014 and 2013 were $37,729 and $208,895, 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. The Black-Scholes option-pricing model is used to estimate the fair value of options or warrants granted. There were no options or warrants issued by the Company during the years ended September 30, 2014 and 2013.

 

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 September 30, 2014 and 2013, the Company had 4,000,000 shares of preferred stock outstanding which are convertible into 600,000,000 shares of common stock.

 

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.  

 

Concentrations of 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.

 

The revenues for the year ended September 30, 2014 were generated from one transaction in June of 2014 of $1,125,000 which represents 84% of our total revenues.

 

Subsequent Events

 

The Company has evaluated all transactions occurring from the end of its fiscal year, September 30, 2014, through the date of issuance of the financial statements for subsequent event disclosure consideration.

 

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 September 30, 2014 and 2013:

		2014				2013
Source Code License		$	2,500			$	2,500
Software License			1,200,106				1,200,106
EMR Certification			23,000				23,000
Encryption Software Code			15,800				15,800
Evolve Software Code			25,000				—
Compose Rose Code			6,000				—
Acquisition of Doctor’s Network of America			10,000				10,000
Total intangible assets			1,282,406				1,251,406
Accumulated amortization of intangible assets (charged to cost of sales)			(668,105	)			(423,485	)
Accumulated impairment of assets			(10,000	)			(10,000	)
Total proprietary technology, net		$	604,301			$	817,921

The Company’s software was placed into service starting in the second quarter of fiscal year ended September 30, 2012. The amortization expense was $244,620 and $243,470 for the years ended September 30, 2014 and 2013, respectively. The Company recognized a $10,000 impairment of software acquired from Doctors Network of America (“DNA”) operating in Flowood, Mississippi during the years ended September 30, 2014 and 2013. 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 assets to be impaired.

 

Source Code License

 

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.

 

Encryption Software Code

 

On November 21, 2012, the Company purchased from CipherSmith, LLC a complete source code, intellectual property rights, all computer software and algorithms licensed and sold under CipherSmith, and appropriate copy rights, patents, mask works, trademarks, service marks, internet domain names and 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, 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 amounts billed for transaction fees were written off in the year ended September 30, 2013 as uncollectible. The Company and the sellers are currently in litigation over the disputed transaction fees of $200,000.

 

NOTE 6 - DISCONTINUED OPERATIONS

 

GPS Operational Device Business

 

The Company’s former Board of Directors believed that it was in the best interest of the Company to discontinue the former 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 specific consideration for this transaction.

 

Accordingly, the Company reclassified the assets, liabilities and operations related to its GPS operational device business as discontinued operations.  Consequently, the accompanying consolidated 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.

DNA

 

On March 16, 2013, the Company closed the acquisition with the final payment for DNA. 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.

 

		September 30, 2014				September 30, 2013
Net liabilities of discontinued operations:
Accounts payable		$	18			$	35,356
Net liabilities of discontinued operations		$	18			$	35,356

           

		Year ended September 30,
		2014				2013
Discontinued operations:
Revenues		$	207,980			$	431,400
Cost of sales			—				—
Operating expenses			169,410				(245,287	)
Bad debt			—				(221,469	)
Gain from write-off of debt			—				58,984
Income from discontinued operations		$	38,570			$	23,628

 

NOTE 7 – LINES OF CREDIT

 

In November 2013, the Company entered into a revolving line of credit with Mutual of Omaha in the amount of $65,000 at a 5.00% interest rate per annum, which renews annually. As of September 30, 2014, the Company had borrowed $53,612 against the line of credit.

 

The Company has a revolving line of credit with Chase Bank with a balance as of September 30, 2014 in the amount of $0 and a borrowing limit of $50,000. The line of credit with Chase Bank has an interest rate of 4.25% per annum and renews annually.

 

Interest expense for these lines of credit was $2,430 from $392 for the years ended September 30, 2014 and 2013, respectively.

 

NOTE 8 – 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 year ended September 30, 2014 and 2013, the Company recognized a gain on the write-off of liabilities in the amount of $0 and $58,984 from third party liabilities, respectively, which was recorded in income from discontinued operations, and additional paid-in capital of $59,704 and $42,137 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.

