Form 10QSB for MEDICAL STAFFING SOLUTIONS INC 22-Nov-2005 Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction - Forward Looking Statements
In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Medical Staffing Solutions, Inc. and its subsidiaries (collectively, the "Company" or "Medical Staffing") is hereby providing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions of future events or performance are not statements of historical facts and may be forward-looking. These forward-looking statements are based largely on Medical Staffing's expectations and are subject to a number of risks and uncertainties, including but not limited to, economic, competitive, regulatory, growth strategies, available financing and other factors discussed elsewhere in this report and in documents filed by Medical Staffing with the U.S. Securities and Exchange Commission ("SEC"). Many of these factors are beyond Medical Staffing's control. Actual results could differ materially from the forward-looking statements made. In light of these risks and uncertainties, there can be no assurance that the results anticipated in the forward-looking information contained in this report will, in fact, occur.
Any forward-looking statement speaks only as of the date on which such statement is made, and Medical Staffing undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The Nurses Onsite Corp. Acquisition and Business
On July 1, 2005 we completed our Asset Purchase Agreement (the "Purchase Agreement"), whereby Medical Staffing, through its wholly-owned subsidiary Nurses PRN Acquisition Corp. (then "NPRN" and now "Nurses Onsite Corp."), acquired the business of Nurses PRN, LLC. As consideration for the purchased assets, Medical Staffing agreed to issue and deliver 9,500,000 shares of common stock to Nurses PRN, LLC to be delivered to the members of Nurses PRN, LLC and 2,500,000 shares to a creditor. NPRN paid Nurses PRN, LLC $1,600,000 as a cash consideration and agreed to pay a contingent payment based on NPRN's achievement of certain financial targets which shall not exceed $500,000. Medical Staffing also assumed certain assumed liabilities including: (a) a $365,487.50 note payable issued to Mr. Jeff Dowling by NPRN; (b) a $250,000 note payable to Mr. Aftabe Adamjee by NPRN and (c) certain general payables as set forth in the Purchase Agreement. We incurred professional costs associated with the Purchase Agreement to our lawyers and accountants in an amount equal to approximately $50,000.00. The acquisition has been funded by a promissory note.
Nurses Onsite Corp. is a provider of per diem nurses to private hospitals. Nurses Onsite Corp. maintains a listing of nurses having a variety of skills and who may be called upon to fill appropriate open shift positions at hospitals. Nurses Onsite Corp. establishes relationships with various hospitals who call upon Nurses Onsite Corp. to fulfill their needs for nurses due to vacancies created by vacations, increased patient loads or similar need situations as well as for extended periods.
We anticipate revenues to grow as a result of our acquisition of Nurses Onsite Corp., which has aggregate revenues greater than Medical Staffing. Nurses Onsite Corp. will substantially increase the Company's operations in the private healthcare nursing sector. The acquisition will significantly increase our sales revenue, is anticipated to make a positive contribution to overhead and earnings and will provide us an entry vehicle into the commercial nurse staffing arena. Cash flow from the operations of the assets of Nurses Onsite Corp. is anticipated to be utilized in the growth of the business and reduction of present cash shortfalls as well as debt reduction. We anticipate that we will recognize economies of scale in areas, such as California, where we are both operating. Nurses Onsite Corp. is presently operating in eight (8) states (including Virginia) and has more than 1,232 nurses that it can call upon to fulfill the needs of the two hundred sixty-two (262) hospitals it presently services. Over the next twelve (12) months, Nurses Onsite Corp. plans to establish operations in several additional states and additional locales within the states in which it operates.
General
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included herein. The information contained below includes statements of the Company's or management's beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements.
Going Concern
As reflected in the Company's financial statements as of September 30, 2005, the Company's accumulated deficit of $6,602,677 and its working capital deficiency of $2,496,079 raise substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional debt or capital, including the ability to raise capital under our Standby Equity Distribution Agreement, dated March 11, 2004, with Cornell Capital Partners, LP ("Cornell Capital"). The financial statements for September 30, 2005 do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Critical Accounting Policies And Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonably based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments and assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
o Revenue recognition;
o Allowance for doubtful accounts; and
o Accounting for income taxes.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures. See Notes to Condensed Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.
