UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
ྈ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended November 30, 2006
ྑ 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.) |
121 WEST SYCAMORE ST., KOKOMO, Indiana 46901 | ||
(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 T No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ¨ No T
State issuer’s revenues for its most recent fiscal year: $ 979,381
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.)
$666,557.17 as at January 12, 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. 74,061,908 as at January 16, 2007
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-QSB may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose any statements contained in this Form 10-QSB that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology is intended to identify forward-looking statements. It is important to note that our actual results could differ materially from those anticipated from the forward-looking statements depending on various important factors. These important factors include our history of losses and ability to continue as a going concern, the uncertainty of acceptance of current and new products in our markets, competition in our markets, our dependence on our distributors and the other factors discussed in our “Risk Factors” found below.
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,
· | our ability to raise capital, |
· | our ability obtain and retain customers, |
· | our ability to provide our products and services at competitive rates, |
· | our ability to execute our business strategy in a very competitive environment, |
· | our degree of financial leverage, |
· | risks associated with our acquiring and integrating companies into our own, |
· | risks related to market acceptance and demand for our services, |
· | the impact of competitive services, |
· | 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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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 generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the nine months ended November 30, 2006 are not necessarily indicative of the results that can be expected for the year ending February 28, 2007.
PAPERFREE MEDICAL SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
November 30, 2006 | February 28, 2006 | |
Current assets | ||
Cash | $ 26,394 | $ 213,368 |
Accounts receivable, net of allowance of $75,000 and $75,000 | 71,870 | 68,223 |
Note receivable - current portion | 7,881 | - |
Deferred financing costs | 31,732 | 13,751 |
Total current assets | 137,877 | 295,342 |
Fixed assets, net of accumulated depreciation of $125,426 and $111,721 | 94,248 | 54,255 |
Deferred financing costs | 54,316 | 77,916 |
Note receivable | 4,878 | - |
Goodwill | 1,703,560 | 1,632,502 |
Total assets | $1,994,879 | $ 2,060,015 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||
Current liabilities | ||
Accounts payable and accrued liabilities | $ 545,252 | $ 332,862 |
Stock payable | 106,032 | 103,849 |
Notes payable - related parties | 201,493 | 195,529 |
Note payable for acquisition | 24,540 | - |
Lines of credit | 10,718 | 16,913 |
Mandatorily redeemable Series C Preferred Stock, $0.001 par value, 90,000 shares authorized, issued and outstanding | 75,600 | 75,600 |
Derivative liabilities | 56,986 | 160,305 |
Total current liabilities | 1,020,621 | 885,058 |
Callable secured convertible notes payable, net of unamortized discount of $572,375 and $628,733 | 627,625 | 171,267 |
Total Liabilities | 1,648,246 | 1,056,325 |
Stockholders’ equity | ||
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, | ||
69,561,857 and 68,561,857 shares issued and outstanding | 69,562 | 68,561 |
Additional paid-in capital | 61,825,504 | 61,749,888 |
Accumulated deficit | (61,548,433) | (60,814,759) |
Total stockholders’ equity | 346,633 | 1,003,690 |
Total liabilities and stockholders’ equity | $1,994,879 | $ 2,060,015 |
PAPERFREE MEDICAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months ended November 30, | Nine Months ended November 30, | |||
2006 | 2005 | 2006 | 2005 | |
Sales | $235,518 | $ 229,678 | $604,549 | $ 803,172 |
Cost of sales | - | 50,497 | 39,249 | 136,876 |
Gross profit | 235,518 | 179,181 | 565,300 | 666,296 |
Operating expenses: | ||||
General and administrative | 449,821 | 265,850 | 1,154,902 | 1,382,250 |