		September 30, 2014				September 30, 2013
Debt Mitigation Program - Accounts payable and accrued expenses		$	59,704			$	101,121
Gain on write-off of debt			—				58,984
Additional paid-in capital (1)		$	59,704			$	42,137

 

(1)

All amounts that were owed to related parties in prior years were recorded to paid-in capital.

 

NOTE 9– COMMITMENTS AND CONTINGENCIES

 

The Company entered into an agreement to purchase the assets of DNA in June 2012 and, after due diligence by both parties, the transaction closed on March 16, 2013. 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 of approximately $200,000. In June 2013, the Company sued the sellers in federal court for breach of contract among other causes of action of unpaid medical billing transaction fees of approximately $200,000. The Company believes it will be successful in its litigation. However, if the Company is successful, the collectability of the judgment is highly questionable.

 

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”). 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 terminate and shareholders that received anti-reverse split stock will be subject to all future stock splits. The Company has issued 90,029,843 anti-reverse split shares and these holders will hold the same number of shares after the reverse split has been completed. The company applied for a 100:1 reverse stock split on September 6, 2014. Had the Company completed the reverse stock split by September 30, 2014, the price of the Company stock would have been $2.49, and 89,129,545 additional shares would have been issued at a total of $221,932,567.

 

As discussed in Note 8, the Company has written off $59,704 and $101,121 in accounts payable, accrued liabilities and notes payable based on the opinion of legal counsel for the years ended September 30, 2014 and 2013, respectively. However, the related creditors could make a claim in the future in regards to these liabilities.

 

In June 2014, the Company entered into an investor relations agreement and market awareness consulting agreement with BCMG Entertainment, Inc. (“BCMG”) for $450,000. The Company has paid BCMG $200,000 as of September 30, 2014. The Company will continue to pays $25,000 per month based on performance until the contract is satisfied. The Company has terminated this contract in full satisfaction of the contract on October 8, 2014.

 

Employment Contracts

 

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 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 2014 and 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

iii.

The issuance of shares equal to the greater of 1% of the then issued and outstanding shares of the Company annually, or 3,000,000 shares. The Company issued these shares in March 2014.

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 2014 and 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

iii.

The issuance of shares equal to the greater of 1% of the then issued and outstanding shares of the Company annually, or 3,000,000 shares. The Company issued these shares in March 2014.

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 CipherSmith, LLC, and 750,000 shares 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.

There are additional shares due to the officers of the Company and the Board has not granted these shares nor determined the amounts due at this time.

 

NOTE 10– RELATED PARTY TRANSACTIONS

 

The Company repaid $8,299 and $25,591 of the advances from the Company’s CEO in the years ended September 30, 2014 and 2013, respectively. The advances from the CEO are due on demand and do not accrue interest. As of September 30, 2014 and 2013, there were no amounts owed to the CEO for advances.

 

NOTE 11 - EQUITY

 

As of September 31, 2014, the Company was authorized to issue 650,000,000 common shares and 4,000,000 preferred shares at a par value of $0.01 per share.

 

Fiscal Year Ended September 30, 2014

 

The Company received $7,000 for the issuance of 50,000 shares of common stock recorded as stock payable and as of September 30, 2014 the common stock has not been issued by the Company.

Stock Issued for Cash

 

During the year ended September 30, 2014, the Company issued 187,000 shares of common stock for $37,000 in net cash proceeds as follows:

Date				Number of Shares				Proceeds
	October 21, 2013				25,000			$	5,000
	January 12, 2014				10,000				10,000
	September 3, 2014				152,000				22,000
	Total				187,000			$	37,000

 

Stock Issued in Connection with Software Licensing and Subscription Agreements

 

During the year ended September 30, 2014, the Company issued 220,000 shares of common stock valued at $5,700 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.

 

Date				Number of Shares				Fair Value
	December 4, 2013				120,000			$	3,600
	February 21, 2014				100,000				2,100
	Total				220,000			$	5,700

 

Stock Issued for Asset Acquisition

 

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 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 issued because the shares were lost during delivery to the shareholders.

