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NET MEDICAL XPRESS SOLUTIONS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

May 15, 2014

OVERVIEW

We operate our business in four divisions.

Our Net Medical Xpress Solutions division derives revenues from the development and marketing of proprietary internet-based software. This division encompasses all revenues and costs from the software aspect of our business, including software usage, software hosting and maintenance, and custom programming (customization or modification to our core software products). Software usage and hosting include our customers who use our proprietary XR-EXpress software to provide their own radiological services. This division also occasionally derives revenue from scanning services and other services such as consulting, training and installation.

Our Net Medical Xpress Staffing division was formed as a result of the purchase of MedTel Solutions, LLC. This division specializes in the recruitment and staffing of telemedicine physicians.

Our Net Medical Xpress Services division provides medical diagnostic reading services for radiology and cardiology. We currently employ seventy licensed radiologists and twenty licensed cardiologists in this division. We use the same proprietary XR-EXpress software to provide these services that we offer to our customers of our Net Medical Xpress Solutions division.

Our Net Medical Xpress Specialists division provides telemedicine services to hospitals and other medical facilities. We currently employ fifteen credentialed specialists in the field of neurology in this division, which includes stroke and behavioral assessment. We facilitate real-time assessment of patients through examination via video conferencing, combined with our proprietary medical software. Revenues and costs in this division also include sales of our proprietary package of equipment necessary for our medical facility customers to initiate their participation in our specialists program.

RESULTS OF OPERATIONS TOTAL REVENUES:



For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $1,271,000$1,221,000$50,000

4.1%



These changes are a result of the following factors:

Net Medical Xpress Solutions Revenues

1. Software usage fees:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $100,000$115,000$(15,000)

(13.0)%



The decrease in software usage fees for the three months ended March 31, 2014 as compared to the same period in 2013 is primarily due to variances in the volume of radiology reports generated for our existing customers. These customers are using our XR-EXpress software to conduct their own businesses.

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2. Software hosting and maintenance:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $13,000$14,000$(1,000)

(7.1)%



This decrease is due to the loss of one small customer during the fourth quarter of 2013. Although we still have a few customers using our digital filing cabinet (DFC) product, the majority of our customers and all of our new customers are using our XR-EXpress software. We generally charge usage fees based on radiological reports generated using XR-EXpress, which includes storage of the reports for later access by the customers, rather than monthly hosting fees. We may occasionally charge a monthly maintenance fee for new customers for the use of our XR-Express software. Software maintenance consists mainly of technical support for our medical software. We expect revenues in this category to stay relatively constant during 2014, as we continue to focus our efforts on growing our telemedicine business, particularly our specialists program.

3. Other revenues:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) Bandwidth $1,000$1,000$0 0.0%



The bandwidth service is a charge for internet access for one customer. We do not anticipate that this service will be a major revenue generator for us in the future.

Net Medical Xpress Services Revenues

1. Radiological services:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $948,000$952,000$(4,000)

(0.4)%



The decrease in radiological services is due to a net decreased volume of reads by existing customers.

2. Cardiological services:



For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $33,000$27,000$6,000

22.2%



The increase in cardiological services is due to a net increase in the volume of reads for existing customers.

Net Medical Xpress Specialists Revenues

1. Neurological services:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $109,000$63,000$46,000 73.0% 15



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The increase in neurological services revenue is due to the addition of new customers throughout the year 2013 and in the beginning of 2014. We expect this revenue to continue increasing during the remainder of 2014 as we continue to add new customers.

2. Specialists program hardware sales:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec)

$0$49,000$(49,000) (100.0)%

The decrease in the specialists program hardware sales is due to the fact that we did not add new customers during the first quarter of 2014, as compared to the addition of several new customers during the first quarter of 2013. The specialist program hardware sales are sales of our proprietary package of third-party equipment required for a customer to begin using our specialist services. This sale is typically a one-time event with each new customer. We expect hardware sales to continue during the remainder of 2014 as we add new customers. We also expect to expand the specialist program to include other medical services during the remainder of 2014.

Net Medical Xpress Staffing Revenues

1. Recruiting and staffing services:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $67,000$0$67,000 Not meaningful

This increase is due to the fact that we purchased MedTel Solutions, LLC on July 1, 2013. We do not expect the revenue for this customer to continue during the remainder of 2014, although we are currently developing new customers that we expect to produce revenues beginning in the second or third quarter of 2014.

COST OF SERVICES:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $982,000$916,000$66,000

7.2%



Approximately eighty percent of the costs of services for the first three months of 2014 are direct costs related to the services and specialists divisions.

These costs consist of radiologist fees, cardiologist fees, neurologist fees, behavioral medicine doctor fees, professional credentialing, professional licenses, professional liability insurance costs, and costs of hardware associated with the specialists program. The majority of these costs are directly related to revenues. In addition, we added an additional employee to our customer support staff for the specialists program during 2013, accounting for approximately half of this increase.

GENERAL AND ADMINISTRATIVE EXPENSES:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $251,000$226,000$25,000

11.1%



The increase in general and administrative expenses is primarily due to increased staffing requirements as we expand our services and increased costs from the compliance audit associated with the FDA clearance of our XR-Express PACS system.

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RESEARCH AND DEVELOPMENT COSTS:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $40,000$16,000$24,000

150.0%



The increase in research and development costs for the first three months of 2014 compared to the same periods in 2013 is due to increased programming costs to continue the development and expansion of the specialists program.

During the first three months of 2014, approximately 90% of our research and development costs were a direct result of staffing. In the software industry, it is common for research and development costs to be ongoing, since development of the next version of the software begins as soon as the current version is completed. In addition, we are constantly developing new applications for our existing software. We anticipate research and development costs during 2014 will continue to focus on the development and expansion of software and services for our specialists program. As a result, these costs may remain somewhat higher than usual during the coming year.

DEPRECIATION:

For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) $3,000$8,000$(5,000)

(62.5)%



The decrease in depreciation expense is due to assets being fully depreciated but not replaced.

OTHER EXPENSE:



For the Three Months Ended March 31,

2014 2013 Increase (Decrease) Percent Inc (Dec) Interest expense $4,000$2,000$2,000 100.0%



The increase in interest expense is a result of circumstances related to the purchase of MedTel Solutions, LLC during 2013.

REPORTABLE SEGMENTS

We believe gross profit is our key indicator of operating progress. Our four operating divisions generated the following gross profit, rounded to the nearest 1,000, during the first three months of 2014:

Solutions Services Specialists Staffing TOTAL Revenue $ 114,000$ 981,000$ 109,000$ 67,000$ 1,271,000 Direct costs 66,000 756,000 109,000 51,000 982,000 Gross profit $ 160,000$ 225,000$ 0 16,000 $289,000 Gross Profit Percent 42% 23% 0% 24% 23%



The majority of the direct costs in the Solutions division are staffing expenses. We expect the gross profit percentage of this division to remain in the range of 40% to 50% during 2014.

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Approximately 81% of the direct costs in the Services division are doctor fees, which are directly related to revenues. The gross profit percentage may change slightly as the mix of services changes. We expect this percentage to remain relatively stable during 2014.

Approximately 50% of the direct cost in the Specialists division for the first quarter consists of doctor fees, which are directly related to revenues. The remaining 50% consists of staffing costs for customer service, which are relatively fixed. The percentage of fixed costs should decrease as revenues increase over the next few years. In general, we believe the gross profit percentage of this division will continue to increase during 2014 as the revenues grow, while the fixed costs remain stable.

The majority of the direct costs in the Staffing division are staffing expenses.

We purchased the staffing company on July 1, 2013. Since this is a relatively new operation, we anticipate the gross profit for this division to increase in the coming years as new customers are added. However, we are currently developing new projects in this division that may involve additional direct costs such as doctor fees. Such changes in the type of direct costs could cause inconsistencies in the future gross profit percentages.

Our normal general and administrative expenses continue to be approximately $200,000 to $250,000 per quarter. However, as we develop a sales and marketing program during 2014 to facilitate growth and expansion of our services and customer base, these general and administrative expenses are expecte to increase.

Information about our reportable segments for the quarter ended March 31, 2014 is as follows: Solutions Services Specialists Staffing TOTAL Revenue $114,000$981,000$109,000$67,000$1,271,000 Cost of service 66,000 756,000 109,000 51,000 982,000



General and administrative 29,000 94,000 69,000 59,000 251,000

Depreciation 2,000 1,000 0 0 3,000 Research and development 2,000 0 4,000 34,000 40,000 Operating income (loss) $15,000$130,000$(73,000)$(77,000)$(5,000) Total assets $254,000$839,000$52,000$318,000$1,463,000



A reconciliation of the segments' operating loss across all segments to the consolidated net loss is as follows:

Segment's operating income $ (5,000) Other income (expense) (4,000) Consolidated net income $ (9,000)



LIQUIDITY AND CAPITAL RESOURCES

"Liquidity" refers to our ability to generate adequate amounts of cash to meet our needs for cash. We believe we will have adequate liquidity to maintain current operations during 2014, but we may choose to locate additional sources of cash to facilitate growth and expansion. As of March 31, 2014, cash and cash equivalents totaled $371,000, representing a $50,000 decrease from December 31, 2013. This decrease in available cash was due to the following factors during the period:

Operating activities:



For the Three Months Ended March 31,

2014 2013 Inc (Dec) in available cash



used $91,000 provided $84,000$(175,000)

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The decrease in available cash from operations is mainly due to a combination of the following factors:



a $70,000 decrease in available cash due to the net increase in accounts payable and accrued expenses of $28,000 during the first three months of 2014 as compared to a net increase of $81,000 during the first three months of 2013.

The changes in accounts payable are mainly due to changes in doctors' fees that vary with revenues throughout the year. The changes in accrued expenses are mainly due to variances in insurance contracts throughout the year.



a $62,000 decrease in available cash due to net loss of $9,000 during the first three months of 2014 as compared to net income of $53,000 during the first three months of 2013.



a $30,000 decrease in available cash due to the net increase in accounts receivable of $135,000 during the first three months of 2014 as compared to a net increase in accounts receivable of $105,000 during the first three months of 2013. The changes in accounts receivable are mainly due to changes in revenues throughout the year.



several minor factors in addition to the above major factors.

Investing activities:

For the Three Months Ended March 31,

2014 2013 Inc (Dec) in available cash used $2,000 used $0$(2,000)



The use of cash during 2014 was for the purchase of additional computer equipment.

Financing activities:



For the Three Months Ended March 31,

2014 2013 Inc (Dec) in available cash provided $43,000 used $1,000

$44,000



The changes in financing activities are primarily due to the exercise of options during the first quarter of 2014.

We do not currently have material commitments for capital expenditures and do not anticipate entering into any such commitments during the next twelve months.

Our current commitments consist primarily of lease obligations for office space, computer equipment and office equipment.

At March 31, 2014, we had a working capital surplus of $325,000 as opposed to a working capital surplus of $283,000 at the beginning of the period, an increase of $42,000. Although we generated a net profit at the end of 2013, and we expect continue profitable operations in general during 2014, we may continue to sell equity securities and incur debt if needed to meet our operating needs and facilitate growth and expansion of our services during 2014.

We anticipate that our primary uses of cash in the next year will continue to be for general operating purposes and to facilitate growth and expansion by establishing a sales and marketing program. We anticipate our operating cash requirements for the next twelve months to be in the range of $5,000,000 to $7,000,000. Profitability remains our primary goal.

OFF-BALANCE SHEET ARRANGEMENTS

We currently have no off-balance sheet arrangements.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In accordance with GAAP, our actual realized results may differ from management's initial estimates as reported. A summary of our significant accounting policies is detailed in the notes to the financial statements, which are an integral component of this filing.

Revenue Recognition



With each sale of our enterprise-level products, the end user enters into a license agreement for which an initial license fee is paid. The license agreement also provides that in order to continue the license, the licensee must pay an annual software maintenance fee for which the licensee receives access to product upgrades and bug fixes or product patches. Software maintenance consists primarily of hosting and managing our customers' data on our servers, as well as technical support programs for our products. Software usage comprises any charges for actual usage of our software.

Currently, software usage in our Net Medical Xpress Solutions division consists of fees for the use of our XR-EXpress medical software by our customers who use it to provide their own radiological reading services, billed as a fee for each report generated by our software for the customer.

Our software revenue recognition policies are in accordance with the ASC Topic 985, Software Revenue Recognition as amended. Revenue is recognized when (a) persuasive evidence of an arrangement exists, (b) delivery has occurred, (c) the fee is fixed or determinable, and (d) collectability is probable. We follow the guidance in ASC Topic 605, Accounting for Performance of Construction-Type and Certain Production-Type Contracts for custom software development arrangements that require us to provide significant production, customization or modification to our core software. Revenue is generally recognized for such arrangements under the percentage of completion method. Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred revenue.

We follow the guidance provided by SEC Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements and SAB No. 104 Revenue Recognition which provide guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. Revenue in our services and specialists divisions, software installation, training and consulting services is recognized when the services are rendered.

Software Development Costs

We account for software development costs in accordance with ASC Topic 985, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Product research and development expenses consist primarily of personnel, outside consulting and related expenses for development, and systems personnel and consultants and are charged to operations as incurred until technological feasibility is established. We consider technological feasibility to be established when all planning, designing, coding and testing have been completed to design specifications. After technological feasibility is established, costs are capitalized. Historically, product development has been substantially completed with the establishment of technological feasibility and, accordingly, no costs have been capitalized.

See Note B to our Consolidated Financial Statements for a full discussion of our critical accounting policies and estimates.


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Source: Edgar Glimpses


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