Edgar Filing: Net Medical Xpress Solutions, Inc.

10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

COMMISSION FILE No. 333-30176

NET MEDICAL EXPRESS SOLUTIONS, INC.

(Exact name of Registrant as specified in charter)

NEVADA

91-1287406

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

5021 Indian School Road, Suite 100

Albuquerque, New Mexico 87110

(Address of principal executive offices) (Zip Code)

(505) 255-1999

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.		YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).		YES [ ] NO [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]	Accelerated filer [ ]
Non-accelerated filer [ ]	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).		YES [ ] NO [X]

The number of shares outstanding of each of the issuer’s classes of common stock at November 7, 2014 was 163,622,470.

TABLE OF CONTENTS


*PART I FINANCIAL INFORMATION*

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)	4
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Operations	5
Condensed Consolidated Statements of Cash Flows	6
Notes to the Condensed Consolidated Financial Statements	7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4. CONTROLS AND PROCEDURES	23

*PART II OTHER INFORMATION*

ITEM 1. LEGAL PROCEEDINGS	23
ITEM 1A. RISK FACTORS	23
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	24
ITEM 4. MINE SAFETY DISCLOSURE	24
ITEM 5. OTHER INFORMATION	24
ITEM 6. EXHIBITS	24

*SIGNATURES*	25

USE OF PRONOUNS AND OTHER WORDS

The pronouns “we”, “us”, “our” and the equivalent used in this annual report mean Net Medical Xpress Solutions, Inc. and consolidated subsidiaries. In the notes to our financial statements, the “Company” means Net Medical Xpress Solutions, Inc. and consolidated subsidiaries. The pronoun “you” means the reader of this quarterly report.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

This quarterly report on Form 10-Q, other reports we have file and will file pursuant to Section 15(d) of the Securities Exchange Act of 1934 and press releases we have issued and will issue will have contained and will contain, as the case may be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are intended to enjoy the benefits of that act. Unless the context is otherwise, we use words such as “anticipate”, “assumption”, ” believe”, “could”, “estimate”, “expect”, “forecast”, “intend”, “may”, “objective”, “outlook”, “plan” and “plans”, “potential”, “predict”, project” and “projection”, “seek”, “should”, “will continue”, “will result” and “would”, or other such words, whether nouns or pronouns and verbs or adverbs in the future tense and words and phrases that convey similar meaning and uncertainty of and information about future events or outcomes and statements about performance that is not an historical fact to identify these forward-looking statements. Such words and statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors discussed elsewhere in this document.

There are a number of important factors beyond our control that could cause actual results to differ materially from the results anticipated by these forward-looking statements. For example, a few of the uncertainties that could affect the accuracy of forward-looking statements include the following:

Rapid changes in technology relating to the Internet

Continued growth and use of the Internet

Changes in government regulations

Changes in our business strategies

Hardware failure of a catastrophic proportion

Terrorist interference with the operation of the Internet or effects of terrorist activities on the economy

Difficulty recruiting and retaining staff of sufficient technical caliber to provide adequate and on-going customer support and product maintenance and development

Failure to successfully market our products through the Internet and our representatives

Inability to locate sources to retire our line of credit or to obtain alternative lending sources

Inability to solve cash flow problems

We make these forward-looking statements based our beliefs and on various factors and using numerous assumptions using information available at the time we make these statements. Forward-looking statements (i) are neither predictions nor guaranties of future events or circumstances, and (ii) the assumptions, beliefs, expectations, forecasts and projections about future events may differ materially from actual results. You have no assurance the factors and assumptions we have used as a basis for forward-looking statements will prove to be materially accurate when the events they anticipate actually occur in the future; and, you should not place undue reliance on any such forward-looking statements. We undertake no obligation to publicly update any forward-looking statement to reflect developments occurring after the date of this annual report or after the date of any previous or subsequent report or any press release after publication.

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Net Medical Xpress Solutions, Inc.