Revenue Recognition
Revenue on time-and-materials contracts is recognized based upon hours incurred at contract rates plus direct costs. Revenue on fixed-price contracts is recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Anticipated losses are recognized as soon as they become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Allowance For Doubtful Accounts
We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer's current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We make judgments as to our ability to collect outstanding receivables based on these factors and provide allowances for these receivables when collections become doubtful. Provisions are made based on specific review of all significant outstanding balances.
Accounting For Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability method of SFAS No. 109, deferred income taxes are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts, and the tax bases of existing assets and liabilities 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. Any deferred tax asset has been reserved by the Company with an offsetting valuation allowance adjustment.
Results of Operations
Results Of Operations For The Quarter Ended September 30, 2005, Compared To The Quarter Ended September 30, 2004
Revenues
Revenues for the quarter ended September 30, 2005 were $4,444,146, an increase of $2,648,226, as compared to revenues of approximately $1,795,920 for the quarter ended September 30, 2004. The increase in revenues in 2005 was attributable to the acquisition of Nurses Onsite.
Cost Of Sales
Cost of sales for the quarter ended September 30, 2005, was $3,254,180 million, or seventy-three percent (73%) of revenues, as compared to $1,140,223, or sixty-three percent (63%) of revenues, for the quarter ended September 30, 2004. The percentage increase in cost of sales for the quarter ended September 30, 2005 was primarily attributable to the fact that the margin on the Nurses Onsite contracts are lower than those within the TeleScience part of the Company.
Gross Profit
Gross profit for the quarter ended September 30, 2005, was $1,189,966, or twenty-seven percent (27%) of revenues, as compared to gross profit of $655,697, or thirty seven (37%) of revenues, for the quarter ended September 30, 2004.
Operating Expenses
Operating expenses for the quarter ended September 30, 2005, were $1,609,156, or thirty-six percent (36%) of revenues, as compared to $827,882, or forty-six percent (46%) of revenues, for the quarter ended September 30, 2004. The increase in operating expenses in 2005 was primarily attributable to increased cost of general administrative expenses resulting mainly from the acquisition of Nurses Onsite Corp.
Other Income (Expense)
Other income (expense) for the quarter ended September 30, 2005, was $89,430, as compared to $61,070 for the quarter ended September 30, 2004. The increase was due to higher interest expenses incurred.
Net Loss
The Company had a net loss of $508,620 for the quarter ended September 30, 2005, compared to a net loss of $233,255 for the quarter ended September 30, 2004. The increased loss of $275,365 was mainly attributable to lower margins and increased operating expenses.
Results of Operations for the Nine (9) Months Ended September 30, 2005, Compared To The Nine (9) Months Ended September 30, 2004
Revenues
Revenues for the nine (9) months ended September 30, 2005, were $7,303,222, an increase of $2,128,844, as compared to revenues of $5,174,378 for the nine (9) months ended September 30, 2004. The increase in revenues in 2005 was primarily attributable to the acquisition of Nurses Onsite and the completion of several significant government contracts for the providing of services in the nursing industry to government facilities.
Cost Of Sales
Cost of sales for the nine (9) months ended September 30, 2005, was $5,214,044, or seventy-one percent (71%) of revenues, as compared to $3,851,861, or seventy-four percent (74%) of revenues, for the nine (9) months ended September 30, 2004. The percentage decrease in cost of sales for the nine (9) months ended September 30, 2005, was primarily attributable to the fact that the contracts we completed were at low margin and that the margin we achieved on work performed this year in our TeleScience part of the Company was better due, in part, to greater control over expenses associated with the labor to perform the contracts this offset the fact that the margin on the Nurses Onsite contracts are lower than those within the TeleScience part of the Company.
Gross Profit
Gross profit for the nine (9) months ended September 30, 2005, $2,089,178, or twenty-nine percent (29%) of revenues, as compared to gross profit of $1,322,517 or twenty-six percent (26%) of revenues, for the nine (9) months ended September 30, 2004.
