**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

| **x**                                                             |   | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|-------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|
|                                                              |   |                                                                                    |
| For the quarterly period ended May 31, 2006                       |
|                                                              |   |                                                                                    |
| **o**                                                             |   | 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**                                                                                                                                                                                  |   **7374**                                     | **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    | X   | No _____ |
|--------|------------------|---------------|----------|

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.

|   | Yes    | X   | No _____ |
|--------|------------------|---------------|----------|

 

 

1

 

 

 

|   | 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.) 

$ 959,866 as at August 22, 2006 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. 

68,561,857 as at August 22, 2006

 

**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, competitionin 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 aforward-looking statement by words such as may, will, should, expect, anticipate, estimate, believe, intend, contemplate or project. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others, 

|   | o | our ability to raise capital, |  
 

o  

our ability obtain and retain customers,

 
 

o  

our ability to provide our products and services at competitive rates,

 
 

o  

our ability to execute our business strategy in a very competitive environment,

 

o  

our degree of financial leverage,

 
 

o  

risks associated with our acquiring and integrating companies into our own,

 
 

o  

risks related to market acceptance and demand for our services,

 
 

o  

the impact of competitive services,

 
 

o  

other risks referenced from time to time in our SEC filings.

 
 

 

2

 

 

 

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 donot 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**

 

As of the date of this  Quarterly  Report on Form 10-QSB,  our  independent  auditor had not yet  completed its review of the financialstatements included herein

 

**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 three months ended May 31, 2006 are not necessarily indicative of the results that can be expected for the year ending February 28, 2007 

 

3

 

 

 

**PAPERFREE MEDICAL SOLUTIONS, INC.**

**CONSOLIDATED BALANCE SHEET**

**May 31, 2006**

**(Unaudited)**

 

ASSETS

Current Assets

 

Cash

$           36,657

Accounts receivable, net of the allowance of $75,000

              53,182

Total current assets

89,839

 

 

Fixed assets, net of accumulated depreciation of $119,207

46,768

Other long term assets

91,667

Goodwill

         1,632,502

 

 

Total assets

$      1,860,776

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

Current Liabilities

 

Accounts payable and accrued liabilities

$         435,885

Deferred revenue

25,000

Stock payable

103,849

Notes payable – related parties

212,765

Lines of credit

11,679

Mandatorily redeemable Series C Preferred Stock, $0.001 par

 

value, 90,000 shares authorized, issued and outstanding

              75,600

 

 

Total current liabilities

864,778

 

 

Callable Secured Convertible Notes Payable, 

204,432

Derivative Liability

64,843

 

 

Total Liabilities

1,134,053

 

 

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, 68,561,857 shares issued and outstanding

68,560

Additional paid-in-capital

61,749,889

Accumulated deficit

      (61,091,727)

Total stockholders’ equity

         726,722

 

 

Total liabilities and stockholders’ equity

$      1,860,775

 

 

4

 

 

 

**PAPERFREE MEDICAL SOLUTIONS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**(Unaudited)**

 

 

Three Months ended May31,

 

2006

2005

 

 

 

Sales

$       134,063

$ 205,283

Cost of sales

            (24,180)

     (26,447)

 

 

 

Gross profit

109,884

178,836

 

 

 

Operating expenses:

 

 

General and administrative

 

 

 

311,383

359,994

Bad debt expense

 

73,000

Depreciation

7,486

-

Consulting fees

66,847

15,000

Professional fees

          28,904

  215,166

 

 

 

Net loss

 

 

from operations

(304,737)

 (484,324)

 

 

 

Gain on derivatives

95,462

 

Interest expense

          (67,694)

        (24,928)

 

 

 

Net loss

$     (276,968)

$    (509,252)

 

 

 

Basic and diluted

 

 

Net loss per share   

$ (0.00)

$(0.01)

 

 

 

Weighted average

 

 

shares outstanding

68,561,857

49,850,066     

 

 

5

 

 

 

                **PAPERFREE MEDICAL SOLUTIONS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Three months ended May 31, 2006 and 2005**

**(Unaudited)**

 

 

 

2006

2005

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

Net loss

$    (276,968)

$  (509,252)

Adjustments to reconcile net loss to cash used in

 

 

operating activities:

 

 

Depreciation

7,486

6,878

Bad debt expense

 

73,000

Shares issued for service

 

168,000

Deferred revenue

25,000

-

Changes in assets and liabilities:

 

 

Accounts receivable

15,041

5,430

Accounts payable and accrued liabilities

    103,025

(79,289)

 

 

 

CASH USED IN OPERATING ACTIVITIES

       (126,416)