 

Stock Issued for Services

 

During the year ended September 30, 2014, the Company issued 68,242,506 shares of common stock as compensation. The fair values of the shares were a total of $1,625,119 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
	March 5, 2014				31,750,000			$	666,750			Compensation to officers
	April 3, 2014				5,000				116			Compensation for legal services
	April 21, 2014				1,392,506				34,227			Compensation for CipherLoc consultants
	April 22, 2014				7,000,000				138,600			Marketing agreement with Hemp, Inc.
	May 3, 2014				5,000				115			Compensation for legal services
	May 5, 2014				50,000				1,150			Compensation for marketing services
	May 6, 2014				25,000,000				605,000			Compensation to a sales consultant
	June 3, 2014				5,000				111			Compensation for legal services
	July 7, 2014				35,000				1,750			Compensation for CipherLoc consultants
	September 3, 2014				3,000,000				177,300			Compensation for marketing services
	Total				68,242,506			$	1,625,119

In June 2014, the Company entered into a consulting agreement with Gawk, Inc. This agreement required the issuance of 3,000,000 common shares and Gawk has agreed to assist the Company in seeking additional purchasers of CipherLoc Encryption Technology within the entertainment industry.

 

Fiscal Year Ended September 30, 2013

 

Stock Issued for Cash

 

During the 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
	March 31, 2013				50,000				50,000
	April 17, 2013				20,000				20,000
	August 26, 2013				20,000				2,000
	Total				217,500			$	143,000

 

Stock Issued in Connection with Software Licensing and Subscription Agreements

 

During the year ended September 30, 2013, the Company issued 450,000 shares of common stock valued at $13,563, 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
	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
	September 30, 2013				50,000				1,250
	Total				450,000			$	13,563

 

Stock Issued for Services

 

During the year ended September 30, 2013, the Company issued 1,165,500 shares of common stock as compensation. The fair values of the shares were a total of $36,629 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			Software Agreement
	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
	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				1,165,500			$	36,629

 

Stock Issued for Intangible Asset and Asset 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 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.

  

Preferred Stock

 

The Company has authorized 4,000,000 shares of preferred stock, at $0.01 par value. The Company established and designated the rights and preferences of a Series A Preferred Stock, and reserved 4,000,000 shares of preferred stock against its issuance, such rights, preferences and designations. Each share of the Preferred Stock has 150 votes on all matters presented to be voted by the holders of common stock. All 4,000,000 shares of preferred stock were issued to our CEO and CFO on April 11, 2011.

 

NOTE 12 – SEGMENT INFORMATION

 

Cloud Medical Doctors Software Corporation has two reporting segments and corporate overhead:

 

•

Cloud-MD – the Company sells medical billing software to doctors. Prior to 2014, all of the Company’s business activities were derived from this segment.

•

CipherLoc – the Company licenses encryption technology software that can be used by larger corporations to protect their data through our polymorphic technology.

•

Corporate Overhead – the Company’s activities that are used to finance the current operations and expansion of its segments.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. The reportable segments are strategic business units that offer different technology and marketing strategies. Most of the businesses were developed internally and management remains the same. To date, the Company’s operations are principally in the United States.

Consolidated revenues from external customers, operating loss, and identifiable assets were as follows:

 

		Year ended September 30,
		2014				2013
Revenues:
Cloud-MD		$	214,155			$	516,868
CipherLoc			1,125,000				—
Total revenues		$	1,339,155			$	516,868
Operating Income (Loss):
Cloud-MD		$	63,905			$	58,503
CipherLoc			1,094,317				—
Corporate			(2,780,013	)			(714,266	)
Operating loss		$	(1,749,601	)		$	(655,763	)

 

		September 30,     2014				September 30, 2013
Identifiable assets:
Cloud-MD		$	583,870			$	810,459
CipherLoc			21,437				15,800
Corporate			552,537				8,587
Total identifiable assets		$	1,157,844			$	834,846

 

NOTE 13 - INCOME TAXES

 

Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The Company has a net operating loss carryforward of approximately $25.9 million available to offset future taxable income through 2014. For income tax reporting purposes, the Company’s aggregate unused net operating losses are subject to limitations of Section 382 of the Internal Revenue Code, as amended. Under the Tax Reform Act of 1986, the benefits from net operating losses carried forward may be impaired or limited on certain circumstances. Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. The consolidation of any limitations that may be imposed for future issuances of equity securities, including issuances with respect to acquisitions have not been determined. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, because in the opinion of management based upon the earning history of the Company; it is more likely than not that the benefits will not be realized.