Condensed Consolidated Balance Sheets

(Rounded to the nearest thousand)

(Unaudited)


			September 30,		December 31,
			2014		2013
Assets

Current assets:
	Cash and equivalents		$	315,000	$	421,000
	Accounts receivable, net of allowance of $18,000			883,000		606,000
		and $29,000, respectively
	Inventory			14,000		2,000
	Prepaid expenses and other assets			108,000		66,000
		Total current assets		1,320,000		1,095,000

Furniture, equipment and improvements, net of accumulated
	depreciation of $656,000 and $643,000, respectively			48,000		58,000
Security deposits				4,000		4,000
Goodwill				239,000		239,000

Total Assets			$	1,611,000	$	1,396,000

Liabilities and Stockholders' Equity (Deficit)

Current liabilities:
	Accounts payable		$	784,000	$	676,000
	Accrued expenses			145,000		79,000
	Deferred revenue			165,000		2,000
	Capital lease			8,000		7,000
	Notes payable - related party			50,000		48,000
		Total current liabilities		1,152,000		812,000

Long-term liabilities
	Notes payable - related party			2,000		2,000
	Capital lease - long-term portion			11,000		11,000
		Total long-term liabilities		13,000		13,000

	Total liabilities			1,165,000		825,000

Stockholders' equity (deficit):
	Preferred stock, $0.001 par value, 500,000 shares authorized, 0 shares
		issued and outstanding, as of 9/30/14 and 12/31/13, respectively		-		-
	Common stock, $0.001 par value, 200,000,000 shares
		authorized, 163,622,470 and 160,622,470 shares issued
		and outstanding as of 9/30/14 and 12/31/13, respectively		163,000		160,000
	Paid-in capital			15,738,000		15,466,000
	Subscriptions payable			66,000		296,000
	Deferred compensation			(25,000)		(40,000)
	Accumulated deficit			(15,496,000)		(15,311,000)
		Total stockholders' equity (deficit)		446,000		571,000

Total Liabilities and Stockholders' Equity (Deficit)			$	1,611,000	$	1,396,000

The accompanying notes are an integral part of these financial statements.

Net Medical Xpress Solutions, Inc.

Condensed Consolidated Statements of Operations

(Rounded to the nearest thousand)

(Unaudited)


			For the three months ended				For the nine months ended
			September 30,				September 30,
			2014		2013		2014		2013


Revenues
	Net Medical Xpress Services			823,000		911,000		2,738,000		2,863,000
	Net Medical Xpress Specialists			157,000		118,000		399,000		348,000
	Net Medical Xpress Solutions		$	90,000	$	99,000	$	311,000	$	344,000
	Net Medical Xpress Staffing			21,000		101,000		88,000		101,000
Gross revenues				1,091,000		1,229,000		3,536,000		3,656,000

Cost of services				928,000		909,000		2,869,000		2,752,000

Gross profit				163,000		320,000		667,000		904,000

Operating costs and expenses:
	General and administrative			235,000		256,000		730,000		707,000
	Depreciation and amortization			4,000		4,000		11,000		16,000
	Research and development			29,000		45,000		99,000		106,000
		Total operating costs and expenses		268,000		305,000		840,000		829,000

Net operating income (loss)				(105,000)		15,000		(173,000)		75,000

Other income (expense):
	Interest expense			(4,000)		(3,000)		(12,000)		(9,000)
		Total other income (expense)		(4,000)		(3,000)		(12,000)		(9,000)

Net income (loss)			$	(109,000)	$	12,000	$	(185,000)	$	66,000


Income (loss) per share - basic			$	(0.00)	$	0.00	$	(0.00)	$	0.00
Income (loss) per share - diluted			$	(0.00)	$	0.00	$	(0.00)	$	0.00

Basic weighted average common shares outstanding				165,222,470		164,708,016		163,909,283		163,793,822
Diluted weighted average common shares outstanding				165,222,470		164,708,016		165,593,511		163,793,822

The accompanying notes are an integral part of these financial statements.

Net Medical Xpress Solutions, Inc.

