BPO Management Services, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - CERTIFICATION - BPO Management Services, Inc.	bpo_10q-ex32.htm
EX-31.2 - CERTIFICATION - BPO Management Services, Inc.	bpo_10q-ex3102.htm
EX-31.1 - CERTIFICATION - BPO Management Services, Inc.	bpo_10q-ex3101.htm
EX-10.1 - SHARE PURCHASE AGREEMENT - BPO Management Services, Inc.	bpo_10q-ex1001.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2009

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

For the transition period from ___________ to ___________.

Commission File Number: 0-13591

BPO MANAGEMENT SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania		23-2214195
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

1290 N. Hancock, Ste 200, Anaheim, CA		92807
(Address of Principal Executive Offices)		(Zip Code)

(714) 974-2670

(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 Exchange Act 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 ý No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

	Large accelerated filer	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 ý

The number of shares outstanding of the registrant’s only class of common stock, $0.10 par value, was 15,116,838 on November 12, 2009.

PART I
FINANCIAL INFORMATION
		Page

Item 1. Financial Statements		3

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2009 and 2008 (Unaudited)	3

	Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosures About Market Risk		27

Item 4T. Controls and Procedures		27

PART II
OTHER INFORMATION

Item 1. Legal Proceedings		28

Item 1-A Risk Factors		28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28

Item 3. Defaults Upon Senior Securities		28

Item 4. Submission of Matters to a Vote of Security Holders		28

Item 5. Other Information		28

Item 6. Exhibits		29

Signatures		30

Exhibits Attached to this Quarterly Report on Form 10-Q		31

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008

Revenues:
IT outsourcing services	$	2,676,977		$	3,377,155		$	8,510,841		$	9,827,698
Healthcare		3,334,816			-			10,446,628			-
Human resource outsourcing servicing		86,139			366,157			614,978			1,338,992

Total revenues		6,097,932			3,743,312			19,572,447			11,166,690

Operating expenses:
Cost of services provided		4,511,790			1,938,998			14,007,957			5,213,168
Selling, general and administrative		1,955,387			2,037,938			6,780,035			6,210,920
Research and development		124,429			81,221			349,189			228,258
Depreciation and amortization		1,032,106			544,781			3,045,721			1,660,672
Share-based compensation		-			207,091			18,333			621,275
Restructuring costs		-			-			382,207			-
Goodwill and intangible asset impairment		2,356,452			-			2,356,452			-

Total operating expenses		9,980,164			4,810,029			26,939,894			13,934,293

Loss from operations		(3,882,232	)		(1,066,717	)		(7,367,447	)		(2,767,603	)

Interest expense
Related parties		18,782			27,148			57,948			80,853
Other, net		110,816			12,953			346,840			54,029
Total interest expense		129,598			40,101			404,788			134,882

Loss before income taxes		(4,011,830	)		(1,106,818	)		(7,772,235	)		(2,902,485	)

Income tax expense		-			19,500			15,600			63,952

Loss from continuing operations		(4,011,830	)		(1,126,318	)		(7,787,835	)		(2,966,437	)

Discontinued operations (Note 3):
Loss from sale of discontinued business		(203,854	)		(736,088	)		(2,942,175	)		(1,599,374	)

Net loss		(4,215,684	)		(1,862,406	)		(10,730,010	)		(4,565,811	)

Foreign currency translation gain (loss)		(110,658	)		(8,372	)		349,677			(188,566	)

Comprehensive loss	$	(4,326,342	)	$	(1,870,778	)	$	(10,380,333	)	$	(4,754,377	)

Loss per share - basic and diluted
Loss from continuing operations	$	(0.27	)	$	(0.09	)	$	(0.51	)	$	(0.24	)
Loss from discontinued operations		(0.01	)		(0.06	)		(0.19	)		(0.13	)
Net loss per share - basic and diluted	$	(0.28	)	$	(0.15	)	$	(0.70	)	$	(0.37	)

Basic and diluted weighted average common shares outstanding		15,138,379			12,671,034			15,156,517			12,529,216

See accompanying notes to condensed consolidated financial statements.

2008 amounts have been reclassified to reflect discontinued operations. See Note 3

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

(UNAUDITED)

	2009			2008

ASSETS
Current assets:
Cash and cash equivalents	$	1,004,790		$	2,895,711
Accounts receivable, net of allowance for doubtful accounts of $534,858 and $505,338, respectively		3,933,364			5,408,156
Prepaid expenses and other current assets		1,046,258			928,647
Current assets held for sale		-			2,290,630
Total current assets		5,984,412			11,523,144

Equipment, net		6,828,277			7,170,213
Goodwill		-			2,282,064
Intangible assets, net		3,633,328			4,192,955
Other assets		614,513			1,244,641
Non-current assets held for sale		-			4,447,545
	$	17,060,530		$	30,860,562
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of lines of credit and long-term debt	$	3,050,345		$	2,196,652
Current portion of capital lease obligations		487,343			394,765
Accounts payable		5,737,822			4,687,333
Accrued expenses		2,989,265			2,856,021
Restructuring liability		316,711			-
Accrued interest-related party		57,948			-
Accrued dividend payable		1,369,331			1,369,331
Accrued dividend payable-related party		651,281			651,281
Amount due former shareholders of acquired companies		-			1,000,000
Deferred revenues		1,609,883			2,091,277
Related party notes payable		830,246			930,246
Other current liabilities		120,000			137,715
Current liabilities associated with assets held for sale		-			4,101,437
Total current liabilities		17,220,175			20,416,058

Lines of credit and long-term debt, net of current portion		-			722,304
Capital lease obligations, net of current portion		799,488			690,278
Other long-term liabilities		1,110,440			742,520
Non-current liabilities associated with assets held for sale		-			5,694
Total liabilities		19,130,103			22,576,854

Commitments and contingencies (Note 9)

Stockholders' equity
Convertible preferred stock, Series B, par value $1.00; authorized 21,105,000 shares; 21,103,955 shares issued and outstanding		21,103,955			21,103,955
Common stock, par value $0.10; authorized 1,900,000,000 shares; 15,138,379 shares issued and outstanding		1,513,838			1,516,559
Additional paid-in capital		14,716,978			14,687,206
Accumulated deficit		(39,436,739	)		(28,706,729	)
Accumulated other comprehensive income (loss), foreign currency translation adjustments		32,395			(317,283	)
Total stockholders' equity		(2,069,573	)		8,283,708
	$	17,060,530		$	30,860,562

See accompanying notes to condensed consolidated financial statements.

2008 amounts have been reclassified to reflect assets and liabilities held for sale of discontinued operations. See Note 3

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(UNAUDITED)

	2009			2008

Cash flows from operating activities:
Net loss	$	(10,730,010	)	$	(4,565,811	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss from sale of discontinued operations		2,942,175			1,599,374
Depreciation		2,568,181			872,604
Amortization of intangible assets		477,540			788,068
Increase in the reserve for doubtful accounts		321,120			-
Non-cash equity compensation expense		27,051			621,275
Goodwill and intangible asset impairment		2,356,452			-

Changes in operating assets and liabilities:
Accounts receivable		1,153,672			(1,074,931	)
Prepaid expenses and other current assets		247,425			(316,499	)
Other assets		265,092			(404,744	)
Accounts payable		1,050,489			(481,800	)
Accrued expenses		133,244			554,594
Restructuring liability		316,711			-
Accrued interest-related parties		57,948			(27,306	)
Accrued dividends-related parties		-			897,556
Amount due former shareholders of acquired companies		-			(215,944	)
Deferred revenues		(481,394	)		400,836
Other long-term liabilities		370,364			-
Net cash provided by (used in) operating activities		1,076,060			(1,352,728	)

