ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The
following discussion should be read in conjunction with our condensed
consolidated financial statements and related notes and the other financial
information included elsewhere in this report and in our Annual Report on Form
10-KSB for the year ended December 31, 2006.
Information
Regarding Forward-Looking Statements
Except
for the historical information and discussions contained herein, statements
contained in this Form 10-QSB may constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
The
forward-looking statements generally include our management's plans and
objectives for future operations, including plans, objectives and expectations
relating to our future economic performance, business prospects, revenues,
working capital, liquidity, ability to obtain financing, generation of income
and actions of secured parties not to foreclose on our assets. The
forward-looking statements may also relate to our current beliefs regarding
revenues we might earn if we are successful in implementing our business
strategies. The forward-looking statements generally can be identified by the
use of the words "believe," "intend," "plan," "expect," "forecast," "project,”
"may," "should," "could," "seek," "pro forma," "estimate," "continue,"
"anticipate" and similar words. The forward-looking statements and associated
risks may include, relate to, or be qualified by other important factors,
including, without limitation:
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anticipated trends in our financial
condition
and results of operations (including expected changes in our gross
margin
and general, administrative and selling
expenses);
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our
ability to finance our working capital and other cash
requirements;
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our
business strategy for expanding our presence in the markets we serve;
and
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our
ability to distinguish ourselves from our current and future competitors.
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We
do not
undertake to update, revise or correct any forward-looking statements. The
forward-looking statements are based largely on our current expectations and
are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements.
Important
factors to consider in evaluating forward-looking statements include:
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changes
in external competitive market factors or in our internal budgeting
process that might impact trends in our results of
operations;
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changes
in our business strategy or an inability to execute our strategy
due to
unanticipated changes in the markets; and
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various
other factors that may prevent us from competing successfully in
the
marketplace.
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Overview
We
provide healthcare staffing services to both commercial and government sector
customers. We are focused on building a nationally-recognized healthcare
staffing company by growing our current customer bases, expanding our service
offerings, and acquiring and growing profitable healthcare staffing services
companies.
We
operate our healthcare staffing services business through our wholly-owned
subsidiary Drug Consultants, Inc. ("DCI"). DCI furnishes personnel to perform
a
range of pharmacy, nursing and other health care services in support of the
operations of government and commercial facilities, including its largest
client, the State of California Department of Corrections and Rehabilitation
("CDCR"). DCI was formed in 1977 and is located in Riverside and San Juan
Capistrano, California.
DCI
has
experience in providing its services in rural areas of California where many
state facilities are located and healthcare professionals are not readily
available. This experience and DCI's database of healthcare professionals have
enabled it to competitively price its services and expand its business to meet
these unique requirements of the CDCR.
DCI
currently operates under three master contracts with the CDCR. The master
contracts are for terms of three years and currently expire on June 30, 2008.
DCI's contracts with the CDCR do not provide for a minimum purchase commitment
of our services and can be terminated by the CDCR at any time on 30 days'
notice. In April 2006, a federal court-appointed receiver assumed total control
over CDCR's healthcare delivery system to address the court's findings of
substandard medical care. Among the receiver's objectives is to reduce the
CDCR's reliance on staffing service providers like DCI. Since the receiver's
appointment, DCI has experienced a loss of several of its healthcare
professionals who have accepted positions with the CDCR. We believe that the
ongoing implications of the receiver's management of the CDCR's healthcare
delivery system include lower demand from the CDCR for DCI's services, higher
attrition of our healthcare professionals, increased competition for recruiting
healthcare professionals to fill positions with the CDCR and reduced margins
for
the services we provide CDCR.
COMPARISON
OF OPERATING RESULTS
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2006
Revenues
for the three months ended September 30, 2007 were $1,827,307 compared to
$2,025,514 for the three months ended September 30, 2006. This is a decrease
of
$198,207 or 10% and is attributable to a decrease in sales to CDCR for the
current period.
Costs
of
revenues for the three months ended September 30, 2007 were $1,535,361 compared
to $1,616,041 for the three months ended September 30, 2006. This is a decrease
of $80,680 or 5% and is attributable to an overall decrease of gross profit
margins to 16.0% for the three months ended September 30, 2007 versus 20.2%
for
the comparable period in the prior year. The decrease is also attributable
to
the decrease in sales mentioned above.
Based
on
the above, the Company realized a gross profit for the three months ended
September 30, 2007 of $291,946, versus gross profit for the three months ended
September 30, 2006 of $409,473.
Selling,
general and administrative expenses for the three months ended September 30,
2007 were $365,037 compared to $417,311 for the three months ended September
30,
2006. This decrease is attributable to a reduction in professional and
administrative fees partially offset by an increase in salaries and wages.
As
a
result, the Company had an operating loss for the three months ended September
30, 2007 of $73,091 compared to an operating loss of $7,838 for the three months
ended September 30, 2006.
Other
expense for the three months ended September 30, 2007 totaled $298,746 compared
to other income of $256,106 for the comparable period in the prior year. The
increase in expense is attributable to a decrease in the gain on derivative
valuations compared to the same period in the prior year. The Company recorded
a
gain of $563,961 during the three months ended September 30, 2006. During the
three months ended September 30, 2007, the Company recorded a gain of
$1,797.
As
a
result, our net loss for the three months ended September 30, 2007 was $368,090
versus net income of $248,268 for the three months ended September 30, 2006.
RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE
NINE
MONTHS ENDED SEPTEMBER 30, 2006
Revenues
for the nine months ended September 30, 2007 were $5,687,320 compared to
$5,857,939 for the nine months ended September 30, 2006. This is a decrease
of
$170,619 or 3% and is attributable to a decrease in sales to CDCR for the
current period.
Costs
of
revenues for the nine months ended September 30, 2007 were $4,770,856 compared
to $4,918,140 for the nine months ended September 30, 2006. This is a decrease
of $147,284 or 3% and is attributable to the decrease in sales mentioned above.
Gross profit margins were 16.1% for the nine months ended September 30, 2007
versus 16.0% for the comparable period in the prior year.
Based
on
the above, the Company realized a gross profit for the nine months ended
September 30, 2007 of $916,464, versus a gross profit for the nine months ended
September 30, 2006 of $939,799.
Selling,
general and administrative expenses for the nine months ended September 30,
2007
were $1,194,555 compared to $1,078,027 for the nine months ended September
30,
2006. This increase is attributable to the $135,750 non-cash stock compensation
charge incurred by the Company for the issuance of preferred stock to MBMC
and
MBA on May 11, 2007. This increase was partially offset by decreases in
professional and administrative fees.
As
a
result, the Company had an operating loss for the nine months ended September
30, 2007 of $278,091 compared to an operating loss of $138,228 for the nine
months ended September 30, 2006.
Other
expense for the nine months ended September 30, 2007 totaled $840,825 compared
to $482,465 for the comparable period in the prior year. The increase in expense
is attributable to a decrease in the gain on derivative valuations compared
to
the same period in the prior year. The Company recorded a gain of $425,378
during the nine months ended September 30, 2006. During the nine months ended
September 30, 2007, the Company recorded a gain of $52,829.
As
a
result, our net loss for the nine months ended September 30, 2007 was $1,118,916
versus a net loss of $620,693 for the nine months ended September 30, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
September 30, 2007, we had negative net working capital of $885,466. Our current
assets of $1,465,285 consisted of cash and cash equivalents of $3,214 and
accounts receivable, net of $1,462,071. Our current liabilities of $2,350,751
consisted of accounts payable and accrued expenses of $899,843; a factoring
liability of $849,921; accrued interest of $459,910; notes payable, current
of
$81,077; and, accounts payable related parties of $60,000.
As
of
September 30, 2007, we had long-term debt of $2,132,868, consisting of $122,217
in derivative liabilities, $3,041,325 outstanding under our convertible secured
notes (less debt discount of $908,457) and $84,137 in notes
payable.
Net
cash
used in operating activities for the nine months ended September 30, 2007 was
$312,464, compared to net cash used in operating activities of $1,420,855 for
the nine months ended September 30, 2006. This improvement from the comparable
period in the prior year is primarily attributable to a large increase in
accounts receivables and a decrease in accounts payable during the nine months
ended September 30, 2006. These significant fluctuations were not experienced
during the nine months ended September 30, 2007.
There
was
no cash provided by or used in investing activities during the nine months
ended
September 30, 2007 and 2006.
Net
cash
provided by financing activities for the nine months ended September 30, 2007
totaled $315,677. We received net proceeds of $60,000 from a related party
note
and our net advances from factored receivables increased $270,141. These
proceeds were offset by payments made on other notes payable. Net cash provided
by financing activities for the nine months ended September 30, 2006 totaled
$379,422 which includes $425,000 of proceeds from our issuance of convertible
secured notes and an increase in net advances from factored receivables of
$290,605. Payments made on notes payable totaled $336,183 for the nine months
ended September 30, 2006.
Our
consolidated financial statements are prepared using the accrual method of
accounting in accordance with generally accepted accounting principles, and
have
been prepared on a going concern basis, which contemplates the realization
of
assets and the settlement of liabilities in the normal course of business.