Consulting fees | - | 25,264 | 78,747 | 57,467 |
Professional fees | 1,012 | - | 49,700 | 91,014 |
Net loss from operations | (215,315) | (111,933) | (718,049) | (864,435) |
Gain on derivatives | 172,447 | - | 173,502 | - |
Law suit settlement | (2,183) | (568,000) | (2,183) | (568,000) |
Waiver of registration rights penalties | 96,000 | - | - | - |
Interest expense | (63,855) | (50,554) | (186,944) | (89,109) |
Net loss | $ (12,906) | $ (730,487) | $(733,674) | $ (1,521,544) |
Basic and diluted | ||||
net loss per share | $(0.00) | $(0.01) | $(0.01) | $(0.03) |
Weighted average | ||||
shares outstanding | 69,067,413 | 54,182,409 | 68,862,222 | 52,219,372 |
PAPERFREE MEDICAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended November 30, | ||
2006 | 2005 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net loss | $ (733,674) | $ (1,521,544) |
Adjustments to reconcile net loss to cash used in operating activities: | ||
Depreciation | 13,706 | 14,456 |
Deferred financing costs amortization | 15,619 | - |
Convertible debt discount amortization | 126,542 | - |
Stock options for services | 49,169 | - |
Imputed interest | 13,799 | - |
Bad debt expense | - | 73,000 |
Gain on derivatives | (173,502) | - |
Common stock issued for service | 11,900 | 353,000 |
Changes in assets and liabilities: | ||
Accounts receivable | (18,015) | (4,919) |
Accounts payable and accrued liabilities | 187,415 | 23,792 |
Stock payable | 2,183 | 486,774 |
CASH USED IN OPERATING ACTIVITIES | (504,858) | (575,441) |
CASH FLOWS FROM INVESTING ACTIVITES: | ||
Acquisition of DBC | (49,768) | |
Purchase of fixed assets | (48,669) | - |
(98,467) | - | |
CASH FLOWS FROM FINANCING ACTIVITIES: | ||
Net change in bank line of credit | (6,195) | (11,622) |
Advances from related party | 90,376 | 138,136 |
Repayment of note receivable | 1,609 | - |
Repayment of advances to related party | (59,439) | - |
Proceeds from exercise of warrants | - | 232,600 |
Proceeds from notes payable | - | 15,973 |
Proceeds from convertible debt, net of offering costs | 390,000 | 740,000 |
Shares issued for cash, net of offering costs | - | 112,608 |
CASH PROVIDED BY FINANCING ACTIVITIES | 416,351 | 1,227,695 |
NET CHANGE IN CASH | (186,974) | 652,254 |
Cash, beginning of period | 213,368 | 121,837 |
Cash, end of period | $ 26,394 | $ 774,091 |
Cash paid for: | ||
Interest | $ - | $ 89,109 |
Income tax | - | - |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||
Acquisition of KMS: | ||
Fair value of assets acquired | $ - | $ 3,556,246 |
Less: fair value of liabilities assumed | - | (556,246) |
Shares issued for acquisition of KMS | - | 3,000,000 |
Discount on convertible debt from derivatives | 70,184 | - |
Stock issued for acquisition of DBC | 1,750 | - |
Note payable for acquisition of DBC | 24,540 | - |
Conversion of accounts receivable to note receivable | 14,368 | - |
PAPERFREE MEDICAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of PaperFree Medical Solutions, Inc., have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and 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. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. 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 2006 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, for the sale of (i) $1,500,000 in callable secured convertible notes and (ii) warrants to purchase 3,000,000 shares of common stock at an exercise price of $0.10 per share. The securities purchase agreement required the purchase of an aggregate of $1,500,000 of the callable secured convertible notes and 3,000,000 warrants occurring in three traunches as follows:
(i) | $800,000 on November 30, 2005 and 1,600,000 warrants to purchase common stock, due November 30, 2008; |
(ii) | $400,000 within two days after filing a registration statement covering the number of shares of common stock underlying the callable secured convertible notes and 800,000 warrants to purchase common stock; and |
(iii) | $300,000 within two days of the effectiveness of the registration statement and 600,000 warrants to purchase common stock. |
On August 31, 2006, PaperFree received $200,000 and issued 400,000 warrants related to the second tranche of convertible notes detailed above. On October 27, 2006, Paperfree received $200,000 and issued 400,000 warrants also related to the second tranche of convertible notes. These notes mature on August 31, 2009 and October 27, 2009, respectively.
