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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

FORM 10-Q

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2009 

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission File Number 000-17520

VIRTUALHEALTH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware

75-2276137

(State or other jurisdiction of
incorporation or organization)

(IRS Employer Identification No.)


325 West Main Street, Suite 240
Lexington, Kentucky 40503
(Address of principal executive offices)
(Zip Code)

(859) 455-9255
(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 o

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 o 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

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 o No x

Shares outstanding of the registrant’s common stock as of November 16, 2009: 53,520,500 shares.

1

 

Item 1: Financial Statements        Page
 
    Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited)    
    and December 31, 2008 (audited)      
 
    Unaudited Condensed Consolidated Statements of Operations    
    for the three and nine months ended September 30, 2009 and 2008      
 
    Unaudited Condensed Consolidated Statements of Cash Flows    
    for the nine months ended September 30, 2009 and 2008      
 
    Notes to Unaudited Condensed Consolidated Financial Statements      6-9 
 
Item 2: Management’s Discussion and Analysis of Financial Condition      

9-14

             and Results of Operations.  
 
Item 3: Quantitative and Qualitative Disclosures About Market Risk.          15 
 
Item 4T: Controls and Procedures          15 
 
PART II – OTHER INFORMATION  
 
Item 1: Legal Proceedings          15 
 
Item 1A: Risk Factors          15 
 
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds          15 
 
Item 3: Defaults upon Senior Securities          15 
 
Item 4: Submission of Matters to a Vote of Security Holders          15 
 
Item 5: Other Information          15 
 
Item 6: Exhibits          16 
 
Signatures      

16



 

2

 

VIRTUALHEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2009 (Unaudited) and December 31, 2008 (Audited)

     

September 30, 2009

   

December 31, 2008

 
ASSETS    
 
CURRENT ASSETS:    
Cash     $ 18,867   $ 87,005  
Accounts Receivable, Net       73,684     72,115  
Interest Receivable       127,599     62,767  
Total current assets       220,150     221,887  
 
PROPERTY, PLANT, AND EQUPMENT (NET)       1,453     3,089  
 
OTHER ASSETS:    
Notes Receivable - Related Parties       609,691     75,000  
Note Receivable       1,500,000     1,500,000  
Goodwill       1,228,856     1,228,856  
Deferred loan costs       31,312     41,750  
TOTAL ASSETS     $ 3,591,462   $ 3,070,582  
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY    
   (DEFICIENCY)    
CURRENT LIABILITIES:    
Accounts payable - Trade     $ 389,306   $ 393,796  
Accrued Payroll and Payroll Taxes       41,644     19,324  
Other accrued Liabilities       2,873     3,493  
Dividends payable       33,750     33,750  
Notes Payable       --     900,000  
Notes Payable - Related Parties       1,804,994     1,966,505  
Accrued Interest - Related Parties       548,627     384,303  
     Total current liabilities       2,821,194     3,701,171  
 
LONG-TERM DEBT:    
Debentures       546,912     225,000  
   
TOTAL LIABILITIES       3,368,106     3,926,171  
 
STOCKHOLDERS' EQUITY (DEFICIENCY)    
   Preferred stock - $0.001 par value, 10,000,000 shares  
   authorized; 300,000 shares Designated as Class B       --     --  
 
   Preferred stock, Class B - $0.001 par value, 300,000  
   shares designated, 70,000 issued and outstanding as of  
   September 30, 2009 and December 31, 2008       70     70  
 
   Common stock - $0.001 par value, 100,000,000 shares  
   authorized, 53,520,200 and 46,451,533 issued and  
   outstanding as of September 30, 2009 and December  
   31, 2008       53,518     46,452  
Additional paid-in capital       3,654,866     2,267,381  
Stock Subscription Receivable       (89,904 )   (89,904 )
Retained Deficit       (3,395,194 )   (3,079,588 )
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)       223,356     (855,589 )
 
TOTAL LIABILITIES AND STOCKHOLDERS'     $ 3,591,462   $ 3,070,582  
   EQUITY (DEFICIENCY)  


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

 

 

3

VIRTUALHEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

 

     

Three

   

Three

   

Nine

   

Nine

 
     

Months

   

Months

   

Months

   

Months

 
     

Ended

   

Ended

   

Ended

   

Ended

 
REVENUES:      

September 30, 2009

   

September 30, 2008

   

September 30, 2009

   

September 30, 2008

 
 
Total Revenue     $ 154,811   $ 174,678   $ 578,003   $ 573,347  
 
Cost of Sales       (31,923 )    (24,714 )    (134,448 )    (64,921 )
 
