UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[Ö] | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||
For the quarterly period ended August 31, 2007 | ||||
[ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the transition period from _______________to ________________ |
Commission File No. 333-86706
PAPERFREE MEDICAL SOLUTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada | 7389 | 98-0375957 |
(State or Other Jurisdiction of Incorporation) | (Primary Standard Industrial Classification Code Number) | (IRS Employer Identification. No.) |
1817 Dogwood Dr, Kokomo, Indiana 46902 | ||
(Address of Principal Executive Offices) (Zip Code) | ||
Issuer’s telephone number, including area code: (765) 456-1089
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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 No
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. Yes No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes No
State issuer’s revenues for its most recent fiscal year: $867,208
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)
$75,050 as of October 9, 2007 based on the last sale price of our shares
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. 93,811,908 as of October 9, 2007
TABLE OF CONTENTS
PAGE | |
PART I. FINANCIAL INFORMATION | |
Consolidated Balance Sheets (unaudited) | 2 |
Consolidated Statements of Operations (unaudited) | 3 |
Consolidated Statements of Cash Flows (unaudited) | 4 |
Notes to Financial Statements (unaudited) | 5 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 |
Item 3. Controls and Procedures | 11 |
PART II. OTHER INFORMATION | |
Item 1. Legal Proceedings | 12 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 12 |
Item 3. Defaults upon Senior Securities | 12 |
Item 4. Submission of Matters to a Vote of Security Holders | 12 |
Item 5. Other Information | 12 |
Item 6. Exhibits and Reports on Form 8-K | 12 |
Signatures | 13 |
FORWARD-LOOKING STATEMENTS
Portions of this Form 10-QSB, including disclosure under “Management’s Discussion and Analysis or Plan of Operation,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Forward-looking statements involve assumptions and describe our plans, strategies, and expectations. You can generally identify a forward-looking statement by words such as may, will, should, expect, anticipate, estimate, believe, intend, contemplate or project. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others,
o | our ability to raise capital, | ||
o | our ability obtain and retain customers, | ||
o | our ability to provide our products and services at competitive rates, | ||
o | our ability to execute our business strategy in a very competitive environment, | ||
o | our degree of financial leverage, | ||
o | risks associated with our acquiring and integrating companies into our own, | ||
o | risks related to market acceptance and demand for our services, | ||
o | the impact of competitive services, | ||
o | other risks referenced from time to time in our SEC filings. |
With respect to any forward-looking statement that includes a statement of its underlying assumptions or bases, we caution that, while we believe such assumptions or bases to be reasonable and have formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material depending on the circumstances. When, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. All subsequent written and oral forward-looking statements attributable to us, or anyone acting on our behalf, are expressly qualified in their entirety by the cautionary statements. We do not undertake any obligations to publicly release any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect unanticipated events that may occur.
1
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAPERFREE MEDICAL SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
August 31, 2007 | February 28, 2007 | ||
Current assets | |||
Cash | $ 6,528 | $ 286,293 | |
Accounts receivable, net of allowance of $124,932 and $80,558 | 44,374 | 82,798 | |
Prepaid and other current assets | 8,015 | 24,974 | |
Total current assets | 58,917 | 394,065 | |
Property, plant and equipment, net of accumulated depreciation of $149,719 and $134,014 | 150,313 | 150,366 | |
Deferred financing costs | 129,236 | 82,050 | |
Other Assets | - | 3,569 | |
Total assets | $ 338,466 | $ 630,050 | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||
Current liabilities | |||
Accounts payable and accrued liabilities | $ 417,044 | $ 275,000 | |
Stock payable | 86,774 | 112,725 | |
Notes payable - related parties | 254,928 | 249,808 | |
Lines of credit | 1,122 | 6,594 | |
Mandatorily redeemable Series C Preferred Stock, $0.001 par value, 90,000 shares authorized, issued and outstanding | 75,600 | 75,600 | |
Derivative liabilities | 239,908 | 103,469 | |
Total current liabilities | 1,075,376 | 823,196 | |
Callable secured convertible notes payable, net | 2,031,092 | 1,433,849 | |
Total Liabilities | 3,106,468 | 2,257,045 | |
Stockholders’ deficit | |||
Series A Convertible Preferred Stock, $0.001 par value, | |||
5,000,000 shares authorized, 0 shares issued and outstanding | - | - | |
Series B Preferred Stock, $0.001 par value, 5,000,000 shares | |||
authorized, 0 shares issued and outstanding | - | - | |
Common stock, $0.001 par value, 500,000,000 shares authorized, | |||
93,811,908 and 76,561,857 shares issued and outstanding | 93,811 | 76,561 | |
Additional paid-in capital | 61,886,660 | 61,871,773 | |
Accumulated deficit | (64,748,473) | (63,575,329) | |
Total stockholders’ deficit | (2,768,002) | (1,626,995) | |
Total liabilities and stockholders’ deficit | $ 338,466 | $ 630,050 |
See Notes to Financial Statements.