The callable secured convertible notes bear interest at 8% per annum from the date of issuance. Interest is computed on the basis of a 365-day year and is payable quarterly in cash. The callable secured convertible notes mature three years from the date of issuance, and are convertible into common stock at the note holders’ option, at the lower of (i) $2.00 or (ii) 65% of the average of the three lowest intraday trading prices for the common stock on the OTC Bulletin Board for the 20 trading days before but not including the conversion date. Accordingly, there is no limit to the number of shares into which the callable secured convertible notes may be converted. 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. 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.
PaperFree incurred direct financing costs of $100,000 associated with the first tranche of the convertible notes and $10,000 associated with the second tranche. These costs were recorded as deferred financing costs to be amortized over the life of the notes using the effective interest method. Costs incurred included:
Debt arrangement fees | $ 45,000 |
Broker fees | 40,000 |
Key man life insurance single premium | 20,000 |
Legal fees | 5,000 |
Total associated fees | 110,000 |
Less amortization | (23,952) |
Deferred financing costs | $ 86,048 |
PaperFree analyzed the Convertible Notes and the Warrants for derivative financial instruments, in accordance with SFAS No. 133. The Convertible Notes are a hybrid instrument which contains more than one embedded derivative feature which would individually warrant separate accounting as derivative instruments under SFAS 133. The various embedded derivative features have been bundled together as a single, compound embedded derivative instrument that has been bifurcated from the debt host contract, and 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 valued the compound embedded derivatives based on a probability weighted discounted cash flow model. The value of the single compound embedded derivative liability was bifurcated from the debt host contract and recorded as a derivative liability, which resulted in a reduction of the initial carrying amounts (as unamortized discounts) of the Convertible Notes. The 1st tranche of Convertible Notes for $800,000 was reduced by $555,809 at inception on November 30, 2005. The amount received for the second traunch as of August 31, 2006 of $200,000 was reduced by $35,465. The second amount received for the second traunch as of October 27, 2006 of $200,000 was reduced by $6,576. The unamortized discounts will be amortized to interest expense using the effective interest method over the life of the Convertible Notes, or 36 months.
The Stock Purchase Warrants are freestanding derivative financial instruments which were valued using the Black-Scholes method. The fair value of the derivative for the 1st tranche was computed at $106,089 at inception on November 30, 2005 and for the 2nd tranche was computed at $18,830 at August 31, 2006 and $9,311 at October 27, 2006. The fair values of both were recorded as derivative liabilities which resulted in a reduction of the initial carrying amount (as unamortized discounts) of the Convertible Notes. The unamortized discounts will be amortized to interest expense using the effective interest method over the life of the Convertible Notes, or 36 months.
Both the embedded and freestanding derivative financial instruments were recorded as liabilities in the consolidated balance sheet and measured at fair value. These derivative liabilities will be marked-to-market each quarter with the change in fair value recorded in the income statement.
Variables used in the Black−Scholes option−pricing model from inception through November 30, 2006 include (1) 4.41% to 5.03% risk−free interest rate, (2) expected warrant lift is the actual remaining life of the warrant as of each period end, (3) expected volatility is from 130% to 200% and (4) zero expected dividends.