Operating Expenses
Operating expenses for the nine (9) months ended September 30, 2005, were $3,035,147, or forty-two percent (42%) of revenues, as compared to $2,591,748, or fifty percent (50%) of revenues, for the nine (9) months ended September 30, 2004. The increase in operating expenses in 2005 was primarily attributable to increased cost of general and administrative expenses, resulting mainly from the acquisition of Nurses Onsite Corp.
Other Income (Expense)
Other income (expense) for the nine (9) months ended September 30, 2005, was $228,179, as compared to $133,335 for the nine (9) months ended September 30, 2004. The increase was due to an increase in interest expenses.
Net Loss
The Company had a net loss of $1,174,148 for the nine (9) months ended September 30, 2005, compared to a net loss of $1,402,566 for the nine (9) months ended September 30, 2004. The decrease of $228,418 was mainly attributable to higher gross margins which led to a higher gross profit which offset higher operating and other expenses.
Liquidity and Capital Resources
The Company's financial statements have been prepared on a going concern basis that contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $1,174,178 and $1,402,566 for the nine (9) months ended September 30, 2005 and 2004, respectively, and had an accumulated deficit of $6,602,677 at September 30, 2005. Management recognizes that they must generate additional resources to enable them to continue operations. Management is planning to obtain additional capital principally through the sale of equity securities. The realization of assets and satisfaction of liabilities in the normal course of business is dependent upon Medical Staffing obtaining additional equity capital and ultimately obtaining profitable operations. However, no assurances can be given that the Company will be successful in these activities. Should any of these events not occur, the accompanying consolidated financial statements will be materially affected.
The Company is at present meeting its current obligations from its monthly cash flows and cash proceeds from sale of equity securities and debt, which during 2002, 2003, 2004 and to date in 2005 has included cash from operations, investor capital, loans from related parties and from other lenders. However, due to insufficient cash generated from operations, the Company currently does not internally generate cash sufficient to pay all of its incurred expenses and other liabilities. As a result, the Company is dependent on investor capital and loans to meet its expenses and obligations. Although investor funds and related party loans have allowed the Company to meet its obligations in the recent past, there can be no assurances that the Company's present methods of generating cash flow will be sufficient to meet future obligations. Historically, the Company has, from time to time, been able to raise additional capital from sales of its capital stock, but there can be no assurances that the Company will be able to raise additional capital in this manner.
Cash used in operating activities was $805,174 for the nine (9) months ended September 30, 2005, compared to $2,687,922 for the same period in 2004. Cash used in 2004 would have been substantially less due to a reduction in accounts receivable in 2004; however cash was placed in escrow for the Nurses OnSite acquisition which closed in July 2005, after this period in 2004.
Cash used in investing activities was $1,686,659 for the nine (9) months ended September 30, 2005, compared to cash provided by investing activities of $26,518 for the same period in 2004. This increase was principally due to the acquisition of Nurses OnSite.
Net cash provided by financing activities was $2,464,639 for the nine (9) months ended September 30, 2005, compared to $2,594,571 during the same period in 2004. This was mainly due to the funding through convertible debentures and the Standby Equity Distribution Agreement
In May 2002, the Company entered into a line of credit agreement with a factor. The loan was fully paid off in June, 2005.
Additionally, the Company maintains a small credit line with a bank. There was no balance outstanding as of September 30, 2005.
In May 2002, the Company borrowed $220,000 from an individual to be used in developing the Company's business plan, including Homeland Security operations. The note payable was non-interest bearing until May 2003 and bore interest at seven percent (7%) going forward. The note was fully paid off in May 2004.
On March 11, 2004, the Company entered into a Securities Purchase Agreement with Cornell Capital. Under the Securities Purchase Agreement, Cornell Capital was obligated to purchase $600,000 of secured convertible debentures from the Company. On March 11, 2004, Cornell Capital purchased $250,000 of convertible debentures. In April 2004, Cornell Capital purchased $350,000 of additional debentures. These debentures accrue interest at a rate of five percent (5%) per year and mature two (2) years from the issuance date. The debentures are convertible into the Company's common stock at the holders' option any time up to maturity at a conversion price equal to the lower of (i) one hundred fifteen percent (115%) of the closing bid price of the common stock as of the closing date or (ii) eighty-five percent (85%) of the lowest closing bid price of the common stock the five (5) trading days immediately preceding the conversion date. The debentures were secured by the assets of the Company. At maturity, the Company had the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price similar to the terms described above. During the year ended December 31, 2004, Cornell Capital converted the entire $600,000 into 19,489,204 shares of common stock and the Company recognized $108,760 of amortization of discount on the debenture conversions.