Gross Profit       122,888     149,964     443,555     508,426  
 
OPERATING EXPENSES:    
   Selling, General and Administrative       (334,257 )    (232,402 )    (929,829 )    (833,392 )
 
LOSS FROM CONTINUING OPERATIONS       (211,369 )   (82,438 )   (486,274 )   (324,966 )
 
OTHER INCOME (EXPENSES):    
   Interest Income       93,278     25,280     168,383     28,910  
   Gain on Settlement       244,548     --     244,548     --  
   Interest (Expense)       (82,945 )   (52,042 )   (242,263 )   (104,776 )
                   
NET GAIN (LOSS)       43,512     (109,200 )   (315,606 )   (400,832 )
   Current Tax Expense       --     --     --     --  
   Deferred Tax Expense       --     --     --     --  
NET GAIN (LOSS)     $ 43,512   $ (109,200 ) $ (315,606 ) $ (400,832 )
 
Basic gain (loss) per common share     $ 0. 00   $ (0.00 ) $ (0.01 ) $ (0.01 )
 
Weighted average number of common shares       48,964,060     42,701,533     47,352,458     42,701,533  


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

 

4

 

VIRTUALHEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

     

Nine months

   

Nine months

 
     

Ended

   

Ended

 
     

September 30 ,2009

   

September 30 ,2008

 
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net loss     $ (315,606 ) $ (400,832 )
Adjustments to reconcile net loss to net cash used  
     in operating activities:  
     Depreciation and amortization       1,636     1,544  
     Non-cash expenses       87,000     --  
     Stock issued for services       90,200     --  
     Gain on settlement       (244,548 )   --  
     Changes in assets and liabilities:  
          (Increase) decrease in accounts receivable       (1,569 )   33,419  
          (Increase) decrease in other assets       10,438     --  
          (Increase) decrease in interest receivable       (64,832 )   --  
          Increase (decrease) in accounts payable       (4,490 )   (13,151 )
          Increase (decrease) in accrued payroll       22,320     (33,554 )
          Increase (decrease) in accrued expenses       (620 )   (136 )
          Increase (decrease) in accrued interest       164,324     76,557  
Net cash used in operating activities       (255,747 )   (336,153 )
 
CASH FLOWS FROM INVESTING ACTIVITIES:    
     Proceeds (Purchases) from Note Receivable       --     (1,050,000 )
     Purchase of note receivable-related party       (534,691 )   --  
     Purchases of property and equipment       --     (10,000 )
Net cash used by investing activities       (534,691 )   (1,060,000 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:    
     Proceeds of notes payable-related party       236,738     1,296,479  
     Payments on notes payable-related party       (124,649 )   --  
     Proceeds of notes payable       685,221     --  
     Payments on notes payable       (75,010 )   --  
Net cash provided by financing activities       722,300     1,296,479  
 
NET INCREASE (DECREASE) IN CASH       (68,138 )   (99,674 )
 
CASH, beginning of period       87,005     226,393  
     
CASH, end of period     $ 18,867   $ 126,719  
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:    
     Cash paid during period for interest     $ -   $ -  
     Cash paid during period for income tax     $ -   $ -  
 
Non-Cash Investing and Financing Activities:    
     Common Stock issued in consulting fees     $ 90,200   $ -  
     Imputed interest expensed as a capital contribution     $ 19,500   $ -  
     Contributed rent as a capital contribution     $ 67,500   $ -  
     Debt conversion     $ 900,000   $ -  
     Stock issued for debt     $ 561,899   $ -  

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

5

 

VIRTUALHEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA ARE NOT INCLUDED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008.     

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements reflect the restructuring of the Company consummated on August 28, 2006, by actions through a certain Stock Exchange Agreement dated July 20, 2006. Our five wholly-owned subsidiaries, MB Holding Corporation (MBHC) (inactive), VPS Holding, LLC, dba Veriscrip LLC (VPSH), Secure eHealth, LLC (SEHLLC), Medical Office Software, Inc. (MOS), and Verified Prescription Safeguards, Inc. (inactive), are included in these statements.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with Form 10-Q, and in the opinion of management, include all normal adjustments considered necessary to present fairly the financial position as of September 30, 2009, the results of operations for the nine months ended September 30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008. These results have been determined on the basis of accounting principles generally accepted in the United States of America, and applied consistently with those used in the preparation of the Company’s audited consolidated financial statements and notes for the year ended December 31, 2008.
 
Certain information and note disclosures normally included in the consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2008 Annual Report on Form 10-K. The results of operations for the periods ended September 30, 2009 and 2008, are not necessarily indicative of the results for the full year.