 

For the years ended September 30, 2014 and 2013, the difference between the amounts of income tax expense or benefit that would result from applying the statutory rates to pretax income to the reported income tax expense of $0 is the result of the net operating loss carryforward and the related valuation allowance.

 

The Company anticipates it will continue to record a valuation allowance against the losses of certain jurisdictions, primarily federal and state, until such time as it is able to determine it is “more-likely-than-not” the deferred tax asset will be realized. Such position is dependent on whether there will be sufficient future taxable income to realize such deferred tax assets. The Company’s effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

ITEM 9A. CONTROLS AND PROCEDURES

 

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 Chief 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 Chief 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 Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our Chief Executive Officer and Chief 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 Chief Financial Officer have concluded that our internal control over financial reporting was not effective as of September 30, 2014.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

 

Changes in internal control over financial reporting

 

There were no changes in our internal control over financial reporting that occurred during the year ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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.

 

ITEM 9B. OTHER INFORMATION

 

There are no events required to be disclosed by the Item. 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

Director and Executive Officer

 

Set forth below is information regarding the Company’s current directors and executive officers. There are no family relationships between any of our directors or executive officers. The directors are elected annually by stockholders. The executive officers serve at the pleasure of the Board of Directors.

 

Name		Age				Title
Michael De La Garza			56			Chairman, CEO,  President, Chairman
Pamela J. Thompson			51			Chief  Financial Officer, Secretary, Treasurer, Director

 

The chief executive officer and director and officer of the Company will hold office until additional members or officers are duly elected and qualified. The background and principal occupations of the sole officer and director of the Company is as follows:

 

Michael De La Garza

 

Cloud Medical Doctor Software Corporation – 2010 - Present. President, CEO, Chairman of the Board, Card Activation Technology Corporation. - President, CEO, Chairman of the Board of a gift card technology company- 2008-2009

 

MedCom USA, Corporation. -President, CEO, Chairman of the Board of a medical software company - 2008-2009

 

PayMed USA, LLC President and co-founder of a medical software company -2003-2012

 

Providers Solution, Corporation. President and co-founder of a medical software company -2000-2012

 

Accident and Injury Medical Centers, Corporation, President and co-founder of a medical rehab company 1993-1999

 

Medical Synergies Corporation. COO, President, a medical billing company. 1991-1999

 

The Center’s for Diagnostic Medical Services, Corporation. COO and President, a medical imaging group company 1991-1999

 

Pamela Thompson

 

Cloud Medical Doctor Software Corporation; 2010 - Present; Chief Financial Officer, Secretary, Treasurer, member of the Board of Directors,

 

Ms. Pamela J. Thompson, CPA, P.C. has been Chief Financial Officer, Treasurer, Secretary and Director of Cloud Medical Doctor Software Corporation since November 19, 2010. Ms. Thompson is the Founder of Pamela J. Thompson CPA PC and serves as its Principal Executive Officer.

 

Ms. Thompson formed Pamela J. Thompson, CPA, P.C. in 1990 and has over 20 years of experience in SEC compliance, tax and accounting for publicly traded companies. Her Sarbanes-Oxley Section compliance implementation experience is focused on assisting publicly traded companies with performing risk assessment on critical business process and documenting business process controls. She served as Chief Financial Officer, Secretary and Treasurer of several public companies. Ms. Thompson started her career in 1986 with the international accounting firm of Arthur Andersen and was subsequently with Pannell Kerr Forester, and one of the larger regional firms Eide, Bailey and Company. Ms. Thompson is featured in Arizona Republic, New Jersey Star, Arizona Women's Success Magazine, National Basketball Players Association Magazine, and Behind the Bench: National Basketball Wives Association Magazine and Wall Street Journal. Ms. Thompson is a Member of the Association of Certified Fraud Examiners and Arizona Association of Certified Fraud Examiners. Ms. Thompson holds a Bachelor of Science from Minnesota State University - Moorhead in Accountancy in 1986 and holds her license as a Certified Public Accountant in the State of Arizona in 1993.