Cash flows from investing activities:
Purchase of equipment and internally developed capitalized software, net		(1,639,067	)		(659,895	)
Release of restricted cash		-			922,888
Net cash provided by (used in) investing activities		(1,639,067	)		262,993

Cash flows from financing activities:
Proceeds from bank loans		111,230			491,292
Repayment of notes issued to former shareholders of acquired companies		(1,000,000	)		(885,827	)
Repayment of capital lease obligations		(385,390	)		(161,036	)
Proceeds from issuance of preferred stock, net of cash paid for commissions and direct costs		-			5,157,996
Dividends accrued on preferred stock		-			(753,461	)
Repayment of notes payable - related party		(100,000	)		(200,000	)
Net cash provided by (used in) financing activities		(1,374,160	)		3,648,964
Net cash used in discontinued operations		(711,131	)		(419,882	)
Effect of exchange rate changes on cash and cash equivalents (cumulative)		757,377			(72,212	)
Net change in cash		(1,890,921	)		2,067,135
Cash and cash equivalents, beginning of period		2,895,711			857,941
Cash and cash equivalents, end of period	$	1,004,790		$	2,925,076

See accompanying notes to condensed consolidated financial statements.

2008 amounts have been reclassified to reflect cash flows from discontinued operations. See Note 3

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(UNAUDITED)

	2009		2008

Supplemental disclosure of cash flow information:
Cash paid for:
Interest	$	346,840	$	300,050
Income taxes	$	15,600	$	70,465

Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment under capital leases	$	587,178	$	434,146
Issuance of Series F Preferred Stock	$	-	$	8,949

See accompanying notes to condensed consolidated financial statements.

2008 amounts have been reclassified to reflect cash flows from discontinued operations. See Note 3

BPO MANAGEMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

1. Organization and Basis of Presentation

Organization

BPO Management Services, Inc. was incorporated in 1982 in the state of Pennsylvania and was previously named Healthaxis, Inc. On December 30, 2008, Healthaxis Inc. (as used in these Condensed Consolidated Financial Statements, “Healthaxis”) acquired the publicly held BPO Management Services, Inc. (“Legacy BPOMS”) in a reverse merger and immediately changed its name to BPO Management Services, Inc., also referred to “BPOMS.” BPOMS is a provider of business process outsourcing services providing information technology outsourcing (“ITO”) services, Healthcare administrative systems and related services and financial and accounting outsourcing (“Healthcare”) services and human resource outsourcing (“HRO”) services to middle market enterprises.

For accounting purposes, the acquisition has been treated as a recapitalization of Legacy BPOMS as the acquirer. The historical consolidated financial statements prior to December 30, 2008, are those of the Legacy BPOMS. All share-related data have been presented giving effect to the recapitalization resulting from the reverse merger. References in these Condensed Consolidated Financial Statements to the “Company” or “BPOMS” refer to BPOMS.

Basis of Presentation

The following unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. Operating results for the three and nine month period ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The interim condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2008. For 2008, amounts have been reclassified to reflect discontinued operations on the condensed consolidated statements of operations, condensed consolidated balance sheets, condensed consolidated statements of cash flows and in the notes contained herein (see Note 3).

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of BPOMS and its wholly-owned subsidiaries. All significant intercompany accounts, transactions and profits among the consolidated entities have been eliminated upon consolidation. Each of the following entities is included in consolidation as of date of its inception or acquisition.

Company		Inception/Acquisition Date

BPO Management Services, Inc. (the "Company") or ("BPOMS")		Inception date: July 26, 2005
Adapsys Document Management LP ("ADM") (2)		Acquired: July 29, 2005
Adapsys LP ("ADP") (2)		Acquired: July 29, 2005
Digica, Inc. ("Digica") (1)		Acquired: January 1, 2006
Novus Imaging Solutions, Inc. ("Novus") (2)		Acquired: September 30, 2006
NetGuru Systems, Inc. ("NGSI")		Acquired: December 15, 2006
Research Engineers, GmbH ("GmbH")		Acquired: December 15, 2006
DocuCom Imaging Solutions, Inc. ("DocuCom") (2)		Acquired: June 21, 2007
Human Resource Micro-Systems, Inc. ("HRMS")		Acquired: June 29, 2007
Blue Hill Data Services, Inc. ("Blue Hill")		Acquired: October 10, 2007
BPO Management Services, Ltd. ("BPOMS Ltd") (2)		Amalgamation: January 1, 2008
Healthaxis Inc. ("Healthaxis") (3)		Acquired: December 30, 2008

(1) Effective January 1, 2008, Digica was merged with Blue Hill

(2) On January 1, 2008, ADM, ADP, Novus and DocuCom were amalgamated into one company, BPO Management Services, Ltd. These operations were sold in July 2009 as discussed in Note 3.

(3) Because the merger of Legacy BPOMS and Legacy Healthaxis took place at the end of fiscal 2008, the operating results for the three and nine months ended September 30, 2009 include those of the Healthcare segment, while the operating results for the three and nine months ended September 30, 2008 do not include the Healthcare segment.

Going Concern

The Company incurred a loss from continuing operations of $7.8 million and a net decline in cash of $1.9 million for the nine months ended September 30, 2009. The Company has historically funded its operations from the private placement of shares of its common stock and preferred stock and through the founders’ bridge loan facility established in August 2006. To meet the needs of the current business and to fund growth, the Company anticipates raising capital by issuing its securities and/or debt in one or more private transactions, by way of a strategic merger or divestiture of certain assets or operations.

The Company’s future capital requirements will depend upon many factors. These factors include but are not limited to sales and marketing efforts, the development of new products and services, possible future corporate mergers or strategic acquisitions or divestitures, the progress of research and development efforts, and the status of competitive products and services. If the Company’s anticipated financing transactions do not take place at all and/or are unreasonably delayed, the Company may not have adequate funds to extinguish all remaining liabilities of the Company and fund its current operations going forward.

Although the Company expects to meet its operating capital needs through one or more financing transactions, merger or divestiture of certain assets or operations, there can be no assurance that funds required will be available on terms acceptable to the Company, if at all. If the Company is unable to raise sufficient funds on acceptable terms, it may be not be able to complete its business plan or otherwise continue to operate its business. If equity financing is available to the Company on acceptable terms, it could result in dilution to the Company’s existing stockholders.

The report of the Company's independent registered public accounting firm dated March 31, 2009 contained in the Company's condensed consolidated financial statements as of and for the year ended December 31, 2008 included a paragraph that explains that the Company had incurred recurring operating losses, a working capital deficit and an accumulated deficit of $28.7 million as of December 31, 2008. The report concluded that these matters, among others, raised substantial doubt about the Company's ability to continue as a going concern.

Concentration of Risk

The Company is subject to credit risk primarily through its accounts receivable balances. The Company does not require collateral for its accounts receivable balances. For the three and nine months ended September 30, 2009 one customer accounted for $1.1 million (18%) and $3.2 million (16%), respectively, of the Company’s total revenues. At September 30, 2009 and December 31, 2008, two customers individually accounted for more than 10% of the Company’s accounts receivable as shown in the table below.

	Percent of accounts and note receivable
	September 30, 2009	Dec. 31, 2008
Customer A	19%	13%
Customer B	11%	11%

Research and Development

The Company's research and development ("R&D") costs consist mainly of software developers' salaries. The Company follows Generally Accepted Accounting Principals (“GAAP”) to capitalize software development costs when technological feasibility has been established and to stop capitalization when the product is available for general release to customers. The Company capitalized software development costs of approximately $140,755 and $142,741 during the three months ended September 30, 2009 and 2008, respectively and $446,544 and $380,341 during the nine months ended September 30, 2009 and 2008, respectively.