NOTE 2 – GOING CONCERN

The Company has current liabilities in excess of current assets and has a stockholders’ deficiency. The Company has had limited operations and has not been able to develop an ongoing, reliable source of revenue to fund its existence. The Company’s day-to-day expenses have been covered by proceeds obtained, and services paid by, the issuance of stock and notes payable. The adverse effect on the Company’s results of operations due to its lack of capital resources can be expected to continue until such time as the Company is able to generate additional capital from other sources. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Management has implemented, or developed plans to implement, a number of actions to address these conditions, including the continued development of projects acquired in connection with the acquisition of VPSH and MOS, which management believes will provide opportunities for growth of the Company’s services within the prescription drug and healthcare industry. Management’s plans include obtaining working capital funds by seeking additional funding from shareholders, debt financing, and/or private placements of its common stock to meet such needs. Without realization of additional capital, it would be unlikely for the Company to continue as a going concern. The Company anticipates that its major shareholders will contribute sufficient funds to satisfy the cash needs of the Company for the next twenty-four months. However, there can be no assurances to that effect, as the Company expects minimal revenues, and additional funding will be necessary for the Company’s development plans and projects. If the Company cannot obtain needed funds, it may be forced to curtail or cease its activities. Therefore, for at least the next twenty-four months, management believes the Company has viable plans to continue as a going concern. There can be no assurance that additional funding will be available when needed or, if available, that the terms of such financing will not adversely affect the Company’s results from operations.

These unaudited interim condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The continuation of the Company as a going concern is dependent upon the success of the Company in obtaining additional funding and the success of its future operations The Company’s ability to achieve these objectives cannot be determined at this time.

6

NOTE 3 – NOTES RECEIVABLE

The Company has advanced as a note receivable, $1,500,000 to Private Access, Inc. an unrelated company. The loan bears interest at 9% per annum from day of advance, with $110,993 and $59,892 accrued as of September 30, 2009 and December 31, 2008 respectively. On August 12, 2009, the Company received a payment of $100,000 under the terms of the Restructuring Agreement, for interest under the Note and restructuring fees, as the result of the capital provided to Private Access, Inc. by Pfizer Inc. (“Pfizer”) under a Notes Purchase Agreement dated August 3, 2009 (the “Pfizer Agreement”). Under an Amendment to Convertible Promissory Notes and Note Restructuring Agreement, the Company agreed to extend the term of the Note from January 15, 2011, until July 31, 2013, and received an enhanced conversion premium in the event that the Note is converted to equity. Additionally, the Company agreed, until the Note is paid in full, to modify its right of first offer to purchase new securities in Private Access so as to be pro rata with Pfizer’s right of first refusal under the Pfizer Agreement. The Pfizer Agreement makes corresponding allowances for the Company’s pro rata right of first offer, with pro rata interests being based on the outstanding principal amounts owed under (i) notes issued to the Company and other investors under the Restructuring Agreement and (ii) notes held by Pfizer under the Pfizer Agreement. The Company also agreed to become the collateral agent for the collateral pledged as security by Private Access, Inc. under a Security Agreement dated August 3, 2009, with the Company and Pfizer, along with other investors under the Restructuring Agreement, holding pro rata security interests in all property of Private Access, Inc. including its intellectual property.

The company has a note receivable from a related party in the amount of $534,691. The loan bears interest at 10% per annum and is due on demand. Accrued interest at September 30, 2009 was $8,044. The company also has a note receivable from a related party in the amount of $75,000. The note bears interest at 10% per annum and is due on demand. Accrued interest was $8,562 and $2,875 at September 30, 2009 and December 31, 2008 respectively.

NOTE 4- NOTES PAYABLE AND LONG-TERM DEBT

Notes Payable

       

September 30, 2009

New Market Technology, Inc.: unsecured, no stated interest rate. On September 30, 2009 the $900,000 debt with New Market Technology Inc. was converted in exchange for 1,000,751 shares of stock.

-0-

         

-0-

 

Notes Payable Related Parties

       

September 30, 2009

Scott Haire, Company Chairman, CEO, and CFO:

 
 

unsecured, payable on September 30, 2009, including interest at 10% per annum. Accrued interest at September 30, 2009 and December 31, 2008 is $11,421 and $9,723 respectively.

$22,400

           

HEB LLC, Scott Haire Manager:

 
 

Unsecured, two separate $1,000,000 open lines of credit, no maturity date, interest at 10% per annum. Accrued interest at September 30, 2009 and December 31, 2008 is $308,105 and $284,298 respectively. Unsecured lines available at September 30, 2009 is $1,252,029.