We
had $1,736,728 in accumulated deficit at September 30, 2007 and a net loss
of
$1,118,916 for the nine months ended September 30, 2007. These factors combined
raise substantial doubt about the Company’s ability to continue as a going
concern. Our management has taken various steps to revise its operating and
financial requirements, which it believes will be sufficient to provide the
Company with the ability to continue its operations for the next twelve
months.
We
had an
operating cash flow deficit in 2006 and for the nine months ended September
30,
2007. We do not currently have enough capital to repay our outstanding
convertible secured notes and other liabilities and we may never generate enough
revenue to repay the amounts owed. In addition, execution of our
acquisition-based growth strategy will require significant additional capital.
In
view
of our net working capital deficit, operating cash flow deficit, long-term
debt
and the other matters described above, recoverability of a major portion of
the
recorded asset amounts shown in our consolidated balance sheet is dependent
upon
continued operations of the Company, which in turn is dependent upon our ability
to raise additional capital, obtain financing and to succeed in our future
operations. The financial statements do not include any adjustments relating
to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. We project that our cash on hand and
cash
flow generated from operations will not be sufficient to fund operational
liquidity requirements. As a result, our ability to continue our operations
and
growth strategy depends on our ability to access the capital markets in the
near
term.
We
currently rely on a working capital line of credit from Monarch Bay Management
Company, LLC (“MBMC”) to meet our short-term liquidity needs. David Walters, our
Chairman, and Keith Moore, our director, each are members of, and each owns 50%
of the ownership interests in, MBMC. Under the terms of working capital line
of
credit, MBMC may advance up to $500,000 in funding to us. The working capital
line of credit is unsecured and bears interest at the rate of 10% of the unpaid
principal balance or $150 per month, whichever is greater. All amounts
outstanding under the working capital line of credit are due on or before
December 31, 2008. As of the date hereof, the outstanding principal balance
under the working capital line of credit was $60,000. Although the line of
credit provides for total funding of up to $500,000, there can be no assurance
that funding from this source will continue to be available, or if such funding
is available, that it will be on terms that management deems sufficiently
favorable.
There
also can be no assurance that capital from other outside sources will be
available, or if such financing is available, that it will be on terms that
management deems sufficiently favorable. If we are unable to obtain additional
financing upon terms that management deems sufficiently favorable, or at all,
we
could be forced to restructure or to default on our obligations or to curtail
or
abandon our business plan, any of which may devalue or make worthless an
investment in the Company.
The
operations of DCII and DCI, which will represent our entire business for the
foreseeable future, were acquired in November 2005. Accordingly, we have a
limited operating history upon which an evaluation of our prospects can be
made.
Our strategy is unproven and the revenue and income potential from our strategy
is unproven. It is difficult for us to predict future liquidity requirements
with certainty and our forecast is based upon certain assumptions, which may
differ from actual future outcomes. Over the longer term, we must successfully
execute our plans to increase revenue and income streams that will generate
significant positive cash flow if we are to sustain adequate liquidity without
impairing growth or requiring the infusion of additional funds from external
sources.
RECEIVABLES
FACTORING FACILITY
On
November 8, 2005, DCII and DCI entered into a Factoring and Security Agreement
to sell accounts receivables to Systran Financial Services Corporation. The
purchase price for each invoice sold is the face amount of the invoice less
a
discount of 1.5%.
On
July
24, 2006, the Factoring Agreement was amended and under the terms of the
amendment a fee equal to prime plus 1.50% shall be charged on a daily basis
based upon total of invoices purchased by Systran that remain unpaid and
outstanding, less the deposit held by Systran. Further, the purchase price
for
each invoice sold was amended to be the face amount of the invoice less a
discount of 0.65%. Additionally, a one time fee of 0.50% on all invoices that
remain unpaid from the date sold shall be incurred on the 91st day from the
date
sold.
All
accounts sold are with recourse by Systran. Systran may defer making payment
to
DCII of a portion of the purchase price payable for all accounts purchased
which
have not been paid up to 10.0% of such accounts (reserve).
All
of
DCII's and DCI's accounts receivable are pledged as collateral under the
agreement. The initial term is for thirty-six months and will automatically
renew for an additional twelve months at the end of the term, unless the Company
gives thirty days written notice of its intention to terminate the factoring
agreement.
CONVERTIBLE
SECURED NOTES
On
August
31, 2004, the Company entered into a securities purchase agreement with four
accredited investors for the sale of secured convertible notes having an
aggregate principal amount of $700,000, a 10% annual interest rate payable
quarterly, and a term of two years. We also agreed to sell warrants to purchase
up to an aggregate of 7,777 shares of our Common Stock at $40.50 per share.
We
only sold $500,000 principal amount of secured convertible notes under the
2004
agreement. As a result, we sold to the investors warrants to purchase up to
an
aggregate of 5,556 shares of our Common Stock at $40.50 per share. The investors
have agreed to purchase the remaining $200,000 commitment under the terms of
our
2005 securities purchase agreement with the investors.
On
November 4, 2005, we entered into an additional securities purchase agreement
with the same accredited investors, for the sale of secured convertible notes
having an aggregate principal amount of $3,000,000, an 8% annual interest rate
(payable quarterly), and a term of three years. We also agreed to sell warrants
to purchase up to an aggregate of 166,667 shares of our Common Stock at $9.00
per share.
On
March
29, 2007, the Company obtained an amendment to the 2005 securities purchase
agreement whereby interest payments are payable at the same time the
corresponding principal balance is due and payable, whether at maturity or
upon
acceleration or by prepayment.
As
of
October 31, 2007, we had issued under the two securities purchase
agreements:
-
$3,075,000 aggregate principal amount of secured convertible notes ($33,675
was
converted to common stock during the first nine months of 2007),
-
Warrants to purchase 5,556 shares of our Common Stock at $40.50 per shares,
-
Warrants to purchase 143,056 shares of our Common Stock at $9.00 per share,
and
-
Warrants
to purchase 166,667 shares of our Common Stock at $4.50 per share.
The
Company does not currently intend to file a registration statement for the
resale of the shares of common stock issuable upon conversion of the secured
convertible notes and exercise of the warrants and, as a result, does not expect
to complete the sale of any additional secured convertible note s and warrants
under the 2005 securities purchase agreement.
On
November 1, 2006, we obtained an amendment to the 2005 securities purchase
agreement extending the date by which the Company was obligated to obtain the
effectiveness of the registration statement covering the resale of the shares
of
our Commons Stock issuable upon conversion of the secured convertible notes
and
the exercise of the warrants in exchange for issuing warrants to purchase
166,667 shares of our Common Stock at $4.50 per share to the holders of the
secured convertible notes.
On
August
16, 2007, we obtained an amendment to the 2005 securities purchase agreement
waiving our obligation to maintain sufficient authorized and reserved common
shares, for the purpose of issuance to provide for the full conversion or
exercise of the outstanding notes and warrants and issuance of the conversion
shares and warrant shares, until such time as the Company has available for
issuance fewer than 100,000,000 authorized, but unissued shares of common stock.
Additionally the amendment terminated our obligation to obtain the effectiveness
of the registration statement covering the resale of the shares of our Commons
Stock issuable upon conversion of the secured convertible notes and the exercise
of the warrants.
In
connection with the 2005 securities purchase agreement, we entered into a
security agreement, whereby we granted the investors a continuing, first
priority security interest in the Company's general assets including all of
the
Company's:
-
Goods,
including without limitations, all machinery, equipment, computers, motor
vehicles, trucks, tanks, boats, ships, appliances, furniture, special and
general tools, fixtures, test and quality control devices and other equipment
of
every kind and nature and wherever situated;
-
Inventory (except that the proceeds of inventory and accounts
receivable);
-
Contract rights and general intangibles, including, without limitation, all
partnership interests, stock or other securities, licenses, distribution and
other agreements, computer software development rights, leases, franchises,
customer lists, quality control procedures, grants and rights, goodwill,
trademarks, service marks, trade styles, trade names, patents, patent
applications, copyrights, deposit accounts, and income tax refunds;
-
Receivables including all insurance proceeds, and rights to refunds or
indemnification whatsoever owing, together with all instruments, all documents
of title representing any of the foregoing, all rights in any merchandising,
goods, equipment, motor vehicles and trucks which any of the same may represent,
and all right, title, security and guaranties with respect to each receivable,
including any right of stoppage in transit; and documents, instruments and
chattel paper, files, records, books of account, business papers, computer
programs and the products and proceeds of all of the foregoing and the Company's
intellectual property.
Additionally,
we entered into an intellectual property security agreement with the investors,
whereby we granted them a security interest in all of the Company's software
programs, including source code and data files, then owned or thereafter
acquired, all computers and electronic processing hardware, all related
documentation, and all rights with respect to any copyrights, copyright
licenses, intellectual property, patents, patent licenses, trademarks, trademark
licenses or trade secrets.
Additional
material terms of the 2005 securities purchase agreement, the secured
convertible notes and the warrants are described below:
Conversion
and Conversion Price
The
secured convertible notes are convertible into our Common Stock, at the
investors' option, at the lower of (i) $0.90 or (ii) 50% of the average of
the
three lowest intraday trading prices for the Common Stock on a principal market
for the 20 trading days before but not including the conversion date.
Accordingly, there is in fact no limit on the number of shares into which the
notes may be converted.