Subsequent Events

The Company’s Management has evaluated subsequent events through November 13, 2009, which is the date that the Company’s condensed consolidated financial statements were filed. Management is aware of no material subsequent events that have occurred since September 30, 2009 that would require recognition or disclosure in the condensed consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current presentation. For 2008, amounts have been reclassified to reflect discontinued operations on the condensed consolidated statements of operations, condensed consolidated balance sheets, condensed consolidated statements of cash flows and in the notes contained herein (see Note 3).

Basic and Diluted Loss Per Share

In accordance with GAAP, we calculate basic and diluted net loss per share using the weighted average number of common shares outstanding during the periods presented and adjust the amount of net loss, used in this calculation, for preferred stock dividends declared during the period.

We incurred a net loss in each period presented, and as such, did not include the effect of potentially dilutive common stock equivalents in the diluted net loss per share calculation, as their effect would be anti-dilutive for all periods. Potentially dilutive common stock equivalents would include the common stock issuable upon the conversion of preferred stock and the exercise of warrants and stock options that have conversion or exercise prices below the market value of our common stock at the measurement date. As of September 30, 2009 and 2008, all potentially dilutive common stock equivalents amounted to 27,643,809 and 142,383,018 shares, respectively.

The following table illustrates the computation of basic and diluted loss per share from continuing and discontinued operations:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Loss From Continuing Operations:	2009			2008			2009			2008
Numerator:
Loss from continuing operations	$	(4,011,830	)	$	(1,126,318	)	$	(7,787,835	)	$	(2,966,437	)
Less:
Preferred dividends paid in stock		-			(34,759	)		-			(68,836	)
Loss and numerator used in computing basic and diluted loss per share	$	(4,011,830	)	$	(1,161,077	)	$	(7,787,835	)	$	(3,035,273	)

Loss From Discontinued Operations:
Numerator:
Loss from discontinued operations and numerator used in computing basic and diluted loss per share	$	(203,854	)	$	(736,088	)	$	(2,942,175	)	$	(1,599,374	)

Denominator:
Denominator for basic and diluted net loss per share-weighted average number of common shares outstanding		15,138,379			12,671,034			15,156,517			12,529,216

Loss per share - basic and dilluted
Loss from continuing operations	$	(0.27	)	$	(0.09	)	$	(0.51	)	$	(0.24	)
Loss from discontinued operations		(0.01	)		(0.06	)		(0.19	)		(0.13	)
Net loss per share - basic and diluted	$	(0.28	)	$	(0.15	)	$	(0.70	)	$	(0.37	)

The following table sets forth potential shares of common stock that are not included in the diluted net loss per share because to do so would be antidilutive since the company reported net losses in all the reporting periods:

	As of September 30,
	2009		2008

Options to purchase shares of common stock		4,492,563		5,002,954
Warrants to purchase shares of common stock		2,047,291		68,086,261
Shares of convertible preferred stock - Legacy BPOMS Series A		-		1,637,710
Shares of convertible preferred stock - Legacy BPOMS Series B		-		1,449,204
Shares of convertible preferred stock - Legacy BPOMS Series D		-		22,833,341
Shares of convertible preferred stock - Legacy BPOMS Series D-2		-		20,999,998
Shares of convertible preferred stock - Legacy BPOMS Series F				22,373,550
Shares of convertible preferred stock - Series B		21,103,955		-

Total		27,643,809		142,383,018

Impact of Recently Issued Accounting Standards

In June 2009, the FASB issued a new accounting standard which provides guidance in accounting for transfers of financial assets to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This standard must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This standard must be applied to transfers occurring on or after the effective date. We are currently evaluating the potential impact that the adoption of this statement will have on our financial position and results of operations and will adopt the provisions of this standard in fiscal 2010.

In June 2009, the FASB issued a new accounting standard which changes the consolidation rules as they relate to variable interest entities. Specifically, the new standard makes significant changes to the model for determining who should consolidate a variable interest entity, and also addresses how often this assessment should be performed. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, with earlier adoption prohibited. We are currently evaluating the potential impact that the adoption of this standard will have on our financial position and results of operations and will adopt the provisions of this standard in fiscal 2010.

In June 2009, the FASB issued new accounting standards codification and the hierarchy of generally accepted accounting principles. This Codification is now the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, in all references made to US GAAP will now use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing US GAAP, it is not expected to have any impact on our consolidated financial position or results of operations.

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In addition, the new standard eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, if certain requirements are met, revenue arrangements that contain tangible products with software elements that are essential to the functionality of the products are scoped out of the existing software revenue recognition accounting guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards will be effective for us in the first quarter of 2011. Early adoption is permitted. We are currently evaluating the impact of the adoption of these accounting standards on our condensed consolidated financial statements.

3. Sale of Discontinued Operations

In the second quarter of 2009, the Board of Directors authorized management to pursue the sale of the BPOMS’ Canadian operations (“BPOMS Ltd.”). On July 30, 2009, BPOMS entered into a Share Purchase Agreement with CriticalControl Solutions Corp., an Alberta corporation located in Calgary, Alberta, Canada which then closed on July 31, 2009. Under the terms of the Agreement, BPOMS sold all of the issued and outstanding capital stock of BPOMS Ltd., an Ontario corporation and all intercompany debt owed by BPOMS, Ltd., to the buyer. The total purchase price payable at closing to BPOMS was 100,000 Canadian Dollars. BPOMS, Ltd., with the backing of the buyer, became responsible for its outstanding liabilities (which totaled $4.7 million Canadian Dollars at closing).

BPOMS Ltd. operations have been accounted for as discontinued operations in prior periods. The results of operations of these businesses have been removed from the results of continuing operations for all periods presented. The assets and liabilities of discontinued operations have been reclassified and are segregated in the condensed consolidated balance sheets. The Company recorded an impairment charge of approximately $2,420,170 in the second quarter of 2009 to write down the discontinued operations to its estimated fair value. During the third quarter of 2009, the sale of BPOMS, Ltd. resulted in an additional charge to discontinued operations of approximately $203,854. BPOMS, Ltd. was the operating subsidiary in which all of the Company’s Canadian operations were maintained and represents a substantial component of its ECM business.

The operating results of the Canadian based business have been classified as discontinued operations and are summarized below:

Discontinued Operations
	For the three months ended						For the nine months ended
	September 30,						September 30,
	2009			2008			2009			2008

Revenues	$	-		$	2,149,545		$	6,252,893		$	9,829,511

Loss from discontinued operations	$	(203,854	)	$	(2,462,660	)	$	(2,942,175	)	$	(1,599,374	)

Loss per share from discontinuted operations	$	(0.01	)	$	(0.19	)	$	(0.19	)	$	(0.13	)

Basic and diluted weighted average common shares outstanding		15,138,379			12,671,034			15,156,517			12,529,216

The assets and liabilities of BPOMS Ltd. held for sale as of December 31, 2008 are summarized below:

	December 31,
Assets Held For Sale	2008

Cash and cash equivalents	$	-
Accounts receivable, net		2,017,649
Inventory		181,968
Prepaid expenses and other current assets		91,013
Total current assets		2,290,630

Equipment, net		565,564
Goodwill		2,574,107
Intangible assets, net		1,307,874
Other assets		-
Total non-current assets	$	4,447,545

Liabilities Associated With Assets Held For Sale

Bank debt	$	1,257,482
Accounts payable		1,016,200
Accrued expenses		572,551
Deferred revenues		865,862
Income taxes payable		146,695
Other current liabilities		242,647
Total current liabilities		4,101,437

Long-term bank debt		5,694
Total non-current liabilities	$	5,694

4. Business Combinations

On December 30, 2008, the Company completed a reverse merger with Healthaxis, in which it exchanged its outstanding common and preferred series shares for the outstanding common and preferred shares of Healthaxis. The following table summarizes estimated fair values of the assets acquired and liabilities assumed from Healthaxis at the date of acquisition:

	Healthaxis

Cash & cash equivalents	$	1,973,907
Accounts receivable		2,212,972
Prepaids		2,068,757
Property, plant and equipment		2,917,563
Other assets		959,349
Goodwill		2,282,064
Identifiable intangible assets		1,600,000
Total assets acquired		14,014,612

Current liabilities		5,656,486
Other non current liabilities		1,360,147
Total liabilities assumed		7,016,633
Net assets acquired	$	6,997,979

An acquired identifiable intangible asset in the amount of $1,600,000 was assigned to customer contracts. The purchase price and costs associated with the reverse merger of Healthaxis exceeded the Company’s allocation of the fair value of net assets acquired by $2,282,064, which was assigned to goodwill. The amount assigned to goodwill is not expected to be deductible for United States income tax or state income tax purposes.