2
PAPERFREE MEDICAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months ended August 31 | Six Months ended August 31, | |||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||
Revenues | $ | 126,107 | $ | 234,968 | $ | 330,042 | $ | 369,031 | ||||
Operating expenses: | ||||||||||||
General and Administrative | 691,967 | 419,189 | 1,165,848 | 857,434 | ||||||||
Depreciation | 7,790 | 1,043 | 15,705 | 8,529 | ||||||||
Net loss from operations | (573,650) | (185,264) | (851,511) | (496,932) | ||||||||
Other income and expense: | ||||||||||||
Gain (loss) on derivatives | (107,245) | 97,903 | (70,145) | 1,055 | ||||||||
Law suit settlement | - | - | - | (96,000) | ||||||||
Registration rights penalties | - | (48,000) | - | - | ||||||||
Interest expense | (126,304) | (51,944) | (251,488) | (128,891) | ||||||||
Net loss | $ | (807,199) | $ | (187,305) | $ | (1,173,144) | $ | (720,768) | ||||
Basic and diluted net loss per share | $ | (0.01) | $ | (0.00) | $ | (0.01) | $ | (0.01) | ||||
Weighted average shares outstanding | 88,578,212 | 68,974,769 | 83,560,549 | 68,867,731 |
See Notes to Financial Statements
3
PAPERFREE MEDICAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended August 31, | ||||||
2007 | 2006 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net loss | $ (1,173,144) | $ (720,768) | ||||
Adjustments to reconcile net loss to cash used in operating activities: | ||||||
Depreciation | 15,705 | 8,529 | ||||
Deferred financing costs amortization | 30,314 | 16,667 | ||||
Convertible debt discount amortization | 118,520 | 76,289 | ||||
Imputed interest | 7,161 | 13,799 | ||||
(Gain) loss on derivatives | 70,145 | (1,055) | ||||
Common stock issued for service | 5,250 | 11,900 | ||||
Employee stock options | 6,430 | - | ||||
Changes in assets and liabilities: | ||||||
Accounts receivable | 38,424 | (39,917) | ||||
Prepaid and other current assets | 20,528 | - | ||||
Deferred revenue | - | 5,000 | ||||
Stock payable | (25,951) | - | ||||
Accounts payable and accrued liabilities | 145,357 | 376,380 | ||||
CASH USED IN OPERATING ACTIVITIES | (741,261) | (253,176) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Purchase of property, plant and equipment | (15,652) | - | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Net change in line of credit | (5,472) | (3,513) | ||||
Advances from related party | 41,724 | 65,076 | ||||
Repayment of advances to related party | (36,604) | (35,387) | ||||
Proceeds from convertible debt, net of offering costs | 477,500 | 195,000 | ||||
CASH PROVIDED BY FINANCING ACTIVITIES | 477,148 | 221,176 | ||||
NET CHANGE IN CASH | (279,765) | (32,000) | ||||
Cash, beginning of period | 286,293 | 213,368 | ||||
Cash, end of period | $ 6,528 | $ 181,368 | ||||
Cash paid for: | ||||||
Interest | $ - | $ 36,301 | ||||
Taxes | - | - | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||
Conversion of note payable to common stock | $ 13,297 | $ - | ||||
Discount on convertible debt from derivatives | 66,294 | 54,295 |
See Notes to Consolidated Financial Statements
4
PAPERFREE MEDICAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and Item 310 (b) of Regulation S-B, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in PaperFree’s Annual Report filed with the SEC on Form 10-KSB. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would, substantially duplicate the disclosure contained in the audited financial statements for fiscal 2007 as reported in Form 10-KSB have been omitted.