The impact of the application of SFAS 133 and EITF 00-19 on the balance sheets and statements of operations as of and through November 30, 2006 was as follows:
Liability as of February 28, 2006 | Discount related to 2nd traunch | 2nd Discount related to 2nd traunch | Gain for the nine months ended November 30, 2006 | Liability as of November 30, 2006 | |
Convertible notes | $ 130,115 | $ 35,465 | $ 6,576 | $ 132,692 | $ 39,464 |
Warrants | 30,190 | 18,830 | 9,311 | 40,810 | 17,522 |
Total | $ 160,305 | $ 54,295 | $15,888 | $ 173,502 | $ 56,986 |
Discount related to 2nd tranche 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 November 30, 2006:
Face value of convertible notes | $ 1,200,000 |
Adjustments: | |
Discount for derivative liability - convertible notes with compound embedded derivatives | (597,851) |
Discount for derivative liability - investors warrant | (134,230) |
Amortization of debt discount | 159,706 |
Convertible notes balance, as adjusted | $ 627,625 |
Per the terms of the registration rights agreement associated with the securities purchase agreement, PaperFree is required to register shares for both the convertible notes and the attached warrants. These shares were to be registered by February 28, 2006. The registration rights agreement contains a liquidated damages clause that enforces penalties at 2% of the face value of the convertible notes for each month the shares remain unregistered. PaperFree had previously accrued $96,000 in expected registration rights penalties. During the quarter ended November 30, 2006, PaperFree received waivers from the noteholders releasing PaperFree from any liabilities incurred due to liquidated damages. The waiver was accounted for by debiting the accrued penalties and crediting the income statement resulting in $0 for the nine months ended November 30, 2006 and a credit of $96,000 for the three months ended November 30, 2006. On December 8, 2006, the SEC issued a notice of effectiveness thereby registering the shares.
NOTE 3 - COMMON STOCK
During the nine months ended November 30, 2006, PaperFree issued 825,000 shares valued at $11,900 for services and 175,000 shares valued at $1,750 for the acquisition of Doctors Billing Corporation.
NOTE 4 - STOCK OPTIONS
During the nine months ended November 30, 2006 PaperFree granted 2,000,000 stock options valued at $21,287 to its CFO. The options were valued using a Black-Scholes model with the following assumptions: Risk free rate of 4.8%, volatility of 220%, and expected option term of 2.08 years.
During the nine months ended November 30, 2006 PaperFree granted 2,000,000 stock options valued at $27,882 to its CEO. The options were valued using a Black-Scholes model with the following assumptions: Risk free rate of 4.76%, volatility of 273%, and expected option term of 1.16 years.
NOTE 5 - DBC ACQUISITION
On September 28, 2006, PaperFree acquired all of the shares issued and outstanding of Doctors Billing Corporation, in exchange for the issuance of 175,000 shares of common stock valued at $1,750 and $74,308 of cash due in three instalments payable September 28, 2006, October 28, 2006 and November 28, 2006. As of November 30, 2006, two payments have been made and the third payment of $24,540 is recorded as a note payable for acquisition. The third payment was made subsequent to November 30, 2006. Doctors Billing Corporation is a developer, licensor and maintenance supporter of proprietary Practice Management and Occupational Medicine software applications. Doctors Billing Corporation at the time of acquisition held customer contracts with annual revenues less than $15,000; proprietary rights to its software and fixed assets with a fair market value of $5,000; and no liabilities. The primary reason for the acquisition was to mitigate revenue risk. Without this pro-active acquisition, Paperfree may have been put in the position of seeking a new software package, re-training all billing services personnel, and migrating clients within a very short window. The purchase price allocation is preliminary awaiting a final valuation of the assets acquired. The estimated fair values of the assets acquired at September 28, 2006 are as follows:
Property and equipment | $ 5,000 | |
Goodwill | 71,058 | |
Total | $76,058 |
Additional consideration, if any, will be allocated to goodwill upon payment. Goodwill will be tested periodically for impairment as required by FASB Statement No. 142, “Goodwill and other Intangible Assets.”
The results of this acquisition are included in the consolidated financial statements from the date of acquisition. Unaudited pro forma operating results for PaperFree, assuming the acquisition occurred on March 1, 2005 are as follows:
Three months ended November 30, | Nine months ended November 30, | |||
2006 | 2005 | 2006 | 2005 | |
Revenue | $ 250,147 | $ 244,307 | $ 648,436 | $ 847,059 |
Net loss | (12,880) | (730,461) | (733,753) | (1,521,623) |
Net loss per share | (0.00) | (0.01) | (0.01) | (0.03) |
NOTE 6 - COMMITMENTS
On March 6, 2006, PaperFree entered into an employment agreement with its CEO. The terms of the agreement are one year, salary of $100,000 and 2,000,000 stock options valued at $27,882. The options vest 500,000 immediately and 500,000 every for each successive three month period. In addition, the agreement contains a put option from March 7, 2007 through September 6, 2007 that allows the CEO to require the company to purchase up to 2,000,000 shares from him from options he exercises at 90% of the closing price on March 7, 2007.