The following unaudited pro forma information presents the combined results of operations of the Company as though the merger with Healthaxis had been consummated on January 1, 2008. The pro forma financial information does not necessarily reflect the actual results of operations had the merger been consummated at the beginning of the period or which may be attained in the future.

Unaudited Pro Forma Statement of Operations For the Three Months Ended September 30, 2008:

	BPOMS			Healthaxis			Pro Forma

Revenues	$	3,743,312		$	3,676,000		$	7,419,312

Net loss	$	(1,862,406	)	$	(7,678,000	)	$	(9,540,406	)

Basic and diluted loss per common share	$	(0.15	)	$	(0.91	)	$	(0.63	)

Basic and diluted weighted average common shares outstanding		12,671,034			8,427,295			15,138,379

Unaudited Pro Forma Statement of Operations For the Nine Months Ended September 30, 2008:


	BPOMS			Healthaxis			Pro Forma

Revenues	$	11,166,690		$	11,615,000		$	22,781,690

Net loss	$	(4,565,811	)	$	(8,301,000	)	$	(12,866,811	)

Basic and diluted loss per common share	$	(0.36	)	$	(0.99	)	$	(0.85	)

Basic and diluted weighted average common shares outstanding		12,529,216			8,385,149			15,156,517

5. Lines of Credit and Long-Term Debt

Blue Hill has a credit facility from Comerica Bank which includes a revolving operating line limited to the lesser of the $1,000,000 maximum availability or 80% of eligible accounts receivable and carries interest at the daily adjusting LIBOR rate plus 4.0%, which amounted to 4.25% at September 30, 2009, a $500,000 term loan amortized over a four year period and bearing interest at the Comerica Bank prime rate plus 1.25%, which amounted to 4.5% at September 30, 2009, a specific advance facility for equipment purchases up to a maximum of $500,000 bearing interest at the Comerica Bank prime rate plus 1.00%, which amounted to 4.25% at September 30, 2009 and a specific advance facility for equipment purchases up to a maximum of $700,000 bearing interest at the daily adjusting LIBOR rate plus 6.0%, which amounted to 6.25% at September 30, 2009. The loans are supported by a general security interest in all the assets of Blue Hill and the operating facility is also supported by the guaranty of Legacy BPOMS and the subordination of loans of a minimum of $1,400,000, payable by Blue Hill to Legacy BPOMS, to Comerica Bank. At September 30, 2009 Blue Hill had an outstanding balance of $646,485 under the operating line, $291,667 under the term loan, $43,687 under the equipment loan and $674,000 under the second equipment loan. These loan agreements contain covenants pertaining to maintenance of various ratios. At September 30, 2009, the Company was in breach of these covenants. Under the terms of the agreement, the bank may call the loans if the Company is in violation of any restrictive covenant. The bank has provided a notice of default to the Company and has not waived the ratio requirement. Accordingly the entire amount of the loans, $1,655,839, including the long-term portion of approximately $717,108, has been included in current liabilities.

On July 22, 2009, certain of the Company’s healthcare subsidiaries entered into an amended and restated loan and security agreement with Silicon Valley Bank (the “Amended LSA”). Under this agreement, the subsidiaries may borrow up to the lesser of (i) $1.6 million or (ii) 80% of eligible accounts receivable subject to certain adjustments. Advances under the Amended LSA bear interest at SVB’s prime rate (4.0% at September 30, 2009) plus 3.5% plus a collateral handling fee of 0.35% per month. The Amended LSA contains customary affirmative and negative covenants including the maintenance of a specified level of EBITDA as defined by the Amended LSA. Advances under the Amended LSA are covered by a first priority lien on substantially all the assets of the Company’s healthcare subsidiaries, including intellectual property. The Amended LSA matures June 14, 2010. At September 30, 2009, the Company’s healthcare subsidiaries had outstanding balances of $1,224,130 and $170,376 under the related revolving line and equipment line, respectively.

6. Related Party Transactions

The Company is a party to a Remote Resourcing Agreement with Healthcare BPO Partners L.P., a company affiliated with a significant shareholder. Healthcare BPO Partners, based in Jaipur, India, provides personnel and infrastructure that is utilized by the Company to provide business process outsourcing services and other software development and technical support services to support the Company’s operations. The resources provided by Healthcare BPO Partners supplement the Company’s existing wholly-owned operations in Utah, Texas and Jamaica. For the three and nine months ended September 30, 2009, the Company incurred costs of approximately $111,000, and $334,000 related to the Resourcing Agreement. At September 30, 2009 and December 31, 2008, the Company had accounts payable to Healthcare BPO Partners of approximately $86,000 and $124,000, respectively.

7. Segment and Geographic Data

The Company is a business process outsourcing services provider. The Company's operating segments are:

●	Information Technology services outsourcing (ITO),
●	Healthcare administrative systems and related services and financial and accounting outsourcing services or (Healthcare) and
●	Human resources outsourcing (HRO)

The Company applies GAAP which requires segments to be determined and reported based on how management measures performance and makes decisions about allocating resources. The Company's management monitors unallocable expenses related to the Company's corporate activities in a separate "Corporate," which is reflected in the tables below.

Due to the classification of BPOMS Ltd. as discontinued operations, these operations have been removed from the segment discussion contained herein. The operations of BPOMS Ltd. comprised approximately 95% of the segment the Company had previously reported as its ECM operations, thus the Company has eliminated any further discussion of the ECM segment and has reclassified the remaining former ECM operations in its ITO Operations discussion.