NOTE 2 - CALLABLE SECURED CONVERTIBLE NOTES PAYABLE
PaperFree entered into a securities purchase agreement with four investors (the “note holders”) on November 30, 2005. This financing facility is composed of callable secured convertible notes (“Notes”) and warrants (“Warrants”). The callable secured convertible notes bear interest at 8% per annum from the date of issuance and is payable quarterly. The callable secured convertible notes are convertible into common stock at the note holders' option, at the lower of (i) $0.05 or (ii) 55% of the average of the three lowest intraday trading prices for the common stock for the 20 trading days before but not including the conversion date. The callable secured convertible notes are secured by PaperFree's assets, including inventory, accounts receivable and intellectual property. The agreement restricts the note holder’s ability to convert their callable secured convertible notes or exercise their warrants and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. As of August 31, 2007 the note holder’s and their affiliates held approximately 4.0% of the aggregate outstanding shares. However, the note holders may repeatedly sell shares of common stock in order to reduce their ownership percentage, and subsequently convert additional callable secured convertible notes. Since the financing facility was established, PaperFree has drawn capital in the following traunches:
1. | $800,000 on November 30, 2005 due November 30, 2008, and 1,600,000 warrants to purchase common stock at an exercise price of $0.10 per share; |
2. | $200,000 on August 31, 2006 due August 31, 2009, and 400,000 warrants to purchase common stock at an exercise price of $0.10 per share; |
3. | $200,000 on October 27, 2006 due October 27, 2009, and 400,000 warrants to purchase common stock at an exercise price of $0.10 per share; |
4. | $300,000 on December 12, 2006 due December 12, 2009, and 600,000 warrants to purchase common stock at an exercise price of $0.10 per share; |
5. | $500,000 on February 7, 2007 due February 10, 2010 and 5,000,000 warrants to purchase common stock at an exercise price of $0.01 per share. |
6. | $330,000 on May 31, 2007 due May 31, 2010 and 5,000,000 warrants to purchase common stock at an exercise price of $0.01 per share. |
7. | $249,750 on July 24, 2007 due July 24, 2014 and 20,000,000 warrants to purchase common stock at an exercise price of $.0012 per share. |
PaperFree has incurred direct financing costs of $197,500 associated with the issuance of the convertible notes. These costs were recorded as deferred financing costs to be amortized over the life of the notes using the effective interest method. Amortization of $20,603 was recorded for the three months ended August 31, 2007. Amortization of $30,314 was recorded for the six months ended August 31, 2007. The following table summarizes deferred financing costs since inception of the notes:
Debt arrangement fees | $ 117,500 |
Broker fees | 45,000 |
Key man life insurance single premium | 20,000 |
Legal fees | 15,000 |
Less: amortization | (68,264) |
Deferred financing costs | $ 129,236 |
These Notes are a hybrid instrument containing more than one embedded derivative feature. PaperFree contracts an outside consultant to analyze the embedded derivative features in accordance with SFAS No. 133 resulting in a single, compound derivative referred to as the “Single Compound Embedded Derivatives within the Convertible Notes”. The single compound embedded derivative features include the conversion feature within the Convertible Notes, the early redemption option and the Contract Rate adjustment. PaperFree does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. PaperFree evaluates all of it financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date using the Black-Scholes pricing model, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, PaperFree uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
The impact of the application of SFAS 133 and EITF 00-19 on the balance sheets and statements of operations as of and through August 31, 2007 were as follows:
Liability as of February 28, 2007 | Discount related to additional financing | Gain/Loss for the six months ended August 31, 2007 | Liability as of August 31, 2007 | ||||
Convertible notes | $ 71,936 | $ 46,415 | $ 95,066 | $ 213,417 | |||
Warrants | 31,533 | 19,879 | (24,921) | 26,491 | |||
Total | $ 103,469 | $ 66,294 | $ 70,145 | $ 239,908 |
Discount related to additional financing of convertible debt is added to derivative liability and has no effect on derivative gain or loss.
The following summarizes the financial presentation of the Convertible Notes at August 31, 2007:
Face value of convertible notes | $ 2,579,750 |
Adjustments: | |
Discount for derivative liability – convertible notes with compound embedded derivatives | (669,728) |
Discount for derivative liability – investors warrant | (164,508) |
Conversion | (25,456) |
Cash discount | (24,750) |
Amortization of debt discount | 335,783 |
Convertible notes balance, net | $ 2,031,091 |
Paperfree amortized $46,063 and $118,520 of discount related to the convertible notes during the three and six months ended August 31, 2007, respectively.