On August 28, 2006, PaperFree entered into an employment agreement with its CFO. The terms of the agreement are for four months, salary of $12,000 per month and 2,000,000 stock options valued at $21,287. The options vest 1,000,000 immediately and 1,000,000 on January 1, 2007.
NOTE 7 - NOTE RECEIVABLE
In September 2006, PaperFree converted certain accounts receivable to a $14,368 note receivable. The note carries interest at 12%, requires 24 monthly payments of $670 with a final payment of $244 in September of 2008, and is unsecured. As of November 30, 2006, payments of $1,609 had been received and interest income of $400 had been recognized.
NOTE 8 - SUBSEQUENT EVENT
On December 13, 2006 PaperFree received $300,000 for the third tranche of the convertible notes payable (see note 2).
In December 2006, PaperFree issued 1,500,000 shares of common stock for conversion of $5,633 of notes payable.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
PaperFree is in the business of providing Medical Practitioners with professional and technical services, software and associated hardware solutions, which meet or exceed security levels specified by the Health Insurance Portability and Accountability Act of 1996. We generate revenue from the provision of these services to Medical Practioners, physician offices, clinics, and hospitals. Inside the medical practitioner marketplace, we focus primarily upon sole practitioners, doctors and other health providers operating in clinics of up to ten providers.
OVERVIEW AND PLAN OF OPERATION
PaperFree Medical Solutions, Inc. (the “Company”) was incorporated on January 29th, 2002 under the laws of the State of Nevada under the name of Link Media Publishing Ltd.
From the date of its last annual report to November 30, 2006 PaperFree has undertaken the following activity:
(1) During the period ending May 31, 2006, PaperFree contracted a new Chief Executive Officer that has refined the strategy of the company and refocused the company’s efforts in the market. The results of this effort were to change PaperFree’s business model from a Value-Added Reseller and Hosted Services Provider to a Service Bureau providing Managed Services. These Managed Services support Provider Practices across the full range of business processes necessary in today’s healthcare industry.
(2) During the period ending May 31, 2006, PaperFree ended its software development efforts in line with the company’s new focus; thus reducing operating expenses associated with direct labor technical staff on that project. Additionally, the company began the integration efforts to combine Commercial-Off-The-Shelf Electronic Medical Record software with our Practice Management applications and Business Productivity Suite Software based on Microsoft technologies to provide a complete Medical Office suite of functionality.
(3) During the Three Months ended August 31, 2006, the company refreshed its executive team by formally appointing the contracted Chief Executive Officer to the position of President and Chief Executive Officer; and, hiring a Chief Financial Officer. These Officers accelerated the transition of the company towards its new strategic and market focus by: a) Initiating a restructuring of the company into a divisional basis to focus on customer and markets; b) Creating a corporate website that informs investors of current events and filings; c) Starting a complete revision of marketing, product offering description, and pricing; and, d) Beginning the development of the Service Bureau solution the company will deliver.
(4) During the second quarter, increases in revenue were accomplished by securing a contract with St. John’s Healthcare Network to perform billing management services. Continued emphasis on technical integration to support our Service Bureau business model results were: a) Secure, web-based conferencing capability was secured through the purchase of the iLinc software application suite which will enable the company to deliver training and provider office support over the Internet; b) Electronic payments posting software extensions were developed; and, c) We achieved Microsoft Certified Partner status in our reseller efforts.
(5) For the period ending November 30, 2006, PaperFree signed another institutional client for billing management services, Bona Vista Programs, and secured a vendor relationship with an EMR software provider. PaperFree purchased the software technology company that owned the Practice Management/Occupational Medicine software that PaperFree has been using to service clients. The company delivered the integrated Common Medical Office Environment (representing our complete medical office service solution) to Alpha testing with Beta Site customer selection started.