On February 25, 2008, the Securities and Exchange Commission issued an administrative order against Ms. Thompson without Ms. Thompson admitting or denying the allegations.  Ms. Thompson was ordered to cease and desist from committing or causing any violations and any future violations of Sections 5(a), 5(c), 17(a)(2), and 17(a)(3) of the Securities Act and Section 17A of the Exchange Act and Rule 17Ac2-1 and was barred from association with any transfer agent, with the right to reapply for association after three (3) years to the appropriate self-regulatory organization, or if there is none, to the Commission. She was also ordered to pay disgorgement of $7,632 and prejudgment interest of $830.82 to the United States Treasury.

 

The above information can be reviewed in its entirety as ADMINISTRATIVE PROCEEDING File No. 3-12969 on the SEC website www.sec.gov.

 

Audit Committee Financial Expert

 

The Company does not have an audit committee or a compensation committee of its board of directors. In addition, the Company’s board of directors has determined that the Company does not have an audit committee financial expert serving on the board. When the Company develops its operations, it will create an audit and a compensation committee and will seek an audit committee financial expert for its board and audit committee.

 

Conflicts of Interest

 

Members of our management are associated with other firms involved in a range of business activities. Consequently, there are potential inherent conflicts of interest in their acting as officers and directors of our company. Although the officers and directors are engaged in other business activities, we anticipate they will devote an important amount of time to our affairs.

 

Our officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may be formed for the purpose of engaging in business activities similar to ours. Accordingly, additional direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations.

 

Our officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we or the companies with which the officers and directors are affiliated both desire to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions.

 

Compliance with Section 16(A) Of the Exchange Act 9.A. Directors and Executive Officers, Promoters, and Control Persons:

 

As of September 30, 2014, the Company is aware that all filings of Form 4 and 5 required of Section 16(a) of the Exchange Act of Directors, Officers or holders of 10% of the Company's prior management and board of directors have not filed the requirements timely.

 

Code of Ethics

 

We have adopted a code of ethics that applies to all of our executive officers, directors and employees. Code of ethics codifies the business and ethical principles that govern all aspects of our business. This document will be made available in print, free of charge, to any shareholder requesting a copy in writing from the Company. A form of the code of conduct and ethics was filed as Exhibit 14.1 to the Annual Report on Form 10-K for the year ended September 30, 2004.

ITEM 11. EXECUTIVE COMPENSATION

 

Executive Officers and Directors

 

Summary Compensation Table

 

The following tables set forth certain information concerning all compensation paid, earned or accrued for service by (i) our Principal Executive Officer and Principal Financial Officer and (ii) all other executive officers who earned in excess of $100,000 in the fiscal years ended September 30, 2014, and each of the other two most highly compensated executive officers of the Company who served in such capacity at the end of the fiscal year whose total salary and bonus exceeded $100,000 (collectively, the “Named Executive Officer”):

 

2014 and 2013 SUMMARY COMPENSATION TABLE

 

Name and Principal Position		Year				Salary ($)				Bonus ($)				Stock Awards ($)				Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)		Total ($)
Michael De La Garza CEO, President & Chairman			2013 2014				199,647 268,865				- 62,500				- 399,000			- -		- -		- -		- 36,000(i)			199,647 766,365
Pamela Thompson, CFO, Secretary, Treasurer & Director			2013 2014				117,500 161,250				- 37,500				- 267,750			- -		- -		- -		- 30,000(i)			117,500 496,500

 

(i)

All other compensation consists of renumerations for auto and health insurance costs.