The significant components of worldwide operations by reportable operating segment for the three and nine months ended September 30, 2009 and 2008, respectively, are:

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2009			2008			2009			2008

Net revenues
ITO	$	2,676,977		$	3,377,155		$	8,510,841		$	9,827,698
Healthcare		3,334,816			-			10,446,628			-
HRO		86,139			366,157			614,978			1,338,992
Consolidated	$	6,097,932		$	3,743,312		$	19,572,447		$	11,166,690

Operating income (loss)
ITO	$	(825,345	)	$	(65,139	)	$	(2,324,955	)	$	107,271
Healthcare		145,019			-			396,211			-
HRO		(59,589	)		(154,683	)		(259,973	)		(314,002	)
Corporate		(3,142,317	)		(846,895	)		(5,178,730	)		(2,560,872	)
Consolidated	$	(3,882,232	)	$	(1,066,717	)	$	(7,367,447	)	$	(2,767,603	)

Depreciation and amortization expense
ITO	$	544,151		$	456,406		$	1,538,490		$	1,312,539
Healthcare		411,935			-			1,275,045			-
HRO		13,611			23,289			40,768			153,868
Corporate		62,409			65,086			191,418			194,265
Consolidated	$	1,032,106		$	544,781		$	3,045,721		$	1,660,672

The Company's continuing consolidated operations are based in domestic and foreign subsidiaries and branch offices in the U.S. and Germany. The following are significant components of worldwide operations by geographic location:

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2009		2008		2009		2008

Net revenues
North America	$	6,009,192	$	3,496,174	$	19,220,235	$	10,561,481
Europe		88,740		247,138		352,212		605,209
Consolidated	$	6,097,932	$	3,743,312	$	19,572,447	$	11,166,690

	At		At
	September 30,		December 31,
Long-Lived Assets	2009		2008
North America	$	11,049,120	$	18,956,867
Europe		26,998		15,515
Consolidated	$	11,076,118	$	18,972,382

8. Restructuring Plan and Liability

In the second quarter of 2009, the Company initiated a restructuring program to reduce overhead costs, which included workforce reduction and consolidation of administrative activities. These restructuring charges are generally of a nonrecurring nature and are excluded from segment financial results, which is our measure used for evaluating performance and for decision-making purposes. For the quarter ended June 30, 2009, we recorded approximately $150,000 related to employee severance and approximately $232,000 for lease exit costs based on the present value of remaining lease rentals reduced by estimated sublease rentals that could be reasonably obtained for the property. The Company paid approximately $31,000 during the three months ended September 30, 2009 with a remaining restructuring liability of $316,711 as of September 30, 2009.

9. Commitments and Contingencies

From time to time we may be involved in claims arising in the ordinary course of business. However, except as described below, there are no other pending legal proceedings or claims to which we are a party or of which any of our property is subject that in the opinion of management, could reasonably be expected to have a material adverse effect on our business or financial condition. Due to our cash flow constraints, the number of vendors with past due balances and the aggregate dollar amount of those past due balances have continued to grow. We expect that the number of threatened claims will continue to grow and that some of these vendors may file lawsuits seeking to collect amounts owed. The Company does not believe that current threats of litigation from any single vendor would materially impact the Company, but the aggregate value of the claims could have a material negative impact on the Company if a substantial number of these vendors file lawsuits against us.

BridgePointe Master Fund Ltd.

The Company is a defendant along with two of its officers in a lawsuit that commenced on May 28, 2009 in the Supreme Court of the State of New York, County of New York, Index No. 601661-2009 entitled BridgePointe Master Fund Ltd. v. BPO Management Services, Inc., James Cortens, and Patrick Dolan. The complaint asserts, among other things, claims for (1) breach of certain provisions of warrants held by BridgePointe; (2) breach of the implied covenant of good faith and fair dealing related to certain stock agreements to which Legacy BPOMS and BridgePointe were parties; and (3) breach of fiduciary duty against two executive officers of BPO Management Services, Inc., Mr. Patrick Dolan and Mr. James Cortens. The complaint seeks damages in excess of $3.2 million from the Company and the other defendants. The Company does not currently believe that the claims have any merit. On August 25, 2009, the Company filed its answer and a motion to dismiss the claims against the two officers and directors named in the suit. The Company intends to continue to vigorously defend the lawsuit.

10. Goodwill and Intangible Asset Impairment

The Company performs its annual goodwill and intangible asset impairment review in the fourth quarter of each year or when events and circumstances indicate that goodwill or intangible assets may be impaired. As of September 30, 2009, management reviewed the carrying value of goodwill and intangible assets due to a change in circumstances and determined that goodwill and intangible asset impairment was probable and reasonably estimable. The Company recognized a goodwill impairment charge of approximately $2.3 million and an intangible asset impairment charge of approximately $74,000.

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

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on our current expectations, assumptions, estimates, and projections about us and our industry and generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance. You can identify certain forward-looking statements by our use of forward-looking terminology such as the words “may,” “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “forecasts,” “projects,” “should,” “could,” “seek,” “pro forma,” “goal,” “continues,” “anticipates,” or similar expressions. These forward-looking statements include, in particular, statements about our plans, strategies, and prospects under this heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and under the heading “Business.” These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements are reasonable, we cannot guarantee that we will achieve our plans, intentions, or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. Some of these risks, uncertainties and other factors are identified under the heading “Risk Factors,” and you should carefully consider such risks, uncertainties and other factors before deciding to invest or maintain an investment in shares of our stock. Any of the factors referenced under the heading “Risk Factors” or elsewhere could cause our future financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

Overview

On December 30, 2008, Healthaxis Inc., a Pennsylvania corporation incorporated in 1982 (“Legacy Healthaxis”), completed a merger resulting in BPO Management Services, Inc., a Delaware corporation (“Legacy BPOMS”), becoming a wholly-owned subsidiary of Healthaxis (the “Merger”). Legacy Healthaxis changed its name to “BPO Management Services, Inc.” upon the closing of the Merger (“BPOMS”). Immediately following the closing of the Merger, Legacy BPOMS’ pre-Merger shareholders held approximately 75% of BPOMS’ shares, and Legacy Healthaxis’ pre-Merger shareholders retained approximately 25% of BPOMS’ shares, all on a fully diluted, as-converted basis. Notwithstanding the fact that Legacy Healthaxis was the legal acquirer under the Merger and remains the registrant for SEC reporting purposes, the Merger was accounted for as a reverse acquisition with Legacy BPOMS as the accounting acquirer. BPOMS has accounted for the Merger as a purchase business combination, using Legacy BPOMS’ historical financial information and accounting policies and applying fair value estimates to the acquired assets, liabilities and commitments of Legacy Healthaxis as of December 30, 2008.

The financial information contained in this report reflects the Merger as if Legacy BPOMS had issued consideration to Legacy Healthaxis shareholders. As a result, financial information derived from the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows included with this report for the three and nine months ended September 30, 2008 reflects the consolidated financial results of Legacy BPOMS alone, while financial information derived from the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2009 reflects the post-merger consolidated financial results of BPOMS. Financial information derived from the Consolidated Balance Sheet at December 31, 2008 reflects the consolidated assets and liabilities of Legacy BPOMS and Legacy Healthaxis at December 31, 2008, while financial information derived from the Condensed Consolidated Balance Sheet at September 30, 2009 reflects the post-merger consolidated assets and liabilities of BPOMS. Please see Note 4 in the Notes to Condensed Consolidated Financial Statements for additional discussion of the Merger and a pro forma presentation of financial results for the combined companies for the three and nine months ended September 30, 2008.

Legacy BPOMS was incorporated in 1981 under the name Research Engineers, Inc., changed its name to netGuru, Inc. in 2000 and to BPO Management Services, Inc. on December 15, 2006 immediately following its reverse merger with privately-held BPO Management Services, Inc. (“Private BPOMS”). Private BPOMS was incorporated in July 2005. On December 15, 2006, Private BPOMS acquired all of the outstanding common stock of publicly-held netGuru, Inc. in a reverse merger. Private BPOMS was the accounting acquirer.

We provide business process outsourcing (BPO) services primarily to middle-market enterprises in the United States. “BPO” refers to the outsourcing of entire business processes, typically to reduce cost and/or to improve the performance of that process. Our objective is to provide a comprehensive suite of BPO functions to support the back-office business requirements of middle-market enterprises on an outsourced and/or recurring revenue basis.

Our primary business offerings are:

●	Information technology services outsourcing or “ITO”;

●	Healthcare administrative systems and related services and financial and accounting outsourcing services or “Healthcare and F&A”, and

●	Human resources information systems and related outsourcing services, or “HRO”

As of July 31, 2009, the Company divested its Canadian operations, and thus the financial information in this report is provided for the Canadian operations as discontinued operations, and the results of the Canadian operations have therefore been removed from the following discussion of the results of continuing operations.