Condensed Consolidated Statements of Cash Flows

(Rounded to the nearest thousand)

(Unaudited)


		For the nine months ended
		September 30,
		2014		2013
Cash flows from operating activities
Net income (loss)		$	(185,000)	$	66,000
Adjustments to reconcile net income (loss) to
	net cash provided by (used in) operating activities:
	Common stock issued for services to board members and officers		-		60,000
	Common stock issued for services		15,000		25,000
	Depreciation and amortization		10,000		19,000
	Depreciation and amortization allocated to cost of goods sold		9,000		2,000
Changes in operating assets and liabilities:
	Accounts receivable		(277,000)		14,000
	Inventory		(12,000)		(7,000)
	Prepaid expenses and other assets		(42,000)		122,000
	Accounts payable		108,000		44,000
	Accrued expenses		66,000		(113,000)
	Deferred revenue		163,000		(1,000)
Net cash provided (used) by operating activities			(145,000)		231,000

Cash flows from investing activities
	Assets purchased under capital lease		8,000		-
	Acquisition of fixed assets		(9,000)		(8,000)
Net cash used by investing activities			(1,000)		(8,000)

Cash flows from financing activities
	Repayment of principal under capital lease		(7,000)		(2,000)
	Proceeds from notes payable - related party		2,000		2,000
	Net proceeds from the issuance of common stock for the exercise of options		45,000		45,000
	Working capital received from MedTel Solutions, LLC transaction		-		36,000
Net cash provided by financing activities			40,000		81,000

Net increase in cash equivalents			(106,000)		304,000
Cash equivalents - beginning			421,000		109,000
Cash equivalents - ending		$	315,000	$	413,000

Supplemental disclosures:
	Interest paid	$	11,000	$	7,000

Supplemental disclosures of non-cash financing activities:
	Insurance contracts financed	$	166,000	$	179,000

	Assets purchased under capital lease	$	8,000	$	-

Supplemental disclosure of noncash investing and financing
	activities related to MedTel Solutions, LLC transaction:
	Acquistion of goodwill through issuance of commons stock	$	-	$	239,000

The accompanying notes are an integral part of these financial statements.

Net Medical Xpress Solutions, Inc.

Notes to the Financial Statements

(Unaudited)

NOTE A - BASIS OF PRESENTATION

The interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2013 and notes thereto included in the Company's Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.

Results of operations for the interim periods are not indicative of annual results.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reclassification:

Certain reclassifications have been made to conform the 2013 amounts to the 2014 classifications for comparative purposes.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts Net Medical Xpress Solutions, Inc. (Formerly New Mexico Software, Inc.) and its wholly-owned subsidiaries, Telerad Service, Inc. and MedTel Solutions, LLC. Intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents:

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. At September 30, 2014, the Company did not have cash and equivalents that exceeded federally insured limits.

Trade Accounts Receivable:

The Company extends unsecured credit to customers under normal trade agreements which generally require payment within 30 - 45 days. Accounts not paid within 15 days after their original due date are considered delinquent. Unless specified by the customer, payments are applied to the oldest unpaid invoice. Accounts receivable are presented at the amount billed.

The Company also estimates an allowance for doubtful accounts, which amounted to $18,000 and $30,000 at September 30, 2014 and December 31, 2013, respectively. The estimate is based upon management’s review of all accounts and an assessment of the Company’s historical evidence of collections. Specific accounts are charged directly to the reserve when management obtains evidence of a customer’s insolvency. Charge-offs, net of recoveries, for the nine months ended September 30, 2014 and 2013 totaled $0 and $1,000, respectively.

Net Medical Xpress Solutions, Inc.

Notes to the Financial Statements

(Unaudited)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property and Equipment:

Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs that do not improve or extend the lives of the respective assets are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income.

Depreciation is computed on the straight-line and accelerated methods for financial reporting and income tax reporting purposes based upon the following estimated useful lives:


Software development	3 years
Equipment	5 years
Computer hardware	5 years
Office furniture	7 years

Long-Lived Assets:

The Company accounts for its long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. The Company determined that none of its long-term assets at September 30, 2014 or December 31, 2013 were impaired.

Stock-Based Compensation:

The Company accounts for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). Stock-based payments to employees include grants of stock, grants of stock options and issuance of warrants that are recognized in the consolidated statement of operations based on their fair values at the date of grant.