2014 and 2013 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE

 

		Option Awards																		Stock Awards
Name		Year			Number of Securities Underlying Unexercised Options (#)			Number of Securities Underlying Unexercised Options (#)			Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)			Option Exercise Price ($)			Option Expiration Date			Number of Shares or Units of Stock That Have Not Vested (#)			Market Value of Shares or Units of Stock That Have Not Vested ($)			Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)			Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
					Exercisable			Unexercisable
Michael De La Garza		2013 2014			- -			- -			- -			- -			- -			- -			- -			- -			- -
Pamela Thompson		2013 2014			- -			- -			- -			- -			- -			- -			- -			- -			- -

Compensation of Directors

 

Our current compensation policy for directors is to compensate them through options to purchase common stock or through common stock as consideration for their joining our board and/or providing continued services as a director. We do not currently provide our directors with cash compensation, although we do reimburse their expenses, with exception for a chairman of the board. No additional amounts are payable to the Company’s directors for committee participation or special assignments. There are no other arrangements pursuant to which any directors was compensated during the Company’s last completed fiscal year for any service provided except as follows:

 

On November 19, 2010, the Board of Directors appointed Michael De La Garza as the new Chief Executive Officer, President and Chairman of the Board of Directors.  

 

On November 19, 2010, the Board of Directors appointed Pamela Thompson as the new Chief Financial Officer, Secretary, Treasurer and member of the Board of Directors.

 

Employment Contracts

 

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 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 2014 and 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

iii.

The issuance of shares equal to the greater of 1% of the then issued and outstanding shares of the Company annually, or 3,000,000 shares. The Company issued these shares in March 2014.

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 2014 and 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

iii.

The issuance of shares equal to the greater of 1% of the then issued and outstanding shares of the Company annually, or 3,000,000 shares. The Company issued these shares in March 2014.

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 CipherSmith, LLC, and 750,000 shares 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.

There are additional shares due to the officers of the Company and the Company has not determined the amounts due at this time.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table lists stock ownership of our Common Stock as of December 18, 2014 based on 283,473,722 shares of common stock issued and outstanding on a fully diluted basis. The information includes beneficial ownership by (i) holders of more than 5% of our Common Stock, (ii) each of our directors and executive officers and (iii) all of our directors and executive officers as a group. Except as noted below, to our knowledge, each person named in the table has sole voting and investment power with respect to all shares of our Common Stock beneficially owned by them.

 

Name and Address of Owner		Title of Class		Number of Shares Owned (1)				Percentage of Class
Michael De La Garza (1) c/o Cloud 1291 Galleria Drive, Suite 200 Henderson, NV 89014		Common Stock			59,000,000				20,81	%
Pamela Thompson (2) c/o Cloud 1291 Galleria Drive, Suite 200 Henderson, NV 89014		Common Stock			17,750,000				6.26	%
All Officers and Directors As a Group (2 persons)		Common Stock			76,750,000				27.07	%

(1)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.

(2)

Pamela Thompson does not have beneficial ownership to the stock issued to her; those shares are held in an irrevocable trust for the benefit of her minor children, that she does not have control or voting control of those shares.

 

Changes in Control

 

We are not aware of any arrangements that may result in a change in control of the Company.

 

DESCRIPTION OF SECURITIES

 

General

 

On April 11, 2011, the Company amended its articles of incorporation to increase the authorized common shares to 650,000,000 shares, at $0.01 par value. There were 283,473,722 shares issued and outstanding as of September 30, 2014.

Common Stock

 

The holders of our common stock are entitled to receive such dividends, if any, as may be declared by our board of directors from time to time out of legally available funds. The dividend rights of our common stock are junior to any preferential dividend rights of any outstanding shares of preferred stock. The holders of our common stock also are entitled to receive distributions upon our liquidation, dissolution or winding up of our assets that are legally available for distribution, after payment of all debt and other liabilities and distribution in full of preferential amounts, if any, to be distributed to holders of our preferred stock.

 

The holders of our common stock are not entitled to preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of any series of preferred stock that we may designate and issue in the future.

 

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, 2014. The Corporation established and designates the rights and preferences of a Series A Convertible Preferred Stock, and reserves 4,000,000 shares of preferred stock against its issuance, such rights, preferences and designations. Each share of the Preferred Stock shall have 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 were issued to our CEO and CFO on April 11, 2011 were valued at the trading price of the common stock of $0.0095 and recorded as an expense of $38,000.