Our business plan for 2009 is to focus on our core strengths in information technology outsourcing and our offerings in managed services and software for healthcare benefits administration, finance and accounting, and human resources. We believe that our growth opportunities in these areas are the keys for putting BPOMS on a faster track for growth and profitability. In the second quarter of 2009, we initiated a restructuring program to reduce overhead costs, which included workforce reduction and consolidation of administrative activities. We will continue our work on integrating the Company’s operations to achieve additional financial synergies. Our longer term strategy continues to focus on organic growth and accretive acquisitions. Our business and strategic plans for 2009 are likely to be negatively impacted by the current severe financial conditions and resulting poor business environment. In the current environment, customers and prospects are likely to delay or avoid making decisions on whether to outsource business process functions, making sales extremely difficult to close. The financial health of some of our customers may also be at risk and we may see declines in volume as some customers scale back their operations or cease activities that rely on our services. The current condition of the capital markets will also have a negative impact on our plans for strategic growth and may limit our options for raising needed additional capital as described below under the caption “Liquidity and Capital Resources.”

The third quarter loss from operations was $3.9 million, which included non-cash expenses for depreciation and amortization of $1.0 million and for goodwill and intangible asset impairment of $2.4 million. We are starting to realize cost savings from our restructuring efforts as evidenced by the $527,000 reduction in selling, general and administrative expense as compared to the second quarter of 2009. More importantly, our ITO operations have recently signed contracts with new customers with a total contract value exceeding $5.0 million and have several more opportunities with total contract value of more than $9.0 million in the contracting or advanced negotiation stage.

Consolidated Results of Operations

Legacy BPOMS began operations in July 26, 2005 and merged with netGuru, Inc. on December 15, 2006 in a reverse merger. For accounting purposes, the acquisition was treated as a recapitalization of Legacy BPOMS with Legacy BPOMS as the acquirer. The historical statements of operations included in this annual report for the three and nine months ended September 30, 2008, are those of Legacy BPOMS.

Except as referenced in footnote (2) below, the following entities of Legacy BPOMS are included in the consolidated results of operations from the date of their respective acquisitions:

Company	Segment	Inception/Acquisition Date

BPO Management Services, Inc. (the "Company") or ("BPOMS")	Corporate	Inception date: July 26, 2005
Adapsys Document Management LP ("ADM") (2)	(2)	Acquired: July 29, 2005
Adapsys LP ("ADP") (2)	(2)	Acquired: July 29, 2005
Digica, Inc. ("Digica") (1)	ITO	Acquired: January 1, 2006
Novus Imaging Solutions, Inc. ("Novus") (2)	(2)	Acquired: September 30, 2006
NetGuru Systems, Inc. ("NGSI")	ITO	Acquired: December 15, 2006
Research Engineers, GmbH ("GmbH")	ITO	Acquired: December 15, 2006
DocuCom Imaging Solutions, Inc. ("DocuCom") (2)	(2)	Acquired: June 21, 2007
Human Resource Micro-Systems, Inc. ("HRMS")	HRO	Acquired: June 29, 2007
Blue Hill Data Services, Inc. ("Blue Hill")	ITO	Acquired: October 10, 2007
BPO Management Services, Ltd. ("BPOMS Ltd") (2)	(2)	Amalgamation: January 1, 2008
Healthaxis Inc. ("Healthaxis") (3)	Healthcare	Acquired: December 30, 2008

(1) Effective January 1, 2008, Digica was merged with Blue Hill

(2) On January 1, 2008, ADM, ADP, Novus and DocuCom were amalgamated into one company, BPO Management Services, Ltd. These operations were sold in July 2009 as discussed in Note 3.

Operations Reporting

BPOMS combines its continuing operating entities into three separate reporting segments:

●	IT Outsourcing (“ ITO”) comprised of Blue Hill, Digica (which was merged with Blue Hill in January 2008), NGSI and GmbH,
●	Healthcare comprised of Legacy Healthaxis, and
●	Human Resources Outsourcing (“HRO”) comprised of HRMS.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

ITO Operations

	For the three months ended September 30,
	2009			2008			Change

Revenues:	$	2,676,977		$	3,377,155		$	(700,178	)

Operating expenses :
Cost of services provided		1,918,628			1,733,499			(185,129	)
Selling, general and administrative		915,114			1,171,168			256,054
Research and development		124,429			81,221			(43,208	)
Depreciation and amortization		544,151			456,406			(87,745	)

Total operating expenses		3,502,322			3,442,294			(60,028	)

Loss from operations before interest and income taxes	$	(825,345	)	$	(65,139	)	$	(760,206	)

Sales for the three months ended September 30, 2009 of $2,676,977 decreased 21% from $3,377,155 for the three months ended September 30, 2008 due to a decline in information technology consulting services provided on a time and materials basis, reduced sales of collaborative software tools, and the loss of legacy data center customers that were acquired and consolidated their IT operations with those of the acquiror. Cost of services provided of $1,918,628 increased from $1,733,499 primarily due to increased costs for software and licensing fees of approximately $300,000, offset with reductions of consulting costs of approximately $130,000. Much of these expenses related to securing and related increasing support of additional contracts that are anticipated to generate greater revenue as they come on stream. Selling, general and administrative expenses of $915,114 decreased 22% from $1,171,168 primarily due to a decrease in payroll costs of approximately $48,000 and consulting costs of approximately $190,000. Research and development (“R&D”) expenses for the three months ended September 30, 2009 of $124,429 increased $43,208 from $81,221 primarily due to increases in software developers’ wages for development of enhancements to and integrations with the EReview collaborative software product. Depreciation and amortization expenses for the three months ended September 30, 2009 increased $87,745 primarily due to the acquisition of fixed assets throughout 2008 and 2009, offset by the reduction of amortization expense of approximately $112,500 due to the impairment loss of $2,765,429 on intangible assets recorded at December 31, 2008.

Healthcare Operations (1)

	September 30,
For Three Months Ended	2009		% of Revenue

Revenues:	$	3,334,816

Operating expenses :
Cost of services provided		2,515,981	75.4%
Selling, general and administrative		261,881	7.9%
Research and development (2)		-	0.0%
Depreciation and amortization		411,935	12.4%

Total operating expenses		3,189,797	95.7%

Income from operations before nterest and income taxes	$	145,019	4.3%

(1)	Due to the merger with Legacy Healthaxis occuring on December 30, 2008, there is no comparable 2008 period with which to compare Healthcare's quarterly results for the three months ended September 30, 2009.

(2)	The Company capitalized software development costs of approximately$118,003 for the three months ended September 30, 2009.

HRO Operations

	For the three months ended September 30,
	2009			2008			Change

Revenues	$	86,139		$	366,157		$	(280,018	)

Operating expenses :
Cost of services provided		77,181			110,457			33,276
Selling, general and administrative		54,936			387,094			332,158
Depreciation and amortization		13,611			23,289			9,678

Total operating expenses	$	145,728		$	520,840		$	375,112

Loss from operations before interest and income taxes	$	(59,589	)	$	(154,683	)	$	95,094

Sales for the three months ended September 30, 2009 of $86,139 decreased from $366,157 for the three months ended September 30, 2008 due to a significant drop in professional services revenue combined with a reduction in software licensing fees and lower maintenance renewals as companies have dramatically reduced spending on less critical administrative applications. Cost of services provided of $77,181 decreased from $110,457 primarily due to the reduction of personnel. Selling, general and administrative expenses of $54,936 decreased from $387,094 due to reductions in personnel, consultant fees and variable sales and marketing costs. The change in depreciation and amortization expense between periods was due to a SFAS revaluation in the second quarter of 2008 which resulted in a reduction to the values previously assigned to fixed assets and intangible assets. Software development costs of approximately $29,600 and $70,600 were capitalized for the three months ended September 30, 2009 and 2008, respectively.