747,971



7

 

 

HEB, LLC, Scott Haire, Manager:

Unsecured note dated 2006, no maturity date. Accrued interest at September 30, 2009 and December 31, 2008 is $1,300 and $1,004 respectively.

3,900

 

HEB Technology, LLC, Scott Haire, Manager

Unsecured note dated September 26, 2009 no maturity date. Accrued interestat September 30, 2009 and December 31, 2009 is $22 and

-0- respectively.

13,618

           

Nevada Multicare, Scott Haire-Manager:

 

This note is considered to be a related party note. Unsecured, payable on demand, including interest at 10% per annum. Accrued interest at September 30, 2009 and December 31, 2008 is $34,893 and $29,296 respectively.

73,805

 

 

Commercial and Financial Holdings, LLC:

  This note is considered to be a related party note. Unsecured, payable on demand, including interest at 10% per annum. Accrued interest at September 30, 2009 and December 31, 2008 is $165,807 and $52,592 respectively  

911,400

 

SWCC, dated 7/21/06, no stated interest rate

21,900

 

Anthony Chamblin, investor in Secure eHealth, LLC:

This note is considered to be a related party note. Unsecured, payable on demand, including interest at 10% per annum. Accrued interest at June 30, 2009 and December 31, 2008 is $6,124 and $5,622 respectively.

10,000

$        1,804,994



 

Debentures

On December 17, 2008 the Company issued convertible debentures which started maturing in 2009 and continue maturing thru 2011. The debt balance at September 30, 2009 and December 31, 2008 is $546,912 and $225,000, respectively. Accrued interest at September 30, 2009 and December 31, 2008 is $20,698 and $764, respectively. Debt issuance costs of $73,752 have been deferred and are being amortized over the term of the debt. During the nine months ended September 30, 2009 $10,438 of debt issuance costs were amortized.

The Debentures may be converted into shares of the Company’s common stock at a conversion price equal to seventy percent (70%) of the lowest closing bid price per share for the twenty (20) trading days immediately preceding the date of conversion; provided that no holder may convert Debentures into, nor shall the Company issue to such holder, shares of common stock to the extent that the conversion would result in a Holder and its affiliates together beneficially owning more than 4.99% of the then issued and outstanding shares of the Company’s common stock. This ownership may be waived, however, by a holder upon sixty-one (61) days prior written notice.

The Debentures may be redeemed by the Company at any time or from time to time at a price equal to (x) one hundred twenty percent (120%) of the principal amount of the Debenture if the Debenture is called for redemption prior to the expiration of six months from the issuance date, or one hundred thirty one percent (131%) if called for redemption thereafter, plus (y) interest accrued through the day immediately preceding the date of redemption.

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Litigation –The Company is involved in a lawsuit from Bell South for an unpaid amount from 2004 that was filed in February 2007. Management believes that this claim will not have a material effect on the financial position of the Company.

8

Lawsuit – The Company has been named as a defendant in a lawsuit. The Company and its attorneys have reviewed the matter and believe the lawsuit is baseless and would have little or no impact on the Company. The Company intends to vigorously defend itself in this matter.

NOTE 6 COMMON STOCK 

The Company is authorized to issue 100,000,000 common shares at a par value of $0.001 per share. These shares have full voting rights. At September 30, 2009 there are 53,520,200 shares issued and outstanding. At December 31, 2008 there were 46,451,533 shares issued and outstanding. 

During the nine months ended September 30, 2009 the Company issued 651,000 shares for payment of services and 6,417,667 shares for payment of debt resulting in a gain on settlement of $244,548. During 2008 the Company issued 2,800,000 shares in payment of Company notes payable and 950,000 shares for payment of consulting fees owed by the Company.

NOTE 7 – SUBSEQUENT EVENTS

Subsequent to September 30, 2009 the Company issued 277,444 shares of common stock for payment of debt.

On November 2, 2009 the Company entered into a Letter of Intent to sell all health care related assets (MOS, Secure eHealth and Veriscrip) to Wound Management Technologies, Inc. (WNDM) in exchange for $1,000,000 in cash and debt, 4,000,000 shares of WNDM stock and a royalty agreement for continued revenues to the Company. In addition, the Company acquired a Lease-Purchase Option Agreement for the Treasure Gulch Gold Mine for $50,000 from a privately held entity. 

The Company has evaluated subsequent events from the balance sheet date through November 13, 2009. 

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

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the Company’s plan of operation and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto.