Internally, PaperFree completed the conversion of our Human Resources administration to a co-employer relationship with Tilson HR. This relationship increases employee benefits management while providing a significant reduction in PaperFree’s administrative overhead. Operationally, the company completed the restructuring of the company into a market-facing subsidiary (LEAPprn Systems, Inc.), a services subsidiary (KMS Computer Services, Inc.), and a software technology subsidiary (Doctors’ Billing Corporation). With this restructuring, PaperFree sets the stage for growth through focusing employee’s efforts on those outcomes necessary for our success.
(6) For the period ended November 30, 2006, PaperFree had total assets of $1,994,879 (February 28, 2006 - $2,060,015). Current assets were comprised of cash resources of $26,394 (February 28, 2006 - $213,368), accounts receivable of $71,870 after taking into account a bad debt allowance of $75,000 (February 28, 2006 accounts receivable of $68,223 net of bad debt allowance of $75,000), current portion of deferred financing costs of $31,732 (February 28, 2006 - $13,751) being $110,000 of costs associated with the callable secured notes payable net of $23,952 (February 28, 2006 - $8,333) amortization over the three year term of the notes, and current portion of note receivable of $7,881 (February 28, 2006 - $0). The cash and equivalents and accounts receivable represent PaperFree’s present source of liquidity.
Long term assets included fixed assets of $94,248 (February 28, 2006 $54,255) net of accumulated depreciation of $ 125,426 (February 28, 2006 - $111,721), deferred financing costs of $54,316 (February 28, 2006 - $77,916) and goodwill of $ 1,703,560 (February 28, 2006 - $1,632,502).
PaperFree’s current liabilities at November 30, 2006 totalled $1,020,621 (February 28, 2006 $885,058) , consisting of $545,252 (February 28, 2006 - $332,862) in accounts payables and accrued liabilities and $106,032 (February 28, 2006 - $103,849) in stock payable, $201,493 (February 28, 2006 $195,529) due to related parties, lines of credit of $10,718 (February 28, 2006 $16,913), note payable for acquisition of $24,540 (February 28, 2006 - $0) and mandatory redeemable preferred stock shown as a current liability item was $75,600 (February 28, 2006 - $75,600). Current liabilities also include $56,986 (February 28, 2006 - $160,305) of derivative liability associated with (1) warrants and (2) callable secured convertible notes payable.
Long term liabilities are comprised of the callable secured convertible notes payable of $1,200,000 (February 28, 2006 - $800,000) net of discount.
PaperFree is presently operating at a loss. PaperFree’s ability to continue as an ongoing concern is dependent on its ability to generate revenues from software sales. Failing that, PaperFree may need to raise additional capital, either debt or equity capital, to fund future operation and ultimately to attain profitable operation.
(7) During the nine months ended November 30, 2006 we incurred losses of $ 718,049 from operations and had a net loss of $733,674 after a gain of $173,502 from marking derivatives to market and recording interest expense of $186,944.
(8) We intend to seek financing necessary to fund future operations and to fund our investigation, negotiation and acquisition of other business acquisition opportunities.
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, 2006, 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 practioners. 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 November 30, 2006, we had cash on hand in the amount of $ 26,394. 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 this Risk Factors section and elsewhere in this prospectus.
ITEM 2. DESCRIPTION OF PROPERTY
PaperFree leases office premises from the former owner of KMS Medical Solutions, Inc.
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 consolidation of subsidiaries and recognition of compensation expense related to stock options. 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
NONE
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
(a) Exhibits
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 |
(b) Reports on Form 8K
On September 1, 2006, we filed on form 8-K a notice of Change of Directors or Principal Officers’; Election of Directors and Appointment of Principal Officers, whereby Mr. William L. Sklar resigned as President, CEO and CFO and Stephen Hawksworth was elected President and CEO and Mr. Craig S. Barrow was elected CFO.
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)
By: /s/ Stephen Hawksworth |
Stephen Hawksworth, Chief Executive Officer
Date: January 16, 2007
By: /s/ Craig S. Barrow |
Craig S. Barrow, Chief Financial Officer
Date: January 16, 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.