   (335,233)

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

Net change in line of credit

(5,234)

(5,237)

Net advances from related party

17,236

25,208

Proceeds from exercise of warrants

 

33,000

Net change in prepayments for exercise of warrants

 

155,725

Callable secured loans

44,127

 

Derivative liability

(106,424)

 

Shares issued for cash, net of offering costs

 

93,051

 

 

 

CASH PROVIDED BY FINANCING ACTIVITIES

        50,295

       301,747

 

 

 

NET CHANGE IN CASH

(176,711)

(33,486)

Cash, beginning of period

           213,368      

      121,837

 

 

 

Cash, end of period

$        36,657

$        88,351

 

 

 

Cash paid for:

 

 

Interest

$        67,694

$        24,928

Income tax

-

-

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

Shares issued for acquisition of KMS

$   3,000,000

$              -

 

-

 

 

 

6

 

 

 

**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. (“PaperFree”), 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 (“SEC”), 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 – PURCHASE OF KMS COMPUTER SERVICES**

 

On March 1, 2005, PaperFree acquired 100 percent of the outstanding common shares of KMS Computer Services, Inc. (‘KMS”) in exchange for the issuance of 2,400,000 shares of PaperFree common stock. The results of KMS’s operations have been included in the consolidated statement of operations since that date. KMS is a provider of billing and practice management software. PapeFree is expected to be the leading provider of paper-free turnkey medical solutions for small to large multi-physician, multi-specialty offices, hospitals and integrated delivery networks.

 

The aggregate purchase price was 2,400,000 shares of Paperfree’s common stock valued at $3,000,000. The value of the 2,400,000 common shares issued was determined based on the market price of PaperFree’s common shares on the date of the initial agreement.

 

The acquisition is accounted for as a purchase. Goodwill in the amount of $3,341,944 is recorded at the date of the acquisition. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

 

Current assets

$    141,888

Goodwill

3,341,944

Property, plant and equipment

         72,414

Total assets acquired

    3,556,246

 

 

Current liabilities

(426,269)

Long-term liabilities

     (129,977)

Total liabilities assumed

     (556,246)

 

 

Total purchase price

$3,000,000

 

 

7

 

 

 

**NOTE 3 – STOCK PAYABLE**

 

During the 2006 fiscal year , a former director of Paperfree sold 179,000 shares of common stock to investors for proceeds of $89,500. These stock sales were not approved by the board prior to their occurrence and the director never transferred the proceeds to Paperfree. Paperfree has agreed to issue the investors the stock in exchange for indemnification. Paperfree has accrued a stock payable and fraud loss of $89,500 during fiscal 2006   As at May 31, 2006 claims were received for $2,796 resulting in the issuance of 54,500 shares.  It is unknown if the 179,000 shares represent all shares sold by the former director without the board’s approval. Paperfree may have further liabilities to accrue and stock to issue if future claims are made.

 

In September 2005, Paperfree agreed to issue 8,000,000 shares of common stock valued at $400,000 for a lawsuit settlement (see note 6 for details). The shares were not issued as of May 31, 2006 and are reflected in the Stock Payable balance on the balance sheet.

 

**NOTE 4 - 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;

 

 

(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.

 

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 issuance of the convertible notes.  These costs were recorded as an “other long term asset” to be amortized over the life of the notes using the effective interest method. Costs incurred included:

 

 

8

 

 

 

 

Debt arrangement fees

$ 35,000

Broker fees

40,000

Key man life insurance single premium

20,000

Legal fees

5,000

Total associated fees

100,000

Less amortization

(8,333)

 

$ 91,667

 

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 compoundembedded derivative liability was bifurcated from the debt host contract and recorded as a derivative liability, which resulted in a reduction of the initial carrying amount (as unamortized discount) of the Convertible Notes of $555,809 at inception on November 30, 2005. The unamortized discount 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 was computed at $106,089 at inception on November 30, 2005 and was recorded as a derivative liability which resulted in a reduction of the initial carrying amount (as unamortized discount) of the Convertible Notes. The unamortized discount 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.

 

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

 

**GENERAL**

The Company is in the business of providing Medical Practitioners with software and associated hardware solutions, which meet or exceed security levels specified by the Health Insurance Portability and Accountability Act of 1996.