The Company was a development stage company until August 28, 2006, at which time it emerged from development stage status upon the acquisition of MBHC, and its wholly-owned operating subsidiaries, VPSH, and SEHLLC. Prior to emerging from development stage status, no ongoing operations were conducted and no revenues were generated prior to the acquisition.

On October 6, 2006, the Company consummated a Stock Exchange Agreement with New Market Technology, Inc., a Nevada corporation, pursuant to which the Company acquired the outstanding shares of MOS, a company engaged in physician practice management. Prior to the acquisition, the Company owned forty-nine percent (49%) of MOS’s outstanding shares. Under the terms of the Stock Exchange Agreement, the Company acquired the remaining outstanding shares of MOS in exchange for (a) 1,400,000 shares of the Company’s common stock, and (b) a two-year convertible promissory note in the principle amount of $900,000. This note was converted as of September 30, 2009 in exchange for 1,000,751 shares of stock.

The Company generated revenue of $154,811 with cost of sales of $31,923, and incurred $334,257 in operating expenses (excluding interest income and expense), resulting in a $211,369 loss from operations during the three months ended September 30, 2009. The Company generated revenue of $578,003 with cost of sales of $134,448, and incurred $929,829 in operating expenses (excluding interest income and expense), resulting in a $486,274 loss during the nine months ended September 30, 2009.

9

Plan of Operation

The Company’s (VHGI) primary business focus is to provide next generation solutions that securely and efficiently connects healthcare providers and their communities. The Company’s three operating units each independently service an area of healthcare that benefits from its technology, and combined the three create a healthcare platform that is completely secure, intuitive and allows healthcare practioners to collaborate with one another in ways that were never possible before. Additional capital will be required, either through the sale of equity or through debt financing to meet our contractual obligations, and continue operations.
The development of Veriscrip™ as the nation’s first “Real-Time” prescription drug monitoring program paves the way to exploit the Company’s deep understanding of the need for improved data security in both state and federal managed healthcare programs. As a result, Secure eHealth, LLC has become the core component in any future development within the Company’s product line. The Medical Office Software (MOS) business unit currently services a client base of over 1,500 early technology adopters. As both Veriscrip and Secure eHealth products are deployed in states where MOS has a base of users, we believe that we can leverage those users’ familiarity with the Company and its technology solutions as initial sites for testing the services.

In 2009, President Obama’s stimulus proposal, which includes billions in funding for healthcare technology implementation, has become the driving force behind a sharp increase in interest by physicians to adopt electronic prescription and electronic health record solutions. In light of the new focus on electronic solutions, VHGI has implemented a strategy for leveraging the federal funding that should be available through the proposed stimulus plan once approved. This strategy includes developing partnerships with several leaders in the area of Community Based HIE (Health Information Exchange) and RHIO (Regional Health Information Organization) to provide an electronic privacy management platform to create the secure environments required for successful adoption. Also included in our 2009 strategy is an emphasis on the marketing of our newly designed Practice Management and EHR (Electronic Health Records) solutions for MOS’ 1,500 existing customers. Also we are continuing to identify strategic acquisitions of like companies to grow the MOS client base of healthcare practitioners providing a wider demographic to cross sell the Company’s services and products.
 
In addition to stimulus funding for healthcare technology implementation, we believe that the approval of funding for the National All Scheduled Prescription Electronic Reporting (NASPER) program by Congress should create the opportunities for us to introduce our Veriscrip products and services as the most comprehensive solution to aid in the growing problem of prescription drug diversion and fraud that is occurring across state lines.

In 2008 Secure eHealth, LLC entered into a licensing agreement with Private Access, Inc. to provide security tools to enhance their existing platform. Private Access, Inc. is a California-based developer of privacy management tools for individuals to determine who, when and under what circumstances others can access and/or use their personal medical information. We believe that our association with Private Access, Inc. will provide a broad audience for Secure eHealth, LLC and facilitate the introduction of our secure electronic platforms for exchanging digital health information.

Veriscrip ™ Business Model and Market Strategy

The business model for our Veriscrip products and services is primarily based upon the selling and operation of real-time controlled prescription drug monitoring for state agencies, which pay for the services. Our fees are composed of a mix of license fees and transaction fees. We believe that these fee components are a standard practice for electronic solutions and will be accepted in the market. In addition, a small amount of revenue may be derived from electronic networks with which we have established connectivity to reach pharmacies and Pharmacy Benefit Managers (PBMs). We expect that our typical customer will be a state or federal agency and can be classified as follows:

Primary Paying Customer: State agencies who contract with us to provide controlled prescription management solutions within their jurisdiction, typically a state, and the regulators they employ to manage the administration of prescription drugs within their states.