The
conversion price is adjusted after major announcements by the Company. In the
event the Company makes a public announcement that the Company intends to
consolidate or merge with any other corporation (other than a merger in which
the Company is the surviving or continuing corporation and its capital stock
is
unchanged) or sell or transfer all or substantially all of the assets of the
Company or any person, group or entity (including the Company) publicly
announces a tender offer to purchase 50% or more of the Company's Common Stock
(or any other takeover scheme) then the conversion price will be equal to the
lower of the conversion price that would be effect on the date the announcement
is made or the current conversion price at the time the secured convertible
note
holders wish to convert.
The
secured convertible notes also provide anti-dilution rights, whereby the
conversion price shall be adjusted in the event that the Company issues or
sells
any shares of Common Stock for no consideration or consideration less than
the
average of the last reported sale prices for the shares of the Common Stock
on
the OTC Bulletin Board for the five trading days immediately preceding such
date
of issuance or sale. The conversion price is also proportionately increased
or
decreased in the event of a reverse stock split or forward stock split,
respectively. The conversion price is also adjusted in the event the Company
effects a consolidation, merger or sale of substantially all its assets (which
may also be treated as an event of default) or if the Company declares or makes
any distribution of its assets (including cash) to holders of its Common Stock,
as provided in the secured convertible notes.
If
a note
holder gives the Company a notice of conversion relating to the secured
convertible notes and the Company is unable to issue such note holder the shares
of Common Stock underlying the secured convertible note within five days from
the date of receipt of such notice, the Company is obligated to pay the note
holder $2,000 for each day that the Company is unable to deliver such Common
Stock underlying the secured convertible note.
The
secured convertible notes contain a provision whereby no note holder is able
to
convert any part of the notes into shares of the Company's Common Stock, if
such
conversion would result in beneficial ownership by the note holder and its
affiliates of more than 4.99% of the Company's then outstanding shares of Common
Stock.
In
addition, we have the right under certain circumstances described below under
"Company Call Option and Prepayment Rights" to prevent the note holders from
exercising their conversion rights during any month after a month in which
we
have exercised certain prepayment rights.
Company
Call Option and Prepayment Rights
Each
secured convertible note contains a call option in favor of the Company, whereby
as long as no event of default under the note has occurred, the Company has
a
sufficient number of authorized shares reserved for issuance upon full
conversion of the secured convertible notes and our Common Stock is trading
at
or below $0.90 per share (subject to adjustment in the secured convertible
note), the Company has the right to prepay all or a portion of the note. The
prepayment amount is equal to the total amount of principal and accrued interest
outstanding under the note, and any other amounts which may be due to the note
holders, multiplied by 130%.
In
the
event that the average daily trading price of our Common Stock for each day
of
any month is below $0.90, the Company may at its option prepay a portion of
the
outstanding principal amount of the secured convertible notes equal to 104%
of
the principal amount thereof divided by thirty-six plus one month's interest
on
the secured convertible notes, or the amount of the remaining principal and
interest, whichever is less. No note holder is entitled to convert any portion
of the secured convertible notes during any month after the month on which
the
Company exercises this prepayment option.
Events
of Default
Upon
an
event of default under the secured convertible notes, and in the event the
note
holders give the Company a written notice of default, an amount equal to 130%
of
the amount of the outstanding secured convertible notes and interest thereon
shall become immediately due and payable or another amount as otherwise provided
in the notes. Events of default under the secured convertible notes include
the
following:
-
failure
to pay any amount of principal or interest on the notes; failure to issue shares
to the selling stockholders upon conversion of the notes, and such failure
continues for ten days after notification by the note holders;
-
breaches by the Company of any of the convents contained in the
notes;
-
breaches by the Company of any representations and warranties made in the 2005
securities purchase agreement or any related document;
-
appointment by the Company of a receiver or trustee or makes an assignment
for
the benefit of creditors;
-
filing
of any judgment against the Company for more than $50,000;
-
bringing of bankruptcy proceedings against the Company and such proceedings
are
not stayed within sixty days of such proceedings being brought; or
-
delisting of the Common Stock from the OTC Bulletin Board or equivalent
replacement exchange.
Stock
Purchase Warrants
The
warrants expire five years from their date of issuance. The warrants include
anti-dilution rights, whereby the exercise price of the warrants shall be
adjusted in the event that the Company issues or sells any shares of the
Company's Common Stock for no consideration or consideration less than the
average of the last reported sale prices for the shares of the Company's Common
Stock on the OTC Bulletin Board for the five trading days immediately preceding
such date of issuance or sale. The exercise price of the warrants are also
proportionately increased or decreased in the event of a reverse stock split
or
forward stock split, respectively. The exercise price is also adjusted pursuant
to the warrants in the event the Company effects a consolidation, merger or
sale
of substantially all of its assets and/or if the Company declares or makes
any
distribution of its assets (including cash) to holders of its common stock
as a
partial liquidating dividend, as provided in the warrants.
The
warrants also contain a cashless exercise, whereby the warrant holders may
convert the warrants into shares of the Company's restricted Common Stock.
In
the event of a cashless exercise under the warrants, in lieu of paying the
exercise price in cash, the selling stockholders can surrender the warrant
for
the number of shares of Common Stock determined by multiplying the number of
warrant shares to which it would otherwise be entitled by a fraction, the
numerator of which is the difference between (i) the average of the last
reported sale prices for the Company's Common Stock on the OTC Bulletin Board
for the five trading days preceding such date of exercise and (ii) the exercise
price, and the denominator of which is the average of the last reported sale
prices for the Company's Common Stock on the OTC Bulletin Board for the five
trading days preceding such date of exercise. For example, if the selling
stockholder is exercising 100,000 warrants with a per warrant exercise price
of
$0.75 per share through a cashless exercise when the average of the last
reported sale prices for the Company's Common Stock on the OTC Bulletin Board
for the five trading days preceding such date of exercise is $2.00 per share,
then upon such cashless exercise the warrant holder will receive 62,500 shares
of the Company's Common Stock.
Side
Letter Agreement
We
entered into a side letter agreement with the investors on November 10, 2005.
The Side Letter Agreement provided that in consideration for the November 2005
sale of the secured convertible notes, the investors agreed that the face amount
of the $500,000 of secured convertible notes issued to the investors in August
2004 and the $200,000 in secured convertible notes which remained to be issued
under the 2004 securities purchase agreement upon the effectiveness of a
registration statement covering such secured convertible notes shall be included
in the amount advanced to the Company under the November 2005 secured
convertible notes. The side letter agreement also provided that the terms of
the
2005 securities purchase agreement shall supercede the prior 2004 securities
purchase agreement and that all interest, penalties, fees, charges or other
obligations accrued or owed by the Company to the investors pursuant to the
2004
securities purchase agreement are waived, provided that in the event of any
material breach of the 2005 securities purchase agreement by the Company, which
breach is not cured within five days of receipt by the Company of written notice
of such breach, the novation of the 2004 securities purchase agreement and
the
waiver of the prior obligations there under shall be revocable by the selling
stockholders and all such prior obligations shall be owed as if the 2004
securities purchase agreement was never superceded.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Critical
Accounting Policies
We
prepare our consolidated financial statements in conformity with GAAP. As such,
we are required to make certain estimates, judgments and assumptions that we
believe are reasonable based upon the information available. These estimates
and
assumptions affect the reported amounts of assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the periods presented. The significant accounting policies which we
believe are the most critical to aid in fully understanding and evaluating
our
reported financial results include the following:
Principles
of Consolidation
The
consolidated financial statements include the accounts of Monarch Staffing,
Inc.
(formerly MT Ultimate Healthcare Corp.) (Monarch), and its wholly-owned
subsidiaries, Drug Consultants International, Inc., formerly known as
iTechexpress, Inc., (DCII) and Drug Consultants, Inc. (DCI), and DCII's
wholly-owned subsidiary, Success Development Group, Inc. (SDG). All significant
inter-company balances and transactions have been eliminated in the
consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities at the
dates
of the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those
estimates.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable consists of amounts billed to customers upon performance of service.
The Company performs ongoing credit evaluations of customers and adjusts credit
limits based upon payment history and the customer current creditworthiness,
as
determined by its review of their current credit information. The Company
continuously monitors collections and payments from its customers and maintains
a provision for estimated credit losses based upon its historical experience
and
any customer-specific collection issues that it has identified. Accounts
receivable are shown net of an allowance for doubtful accounts of $0 at
September 30, 2007 and December 31, 2006, respectively. An allowance is
established whenever receivables are over 90 days old and the customer has
not
responded to efforts to reconcile differences. Such receivables are deemed
to be
uncollectible after 180 days. There were no such receivables for the current
year or prior year.
Cash
Cash
equivalents include short-term, highly liquid investments with maturities of
three months or less at the time of acquisition.
Long-Lived
Assets
The
Company accounts for its long-lived assets in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144
requires that long-lived assets be reviewed for impairment whenever events
or
changes in circumstances indicate that the historical cost carrying value of
an
asset may no longer be appropriate. The Company assesses recoverability of
the
carrying value of an asset by estimating the future net cash flows expected
to
result from the asset, including eventual disposition. If the future net cash
flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset's carrying value and fair
value or disposable value.