 

**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 incorporation to May 31, 2006 the Company has undertaken the following activity:

 

9

 

 

 

(1) Through an agreement dated February 15, 2002 and completed on February 22, 2002, we acquired a 100% equity interest in Business to Business Publishing Ltd. (“B2B”), a private British Columbia company involved in the publication and distribution of industry and profession specific wall planners. The agreement was in consideration of 2,600,000 (13,000,000 post forward 5:1 split, and 325,000 after the 1:40 reverse split) restricted shares of its common stock and by advancing B2B with $50,000 in long-term loans carrying no interest or fixed terms of repayment. As a result of the transaction B2B became a wholly owned subsidiary of the Company and their operations were merged. 

The Company through B2B, which had no salaried employees, was considered a start-up corporation involved in the production and distribution of industry specific and special interests wall planners. Revenue was generated by B2B by selling advertising space in its wall planners. The wall planners were distributed, free of charge, to targeted professionals or individuals who comprise the industry or interest groups for which the planners were designed and produced.

(2) During the fiscal year ended February 28, 2003, our subsidiary suspended operations due to our failure to raise sufficient working capital to fund ongoing operations and our inability to attain profitable operations. We attempted to raise additional financing to fund future operations, but were not successful. 

(3) On July 14, 2003, the Company completed a 5:1 stock split of its outstanding share capital in connection with the proposed acquisition of Crown Medical Systems, Inc. resulting in an increase in outstanding common shares from 6,390,367 shares to 31,951,835 shares.

(4) On September 3, 2003, the Company executed an Agreement and Plan of Merger (the “Merger Agreement”) with Crown Medical Systems, Inc. (“Crown Delaware”). Crown Delaware is a private Delaware company that provides computer software, hardware and support solutions to the health care industry.

(5) Effective December 18, 2003 the Company changed its name to Crown Medical Systems, Inc.

(6) On February 23, 2004 the Company disposed of its entire interest in the shares of Business to Business Publishing Inc. in return for the surrender for cancellation of the 13,000,000 post forward split shares of the Company issued in connection with the acquisition of Business to Business Publishing Inc.

(7) The Company, through an agreement dated January 27, 2004 acquired the rights to MD PaperFree, a proprietary EMR (Electronic Medical Record) software program used by Medical Practitioners to document patient encounters. 

(8) On September 1, 2004, PaperFree, in connection with its aborted takeover of Crown Medical Systems, Inc. (Delaware) for 4,396,825 Preferred Series A shares. These Series A shares were immediately converted into 39,901,187 PaperFree common shares.

As the former management of Crown Medical Systems, Inc. (Delaware) were unable to provide financial records in a format that was economically susceptible to audit verification by an independent registered accounting firm, the PaperFree Board of Directors took formal action to abandon the investment in Crown Medical Systems, Inc. (Delaware). 

(9) On September 3, 2004, the Company executed an Agreement and Plan of Merger (the “Merger Agreement”) with Crown Delaware. This Merger Agreement takes precedent over the Share Purchase Agreement executed June 20, 2004. Crown Delaware is a private Delaware company that provides computer software, hardware and support solutions to the health care industry.

As the former management of Crown Medical Systems, Inc. (Delaware) were unable to provide financial records in a format that was economically susceptible to audit verification by an independent registered accounting firm, the PaperFree Board of Directors took formal action to abandon the investment in Crown Medical Systems, Inc. (Delaware).

(10) Following the decision to abandon the Crown acquisition, PaperFree Management undertook a search for a replacement operating company. They identified a Company known as KMS Computer Services , Inc., located in Kokomo, Indiana. KMS is a provider of paper-free turnkey medical solutions for small to large multi-physician, multi-specialty offices, hospitals and integrated delivery networks.

(11) On March 1, 2005, PaperFree acquired 100 percent of the outstanding common shares of KMS Computer Services, Inc. (‘KMS”) in exchange for the issuance of 2,400,000 shares of PaperFree common stock. The results of KMS’s operations have been included in the consolidated statement of operations since that date. KMS is a provider of billing and practice management software. PaperFree is expected to be the leading provider of paper-free turnkey medical solutions for small to large multi-physician, multi-specialty offices, hospitals and integrated delivery networks.

The aggregate purchase price was 2,400,000 shares of Paperfree’s common stock valued at $3,000,000. The value of the 2,400,000 common shares issued was determined based on the market price of PaperFree’s common shares on the date of the initial agreement 

 

10

 

 

 

(12)  For the period ended May 31, 2006, the Company had total assets of $ 1,860,776 (February 28, 2006 - $2,060,015). Current Assets were comprised of cash resources of $ 36,657 (February 28, 2006 - $213,368),  and Accounts Receivable of $53,182 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). The cash and equivalents and Accounts Receivable represent the Company’s present source of liquidity. 