Parties Involved: Prescribers, including physicians, nurse practitioners, psychiatrists, and dentists, as well as pharmacies, are participants as they are directly involved in the authorization and dispensing of controlled prescription drugs. We service these parties per our agreements with state sponsors; however, we have not forecasted, nor do we expect to, derive revenue for our core functionality from these parties for our core product offering. Future value-added transaction sets and functionality may garner additional revenue.

10

 

The following are our anticipated primary sources of revenue:

Pilot Fees: In advance of each contract with a state-wide agency, it is anticipated we will begin with a pilot program within a small region to test and verify with the state agency the effectiveness and operation of our solution. We anticipate that the state agency will pay a nominal amount, most likely as a flat fee, to support these pilot activities.

License Fees: We expect to be paid a one-time license fee from our state agency customers, based upon state population, and paid over a period of time. This fee is anticipated to cover all of our startup and implementation costs.

State Transaction Fees: We also anticipate receiving transaction revenue from our state agency customers for each transaction processed.

 

We believe that our Veriscrip System has several advantages in this emerging market, key among which are:

First to Operate a Real-Time Solution: We believe that the Veriscrip pilot project in Kentucky is the first state-backed real time electronic prescription drug monitoring program (PDMP) in the United States. This experience provides us with an opportunity to work with regulators and state governments to fine tune an overall product offering, and provides a potential advantage in marketing to other states.

Single Focus: Unlike many potential competitors, Veriscrip has one focus—the provision of controlled prescription compliance solutions to state agencies. By maintaining a simple focus, we can maximize our resources. Although our management personnel have a deep and varied base of experience in related healthcare solutions (i.e., records management, healthcare privacy solutions) of our competitors, our simple focus helps to avoid management distractions that might otherwise be focused toward these related areas.

Most Secure: One of the largest hurdles in the introduction of healthcare technology proliferation, specifically in the areas of centralized data storage and data mobility is the perceived inability to adequately protect patient information. Veriscrip is designed to take full advantage of the latest advances in authentication and encryption technologies by integrating Secure eHealth’s suite of security products rendering the Veriscrip platform the most secure PDMP available.

Our marketing strategy is to position Veriscrip such that user barriers to adoption are minimized, leveraging existing complementary vendors rather than competing with them and combining a set of services that both uniquely meets the regulatory monitoring needs of state agencies and resolves current problems facing prescribers and pharmacies. Our current marketing efforts are focused on states that appear to be aware of the prescription drug problems within their state, have drafted bills or commissioned studies on prescription drug abuse, and have some drug monitoring system or plan currently in place. These criteria will assist in identifying target states for marketing efforts, but contacts and relationships of management will play essential roles in securing audience with state decision makers. Currently as of August 2009, there are only forty states with legislation allowing prescription drug monitoring of which thirty-two have active programs in place. Of these programs none are real-time, which represents a tremendous opportunity for Veriscrip to be the leader in the field of PDMP.

As a rule, the following challenges exist within every state:

Lack of awareness: Most state governments do not have a general awareness of the extent and cost of prescription drug abuse. In addition, most do not know that practical real time options exist for administration and monitoring of prescription drugs. Generating awareness through media stories and direct marketing to government officials and health related groups are essential parts of our strategy.

Confidentiality of Patient Information: Patient confidentiality remains a key barrier in passing legislation in certain states and is a primary contributing factor in the slow adoption. HIPAA legislation passed by Congress in 1996 provides a strong framework for securing health information. We believe that our Veriscrip System is HIPAA compliant, and meeting this concern requires effective communication of our system attributes, compliance, and a proactive approach to security and confidentiality in general.

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Funding: States, facing fiscal crisis, have few dollars to spend on new programs even if they will save the state significant amounts of money. We believe, however, that there are several ways for states to generate the funding necessary for our Veriscrip System. For example, the U.S. Department of Justice is currently administering the Hal Rogers Fund, which was established to issue grants to states wishing to implement or improve prescription drug monitoring programs. In addition, states could establish a mechanism by which pharmaceutical companies may contribute to the state monitoring programs. As part of our marketing efforts, we plan on educating our potential customers as to these various approaches to funding for our services.

MOS Business Model and Market Strategy

Since its inception, MOS has been engaged in the physician practice management system ("PMS") market. Having completed more than 1,500 installations, MOS has established a strong presence and brand throughout Southeastern Florida as the premier provider of physician practice solutions. MOS began as a developer and marketer of its own PMS solution. At the present, however, MOS focuses almost exclusively on reselling and supporting products developed by other parties in an effort to provide the best of breed to its customers. The market segments and products for each of these markets are as follows:

Physician Practices: Practice Management Software, Electronic Medical Records Software, Electronic Claims Transactions via our Portal, E-prescribing Solutions.