Goodwill
The
excess of purchase price and related costs over the fair value of net assets
of
entities acquired is recorded as goodwill. In accordance with SFAS
No. 142,
Goodwill and Other Intangible Assets
,
the
Company evaluates goodwill annually for impairment at the reporting unit level
and whenever circumstances occur indicating that goodwill might be impaired.
The
performance of the test involves a two-step process. The first step of the
impairment test involves comparing the fair value of the Company’s reporting
units with the reporting unit’s carrying amount, including goodwill. The Company
generally determines the fair value of its reporting units using the expected
present value of future cash flows, giving consideration to the market valuation
approach. If the carrying amount of the Company’s reporting units exceeds the
reporting unit’s fair value, the Company performs the second step of the
goodwill impairment test to determine the amount of impairment loss. The second
step of the goodwill impairment test involves comparing the implied fair value
of the Company’s reporting unit’s goodwill with the carrying amount of that
goodwill. At December 31, 2006 and 2005, the Company performed the annual
impairment test and determined there was no impairment of goodwill.
Beneficial
Conversion Feature
From
time
to time, the Company has debt with conversion options that provide for a rate
of
conversion that is below market value. This feature is normally characterized
as
a beneficial conversion feature ("BCF"), which is recorded by the Company
pursuant to Emerging Issues Task Forces ("EITF") Issue No. 98-5 ("EITF 98-05"),
"Accounting for Convertible Securities with Beneficial Conversion Features
or
Contingently Adjustable Conversion Ratios," and EITF Issue No. 00-27,
"Application of EITF Issue No. 98-5 to Certain Convertible
Instruments."
If
a BCF
exists, the Company records it as a debt discount and amortizes it to interest
expense over the life of the debt on a straight-line basis, which approximates
the effective interest method.
Derivative
Financial Instruments
The
Company's derivative financial instruments consist of embedded derivatives
related to the convertible notes, since the notes are not conventional
convertible debt. These embedded derivatives include certain conversion
features, monthly payment options, variable interest features, call options,
liquidated damages clauses in the registration rights agreement and certain
default provisions. The accounting treatment of derivative financial instruments
requires that we record the derivatives and related warrants at their fair
values as of the inception date of the agreement and at fair value as of each
subsequent balance sheet date.
Any
change in fair value of these instruments will be recorded as non- operating,
non-cash income or expense at each reporting date. If the fair value of the
derivatives is higher at the subsequent balance sheet date, we will record
a
non-operating, non-cash charge. If the fair value of the derivatives is lower
at
the subsequent balance sheet date, we will record non-operating, non-cash
income. The derivative and warrant liabilities are recorded as long-term
liabilities in the consolidated balance sheet.
Revenue
Recognition
Revenues
and costs of revenues from services are recognized during the period in which
the services are provided. The Company applies the provisions of SEC Staff
Accounting Bulletin ("SAB") No. 104, Revenue Recognition in Financial Statements
("SAB 104"), which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 104
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In general,
the
Company recognizes revenue related to monthly contracted amounts for services
provided when (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred or services have been rendered, (iii) the fee is fixed or
determinable, and (iv) collectibility is reasonably assured.
The
Company has contracts with various governments and governmental agencies.
Government contracts are subject to audit by the applicable governmental agency.
Such audits could lead to inquiries from the government regarding the
allowability of costs under applicable government regulations and potential
adjustments of contract revenues. To date, the Company has not been involved
in
any such audits.
Income
Taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences attributable
to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not that such assets will not
be
realized through future operations. We currently have recorded a valuation
allowance against all of our deferred tax assets. We have considered future
taxable income and ongoing tax planning strategies in assessing the amount
of
the valuation allowance. If actual results differ favorably from these
estimates, we may be able to realize some or all of the deferred tax assets,
which could favorably impact our operating results.
Issuance
of Shares for Non-Cash Consideration
The
Company accounts for the issuance of equity instruments to acquire goods and/or
services based on the fair value of the goods and services or the fair value
of
the equity instrument at the time of issuance, whichever is more reliably
determinable. The majority of equity instruments have been valued at the market
value of the shares on the date issued.
The
Company's accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees
for
Acquiring, or in Conjunction with Selling, Goods or Services" and EITF 00-18,
"Accounting Recognition for Certain Transactions Involving Equity Instruments
Granted to Other Than Employees." The measurement date for the fair value of
the
equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii)
the
date at which the consultant or vendor's performance is complete. In the case
of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement. In
accordance to EITF 00-18, an asset acquired in exchange for the issuance of
fully vested, nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor's balance sheet once the equity
instrument is granted for accounting purposes.
RISK
FACTORS
The
more
prominent risks and uncertainties inherent in our business are described below.
However, additional risks and uncertainties may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations will likely suffer. Any of these
or
other factors could harm our business and future results of operations and
may
cause you to lose all or part of your investment.
RISKS
RELATING TO OUR BUSINESS
WE
MAY
CONTINUE TO BE UNPROFITABLE AND MAY NOT GENERATE PROFITS TO CONTINUE OUR
BUSINESS PLAN.
We
have
historically lost money. As of September 30, 2007, we had $1,736,728 in
accumulated deficit. There is a risk that our healthcare staffing services
business will fail. If our business plan is not successful, we will likely
be
forced to curtail or abandon our business plan. If this happens, investors
could
lose their entire investment in our Common Stock.
WE
DO NOT
HAVE SUFFICIENT CASH ON HAND AND CASH FLOW FROM OPERATIONS TO MEET OUR LIQUIDITY
REQUIREMENTS, AND WILL REQUIRE ADDITIONAL NEAR-TERM FINANCING TO CONTINUE OUR
BUSINESS OPERATIONS AND PURSUE OUR GROWTH STRATEGY.
We
project that our cash on hand and cash flow generated from operations will
not
be sufficient to fund operational liquidity requirements. As a result, our
ability to continue our operations and growth strategy depends on our ability
to
access the capital markets in the near term.
We
currently rely on a working capital line of credit from Monarch Bay Management
Company, LLC (“MBMC”) to meet our short-term liquidity needs. David Walters, our
Chairman and Chief Financial Officer, and Keith Moore, our director, each are
members of, and each owns 50% of the ownership interests in, MBMC. Although
the
line of credit provides for total funding of up to $500,000, there can be no
assurance that funding from this source will continue to be available, or if
such funding is available, that it will be on terms that management deems
sufficiently favorable.
There
also can be no assurance that capital from other outside sources will be
available, or if such financing is available, that it will be on terms that
management deems sufficiently favorable. If we are unable to obtain additional
financing upon terms that management deems sufficiently favorable, or at all,
we
could be forced to restructure or to default on our obligations or to curtail
or
abandon our business plan, any of which may devalue or make worthless an
investment in the Company.
OUR
AUDITORS HAVE EXPRESSED AN OPINION THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR
ABILITY TO CONTINUE AS A GOING CONCERN.
Our
auditors have expressed an opinion that there is substantial doubt about our
ability to continue as a going concern primarily because we have yet to generate
sufficient working capital to support our operations and our ability to pay
outstanding employment taxes. Our most recent financial statements have been
prepared assuming that we will continue as a going concern. The financial
statements do not include any adjustments that might result from our inability
to continue as a going concern. If we are unable to continue as a going concern,
investors will lose their entire investment in our Common Stock.
OUR
OPERATIONS ARE RECENTLY ACQUIRED WHICH MEANS THAT WE HAVE A LIMITED OPERATING
HISTORY UPON WHICH YOU CAN BASE YOUR INVESTMENT DECISION.
Prior
to
August 2003, we were a development stage company. Although we were incorporated
only six years ago, we have undergone a number of changes in our business
strategy and organization. In August 2003, we entered the payroll nurse staffing
and homecare business. We adjusted our business strategy again in November
2005
by broadening our service offerings and to focus our activities on growing
profitable operations. We have begun to implement this strategy by acquiring
DCII and DCI.
The
operations of DCII and DCI, which will represent our entire business for the
foreseeable future, were acquired in November 2005. Accordingly, we have a
limited operating history upon which an evaluation of our prospects can be
made.
Our strategy is unproven and the revenue and income potential from our strategy
is unproven. Our business strategy may not be successful and we may not be
able
to successfully address these risks. If we are unsuccessful in the execution
of
our current strategic plan, we could be forced to reduce or cease our
operations. If this happens, investors could lose their entire investment in
our
Common Stock.
WE
WILL
REQUIRE SIGNIFICANT ADDITIONAL CAPITAL TO REPAY MONIES BORROWED BY US, CONTINUE
OUR BUSINESS OPERATIONS AND PURSUE OUR GROWTH STRATEGY.
We
have
sold $3,075,000 in secured convertible notes ($33,675 of which was repaid as
of
September 30, 2007 through the conversion of notes into common stock). We do
not
currently have enough capital to repay the amounts outstanding under the notes
and we may never generate enough revenue to repay the amounts owed. As a result,
we could be forced to curtail or abandon our business plan, making any
investment in our Common Stock worthless.
Our
continued operations and growth strategy depend on our ability to access the
capital markets. There can be no assurance that capital from outside sources
will be available, or if such financing is available, that it will be on terms
that management deems sufficiently favorable. If we are unable to obtain
additional financing upon terms that management deems sufficiently favorable,
or
at all, it would have a material adverse impact upon our ability to continue
our
business operations and pursue our growth strategy. In the event we do not
raise
additional capital, it is likely that our growth will be restricted and that
we
may be forced to scale back or curtail implementing our business plan. If this
happens, investors would likely experience a devaluing of our Common
Stock.