The Convertible Notes and Warrants are subject to a registration rights agreement which requires PaperFree to register the underlying shares by 90 days from the date of the agreements or pay liquidated damages of 2% of the purchase price of the note each month the securities are not registered. The damages are payable in cash or stock at PaperFree’s option. If the damages are settled in stock, the conversion rate is the same as the Convertible Notes. If the shares underlying all outstanding Convertible Notes remain unregistered for 24 months, PaperFree may be required to pay up to $1,118,400 in damages. PaperFree currently does not have enough shares outstanding to settle in stock. PaperFree has concluded the likelihood of having to pay these liquidated damages to be remote and has not accrued a liability at this time.
NOTE 3 - COMMON STOCK
During the six months ended August 31, 2007, PaperFree issued 750,000 shares valued at $5,250 for services.
During the six months ended August 31, 2007 PaperFree issued 16,500,000 shares of common stock to convert $13,299 of notes payable.
Fair value for common shares issued in connection with services was determined using the quoted stock price on the date of grant.
NOTE 4 – WARRANTS AND OPTIONS
The following table provides a summary of warrants and options:
Warrants | Weighted average exercise price | Aggregate intrinsic value | Weighted Average remaining contractual life (years) | |||||
Outstanding at February 28, 2007 | 6,519,600 | $ 0.08 | ||||||
Granted | 26,500,000 | 0.01 | ||||||
Exercised | - | - | ||||||
Forfeited /Expired | - | - | ||||||
Outstanding at August 31, 2007 | 33,019,600 | $0.01 | $ 596,810 | 7.0 | ||||
Exercisable at August 31, 2007 | 33,019,600 |
During the six months ended August 31, 2007 PaperFree granted 1,000,000 stock options valued at $3,933 to its CEO as part of his contract renewal. The options were valued using a Black-Scholes model with the following assumptions: Risk free rate of 7.25%, volatility of 232%, and expected option term of 2.08 years.
During the six months ended August 31, 2007, PaperFree granted 500,000 stock options valued at $2,497 to its CFO. The options were valued using a Black-Scholes model with the following assumptions: Risk free rate of 7.25%, volatility of 232%, and expected option return of 2.08 years.
No stock options or warrants were exercised during the six months ended August 31, 2007.
NOTE 5 - CONTINGENCIES
PaperFree has recorded $209,139 owed to a related party as of May 31, 2007. The related party has disputed this amount and claims the amount owed is $321,139. Paperfree believes a settlement of the disputed amount is not probable at this time. Litigation has been undertaken on the power of the company to resolve this and other disputes.
NOTE 6 – NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). This Interpretation provides guidance on recognition, classification and disclosure concerning uncertain tax liabilities. The evaluation of a tax position requires recognition of a tax benefit if it is more likely than not it will be sustained upon examination. We adopted this Interpretation effective March 1, 2007. The adoption did not have a material impact on our consolidated financial statements.
NOTE 7 – SUBSEQUENT EVENTS
On September 14, 2007, we acquired additional funding in the amount of $175,000 from our funding partners. The terms of this note are 8% interest per annum, due three years from date of note. In addition, 5,000,000 warrants were issued with this note. The discount on this note is $15,000. The convertible features of this note are the same as the previous notes issued, which is discussed in Note 2 above.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
EXECUTIVE OVERVIEW
PaperFree Medical Solutions is a services company delivering digital medical office functionality to the healthcare market through the managed services of integrated software applications. Our target client base is the medical provider practice of ten providers or less with fifty employees or less. We concentrate on the market geography of the central Midwest states; excluding the major metropolitan areas. Our stock is listed on the Pink Sheets under the symbol “PFMS.”
Our business is organized around two product-service offerings:
· | MDPaperFree™ - This service offering is a service bureau providing integrated digital office technologies to the medical provider practice on a managed services provisioning (“MSP”) basis. The technologies provided include, but are not limited to: a) Electronic Medical Record; b) Secure Document Management; c) Office Productivity Tools; d) Internet Presence; e) Data and Computing Security; f) Information Security; and g) Back-up/Restore/Contingency Services. |
· | LEAPprn - This service offering provides three categories of revenue cycle management services: a) Complete billing management services; b) Shared billing management services wherein the client performs data entry only; and, c) Licensed/Hosted billing management software wherein the client performs all data and payer business processes using our software. |
BUSINESS ENVIRONMENT
Our business intersects two very dynamic industries – healthcare and technology. Our second quarter for this fiscal year has seen changes in the following:
· | Operations |
· | Financial |
Operations
Facilities:
We have consolidated two leased office spaces into one producing cost savings estimated to be 60% of prior years’ expenditures. This resulted in a move of our principal offices from 121 W. Sycamore St., Kokomo IN, 46901 to 1817 Dogwood Dr., Kokomo IN, 46902.