The Company accounts for stock-based payments to non-employees in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees.” Stock-based payments to non-employees include grants of stock, grants of stock options and issuances of warrants that are recognized in the consolidated statement of operations based on the value of the vested portion of the award over the requisite service period as measured at its then-current fair value as of each financial reporting date.

The Company calculates the fair value of option grants and warrant issuances utilizing the Binomial pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock option or warrant. The Company estimates forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, the Company monitors both stock option and warrant exercises as well as employee termination patterns. The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period.

Net Medical Xpress Solutions, Inc.

Notes to the Financial Statements

(Unaudited)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock-Based Compensation (continued):

During the nine months ended September 30, 2014 and 2013, the Company recognized stock-based compensation expense totaling $15,000 and $60,000, from the issuance of a total of 0 and 0 shares of its common stock to officers, directors, and consultants (See Note E).

Income Taxes:

The Company accounts for its income taxes under the provisions of ASC Topic 740, “Income Taxes.” The method of accounting for income taxes under ASC 740 is an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities.

Gain (Loss) per Share:

The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

Revenue Recognition:

The Company recognizes revenue in accordance with Statement of Position ASC Topic 985 Software Revenue Recognition as amended.

Revenue from proprietary software sales that does not require further commitment from the Company is recognized upon persuasive evidence of an arrangement as provided by agreements executed by both parties, delivery of the software, and determination that collection of a fixed or determinable fee is probable. These sales are generally direct purchases of a software product and there is no other involvement by the Company.

The Company offers with certain sales of its software products, software maintenance, upgrade and support arrangements. These contracts may be elements in a multiple-element arrangement or may be sold in a stand-alone basis. Revenues from maintenance and support services are recognized ratably on a straight-line basis over the term that the maintenance service is provided.

The Company typically charges 17% to 21% of the software purchase price for a 12-month maintenance contract with discounts available for longer-term agreements. The complexity of the software determines the percentage that is charged to any individual customer, and that percentage remains consistent upon renewal unless there is a change in the software or the terms of the agreement.

Charges for hosting are likewise spread ratably over the term of the hosting agreement, with the typical hosting agreement having a term of 12 months, with renewal on an annual basis. The Company sells some hosting contracts in conjunction with the sale of software, and some hosting contracts without an associated software sale. When the hosting arrangement is sold in conjunction with a software sale, the Company allocates a portion of the fee to the software license. Hosting services do not require the customer to purchase the software license, and for those hosting contracts that are sold without an associated software sale, the customer has neither the right nor the ability to operate the software on its own.

Net Medical Xpress Solutions, Inc.

Notes to the Financial Statements

(Unaudited)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (continued):

Should the sale of software involve an arrangement with multiple elements (for example, the sale of a software license along with the sale of maintenance and support to be delivered over the contract period), the Company allocates revenue to each component of the arrangement using the residual value method based on the fair value of the undelivered elements. The Company defers revenue from the arrangement equivalent to the fair value of the undelivered elements and recognizes the remaining amount at the time of the delivery of the product or when all other revenue recognition criteria have been met. Fair values for the ongoing maintenance and support obligations are based upon separate sales of renewals of maintenance contracts. Fair value of services, such as training or consulting, is based upon separate sales of these services to other customers.

The Company follows the guidance in FASB ASC Topic 605, Accounting for Performance of Construction-Type and Certain Production-Type Contracts for custom software development arrangements that require significant production, customization or modification to its core software. Revenue is generally recognized for such arrangements under the percentage-of-completion method. Under percentage-of-completion accounting, both the product license and custom software development revenue are recognized as work progresses based on specific milestones in accordance with FASB ASC Topic 450. The Company believes that project milestones based on completion of specific tasks provide the best approximation of progress toward the completion of the contract. At September 30, 2014 and September 30, 2013, there were no custom software development arrangements in progress.

The Company also occasionally derives revenue from the sale of third party hardware, which is billed as a separate deliverable under consulting or custom development contracts. Revenue from radiological services, radiological quality assurance (QA) services, software installation, and any training or consulting services is recognized when the services are rendered. These revenues include services that are not essential to the functionality of the software. If these services are included in a software agreement with multiple elements, amounts are allocated to these categories based on the estimated number of hours required to complete the work, which is the same criteria used to bill for the services separately. License revenue is recognized ratably over the term of the license.

Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred revenue.

The application of ASC 605, as amended, requires judgment, including a determination that collectability is probable and the fee is fixed and determinable.

The Company follows 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.

Due to uncertainties inherent in the estimation process it is at least reasonably possible that completion costs for contracts in progress will be further revised in the near-term.

The cost of services, consisting of staff payroll, outside services, equipment rental, communication costs and supplies, is expensed as incurred.

Research and Development Expenses:

Costs of research and development activities are expensed as incurred.

Advertising Expenses:

The Company expenses advertising costs which consist primarily of direct mailings, promotional items and print media, as incurred. Advertising expenses amounted to $0 and $0 for the nine months ended September 30, 2014 and 2013, respectively.

Net Medical Xpress Solutions, Inc.

Notes to the Financial Statements

(Unaudited)

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments:

The Company adopted the Financial Accounting Standards Board (“FASB”) standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs other than quoted prices in active markets that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company’s financial instruments consist of cash, accounts receivable, inventory, prepaid expenses, leasehold improvements, property and equipment, deposits, other assets, accounts payable, accrued expenses, deferred revenue, capital leases and notes payable. The recorded values of cash, accounts receivable, inventory, prepaid expenses, and accounts payable approximate fair values due to the short maturities of such instruments. Recorded values for notes payable and related liabilities approximate fair values, since their stated or imputed interest rates are commensurate with prevailing market rates for similar obligations.

Recent Pronouncements:

The Company’s management has reviewed recent accounting pronouncements issued through the date of the issuance of these financial statements. In management’s opinion, no pronouncements apply or will have a material effect on the Company’s financial statements.

NOTE C - FURNITURE, EQUIPMENT, AND IMPROVEMENTS

Furniture, equipment, and improvements as of September 30, 2014 consisted of the following:


Computers		499,000
Furniture, fixtures and equipment		150,000
Automobiles		41,000
Leasehold improvements		20,000
		710,000
Accumulated depreciation		(662,000)
		$ 48,000

Depreciation expense for the nine months ended September 30, 2014 and 2013 was $11,000 and $16,000, respectively.

Net Medical Xpress Solutions, Inc.

Notes to the Financial Statements

(Unaudited)

NOTE D - GOODWILL

On July 1, 2013, the Company completed its merger with MedTel Solutions, LLC (“MedTel”), an Alabama limited liability company, in accordance with its Merger Agreement dated June 28, 2013. MedTel was organized on June 13, 2012 for the purpose of engaging in and is now engaged in the business of providing licensed medical practitioners to perform services via telemedicine. Pursuant to the agreement, the Company authorized the issuance of 3,000,000 shares of its common stock in exchange for 100% of the outstanding membership interests of MedTel. The fair value of the consideration given up totaled $275,000 of which $36,000 has been allocated to the fair value of net identifiable assets and the remaining $239,000 to goodwill.

In accordance with FASB ASC 350, “Intangibles - Goodwill and Other,” the Company performs goodwill impairment testing at least annually, unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit (including any unrecognized intangibles) as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. As of September 30, 2014, there is no impairment of goodwill.

In connection with the merger, the Company also entered two employment agreements to the former holders of MedTel membership interests. Each agreement provides for bonus compensation of 2,000,000 shares of common stock to be earned equally upon attainment of quarterly sales and profitability goals. As of September 30, 2014, these goals have not been met.

NOTE E - CAPITAL TRANSACTIONS

Common stock:

During the nine month period ended September 30, 2014, the Company effected the following stock transactions:

The Company received cash for the exercise of options valued at $45,000. At September 30, 2014, the shares are authorized but not issued.

The Company issued a total of 3,000,000 shares of the Company’s $0.001 par value common stock for the purchase of MedTel Solutions, LLC on July 1, 2013.

The Company expensed $15,000 during the nine months ended September 30, 2014 for compensation earned from shares issued during 2013.