WE
MAY BE
FORCED TO SELL SHARES OF COMMON STOCK AND/OR ENTER INTO ADDITIONAL CONVERTIBLE
NOTE FINANCING AGREEMENTS IN ORDER TO REPAY AMOUNTS OWED AND CONTINUE OUR
BUSINESS PLAN.
We
owe
$3,041,325 (as of September 30, 2007) to the holders of the notes (not including
any accrued interest). We do not currently have enough capital to repay any
of
these amounts and we may never generate enough revenue to repay the amounts
owed. We may be forced to raise additional funds to repay these amounts through
the issuance of equity, equity-related or convertible debt securities. The
issuance of additional common stock dilutes existing stockholdings.
Additionally, in furtherance of our convertible secured note transaction, we
may
issue additional shares of common stock throughout the term, and accordingly,
our stockholders may experience significant dilution. Further procurement of
additional financing through the issuance of equity, equity-related or
convertible debt securities or preferred stock may further dilute existing
stock. The perceived risk of dilution may cause the holders of our secured
convertible notes, as well as other holders, to sell their shares, which would
contribute to downward movement in the price of your shares. Additionally,
if
such additional shares are issued, investors would likely experience a devaluing
of our Common Stock.
WE
HAVE
PLEDGED ALL OF OUR ASSETS TO EXISTING CREDITORS.
Our
secured convertible notes are secured by a lien on substantially all of our
assets, including our equipment, inventory, contract rights, receivables,
general intangibles, and intellectual property. A default by us under the
secured convertible notes would enable the holders of the notes to take control
of substantially all of our assets. The holders of the secured convertible
notes
have no operating experience in our industry and if we were to default and
the
note holders were to take over control of our Company, they could force us
to
substantially curtail or cease our operations. If this happens, investors could
lose their entire investment in our Common Stock.
DCII
and
DCI, our principal operating subsidiaries, have pledged substantially all of
their accounts receivable to secure the payment of accounts receivable sold
under a factoring agreement with Systran Financial Services Corporation
("Systran"). If Systran is unable to collect our accounts receivable purchased
from us, they could take control of all of our accounts receivable, which would
substantially reduce our working capital and could force us to curtail or
abandon our business plan. If this happens, investors could lose their entire
investment in our Common Stock.
In
addition, the existence of these asset pledges to the holders of the secured
convertible notes and to Systran will make it more difficult for us to obtain
additional financing required to repay monies borrowed by us, continue our
business operations and pursue our growth strategy.
THE
SECURED CONVERTIBLE NOTES BECOME IMMEDIATELY DUE AND PAYABLE UPON DEFAULT AND
WE
MAY BE REQUIRED TO PAY AN AMOUNT IN EXCESS OF THE OUTSTANDING AMOUNT DUE UNDER
OF THE SECURED CONVERTIBLE NOTES, AND WE MAY BE FORCED TO SELL ALL OF OUR
ASSETS.
The
secured convertible notes become immediately due and payable upon an event
of
default including:
-
failure
to pay interest and principal payments when due;
-
a
breach by us of any material covenant or term or condition of the secure
convertible notes or any agreement made in connection therewith;
-
a
breach by us of any material representation or warranty made in the 2005
securities purchase agreement or in any agreement made in connection
therewith;
-
we make
an assignment for the benefit of our creditors, or a receiver or trustee is
appointed for us;
-
the
entering of any money judgment, writ or similar process against us or any of
our
subsidiaries or any of our property or other assets for more than
$50,000;
-
any
form of bankruptcy or insolvency proceeding is instituted by or against us;
and
-
our
failure to timely deliver shares of Common Stock when due upon conversions
of
the secured convertible notes.
If
we
default on the secured convertible notes and the holders demand all payments
due
and payable, we will be required to pay the holders of the secured convertible
notes an amount equal to the greater of (x) 130% times the sum of the
outstanding amount of the secured convertible notes per month plus accrued
and
unpaid interest on the secured convertible notes plus additional amounts owed
to
the holders of the notes under the 2004 securities purchase agreement and the
2005 securities purchase agreement and related documents or (y) the value of
the
highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to the amount calculated under clause (x) determined based
on
the highest closing price of the Common Stock during the period beginning on
the
date of default and ending on the date of the payment described herein. We
do
not currently have the cash on hand to repay this amount. If we are unable
to
raise enough money to cover this amount we may be forced to restructure, file
for bankruptcy, sell assets or cease operations. If any of these events happen,
investor could lose their entire investment in our Common Stock.
WE
MAY BE
SUBJECT TO LIQUIDATED DAMAGES IN THE AMOUNT OF 3% OF THE OUTSTANDING AMOUNT
OF
THE SECURED CONVERTIBLE NOTES PER MONTH PLUS ACCRUED AND UNPAID INTEREST ON
THE
SECURED CONVERTIBLE NOTES FOR BREACHES BY US OF OUR REPRESENTATIONS AND
WARRANTIES AND CERTAIN COVENANTS UNDER THE 2005 SECURITIES PURCHASE
AGREEMENT.
In
the
2005 securities purchase agreement relating to our secured convertible notes,
we
made certain representations and warranties and agreed to certain covenants
that
are customary for securities purchase agreements. In the event that we breach
those representations, warranties or covenants, we will be subject to liquidated
damages in the amount of 3% of the outstanding amount of the secured convertible
notes, per month, plus accrued and unpaid interest on the notes for such
breaches. As of September 30, 2007, the outstanding amount of the secured
convertible notes was $3,041,325. We have not previously been required to pay
any liquidated damages, however if we do breach the representations, warranties
or covenants, we will be forced to pay liquidated damages to the note holders.
If we do not have enough cash on hand to cover the amount of the liquidated
damages, we could be forced to sell part or all of our assets, which could
force
us to scale back our business operations. If this happens, investors would
likely experience a devaluing of our Common Stock.
WE
ARE
HEAVILY DEPENDENT ON THE OPERATIONS OF DCI FOR OUR REVENUES, WHICH ITSELF IS
HIGHLY DEPENDENT ON THE STATE OF CALIFORNIA DEPARTMENT OF CORRECTIONS AND
REHABILITATION AS ITS MAJOR CUSTOMER.
We
anticipate approximately 95% of our revenues for the foreseeable future will
come from the operations of DCI. Approximately 95% of DCI's revenue comes from
the CDCR. DCI's agreements with the CDCR do not provide for a minimum purchase
commitment of our services and can be terminated by the CDCR at any time on
30
days' notice. Our dependence on the CDCR as our major customer subjects us
to
significant financial risks in the operation of our business if the CDCR were
to
terminate or materially reduce, for any reason, its business relationship with
us.
We
recently have experienced a loss of several of our healthcare professionals
who
have accepted positions with the CDCR due to a federal court-appointed
receiver’s management of the CDCR healthcare delivery system. See “THE
COURT-APPOINTED RECEIVER MANAGING THE CDCR’S HEALTHCARE DELIVERY SYSTEM INTENDS
TO REDUCE THE CDCR’S ULTILIZATION OF STAFFING SERVICE PROVIDERS LIKE DCI”
below.
Further,
the CDCR is subject to unique political and budgetary constraints and has
special contracting requirements that may affect our ability to obtain
additional contacts or business. In addition, future sales to the CDCR and
other
governmental agencies, if any, will depend on our ability to meet government
contracting requirements, certain of which may be onerous or impossible to
meet,
resulting in our inability to obtain a particular contract. Common requirements
in government contracts include bonding; provisions permitting the purchasing
agency to modify or terminate, at will, the contract without penalty; and
provisions permitting the agency to perform investigations or audits of our
business practices. If we are unable to maintain our contracts in the CDCR
and/or gain new contracts in California and elsewhere, we could be forced to
curtail or abandon our business plan. If this happens, investors could lose
their entire investment in our Common Stock.
THE
COURT-APPOINTED RECEIVER MANAGING THE CDCR’S HEALTHCARE DELIVERY SYSTEM INTENDS
TO REDUCE UTILIZATION OF STAFFING SERVICE PROVIDERS LIKE DCI.
In
April
2006, a federal court-appointed receiver assumed total control over CDCR’s
healthcare delivery system to address the court’s findings of substandard
medical care. Among the receiver’s objectives is to reduce the CDCR’s reliance
on staffing service providers like DCI. Since the receiver’s appointment, DCI
has experienced a loss of several of its healthcare professionals who have
accepted positions with the CDCR. We believe that the ongoing implications
of
the receiver’s management of the CDCR’s healthcare delivery system include lower
demand from the CDCR for DCI’s services, higher attrition of our healthcare
professionals, increased competition for recruiting healthcare professionals
to
fill positions with the CDCR and reduced margins for the services we provide
the
CDCR. These factors will have a material adverse impact on our results of
operations, and could have an adverse effect on the value of our Common Stock,
unless we can successfully reduce our dependence on the CDCR and obtain higher
margin contracts with other customers.