We have rebuilt the Data and Network Operations Center in our new facility with greater capacity and increased redundancy. This rebuild has resulting in improved server up-times as well as lower environmental load (cost).
Sales & Marketing:
We have retained a professional in the new role of Vice-President, Business Development.
Personnel:
We have retained a technical professional in the role of Technical Director.
Legal-Regulatory:
A legacy client that represents over $75,000 in accounts receivable has refused to make payment. We are currently in arbitration with this client to recover these monies.
We have initiated litigation with the founder of KMS Computer Services over contractual disputes. We entered into this litigation after fifteen (15) months of continual negotiations failed to resolve the core issues.
Governance:
The following changes took place to the board of directors to be effective on October 12, 2007. These changes include the following: Dr. Paver resigned as a board member, Craig S. Barrow elected to the board of directors, William Sklar resigns as chairmen of the company, and Craig S. Barrow elected as chairmen of the company.
This disclosure is in lieu of filing an 8K consistent with SEC regulations; these events are contemporaneous with the filing of this 10QSB.
Over the past quarter, we have finalized the shift to a standardized and simplified accounting system, with robust internal controls. This shift represents dramatic improvement is regulatory compliance; e.g. SEC filings, as well as support managerial accounting needs in the areas of reporting, pricing, and planning.
Management believes that the company’s stock is undervalued. The board of directors has authorized, on September 20, 2007, a stock buy back program to purchase treasury stock. This program will be implemented beginning in the third quarter of the fiscal year 2008.
MANAGEMENT SUMMARY
Our recent consolidation of offices into a single location has increased the impact on attitude, aptitude and energy of the company noted in the first quarter filing. Management believes that the ‘clean up’ period here has been successfully concluded. The entire company is singularly focused on growth through superior customer service, increasing our client base, and expanding our service offerings. Our role is to improve the business of medical practice for independent medical providers.
RESULTS OF OPERATIONS
Three months ended August 31, 2007 vs. 2006
Revenue decreased $108,861 to $126,107 for the quarter ended August 31, 2007 compared to the same period in 2006. This decrease is primarily due to the decrease of revenues from two clients whose service terms are coming to end.
General and administrative expenses increased $272,778 for the quarter ended August 31, 2007 compared to the same period in 2006.
For the quarter ended August 31, 2007, we recorded a loss on derivatives of $107,245 compared to a gain on derivatives of $97,903 in the second quarter of 2006. Gains and losses on derivatives are based on the fair value of the derivatives at the end of each respective period.
The convertible debenture requires that adequate shares be registered to meet conversion needs. In 2006, the company registered 10,000,000 S-8 shares and 19,428,000 SB-2 shares. Of the 19,428,000 shares registered, 175,000 shares were issued on the S-8 for the acquisition of Doctors’ Billing Corporation. Of the remaining 19,253,000 shares, up to 10,000,000 shares were reserved to support anticipated Directors, Officers, Employees, and Consultants options and warrants plan. The balance of shares registered were to support the callable secured convertible notes issued by the company in accordance with the good faith estimate filed in the SB-2 in December 2006 with SEC. This registration was not completed as specified by the debt holder and liquidated damages were accrued in the amount of $48,000. The debt holder subsequently waived said damages and the accrual was reversed.
Interest expense was $126,304 for the quarter ended August 31, 2007 compared to $51,944 for the comparable period in 2006. This increase is primarily due to increased borrowing.
Six months ended August 31, 2007 vs. 2006
Revenue decreased $38,989 to $330,042 for the quarter ended August 31, 2007 compared to the same period in 2006. This decrease is primarily due to the decrease of revenues from two clients whose service terms are coming to end.
General and administrative expenses increased $308,414 for the quarter ended August 31, 2007 compared to the same period in 2006. This is primarily due to an increase in personnel.
For the quarter ended August 31, 2007, we recorded a loss on derivatives of $70,145 compared to a gain on derivatives of $1,055 in the second quarter of 2006. Gains and losses on derivatives are based on the fair value of the derivatives at the end of each respective period.
Interest expense was $251,488 for the quarter ended August 31, 2007 compared to $128,891 for the comparable period in 2006. This increase is primarily due to increased borrowing.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2007, we had $6,528 in cash and equivalents and a working capital deficit of $1,016,459. During the six months ended August 31, 2007, we received $477,500 in net proceeds from our funding partners, which were used to settle an IRS liability, initiate an investor relation and public relation campaign, and for other operating expenses.