Corporate Operations

	For the three months ended September 30,
	2009		2008		Change

Operating expenses :
Selling, general and administrative	$	723,456	$	574,718	$	(148,738	)
Depreciation and amortization		62,409		65,086		2,677
Stock based compensation		-		207,091		207,091
Restructuring costs		-		-		-
Goodwill & Intangible asset impairment		2,356,452		-		(2,356,452	)

Total operating expenses before interest and income taxes	$	3,142,317	$	846,895	$	(2,295,422	)

Selling, general and administrative expenses for the three months ended September 30, 2009 of $723,456 increased from $574,718 for the three months ended September 30, 2008, primarily due to the addition of corporate related expenses in the 2009 period from the reverse merger with Legacy Healthaxis of approximately $157,000 partially offset by broad-based decreases in corporate operating costs resulting from our restructuring and consolidation efforts. The decrease in stock-based compensation expense is a result of all Legacy BPOMS stock-based awards becoming fully vested and completely expensed as of December 31, 2008, a result of the reverse merger with Legacy Healthaxis on December 30, 2008. The goodwill and intangible asset impairment charge resulted from Management’s review of the carrying value of the assets compared to their fair value during the three months ended September 30, 2009.

Interest Expense

	For the three months ended September 30,
	2009		2008		Change
Interest expense:
Related parties	$	18,782	$	27,148		8,366
Other, net		110,816		12,953		(97,863	)

Total interest expense	$	129,598	$	40,101	$	(89,497	)

Total interest expense for the three months ended September 30, 2009 of $129,598 increased $89,497 from $40,101 for the three months ended September 30, 2008, primarily due to the increased usage of various loan facilities and the addition of approximately $57,450 in interest expense associated with the operations of our new Healthcare segment, partially offset by the reduction in notes payable to related parties.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

ITO Operations

	For the nine months ended September 30,
	2009			2008		Change

Revenues:	$	8,510,841		$	9,827,698	$	(1,316,857	)

Operating expenses :
Cost of services provided		5,727,889			4,820,700		(907,189	)
Selling, general and administrative		3,220,228			3,358,930		138,702
Research and development		349,189			228,258		(120,931	)
Depreciation and amortization		1,538,490			1,312,539		(225,951	)

Total operating expenses		10,835,796			9,720,427		(1,115,369	)

Income (loss) from operations before interest and income taxes	$	(2,324,955	)	$	107,271	$	(2,432,226	)

Sales for the nine months ended September 30, 2009 of $8,510,841 decreased 13% from $9,827,698 for the nine months ended September 30, 2008 due to a decline in information technology consulting services provided on a time and materials basis, reduced sales of collaborative software tools, and the loss of legacy data center customers that were acquired and consolidated their IT operations with those of the acquiror. Cost of services provided of $5,727,889 increased from $4,820,700 primarily due to increased costs for software and licensing fees of approximately $786,000 and increased wages of approximately $265,000 offset by reductions is consulting fees of approximately $143,000. Much of these expenses related to securing and related increasing support of additional contracts that are anticipated to generate greater revenue as they come on stream. Selling, general and administrative expenses of $3,220,228 decreased from $3,358,930 primarily due to a reduction in payroll costs of approximately $117,000, reduction in consultant fees of approximately $147,000, partially offset with an increase in bad debt expense of approximately $138,000. Research and development (“R&D”) expenses for the nine months ended September 30, 2009 of $349,189 increased $120,931 from $228,258 primarily due to increases in software developers’ wages for development of enhancements to and integrations with the EReview collaborative software product. Depreciation and amortization expenses for the nine months ended September 30, 2009 increased $225,951 primarily due to the continued acquisition of fixed assets throughout 2008 and the first nine months of 2009, offset by the reduction of amortization expense of approximately $337,500 due to the impairment loss of $2,765,429 on intangible assets recorded at December 31, 2008.

Healthcare Operations (1)

	September 30,
For Nine Months Ended	2009		% of Revenue

Revenues:	$	10,446,628

Operating expenses :
Cost of services provided		7,984,285	76.4%
Selling, general and administrative		791,087	7.6%
Research and development (2)		-	0.0%
Depreciation and amortization		1,275,045	12.2%

Total operating expenses		10,050,417	96.2%

Income from operations before interest and income taxes	$	396,211	3.8%

(1) Due to the merger with Legacy Healthaxis occuring on December 30, 2008, there is no comparable 2008 period with which to compare Healthcare's results for the nine months ended September 30, 2009.

(2) The Company capitalized software development costs of approximately $339,050 for the nine months ended September 30, 2009.

HRO Operations

	For the nine months ended September 30,
	2009			2008			Change

Revenues	$	614,978		$	1,338,992		$	(724,014	)

Operating expenses :
Cost of services provided		295,783			392,468			96,685
Selling, general and administrative		538,400			1,106,658			568,258
Depreciation and amortization		40,768			153,868			113,100

Total operating expenses	$	874,951		$	1,652,994		$	778,043

Loss from operations before
interest and income taxes	$	(259,973	)	$	(314,002	)	$	54,029

Sales for the nine months ended September 30, 2009 of $614,978 decreased from $1,338,992 for the nine months ended September 30, 2008 primarily due to a significant drop in professional services revenue combined with a reduction in software licensing fees and lower maintenance renewals as companies have dramatically reduced spending on less critical administrative applications. Cost of services provided of $295,783 decreased from $392,468 primarily due to the reduction of personnel. Selling, general and administrative expenses of $538,400 decreased from $1,106,658 as reductions in personnel and variable sales and marketing costs were somewhat offset by an increase in bad debt expense of approximately $85,000. Depreciation and amortization expense for the nine months ended September 30, 2009 decreased $113,100 from $153,868 for the nine months ended September 30, 2008 primarily due to a SFAS revaluation in the second quarter of 2008 which resulted in a reduction of values previously assigned to fixed assets and intangible assets. Software development costs of $84,700 and $237,600 were capitalized for the nine months ended September 30, 2009 and 2008, respectively.

Corporate Operations

	For the nine months ended September 30,
	2009		2008		Change

Operating expenses :
Selling, general and administrative	$	2,230,320	$	1,745,332	$	(484,988	)
Depreciation and amortization		191,418		194,265		2,847
Stock based compensation		18,333		621,275		602,942
Restructuring costs		382,207		-		(382,207	)
Goodwill & Intangible asset impairment		2,356,452		-		(2,356,452	)

Total operating expenses before interest and income taxes	$	5,178,730	$	2,560,872	$	(2,617,858	)

Selling, general and administrative expenses for the nine months ended September 30, 2009 of $2,230,320 increased from $1,745,332 for the nine months ended September 30, 2008. For the nine months ended September 30, 2008, the Company released a contingent liability of approximately $215,000, and as a result, the prior year expenses are lower by this amount. The overall change primarily results from the release of this liability combined with corporate related expenses in the 2009 period from the reverse merger with Legacy Healthaxis of approximately $335,000. These changes were partially offset by a broad based decrease of overall corporate expenses resulting from our restructuring and consolidation efforts. The decrease in stock-based compensation expense is a result of all Legacy BPOMS stock-based awards became fully vested and completely expensed as of December 31, 2008, a result of the reverse merger with Legacy Healthaxis on December 30, 2008. In the second quarter of 2009, the Company initiated a restructuring program to reduce overhead costs, which included workforce reduction and consolidation of administrative activities. These restructuring charges are generally of a nonrecurring nature and are excluded from segment financial results, which is our measure used for evaluating performance and for decision-making purposes. For the nine months ended September 30, 2009, we recorded approximately $150,000 related to employee severance and approximately $232,000 for lease exit costs based on the present value of remaining lease rentals reduced by estimated sublease rentals that could be reasonably obtained for the property. The goodwill and intangible asset impairment charge resulted from Management’s review of the carrying value of the assets compared to their fair value during the three months ended September 30, 2009.