THE
INTERNAL REVENUE SERVICE MAY ATTEMPT TO CLASSIFY OUR TEMPORARY HEALTHCARE
PROFESSIONALS AS EMPLOYEES AND NOT INDEPENDENT CONTRACTORS.
A
pharmacist who, in 2004 and 2005, provided services to the CDCR, a client
of the Company’s subsidiary (DCI), requested the Internal Revenue Service (“the
IRS”) to determine that she was an employee of DCI. On May 31, 2007, the
Company received notice from the IRS reaffirming the IRS's conclusion that
DCI
was a third-party payer to and thus the employer of the pharmacist who provided
services to the CDCR. The IRS notice addresses only the case of the
individual pharmacist. It does not yet represent a formal determination
that is binding on the Company. The Company disagrees with the conclusion
of the IRS notice and believes that the pharmacist in question was properly
classified as an independent contractor. If the IRS audits DCI and
concludes that pharmacists are employees of DCI, and not independent
contractors, DCI intends to contest the matter. However, if it is
ultimately decided that pharmacists and nurses in its registry who provide
services to DCI's clients are employees of DCI, DCI would be required to pay
to
federal income tax withholding, Federal Insurance Contributions Act (FICA)
tax,
and Federal Unemployment Tax Act (FUTA) tax on the compensation payable to
such
pharmacists and nurses. In addition, the Company may be exposed to
liability for past taxes, penalties and interest. Any of these results
would have a material adverse effect on the Company's business, financial
condition and results of operations.
WE
FACE
SIGNIFICANT COMPETITION FOR OUR SERVICES AND AS A RESULT, WE MAY BE UNABLE
TO
COMPETE IN THE HEALTHCARE STAFFING INDUSTRY.
We
face
significant competition for our staffing services. The markets for our services
are intensely competitive and we face significant competition from a number
of
different sources. Several of our competitors have significantly greater name
recognition as well as substantially greater financial, technical, service
offerings, product development and marketing resources than we do. Additionally,
competitive pressures and other factors may result in price or market share
erosion that could have a material adverse effect on our business, results
of
operations and financial condition.
THERE
IS
A SHORTAGE OF WORKERS IN THE HEALTHCARE INDUSTRY THAT MAY IMPEDE OUR ABILITY
TO
ACQUIRE QUALIFIED HEALTHCARE PROFESSIONALS FOR OUR CONTINUED
GROWTH.
Presently,
the healthcare industry is experiencing a growing shortage of healthcare
professionals. As the operations of DCI are in part based on the placement
of
healthcare professionals, there can be no assurance that we will be able to
acquire qualified healthcare professionals to meet our growing needs. Any
shortage in the number of professionals in the healthcare industry could impede
the Company's ability to place such healthcare professionals into jobs and/or
impede our growth rate. If we are unable to find qualified healthcare
professionals to place in jobs, it would prevent us from continuing our current
business strategy. If this happens, investors would likely experience a
devaluing of our Common Stock.
WE
ARE
ACTIVELY SEEKING TO ACQUIRE COMPANIES RELATED TO OUR BUSINESS OPERATIONS, BUT
OUR EFFORTS MAY NOT MATERIALIZE INTO DEFINITIVE AGREEMENTS.
Our
business model is dependent upon growth through acquisition of other staffing
service providers. We completed the acquisition of DCI in November 2005.
Although we currently have no commitments with respect to any other
acquisitions, we expect to continue making acquisitions that will enable us
to
expand our staffing services and build our customer base. There can be no
assurance that we will be successful in identifying suitable acquisition
candidates or in coming to definitive terms with respect to any negotiations
which we may enter into, or, assuming that we reach definitive agreements,
that
we will close the acquisitions. In the event that we do not reach any additional
definitive agreements or close any additional acquisitions, our expansion
strategy will not proceed as intended which will have a material adverse effect
on our growth.
OUR
FUTURE ACQUISITIONS, IF ANY, MAY BE COSTLY AND MAY NOT REALIZE THE BENEFITS
ANTICIPATED BY US.
We
may
engage in future acquisitions, which may be expensive and time- consuming and
from which we may not realize anticipated benefits. We may acquire additional
businesses, technologies, products and services if we determine that these
additional businesses, technologies, products and services are likely to serve
our strategic goals. We currently have no commitments or agreements with respect
to any acquisitions. The specific risks we may encounter in these types of
transactions include the following:
-
Potentially dilutive issuances of our securities, the incurrence of debt and
contingent liabilities and amortization expenses related to intangible assets,
which could adversely affect our results of operations and financial
conditions;
-
The
possible adverse impact of such acquisitions on existing relationships with
third-party partners and suppliers of services;
-
The
possibility that staff or customers of the acquired company might not accept
new
ownership and may transition to different technologies or attempt to renegotiate
contract terms or relationships;
-
The
possibility that the due diligence process in any such acquisition may not
completely identify material issues associated with product quality,
intellectual property issues, key personnel issues or legal and financial
contingencies; and
-
Difficulty in integrating acquired operations due to geographical distance,
and
language and cultural differences.
A
failure
to successfully integrate acquired businesses for any of these reasons could
have a material adverse effect on our results of operations.
WE
MAY BE
UNABLE TO MANAGE OUR GROWTH.
Any
growth that we experience is expected to place a significant strain on our
managerial and administrative resources. We have limited employees who perform
management or administrative functions. Further, if our business grows, we
will
be required to manage multiple relationships with various clients, healthcare
professionals and third parties. These requirements will be exacerbated in
the
event of further growth. There can be no assurance that our other resources
such
as our systems, procedures or controls will be adequate to support our growing
operations or that we will be able to achieve the rapid execution necessary
to
successfully offer our services and implement our business plan. Assuming that
our business grows, our future success will depend on our ability to add
additional management and administrative personnel to help compliment our
current employees as well as other resources. If we are unable to add additional
managerial and administrative resources, it will prevent us from continuing
our
business plan, which calls for expanding our operations, and could have an
adverse effect on the value of our Common Stock.
WE
HEAVILY DEPEND ON OUR RELATIONSHIPS WITH ENTITIES OWNED BY OUR
DIRECTORS
We
depend
on relationships with MBMC and another entity controlled by David Walters and
Keith Moore (both directors) for short-term working capital as well as for
outsourced financial management, administrative, investment banking and other
services. Accordingly, the success of the Company heavily depends upon our
relationships with, and the performance of, these entities.
We
currently rely on a working capital line of credit from MBMC. Although the
line
of credit provides for total funding of up to $500,000, there can be no
assurance that funding from this source will continue to be available, or if
such funding is available, that it will be on terms that management deems
sufficiently favorable.
In
addition, any failure to perform adequately the outsourced services could have
a
material adverse effect on our business and operations and cause us to expend
significant resources in finding replacement providers, which could cause the
value of our Common Stock to decline or become worthless.
DAVID
WALTERS AND KEITH MOORE CAN EXERCISE CONTROL OVER CORPORATE DECISIONS INCLUDING
THE APPOINTMENT OF NEW DIRECTORS.
David
Walters and Keith Moore can vote an aggregate of 13,283,333 shares (or 37.5%)
of
our outstanding Common Stock (or 681,714,338 shares ( or 94.6%) assuming the
floating conversion price feature of the Series A Preferred Stock described
below was currently in effect). Accordingly, Mr. Walters and Mr. Moore will
exercise control in determining the outcome of all corporate transactions or
other matters, including the election of directors, mergers, consolidations,
the
sale of all or substantially all of our assets, and also the power to prevent
or
cause a change in control. All of our other stockholders are minority
stockholders and as such will have little to no say in the direction of the
Company and the election of Directors. Additionally, it will be difficult if
not
impossible for stockholders to remove Mr. Walters and Mr. Moore as Directors
of
the Company, which will mean they will remain in control of who serves as
officers of the Company as well as whether any changes are made in the Board
of
Directors.
Messrs.
Walters and Moore beneficially own 10,000 shares of our Series A Preferred
Stock. The Series A Preferred Stock is convertible into a number of shares
of
our Common Stock determined by dividing (i) the sum of liquidation preference
of
such share of Series A Preferred Stock ($100 per share), plus any accrued but
unpaid dividends thereon, by (ii) a conversion price equal to (a) at any time
prior to November 15, 2007, $0.20 and (b) from and after November 15, 2007,
the
lower of (x) $0.20 or (y) 75% of the average of the three lowest intraday
trading prices for the Common Stock on a principal market for the 20 trading
days before but not including the conversion date. If converted on October
31,
2007, the Series A Preferred Stock beneficially owned by Messrs. Walters and
Moore would be convertible into 5,000,000
shares
of
our Common Stock based upon a current conversion price of $0.20. If the floating
conversion price conversion feature had been effect, the number of shares
issuable on such date would have been 681,714,338, based on a conversion price
of $0.0014675. The floating conversion price feature of the Series A Preferred
Stock could enable Messrs. Walters and Moore to retain substantial voting
control of the Company while other existing stockholders experience substantial
dilution of their ownership interests.
OUR
RESULTS OF OPERATIONS HAVE FLUCTUATED IN THE PAST AND AS A RESULT, THE RESULTS
OF ONE QUARTER MAY NOT BE INDICATIVE OF OUR YEARLY RESULTS, MAKING ANY
INVESTMENT IN US SPECULATIVE.
Our
quarterly operating results and revenue has historically fluctuated in the
past
and may do so in the future from quarter to quarter and period to period, as
a
result of a number of factors including, without limitation:
-
the
size and timing of orders from clients;
-
changes
in pricing policies or price reductions by us or our competitors;
-
changes
in revenue recognition or other accounting guidelines employed by us and/or
established by the Financial Accounting Standards Board or other rule-making
bodies;
-
our
success in expanding our sales and marketing programs;
-
execution of or changes to Company strategy;
-
personnel changes; and
-
general
market/economic factors.
-
Due to
all of the foregoing factors, it is possible that our operating results may
be
below the expectations of public market analysts and investors. In such event,
the price of our Common Stock would likely decline and any investment in us
could become worthless.
WE
FACE
POTENTIAL LIABILITY FOR SECURITY BREACHES RELATING TO OUR
TECHNOLOGY.
We
face
the possibility of damages resulting from internal and external security
breaches, and viruses. The systems with which we may interface, such as the
Internet and related systems may be vulnerable to security breaches, viruses,
programming errors, or similar disruptive problems. The effect of these security
breaches and related issues could reduce demand for our services. Accordingly,
we believe that it is critical that these facilities and related infrastructures
not only be secure, but also be viewed by our customers as free from potential
breach. Maintaining such standards, protecting against breaches and curing
security flaws, may require us to expend significant capital.
RISKS
RELATING TO OUR SECURED CONVERTIBLE NOTES AND SERIES A PREFERRED
STOCK
THE
ISSUANCE AND SALE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES
(AND
RELATED WARRANTS) AND OUR SERIES A PREFERRED STOCK MAY DEPRESS THE MARKET PRICE
OF OUR COMMON STOCK.
We
issued
21,069,559 shares of Common Stock upon conversion of our secured convertible
notes during the period from January 1, 2007 through October 31, 2007. Over
the
same time period the market price of our Common Stock declined from $0.03 to
$0.0025. As of October 31, 2007, we had 30,287,935 shares of Common Stock issued
and outstanding. As of October 31, 2007, a total of 3,555,955,707 shares of
Common Stock were issuable upon conversion of our secured convertible notes
and
related warrants and 698,466,780 shares of Common Stock were issuable upon
conversion of our Series A Preferred Stock (assuming the floating conversion
price feature of the Series A Preferred Stock was in effect as of such date).
As
sequential conversions and sales take place, the price of our Common Stock
may
decline, and as a result, the holders of the these securities could be entitled
to receive an increasing number of shares, which could then be sold, triggering
further price declines and conversions for even larger numbers of shares, to
the
detriment of the investors in our Common Stock.
WE
HAVE
INSUFFICIENT AUTHORIZED SHARES OF COMMON STOCK TO AFFECT THE CONVERSION OF
OUR
SECURED CONVERTIBLE NOTES AND OUR SERIES A PREFERRED STOCK, AND WILL NEED TO
OBTAIN STOCKHOLDER APPROVAL FOR AN INCREASE IN AUTHORIZED SHARES AND/OR A
REVERSE STOCK SPLIT
We
currently have 400,000,000 shares of our Common Stock authorized for
issuance. As of October 31, 2007, a total of 3,555,955,707 shares of
Common Stock were issuable upon conversion of our secured convertible notes
and
related warrants and 698,466,780 shares of Common Stock were issuable upon
conversion of our Series A Preferred Stock (assuming the floating conversion
price feature of the Series A Preferred Stock was in effect as of such
date). Accordingly, to fulfill our obligations under these
securities, we will need to obtain stockholder approval for an increase in
the
number of authorized shares of our Common Stock and/or a reverse stock split
of
our Common Stock. David Walters and Keith Moor (two of
our directors) have sufficient voting control to approve each of these actions
without the vote of any other stockholder. See “DAVID WALTERS AND
KEITH MOORE CAN EXERCISE CONTROL OVER CORPORATE DECISIONS INCLUDING THE
APPOINTMENT OF NEW DIRECTORS” above. The occurrence of either of
these actions will likely adversely affect the market price of our Common
Stock.
THE
ISSUANCE AND SALE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES
(AND
RELATED WARRANTS) AND OUR SERIES A PREFERRED STOCK) REPRESENT
OVERHANG.
In
addition, the Common Stock issuable upon conversion of the secured convertible
notes and Series A Preferred Stock and exercise of the warrants may represent
overhang that may also adversely affect the market price of our Common Stock.
Overhang occurs when there is a greater supply of a company's stock in the
market than there is demand for that stock. When this happens the price of
the
company's Common Stock will decrease, and any additional shares which
shareholders attempt to sell in the market will only decrease the share price
even more. The secured convertible notes and Series A Preferred Stock may be
converted at a conversion price of $0.00098 and $0.00147 per share,
respectively, as of October 31, 2007. Warrants to purchase 5,556 shares of
our
Common Stock may be exercised at a price of $40.50 per share, warrants to
purchase 143,056 shares of our Common Stock may be exercised at a price of
$9.00
per share, and warrants to purchase 166,667 shares of our Common Stock may
be
exercised at $4.50 per share. As of October 31, 2007, the market price for
one
share of our Common Stock was $0.0025. Therefore, the secured convertible notes
and Series A Preferred Stock may be converted into Common Stock at a discount
to
the market price, providing holders with the ability to sell their Common Stock
at or below market and still make a profit. In the event of such overhang,
holders will have an incentive to sell their Common Stock as quickly as
possible. If the share volume of the Company's Common Stock cannot absorb the
discounted shares, the market price per share of our Common Stock will likely
decrease.
THE
ISSUANCE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES (AND RELATED
WARRANTS) AND OUR SERIES A PREFERRED STOCK) WILL CAUSE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The
issuance of Common Stock upon conversion of the secured convertible notes and
Series A Preferred Stock and exercise of the warrants by the holders of these
securities will result in immediate and substantial dilution to the interests
of
other stockholders since the security holders may ultimately receive and sell
the full amount issuable on conversion or exercise. Although the security
holders may not convert their secured convertible notes, Series A Preferred
Stock and/or exercise their warrants if such conversion or exercise would cause
them to own more than 4.9% of our outstanding Common Stock, this restriction
does not prevent the security holders from converting and/or exercising some
of
their holdings, selling those shares, and then converting the rest of their
holdings, while still staying below the 4.9% limit. In this way, the security
holders could sell more than this limit while never actually holding more shares
than this limit allows. If the security holders choose to do this it will cause
substantial dilution to the holders of our Common Stock.
THE
CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES AND OUR SERIES A PREFERRED STOCKCOULD REQUIRE US TO ISSUE A SUBSTANTIALLY
GREATER NUMBER OF SHARES, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK AND CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our
existing stockholders will experience substantial dilution of their
i
nvestment
upon conversion of our secured convertible notes and our Series A Preferred
Stock into shares of our Common Stock.
|
|
·
|
The
secured convertible notes are convertible into shares of our Common
Stock
at the lesser of $0.90 or 50% of the average of the three lowest
trading
prices of our Common Stock during the 20 trading day period ending
one
trading day before the date that a holder sends us a notice of conversion.
|
|
|
·
|
Effective
as of November 15, 2007, the Series A Preferred Stock is convertible
into
shares of our Common Stock at the lesser of $0.20 or 75% of the average
of
the three lowest trading prices of our Common Stock during the 20
trading
day period ending one trading day before the date that a holder sends
us a
notice of conversion.
|
If
converted on October 31, 2007, the secured convertible notes would be
convertible into approximately 3,555,955,707 shares of Common Stock (based
upon
a conversion price of $0.00098) and the Series A Preferred Stock would be
convertible into approximately 698,466,780 shares of Common Stock (based upon
a
conversion price of $0.00147).
The
number of shares issuable could prove to be significantly greater in the event
of a decrease in the trading price of our Common Stock that would cause dilution
to our existing stockholders.
The
sale
of shares of Common Stock issuable upon conversion of these securities may
adversely affect the market price of our Common Stock. As sequential conversions
and sales take place, the price of our Common Stock may decline and if so,
the
holders of secured convertible notes and Series A Preferred Stock would be
entitled to receive an increasing number of shares, which could then be sold,
triggering further price declines and conversions for even larger numbers of
shares, which would cause additional dilution to our existing stockholders.
Additionally, there are no provisions in the 2005 securities purchase agreement,
the secured convertible notes, the warrants, or any other document which
restrict the holders' ability to sell short our Common Stock, which they could
do to decrease the price of our Common Stock and increase the number of shares
they would receive upon conversion and thereby further dilute other
stockholders.
In
addition, the issuance and sale (and potential issuance and sale) of Common
Stock underlying the secured convertible notes, related warrants and series
A
preferred stock will make it more difficult for us to obtain additional
financing required to repay monies borrowed by us, continue our business
operations and pursue our growth strategy.
The
following is an example of the amount of shares of our Common Stock that are
issuable upon conversion of the secured convertible notes and Series A Preferred
Stock based on conversion prices that are 25%, 50% and 75% below the conversion
price as of October 31, 2007 of $0.00098
and
$0.00147 for the secured convertible notes and Series A Preferred Stock,
respectively.
Secured
Convertible Notes
|
Percentage Below
|
|
Estimated
|
|
Approximate
|
|
% of
|
|
|
Conversion Price
|
|
Conversion
|
|
Number of
|
|
Oustanding
|
|
|
As of October 31, 2007
|
|
Price
|
|
Shares Issuable (1)
|
|
Common Stock (1,2)
|
|
|
25%
|
|
$
|
0.0007
|
|
|
4,741,274,276
|
|
|
99.37
|
%
|
|
50%
|
|
$
|
0.0005
|
|
|
7,111,911,414
|
|
|
99.58
|
%
|
|
75%
|
|
$
|
0.0002
|
|
|
14,223,822,828
|
|
|
99.79
|
%
|
(1)
Includes shares of Common Stock issuable upon conversion of the secured
convertible notes. Does not include 341,112 shares of Common Stock issuable
upon
exercise of outstanding warrants. Does not include 698,466,780 shares of Common
Stock issuable upon conversion of our Series A Preferred Stock (assuming the
floating conversion price feature of the Series A Preferred Stock was in effect
as of such date).
(2)
As of
October 31, 2007, we had 30,287,935 shares of Common Stock issued and
outstanding.
Series
A Preferred Stock
|
Percentage Below
|
|
Estimated
|
|
Approximate
|
|
% of
|
|
|
Conversion Price
|
|
Conversion
|
|
Number of
|
|
Oustanding
|
|
|
As of October 31, 2007
|
|
Price
|
|
Shares Issuable (1)
|
|
Common Stock (1,2)
|
|
|
25%
|
|
$
|
0.00110
|
|
|
931,289,040
|
|
|
96.85
|
%
|
|
50%
|
|
$
|
0.00073
|
|
|
1,396,933,560
|
|
|
97.88
|
%
|
|
75%
|
|
$
|
0.00037
|
|
|
2,793,867,121
|
|
|
98.93
|
%
|
(1)
Includes shares of Common Stock issuable upon conversion of our Series A
Preferred Stock (assuming the floating conversion price feature of the Series
A
Preferred Stock was in effect as of such date) . Does not include 341,112 shares
of Common Stock issuable upon exercise of outstanding warrants. Does not include
shares of Common Stock issuable upon conversion of the secured convertible
notes.
(2)
As of
October 31, 2007, we had 30,287,935 shares of Common Stock issued and
outstanding.
As
illustrated, the number of shares of Common Stock issuable upon conversion
of
the secured convertible notes and Series A Preferred Stock will increase if
the
conversion price of our Common Stock declines, which will cause dilution to
our
existing stockholders.
THE
CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF THE SECURED CONVERTIBLE
NOTES AND SERIES A PREFERRED STOCK MAY ENCOURAGE INVESTORS, INCLUDING THE NOTE
HOLDERS, TO SELL SHORT OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT
ON
THE PRICE OF OUR COMMON STOCK.
There
are
no provisions in the 2005 securities purchase agreement, the secured convertible
notes, the warrants, the Series A Preferred Stock or any other document which
restrict the holders' ability to sell short our Common Stock, which they could
do to decrease the price of our Common Stock and increase the number of shares
they would receive upon conversion and thereby further dilute other
stockholders.
The
significant downward pressure on the price of our Common Stock as the security
holders convert and sell material amounts of our Common Stock could encourage
investors to short sell our Common Stock. This could place further downward
pressure on the price of our Common Stock. In addition, not only the sale of
shares issued upon conversion of the secured convertible notes and Series A
Preferred Stock or exercise of the warrants, but also the mere perception that
these sales could occur, may adversely affect the market price of our Common
Stock.
THE
NOTE
HOLDERS MAY EXPLOIT A MAJOR ANNOUNCEMENT MADE BY THE COMPANY TO CONVERT THE
SECURED CONVERTIBLE NOTES AT A PRICE SUBSTANTIALLY LOWER THEN THE CONVERSION
PRICE WOULD BE OTHERWISE.
Under
the
terms of the secured convertible notes, the conversion price which the note
holders must pay is changed after major announcements by the Company, discussed
below. In the event the Company makes a major announcement, the conversion
price
of the secured convertible notes is equal to the lower of the conversion price
that would be in effect on the date the announcement is made or the current
conversion price at the time the note holders wish to convert. Therefore, if
the
Company's stock price was to increase substantially after a major announcement
the note holders could still convert the secured convertible notes the lower
price which applied before the announcement. In this way, the note holders
could
hold shares of Common Stock worth much more then the note holders originally
paid for them. Therefore, the note holders could sell the shares at a price
lower then the current market prices, still making a profit on their investment
which would drive down the price of the Common Stock.
IF
THE
COMPANY WISHES TO MERGE OR CONSOLIDATE ITS ASSETS WITH ANOTHER COMPANY PRIOR
TO
FULLY PAYING BACK THE SECURED CONVERTIBLE NOTES, IT COULD LEAD TO A DEFAULT
UNDER THE NOTES, MAKING THEM IMMEDIATELY DUE.
Under
the
terms of the secured convertible notes, any sale, conveyance or disposition
of
all or substantially all of the assets of the Company in which more than 50%
of
the voting power of the Company is disposed of, or the consolidation, merger
or
other business combination of the Company with or into any other entity when
the
Company is not the survivor shall either: (i) be deemed to be an event of
default under the notes which could cause the Company to pay substantial
penalties, or (ii) require the Company to get written approval by the successor
entity that such successor entity assumes the obligations of the secured
convertible notes. Additionally, if the Company makes any issuance of shares
of
Common Stock, options for shares of Common Stock, or issues any additional
convertible notes for consideration less than the conversion price then in
effect, the conversion price of the secured convertible notes will become the
price the shares or options were issued for or the price the additional
convertible notes will be convertible for. If the Company is forced to pay
penalties under the secured convertible notes or the conversion price of the
notes is decreased substantially, the Company could be forced to curtail its
business operations or issue more shares of Common Stock, which would have
a
dilutive effect on the then shareholders.
RISKS
RELATING TO OUR COMMON STOCK
THE
MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS BEEN
VOLATILE.
The
market price of our Common Stock historically has fluctuated significantly
based
on, but not limited to, such factors as: general stock market trends,
announcements of developments related to our business, actual or anticipated
variations in our operating results, our ability or inability to generate new
revenues, conditions and trends in the healthcare industry and in the industries
in which our customers are engaged.
Our
Common Stock is traded on the OTC Bulletin Board. In recent years the stock
market in general has experienced extreme price fluctuations that have
oftentimes have been unrelated to the operating performance of the affected
companies. Similarly, the market price of our Common Stock may fluctuate
significantly based upon factors unrelated or disproportionate to our operating
performance. These market fluctuations, as well as general economic, political
and market conditions, such as recessions, interest rates or international
currency fluctuations may adversely affect the market price of our Common
Stock.
OUR
COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE COMMISSION WHICH
LIMITS THE TRADING MARKET IN OUR COMMON STOCK, MAKES TRANSACTIONS IN OUR COMMON
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR COMMON
STOCK.
Our
Common Stock is considered a "penny stock" as defined in Rule 3a51-1 promulgated
by Commission under the Securities Exchange Act of 1934. In general, a security
which is not quoted on NASDAQ or has a market price of less than $5 per share
where the issuer does not have in excess of $2,000,000 in net tangible assets
(none of which conditions the Company meets) is considered a penny stock.
The
Commission's Rule 15g-9 regarding penny stocks impose additional sales practice
requirements on broker- dealers who sell such securities to persons other
than
established customers and accredited investors (generally persons with net
worth
in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000
jointly with their spouse). For transactions covered by the rules, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to
the
sale. Thus, the rules affect the ability of broker-dealers to sell our Common
Stock should they wish to do so, because of the adverse effect that the rules
have upon liquidity of penny stocks. Unless the transaction is exempt under
the
rules, under the Securities Enforcement Remedies and Penny Stock Reform Act
of
1990, broker-dealers effecting customer transactions in penny stocks are
required to provide their customers with (i) a risk disclosure document;
(ii)
disclosure of current bid and ask quotations if any; (iii) disclosure of
the
compensation of the broker-dealer and its sales personnel in the transaction;
and (iv) monthly account statements showing the market value of each penny
stock
held in the customer's account. As a result of the "penny stock" rules, the
market liquidity for our Common Stock may be adversely affected by limiting
the
ability of broker-dealers to sell our Common Stock and the ability of purchasers
to resell our Common Stock. Additionally, the value of the Company's securities
may be adversely affected by the "penny stock" rules, because of the additional
disclosures required by broker-dealers, which take additional time and effort
from broker-dealers, decreasing the likelihood that broker-dealers will sell
the
Company's Common Stock. This may in turn have an adverse effect on the liquidity
of the Company's securities which in turn could adversely affect the price
of
the Company's securities.
In
addition, various state securities laws impose restrictions on transferring
"penny stocks" and as a result, investors in the Common Stock may have their
ability to sell their shares of the Common Stock impaired.
THE
COMPANY HAS NOT PAID ANY CASH DIVIDENDS.
The
Company has paid no cash dividends on its Common Stock to date and it is
not
anticipated that any cash dividends will be paid to holders of the Company's
Common Stock in the foreseeable future. While the Company's dividend policy
will
be based on the operating results and capital needs of the business, it is
anticipated that any earnings will be retained to finance the future expansion
of the Company.
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