Exercise prices and weighted-average contractual lives of stock options outstanding as of September 30, 2014, are as follows:


Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Prices	Number Exercisable	Weighted Average Exercise Price
$0.03-$0.044	6,500,000	2.63	$0.03	6,500,000	$0.03

Net Medical Xpress Solutions, Inc.

Notes to the Financial Statements

(Unaudited)

NOTE E - CAPITAL TRANSACTIONS (CONTINUED)

Summary of Options Granted and Outstanding:


	For the nine months ended September 30,
	2014
	Shares	Weighted Average Exercise Price
Options:
Outstanding at beginning of year	8,000,000	$0.03
Granted	-	-
Cancelled	-	-
Exercised	1,500,000	-
Outstanding at end of period	6,500,000	$0.03

NOTE F - MAJOR CUSTOMERS

During the nine month period ended September 30, 2014, two customers accounted for 36% or approximately $1,269,000 of the Company's revenue.

As of September 30, 2014, balances due from three customers comprised 46% or approximately $414,000 of total accounts receivable.

NOTE G - REPORTABLE SEGMENTS

Management has identified the Company's reportable segments based on separate lines of business. The parent company, Net Medical Xpress Solutions, derives revenues from the development and marketing of proprietary internet technology-based software. Net Medical Xpress Staffing, the Company’s new division within the parent company, specializes in the recruitment and staffing of telemedicine physicians. The Company’s wholly-owned subsidiary, Telerad Service, Inc., operates under the trade names Net Medical Xpress Services and Net Medical Xpress Specialists. Net Medical Xpress Services provides medical diagnostic reading services. Net Medical Xpress Specialists provides telemedicine services to hospitals and other medical entities.

Information related to the Company's reportable segments for the nine months ended September 30, 2014 is as follows:


	Services	Specialists	Solutions	Staffing	TOTAL
Revenue	$2,689,000	$448,000	$311,000	$88,000	$3,536,000

Cost of Service	2,129,000	351,000	230,000	159,000	2,869,000
General & administrative	230,000	200,000	131,000	169,000	730,000
Depreciation	3,000	0	8,000	0	11,000
Research & development	0	8,000	3,000	88,000	99,000

Operating Income (loss)	$327,000	$(111,000)	$(61,000)	$(328,000)	$(173,000)

Total assets	$967,000	$234,000	$163,000	$247,000	$1,611,000

Net Medical Xpress Solutions, Inc.

Notes to the Financial Statements

(Unaudited)

NOTE G - REPORTABLE SEGMENTS (CONTINUED)

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


Segment’s operating loss	$ (173,000)
Other income (expense)	(12,000)
Consolidated net loss	$ (185,000)

NOTE H - COMMITMENTS AND CONTINGENCIES

Leases:

The Company leases office space in New Mexico expiring on January 31, 2017. The Company also leases office and computer equipment. Future minimum lease payments as of September 30, 2014, are as follows:


Year		Amount
2014		$23,000
2015		$92,000
2016		$94,000
2017		$9,000

Rent expense for the nine months ended September 30, 2014 and 2013 amounted to $61,000 and $55,000, respectively.

Employment Agreement (Related Party):

During the first quarter of 2013, the Company entered into a new employment agreement with Mr. Govatski whereby agreeing to annual compensation of $30,000 for a term of one year commencing on January 1, 2013. The agreement will automatically renew for one additional term unless terminated by either party. The non-compete agreement has remained intact and becomes effective only in the event of termination by either party and will remain in effect for a period of one year.

NOTE I - SUBSEQUENT EVENTS

The Company’s wholly-owned subsidiary, Telerad Service, Inc., has filed suit against two customers for failure to make payments for services rendered in the amounts of approximately $45,000 and $39,000. At the date of this filing, no response has been received from either customer. The Company intends to vigorously pursue collection of the amounts owed.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

OVERVIEW

We operate our business in four divisions.

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 to the 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 a virtual 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.

Our Net Medical Xpress Solutions division derives revenues from the development and marketing of proprietary internet technology-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. In addition, we are now offering home health care services - consultations with primary care physicians - in this division.

RESULTS OF OPERATIONS

TOTAL REVENUES: