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 The leading web portal for pharmacy resources, news, education and careers May 28, 2017
Pharmacy Choice - Pharmaceutical News - NET MEDICAL XPRESS SOLUTIONS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - May 28, 2017

Pharmacy News Article

 5/15/17 - NET MEDICAL XPRESS SOLUTIONS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

OVERVIEW

We provide wide-ranging and unique solutions for the rapidly expanding multi-billion-dollar telemedicine industry. We recruit and maintain an extensive cadre of telemedicine physicians that we provide to the industry, together with highly proprietary software that links electronic medical records while facilitating state-of-the-art conferencing and communications. We also offer a call center, unique hardware implementations, staffing and recruiting operations, diagnostic and clinical services, and advanced software research and development capabilities. All of these product and service offerings are in support of, and integrated with, our physician services revenues.

We are participating in a $15.1 million federal grant with the University of New Mexico Health Science Center to establish a statewide 30 hospital telemedicine network to support critical cerebral emergency support services. The grant was awarded by the Center for Medicare and Medicaid Services (CMS) to help CMS study the impact of providing telemedicine for critical care services in rural areas. The project calls for the University to form a statewide 30-hospital telehealth system (THS) in conjunction with the Company during a three-year period. The program will provide remote emergency neurological consultations using our video conferencing equipment and telemedicine management services. The added goal of the model is to maintain patient care in the local facility without needing patient transport to tertiary care hospitals when non-operative care is appropriate.



RESULTS OF OPERATIONS


TOTAL REVENUES:


For the Three Months Ended March 31,

2017 2016 Increase (Decrease) Percent Inc (Dec) $731,000 $918,000 $(187,000)

           (20.4)%



These changes are primarily a result of the following factors:

Radiology and cardiology services decreased by approximately $50,000 during the first quarter of 2017 as compared to the first quarter of 2016. Approximately 70% of the decrease is due to the loss of several customers. The remaining decrease is due to volume decreases with existing customers. The loss of customers is mainly due to price competition.

Neurological and behavioral services decreased by approximately $90,000 during the first quarter of 2017 as compared to the first quarter of 2016. All of this decrease is due to a progress billing of $100,000 for the grant described above during the first quarter of 2016 as compared to none during the first quarter of 2017.





Recruiting and staffing services decreased by approximately $19,000 during the first quarter of 2017 as compared to the first quarter of 2016. This decrease is due to decreased volume of consults from one customer.





                                       18



COST OF SERVICES:

For the Three Months Ended March 31,

2017 2016 Increase (Decrease) Percent Inc (Dec) $542,000 $629,000 $(87,000)

           (13.8)%



Approximately eighty percent of the cost of services for the first three months of 2017 and 2016 are directly related to revenues. Therefore, the majority of the decrease in cost of services for the first quarter of 2017 as compared to the first quarter of 2016 is due to the same factors discussed in revenues above. These costs consist of radiologist fees, cardiologist fees, neurologist fees, professional credentialing, professional licenses, professional liability insurance costs, and costs of hardware associated with the specialists program.

GENERAL AND ADMINISTRATIVE EXPENSES:

For the Three Months Ended March 31,

2017 2016 Increase (Decrease) Percent Inc (Dec) $204,000 $242,000 $(38,000)

           (15.7)%



The decrease in general and administrative expenses for the first quarter of 2017 as compared to the first quarter of 2016 is primarily due to two factors:

Approximately $25,000 is the result of no fees for the Board of Directors for the first quarter of 2017





Approximately $19,000 is the result of no marketing expenses for the first quarter of 2017

RESEARCH AND DEVELOPMENT COSTS:

For the Three Months Ended March 31,

2017 2016 Increase (Decrease) Percent Inc (Dec) $22,000 $22,000 $0

                0.0%



During the first three months of 2017 and 2016, approximately 90% of our research and development costs were related to 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 2017 will continue to focus on the development and expansion of our software and our physician services. As a result, these costs will likely remain steady during 2017.



DEPRECIATION:


For the Three Months Ended March 31,

2017 2016 Increase (Decrease) Percent Inc (Dec) $2,000 $3,000 $(1,000)

            (33.3)%



We expect depreciation to decrease slightly during 2017 as assets are fully depreciated. We have no plans for any significant fixed asset purchases at this time.




                                       19



OTHER EXPENSE:

For the Three Months Ended March 31,


                  2017   2016  Increase (Decrease) Percent Inc (Dec)
Interest expense $2,000 $2,000         $0                 0%



We don't anticipate significant changes in this category during 2017.

We believe gross profit is our key indicator of operating progress. Our operations generated the following gross profit, rounded to the nearest 1,000, during the first three months of 2017 and 2016:


                                                2017      2016
                    Revenue                $ 731,000 $ 918,000

                    Direct costs             542,000   629,000

                    Gross profit           $ 189,000 $ 289,000

                    Gross Profit Percent         26%       31%


Our gross profit percentage was higher than normal in 2016 due to approximately $100,000 in revenue that had no associated direct costs. Although our gross profit percentage during the first quarter of 2017 was adequate, the volume of sales was not sufficient to cover the remaining expenses after the direct costs were deducted. In order to reach our goal of ongoing profitability, our main priority is to increase revenues while maintaining the current gross profit percentage.

We estimate that our general and administrative expenses will be approximately $200,000 to $225,000 per quarter during 2017.

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 2017, but we may choose to locate additional sources of cash to facilitate growth and expansion.

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, 2017, we had a working capital surplus of $153,000 as opposed to a working capital surplus of $186,000 at the beginning of the period, a decrease of $33,000. This decrease is due to a combination of factors. The primary factors are: A decrease of $36,000 in available cash, an increase in accounts receivable of $80,000, and an increase in accounts payable of $62,000. We may continue to sell equity securities and incur debt if our liquidity proves insufficient to meet our operating needs and facilitate growth and expansion of our services during 2017.

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 of our services. We anticipate our operating cash requirements for the next twelve months to be approximately $4,000,000 to $5,000,000. Profitability remains our primary goal.



                                       20



OFF-BALANCE SHEET ARRANGEMENTS

We currently have no off-balance sheet arrangements.

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


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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