On March 11, 2004, the Company entered into a Standby Equity Distribution Agreement with Cornell Capital. Under the agreement, the Company may issue and sell to Cornell Capital common stock for a total purchase price of up to Fifteen Million Dollars ($15 million). The purchase price for the shares is equal to one hundred percent (100%) of the market price. The amount of each advance is subject to an aggregate maximum advance amount of $250,000, with no advance occurring within seven (7) trading days of a prior advance. Cornell Capital received a one-time commitment fee of 750,000 shares of the Company's common stock. Cornell Capital is entitled to an underwriting fee of five percent (5%) of each advance. In addition, the Company entered into a placement agent agreement with Newbridge Securities Corporation, a registered broker-dealer. Pursuant to the placement agent agreement, the Company paid a one-time placement agent fee of 10,000 restricted shares of common stock equal to approximately $1,400 based on the Company's stock price on March 11, 2004.
On June 11, 2004, the Company received $1,000,000 in return for a promissory note to Cornell Capital. As of March 31, 2005, the note has been fully paid.
On October 18, 2004, the Company received $315,000 in return for a promissory note issued to Cornell Capital. As of March 31, 2005, the note has been fully paid.
On January 1, 2005, Medical Staffing and Dr. Brajnandan B. Sahay entered into a five (5) year employment agreement. Pursuant to the employment agreement, Dr. Sahay shall serve as Medical Staffing's President and Chief Executive Officer or other executive officer of Medical Staffing. Dr. Sahay will receive a salary of $250,000 per year, four (4) weeks paid vacation, a car allowance and will be reimbursed for business expenses. Dr. Sahay will receive additional consideration of 3,000,000 options to purchase common stock of Medical Staffing for the fiscal year 2005 at an exercise price of $0.06 per share. For each year after 2005 and during the term of the employment agreement, Dr. Sahay shall be entitled to receive 3,000,000 options to purchase common stock of Medical Staffing at an exercise price equal to the average of the closing price of Medical Staffing's common stock for the ten (10) days immediately preceding September 30 of the applicable year. The obligations of Medical Staffing pursuant to the employment agreement will have a significant impact on Medical Staffing's liquidity and results of operations.
On January 5, 2005, Medical Staffing received $2,000,000 in return for a promissory note issued to Cornell Capital which was subsequently amended on June 7, 2005. The promissory note, as amended, accrues interest at twelve percent (12%) per year and matures on January 5, 2006. The promissory notes are due at maturity, regardless of the availability of proceeds under the Standby Equity Distribution Agreement, unless an extension is mutually agreed to by Cornell Capital and Medical Staffing in writing. If the note is not paid in full when due, the outstanding principal owed thereunder will be due and payable in full together with interest thereon at the rate of twenty-four percent (24%) per year or the highest permitted by applicable law, if lower. On April 26, 2005, Medical Staffing received $500,000 in return for a promissory note issued to Cornell Capital which was amended on June 7, 2005. The promissory note, as amended, accrues interest at twelve percent (12%) per year and matures in December 2005. The note is payable either out of the net proceeds to be received by Medical Staffing under the Standby Equity Distribution Agreement or Medical Staffing is to pay all amounts due at maturity, regardless of the availability of proceeds under the Standby Equity Distribution Agreement, unless an extension is mutually agreed to by Cornell Capital and Medical Staffing in writing. If the note is not paid in full when due, the outstanding principal owed thereunder will be due and payable in full together with interest thereon at the rate of twenty-four percent (24%) per year or the highest permitted by applicable law, if lower. As of September 30, 2005, $2,113,332 plus accrued interest as of that date remain outstanding on all promissory notes issued to Cornell Capital.