The following are MOS’s anticipated primary sources of revenue:

License Fees: For each of the software solutions whether Practice Management or Electronic Medical Records there is a license fee collected. The amount of each fee varies upon the scope of the installation and number of users. This one-time fee is independent of any on-going maintenance fees paid.

Upgrade Fees: As newer and improved versions of the software products are released, an upgrade fee is collected from the customer. Since many of the transactions that emerge from the software are regulated standards, these upgrades are issued annually and are quickly adopted by the user base.

Training Fees: Training fees are collected for both new installations and for existing installations that have a need to train new staff or for improved use of the existing product.

Support Maintenance Fees: We expect to be paid an annual maintenance fee for each installation. These fees are typically collected on the anniversary of the installation for each customer. They allow customers to receive critical updates and support for their products. Support is available via telephone, remotely via the web, or on-site as deemed necessary.

Transaction Fees: There are multiple transactions generated by the Practice Management Software: Electronic Claims, Electronic Statements, and Electronic Prescriptions. These transactions are all billed to the customer as a per transaction fee or a flat monthly rate option.

Hardware Sales: In addition to the software solutions, MOS also provides and installs hardware on which the MOS services operate (PC Workstations, Network HW, and Servers).

Hardware and Network Maintenance and Consulting Fees: MOS has an in-house team of technicians that are capable of setting up, trouble shooting and streamlining network performance and efficiency. These fees vary with the scope of each request.

Custom Development Fees: We also provide custom development services for customers who desire forms or reports particular to their operations. These fees vary on the scope of each request.

In a continuing pattern of identifying the changing needs of its customers and the industry, MOS recently entered into an agreement with SILK Information Systems, a developer of Software as a Service (SaaS) based Revenue Cycle Management solutions. This relationship is an important strategic success for MOS by having the diversity of both the traditional license model for software applications coupled with the ability to now provide monthly subscription based access to the same leading edge technology. The Company will benefit from the long-term recurring revenue streams of a SaaS model, which historically provide 5-8 times multiples in the market or higher for companies on this model versus a traditional license revenue only company.

One very interesting aspect of this new line of business is its ability to help customers increase their revenues. According to VHGI, the increased automation and efficiency enabled by its SILK solution allows its physician practice clients to increase collected revenues by 20% to 30%. With research conducted by the AMA revealing that physicians expend 14% of their collected revenues on correct billing alone, the ability of the company’s technology to eliminate these costs are an extremely valuable asset for MOS and have played an integral role in building its current client base.

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Secure eHealth Business Model and Market Strategy

Secure eHealth, LLC, formerly known as Envoii Healthcare, LLC, provides a suite of products to the healthcare industry that enhance an existing platform’s ability to provide users access to their most critical and confidential information, quickly and securely. Its flagship product, the System Tray Notifier™ introduced last year is designed to revolutionize the communication of sensitive healthcare information by providing “single click access” to important messages from within the user’s system tray without interrupting workflow and securely displaying the images, documents or messages directly from its server.
 
The System Tray Notifier™ was recently licensed by Private Access, Inc. a California developer of web-based tools that allows patients and healthcare professionals to control both the privacy and accessibility of confidential personal health records. Secure eHealth is also pursuing Health Information Exchange programs nationwide as a vehicle for securely exchanging data between disparate clinic and hospital based systems.
 
Secure eHealth, LLC recently concluded the formal license agreement with DRM Security, LLC to distribute the Cifra™ product in both a stand-alone product configuration and as a Software as a Service (SaaS) model. Three key benefits and features of Cifra are:

       

Cifra provides a secure environment to transfer or store sensitive documents with the originator retaining complete control over the disposition of those documents (controls the recipient’s ability to copy, print, save, edit, comment, etc.)

   
       

Cifra provides a level of encryption equivalent to those authorized for use by the government such as the National Security Agency in instances where only the sender and recipient have access to the keys. The server and the system administrator NEVER have key access.

   
        Cifra is a closed environment preventing SPAM and minimizing the potential spread of viruses and worms    


More than simply a secure messaging system, Cifra is a robust data delivery platform. It is expected that Cifra will change the way that healthcare practitioners around the world collaborate with one another. In the initial agreement, Secure eHealth will have preferred rights to market Cifra directly to both small and enterprise sized physician groups as well as Regional Health Organizations and state run Health Information Exchange programs. Cifra will also become an imbedded component in the Company’s subsidiary, Medical Office Software which will be used for securely connecting both private and hospital based physician groups. In addition, Cifra will also become the key platform that will drive the Veriscrip prescription drug monitoring program to transfer controlled substance data between state agencies.  