On September 14, 2007, we acquired additional funding in the amount of $175,000 from our funding partners. The terms of this note are 8% interest per annum, due three years from date of note. In addition, 5,000,000 warrants were issued with this note. The discount on this note is $15,000. The convertible features of this note are the same as the previous notes issued.
Efforts to significantly reduce expenses has been undertaken by management, which is expected to dramatically reduce operating costs going forward. Also, the company has hired a Vice President of Business Development and expects future capital funding to be derived from additional client revenues. Additional monies required beyond those generated from operations will be sought from existing or new funding partners.
Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-KSB for the year ended February 28, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-KSB are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Unsuccessful Operating History
We have a limited operating history upon which an evaluation of our future prospects can be made. Our prior business history has been limited to the publication and distribution of industry and profession specific wall planners. Currently, we are engaged in the provision of Billing Services as well as the sale of computerized Practice Management and Electronic Medical Record solutions to medical practitioners. We are not yet profitable. There is no guarantee that we will be able to raise the financing necessary to develop any future business plan we may adopt.
If We Do Not Obtain Additional Financing, We Will Not Be Able to Acquire Any Assets
As of August 31, 2007, we had cash on hand in the amount of ($1,381). We will likely have to raise funds to acquire new assets and finance operation or acquire new assets and to finance operations. If we are not able to raise the funds necessary to fund our business objectives, we may have to delay the implementation of any future business plan.
We do not have any arrangements for financing and we can provide no assurance that we will be able to obtain the required financing when needed. Obtaining additional financing will be subject to a number of factors, including:
* | Market conditions; | |
* | Investor acceptance of potential business assets; and | |
* | Investor sentiment. |
These factors may make the timing, amount, terms and conditions of additional financing unattractive or unavailable to us. If we are not successful in achieving financing id operation or acquire business assets, our development will be delayed.
If We Are Unable To Generate Significant Revenues From Our Operations, Our Business Will Fail.
If we are unable to generate significant revenues from resumption of operations or any business interest we acquire, we will not be able to achieve profitability or continue operations.
Our Securities May Be Subject to Penny Stock Regulation.
If an active trading market for our securities develops and the price of our common stock falls below $5.00 per share, then we will be subject to “penny stock” regulation. “Penny stock” rules impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with a spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule prescribed by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our shares of common stock. The market price of our shares would likely suffer as a result.
Forward-Looking Statements
This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements. Our actual results are most likely to differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in the Risk Factors section and elsewhere in this prospectus.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures:
Based on their evaluation of our disclosure controls and procedures (as defined in Rule 13a−15e under the Securities Exchange Act of 1934 (the "Exchange Act")), our principle executive officer and principle financial officer have concluded that as of the end of the period covered by this quarterly report on Form 10−QSB such disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The deficiencies in our internal control related to accrual of registration rights penalties. These deficiencies have been disclosed to our Board of Directors. Additional effort is needed to fully remedy these deficiencies and we are continuing our efforts to improve and strengthen our control processes and procedures. We are in the process of improving our internal control over financial reporting in an effort to remediate these deficiencies by improving supervision and increasing training of our accounting staff with respect to generally accepted accounting principles, providing additional training to our management regarding use of estimates in accordance with generally accepted accounting principles, adding additional accounting personnel to assist daily transactions, and increasing the frequency of internal financial statement review.
Changes in internal controls:
There were no significant changes in PaperFree’s internal controls or in other factors that could significantly affect those controls since the most recent evaluation of such controls.
PART II
ITEM 1 - LEGAL PROCEEDINGS
Paperfree is currently in arbitration with the former owner of KMS Computer Services, Inc. over the disputed amount previously mentioned under Note 5.
Paperfree is currently in arbitration with a former client for the total of his unpaid balance as mentioned in Item 2.
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit | Description of Exhibit |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/l5d-14(a) |
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350 |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, PaperFree has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PAPERFREE MEDICAL SOLUTIONS, INC.
(Registrant)
/s/Stephen Hawksworth | /s/ Craig S. Barrow | |||
Name:Stephen Hawksworth | Name: Craig S. Barrow | |||
Title: Chief Executive Officer | Title: Chief Financial Officer |
Date: October 15, 2007
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, PaperFree has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.