Through September 30, 2005, Medical Staffing has drawn down $2,440,000 under the Standby Equity Distribution Agreement and Medical Staffing has issued 74,744,294 shares of common stock to Cornell Capital. The proceeds have been utilized to repay principal of the $1,000,000 promissory note issued to Cornell Capital on June 11, 2004 and the $315,000 promissory note issued to Cornell Capital on October 18, 2004, and a portion of the $2,000,000 promissory note issued to Cornell Capital on January 5, 2005.
On June 27, 2005, Medical Staffing entered into a factoring agreement (the "Factoring Agreement") with its wholly-owned subsidiary TeleScience International, Inc. ("TeleScience"), its wholly-owned subsidiary Nurses PRN Acquisition Corp. ("NPRN") and SYSTRAN Financial Service Corporation ("SYSTRAN"), a subsidiary of Textron Financial Corporation ("Textron"), pursuant to which SYSTRAN established a Five Million Dollar ($5,000,000) credit facility (the "Facility") with Medical Staffing in order for Medical Staffing to finance the accounts receivables of TeleScience and NPRN. The Factoring Agreement shall commence its term on the date Medical Staffing first receives funds pursuant to the Facility, and shall continue through twelve (12) months, with twelve (12) month renewal periods. Medical Staffing shall pay interest on any outstanding balance at the Wells Fargo Bank Prime Rate plus one half of one percent (0.50%), and pay a discount fee of one half of one percent (0.50%) of the face amount of all unbilled invoices and bills purchased by SYSTRAN. SYSTRAN shall have a first and only security interest in all of Medical Staffing's present and future accounts, deposit accounts, chattel paper, contract rights (including insurance contracts and insurance proceeds), general intangibles, choses in action, instruments and documents, whether owned as of the date of the Factoring Agreement or acquired thereafter, and the proceeds of each of the foregoing. Upon the request of Medical Staffing, the Facility shall be reviewed for conversion to a Textron asset-based revolving credit facility. The outstanding balance at September 30, 2005 was $2,279,731.
On July 1, 2005 we completed our Asset Purchase Agreement (the "Purchase Agreement"), whereby Medical Staffing, through its wholly-owned subsidiary Nurses PRN Acquisition Corp. (then "NPRN" and now "Nurses Onsite Corp."), acquired the business of Nurses PRN, LLC. As consideration for the purchased assets, Medical Staffing agreed to issue and deliver 9,500,000 shares of common stock to Nurses PRN, LLC to be delivered to the members of Nurses PRN, LLC and 2,500,000 shares to a creditor. NPRN paid Nurses PRN, LLC $1,600,000 as a cash consideration and agreed to pay a contingent payment based on NPRN's achievement of certain financial targets which shall not exceed $500,000. Medical Staffing also assumed certain assumed liabilities including: (a) a $365,487.50 note payable issued to Mr. Jeff Dowling by NPRN; (b) a $250,000 note payable to Mr. Aftabe Adamjee by NPRN and (c) certain general payables as set forth in the Purchase Agreement. We incurred professional costs associated with the Purchase Agreement to our lawyers and accountants in an amount equal to approximately $50,000.00. The acquisition has been funded by a promissory note.
Effective August 10, 2005, the Company issued to Cornell Capital a common stock purchase Warrant in connection with a commitment for the $50,000,000 Standby Equity Distribution Agreement and for Ten United States Dollars ($10.00) and other good a valuable consideration. Cornell Capital is entitled to purchase from the Company, upon surrender of the Warrant, Five Million (5,000,000) fully paid and nonassessable shares of our common stock at an exercise price of $0.05 (or as subsequently adjusted pursuant to the terms of the Warrant). The Warrant shall expire three (3) years from the date of issuance, on or about August 10, 2008.
On September 2, 2005 Medical Staffing entered into a Securities Purchase Agreement with Cornell Capital whereby the Company issued and sold to Cornell Capital up to $2,113,332.11 of secured convertible debentures (the "Convertible Debenture") which shall be convertible into shares of the Company's common stock. Of this amount, $1,095,428.88 (comprised of $1,072,164.38 in principal and $23,264.50 in accrued interest) has been previously funded pursuant to that certain promissory note dated January 5, 2005, as amended and restated on June . . .
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