 

The issuance of preferred stock by our board of directors could adversely affect the rights of holders of the common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. See “Risk Factors” above.

 

Warrants and Options

 

All warrants and options issued have expired.

 

Voting Rights 

 

Each holder of Common Stock is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders.

 

Dividends 

 

Subject to preferences that may be applicable to any then-outstanding shares of Preferred Stock, if any, and any other restrictions, holders of Common Stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the Company’s board of directors out of legally available funds. The Company and its predecessors have not declared any dividends in the past. Further, the Company does not presently contemplate that there will be any future payment of any dividends on Common Stock.

 

Convertible Securities

 

The Company has no convertible securities as of September 30, 2014.

 

Amendment of our Bylaws

 

Our bylaws may be adopted, amended or repealed by the affirmative vote of a majority of our outstanding shares. Subject to applicable law, our bylaws also may be adopted, amended or repealed by our board of directors.

 

Transfer Agent

 

On August 31, 2011, the Company engaged Pacific Stock Transfer to serve in the capacity of transfer agent. Their mailing address and telephone number are as follows: Pacific Stock Transfer, 4045 South Spencer #403, Las Vegas, NV 89119 - (702) 361-3033.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The Company repaid $8,299 and $25,591 of the advances from the Company’s CEO in the years ended September 30, 2014 and 2013, respectively. The advances from the CEO are due on demand and do not accrue interest. As of September 30, 2014 and 2013, there were no amounts owed to the CEO for advances, respectively.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit Fees. The aggregate fees billed by GBH CPAs, PC for the audit of the Company’s annual financial statements for fiscal years ended September 30, 2014 and 2013 were approximately $50,000 and $40,000, respectively.

 

Audit-Related Fees. The aggregate fees billed by GBH CPAs, PC for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements for the fiscal years ended September 30, 2014 and 2013, and that are not disclosed in the paragraph captioned “Audit Fees” above, were $0 and $0, respectively.

 

Tax Fees. The aggregate fees billed by GBH CPAs, PC for professional services rendered for tax compliance, tax advice and tax planning for the fiscal years ended September 30, 2014 and 2013 were $0 and $0, respectively.

 

All Other Fees. The aggregate fees billed by GBH CPAs, PC for products and services, other than the services described in the paragraphs “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” above for the fiscal years ended September 30, 2014 and 2013 were $0 and $0, respectively.

 

The Board of Directors has received and reviewed the written disclosures and the letter from the independent registered public accounting firm required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and has discussed with its auditors its independence from the Company. The Board of Directors has considered whether the provision of services other than audit services is compatible with maintaining auditor independence.

 

Based on the review and discussions referred to above, the Board of Directors approved the inclusion of the audited financial statements be included in the Company’s Annual Report on Form 10-K for its 2013 fiscal year for filing with the SEC.

 

The Board of Directors pre-approved all fees described above.

PART IV

 

ITEM 15. EXHIBITS AND REPORTS

Exhibits

3.1	Articles of Incorporation(1)
3.2	Bylaws(2)
3.3	Amendment to Preferred Shares (9)
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)
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act(9)
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act(9)
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act(9)
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act(9)

____________

(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 SB-2 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 October 10, 2013.
(9)	Incorporated herein

 

SIGNATURES

 

In accordance with 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, there unto duly authorized.

 

Registrant   Date: January 5, 2015		Cloud Medical Doctor Software Corporation   By: /s/ Michael De La Garza
		Michael De La Garza
		Chairman, Chief Executive Officer (Principal Executive Officer), President
Date: January 5, 2015		By: /s/ Pamela Thompson
		Pamela Thompson
		Chief Financial Officer (Principal Accounting Officer), Secretary, Treasurer

 

 

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

 

 

Date: January 5, 2015		By: /s/ Michael De La Garza
		Michael De La Garza
		Chairman
Date: January 5, 2015		By: /s/ Pamela Thompson
		Pamela Thompson
		Director