Interest Expense

	For the nine months ended September 30,
	2009		2008		Change
Interest expense:
Related parties	$	57,948	$	80,853		22,905
Other, net		346,840		54,029		(292,811	)

Total interest expense	$	404,788	$	134,882	$	(269,906	)

Total interest expense for the nine months ended September 30, 2009 of $404,788 increased $269,906 from $134,882 for the nine months ended September 30, 2008, primarily due to the increased usage of various loan facilities and the addition of approximately $156,055 in interest expense associated with the operations of our new Healthcare segment, partially offset by the reduction of notes payable to related parties.

Liquidity and Capital Resources

Overview of Cash Resources

At September 30, 2009, our cash and cash equivalents amounted to $1.0 million compared to $2.9 million at December 31, 2008. The sources and uses of cash during 2009 are described more fully in “Analysis of Cash Flows” below. The Company’s focus is on becoming profitable and generating positive cash flow, however in the event that we are unable to generate sufficient cash from operations or raise additional capital, then our business would be adversely affected.

On July 22, 2009, certain of the Company’s healthcare subsidiaries entered into an amended and restated loan and security agreement with Silicon Valley Bank (the “Amended LSA”). Under this agreement, the subsidiaries may borrow up to the lesser of (i) $1.6 million or (ii) 80% of eligible accounts receivable subject to certain adjustments. Advances under the Amended LSA bear interest at SVB’s prime rate (4.0% at September 30, 2009) plus 3.5% plus a collateral handling fee of 0.35% per month. The Amended LSA contains customary affirmative and negative covenants including the maintenance of a specified EBITDA level. Advances under the Amended LSA are covered by a first priority lien on substantially all the assets of the Company’s healthcare subsidiaries, including intellectual property. The Amended LSA matures June 14, 2010. At September 30, 2009, the Company’s healthcare subsidiaries had outstanding balances of $1,224,130 and $170,376 under the related revolving line and equipment line, respectively.

Blue Hill has a credit facility from Comerica Bank which includes a revolving operating line limited to the lesser of the $1,000,000 maximum availability or 80% of eligible accounts receivable and carries interest at the daily adjusting LIBOR rate plus 4.0%, which amounted to 4.25% at September 30, 2009, a $500,000 term loan amortized over a four year period and bearing interest at the Comerica Bank prime rate plus 1.25%, which amounted to 4.5% at September 30, 2009, a specific advance facility for equipment purchases up to a maximum of $500,000 bearing interest at the Comerica Bank prime rate plus 1.00%, which amounted to 4.25% at September 30, 2009 and a specific advance facility for equipment purchases up to a maximum of $700,000 bearing interest at the daily adjusting LIBOR rate plus 6.0%, which amounted to 6.25% at September 30, 2009. The loans are supported by a general security interest in all the assets of Blue Hill and the operating facility is also supported by the guaranty of Legacy BPOMS and the subordination of loans of a minimum of $1,400,000, payable by Blue Hill to Legacy BPOMS, to Comerica Bank. At September 30, 2009 Blue Hill had an outstanding balance of $646,485 under the operating line, $291,667 under the term loan, $43,687 under the equipment loan and $674,000 under the second equipment loan. These loan agreements contain covenants pertaining to maintenance of various ratios. At September 30, 2009, the Company was in breach of these covenants. Under the terms of the agreement, the bank may call the loans if the Company is in violation of any restrictive covenant. The bank has provided a notice of default to the Company and has not waived the ratio requirement, but has allowed the Company to continue to borrow on the revolving line and has not demanded immediate repayment in full of the obligations to the bank. Accordingly the entire amount of the loans, $1,655,839, including the long-term portion of approximately $717,108, has been included in current liabilities.

Analysis of Cash Flows

Cash provided by operating activities for the nine months ended September 30, 2009 was approximately $1.1 million as compared to cash used in operating activities of approximately $1.4 million for the same period in 2008. The improvement was primarily the result of changes in working capital, including generating cash from the reduction of accounts receivable combined with a higher accounts payable balance. These increases to cash flow from operations were partially offset by the increased net loss from continuing operations.

Cash used in investing activities during the nine months ended September 30, 2009 was approximately $1.6 million as compared to cash used in investing activities of approximately $263,000 for the same period in 2008. During the nine months ended September 30, 2009, the Company’s purchase of equipment and internally developed capitalized software amounted to approximately $1.6 million. For the nine months ended September 30, 2008, cash used by investing activities was due to the purchase of equipment of approximately $660,000, offset by the release of restricted cash in the amount of approximately $923,000.

Net cash used in financing activities during the nine months ended September 30, 2009 was approximately $1.4 million as compared to net cash provided by financing activities of approximately $3.6 million for the same period in 2008. Net cash used in financing activities for the nine months ended September 30, 2009 is the net result of proceeds from bank loans of approximately $111,000, payment of notes issued to former shareholders of $1.0 million, repayment of capital lease obligations of approximately $385,000, repayment of a note payable to a related party in the amount of $100,000. Net cash provided by financing activities for the nine months ended September 30, 2008 is the result of proceeds from the issuance of preferred stock of $5.2 million plus net bank borrowings of approximately $491,000 offset by payments to former shareholders of approximately $886,000, dividend payments of approximately $753,000, repayment of note payable to a related party in the amount of $200,000 and capital lease obligation payments of approximately $161,000.

During the next twelve months, the Company anticipates raising capital necessary to meet the needs of its current business, grow its business and complete additional acquisitions by issuing its securities and/or debt in one or more private transactions, merger, or divestiture of certain assets or operations.

Our future capital requirements will depend upon many factors. These factors include but are not limited to sales and marketing efforts, the development of new products and services, possible future corporate mergers or strategic acquisitions or divestitures, the progress of research and development efforts, and the status of competitive products and services. If our anticipated financing needs are not met or are unreasonably delayed, we may not have adequate funds to extinguish all our remaining obligations and fund our current operations going forward.

Although we plan to meet our operating capital needs through one or more financing transactions, merger, or divestiture of certain assets or operations, there can be no assurance that funds required will be available on terms acceptable to us, if at all. If we are unable to raise sufficient funds on acceptable terms, we may not be able to complete our business plan. If equity financing is available to us on acceptable terms, it could result in additional dilution to our existing stockholders.

This uncertainty, recurring losses from operations, limited cash resources, and an accumulated deficit, among other factors, raise doubt about our ability to continue as a going concern and led our independent registered public accounting firm to include an explanatory paragraph in their report dated March 31, 2009 contained in the Company's consolidated financial statements as of and for the year ended December 31, 2008. The report concludes that these matters, among others, raise substantial doubt about the Company's ability to continue as a going concern.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable under smaller reporting company scaled disclosure requirements

Item 4T. Controls and Procedures

The Company maintains "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

The management of the Company has designed and evaluated the Company's disclosure controls and procedures. Management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

The Company's management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of September 30, 2009, and concluded that the disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted a material weakness as disclosed in the Company's Form 10-K for the year ended December 31, 2008. The material weaknesses identified did not result in the restatement of any previously reported consolidated financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company's financial statements for the current reporting period.

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during the quarterly period ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.