The market segments for Cifra include:

        State based Health Information Exchange Programs    
        Both State run and Private Health Plans    
        Hospital based Physicians Groups    
        Regional Health Information Organizations    
        Any covered entity that requires compliance with HIPAA and recent “Red Flag” rules for healthcare    


The Services / Products for each of the above would include:

Authentication applications, secure messaging, secure encryption technologies for data exchange, transfer, secure storage/repository for all digital data files, and high security connectivity solutions.

The following are Secure eHealth’s anticipated primary sources of revenue:

Pilot Fees: In advance of each contract with a state-wide agency, it is anticipated we will begin with a pilot program within a small region to test and verify with the state agency the effectiveness and operation of our solution. We anticipate that the state agency will pay a nominal amount, most likely as a flat fee, to support these pilot activities.

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License Fees: We expect to be paid a one-time license fee from our state agency customers, based upon state population, and paid over a period of time. This fee is anticipated to cover all of our startup and implementation costs.

State Transaction Fees: We also anticipate receiving transaction revenue from our state agency customers for each transaction processed.

Sales Revenues from “Product” and “Software as a Service”: Although the initial model will be to offer the Cifra solution to a select number of users at no-charge, the clients beyond those users will generate revenue based on a one-time purchase of the Cifra product set plus the annual support fees, or as a SaaS client with monthly recurring User fees, including support. The product will be propagated by the users as one client elects to share a secure document or message with another, the new users must be invited and then purchase the application, download to the client before using the system.

Liquidity and Capital Resources

The Company currently has no funds to execute its business plans, and it has no agreements or understandings in place that would provide it with the required funding to execute its business plan.

The Company's working capital requirements for the foreseeable future will vary based upon a number of factors and depending upon the entity owned by the company. VPSH, the owner of the Veriscrip System has capital demands to finish development and any customization of its primary system for the tracking of controlled prescriptions, the costs associated with launching the system if successfully developed, the acceptance of the system by each state and market penetration along with other factors that may not be foreseeable at this time. Secure eHealth, has capital requirements to finish development and any customization of its security platform and the launching and distribution of its systems. MOS, even though it has revenues sufficient to support its typical operations, has capital demands from time to time that exceed its ability to fund itself on its own. Management believes that the Company will need additional funding to grow. There can be no assurance that we will be able to obtain additional funding on satisfactory terms, or at all. If we do not receive the needed funding, we will not be able to execute our business plans.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Forward-Looking Statements

When used in this Form 10-Q or other filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized officer of the Company’s executive officers, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that forward-looking statements involve various risks and uncertainties. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statement.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.       

As a smaller reporting company, we are not required to provide this information.

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ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer, who is also the principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer/principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes In Internal Control Over Financial Reporting. There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in a lawsuit from Bell South for an unpaid amount from 2004 that was filed in February 2007. Management believes that this claim will not have a material effect on the financial position of the Company.

Item 1A. Risk Factors

As a smaller reporting company, we are not required to provide this information.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

 

Item 5. Other Information

Item 6. Exhibits

The following documents are filed as part of this Report:

EXHIBIT NO.

DESCRIPTION OF EXHIBIT

 

3(i)

Amended and Restated Certificate of Incorporation

3(ii)

By-Laws (Incorporated by reference to Exhibit 3(ii).1 of the Company’s Annual Report on Form 10-KSB, dated December 31, 2003)

10.1

Form of Loan, Investment and Security Agreement (Incorporated by reference to Exhibit 10.25 to the Company's Current Report on Form 8-K file with the Commission on May 22, 2008)

10.2

Form of Note (Incorporated by reference to Exhibit 10.26 to the Company's Current Report on Form 8-K filed with the Commission on May 22, 2008)

10.3

Securities Purchase Agreement, dated as of November 19, 2008, by and among VirtualHealth Technologies, Inc., and the investors named therein.*

10.4

Securities Purchase Agreement, dated as of July 1, 2009, by and among VirtualHealth Technologies, Inc., and the investors named therein (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on July 23, 2009).

 

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EXHIBIT NO.

DESCRIPTION OF EXHIBIT

 

10.5

Note Restructuring Agreement (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on August 12,2009)

31.1*

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



 

SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    VIRTUALHEALTH TECHNOLOGIES, INC.  
    (Registrant)  
Date: November 16, 2009     By /s/ James M. Renfro,    
    James M. Renfro,  
    President  


 

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