Long term assets included Fixed Assets of $ 46,768 (February 28, 2006 $54,255) (net of accumulated depreciation of $ 119,207 (February 28, 2006 - $111,721)), goodwill of $ 1,632,502 (February 28, 2006 - $1,632,502) and other long term assets of $ 91,667 (February 28, 2006 -$91,667) . Total assets were $ 1,860,776 (February 28, 2006 -$2,060,015)

The Company’s liabilities at May 31, 2006 totalled $ 1,134,053 (February 28, 2006  $1,056,325) , consisting of $ 435,885 (February 28, 2006 - $332,862) in accounts payables and accrued liabilities and $103,849 (February 28, 2006 - $103,849) in stock payable and $212,765 (February 28, 2006 $195,529)  due to related parties, as well as a line of credit of $11,679 (February 28, 2006 $16,913). And mandatory redeemable preferred stock shown as a current liability item was $75,600 (February 28, 2006 - $75,600).

The Company  is presently operating at a loss. The Company’s ability to continue as an ongoing concern is dependent on its ability to generate revenues from software sales. Failing that, the Company may need to raise additional capital, either debt or equity capital, to fund future operation and ultimately to attain profitable operation. 

(13) During the Three Months  ended May 31, 2006 , 2006 we incurred losses of $304,737 from operations and had a net loss of $276,968 after a gain of $95,462 from marking derivatives to market and recording interest expense of $67,694.

 

We intend to seek financing necessary to fund future operations and to fund our investigation, negotiation and acquisition of other business acquisition opportunities. Currently we have commitments for $700,000 of additional financing dependent upon the filing of registration statement with the Securities Exchange Commission.

 

**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 May 31, 2006, we had cash on hand in the amount of $ 36,657. 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.

 
 

 

11

 

 

 

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 Commissionrelating 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**

The Company leases office premises from the former owner of KMS Medical Solutions, Inc.

 

**ITEM 3. LEGAL PROCEEDINGS**

Not applicable.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None

 

**ITEM 3. CONTROLS AND PROCEDURES**

Evaluation of disclosure controls and procedures:

Within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the  effectiveness  of  the design and operation of its disclosure  controls  and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the participation of the Company’s President and Chief Financial Officer. Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures were not effective in gathering, analyzing and disclosing information needed to satisfy the Company’s disclosure obligations under the Exchange Act.

 

12

 

 

 

Changes in internal controls:

There were no significant changes in the Company’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*.*

 

13

 

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

PAPERFREE MEDICAL SOLUTIONS, INC.

(Registrant)

 

 

By:   /s/ William L Sklar

William L Sklar, CEO

Date:  August 22, 2006

 

 

 

By:   /s/ William L. Sklar

William L Sklar, Chief Financial Officer, Treasurer and Director

Date:  August 22, 2006

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

14

 

 

 

**EXHIBIT 31.1**

**CERTIFICATION**

 

I, William L Sklar, Treasurer, Chief Financial Officer of PaperFree Medical Solutions, Inc.. certify that: 

1. I have reviewed this quarterly report on Form 10-QSB of PaperFree Medical Solutions, Inc. 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)             designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)           evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)           presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)           all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.             The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

By: /s/ William L Sklar

Date: August 22, 2006

 

15

 

 

 

**EXHIBIT 31.2**

**CERTIFICATION**

I, William L Sklar., Chief Executive Officer of PaperFree Medical Solutions, Inc.. certify that: 

1. I have reviewed this quarterly report on Form 10-QSB of PaperFree Medical Solutions, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)             designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)           evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)           presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)           all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.             The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

By:  /s/William L Sklar

Date: August 22, 2006

 

16

 

 

 

**EXHIBIT 32.1**

**CERTIFICATION**

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the filing of the Annual Report on Form 10QSB for the quarter ended May 31,, 2006 (the “Report”) by PaperFree Medical Solutions, Inc.,, the undersigned hereby certifies that:

 

1. The Report complies in all material respects with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

2. The information contained in the Report fairly presents, in all material respects the financial condition and results of operations of the Registrant.

By: /s/ William L Sklar

 

Date:  August 22, 2006  

Chief Executive Officer

 

17

 

 

 

**EXHIBIT 32.2**

**CERTIFICATION**

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the filing of the Quarterly Report on Form 10QSB for the Quarter ended May 31, 2006 (the “Report”) by PaperFree Medical Solutions, Inc.,, the undersigned hereby certifies that:

 

1. The Report complies in all material respects with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

2. The information contained in the Report fairly presents, in all material respects the financial condition and results of operations of the Registrant.

 

By: /s/ William L Sklar

 

Date: August 22, 2006  

Chief Financial Officer

 

 

18

 

 

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