Although we do not sell insured plans, the discounts realized by members through our programs typically range from 10% to 75% off providers’ usual and customary fees. In general, the overall average discounted fee is between 22% and 28%. Our programs require members to pay the provider at the time of service, thereby eliminating the need for any insurance claims filing. These discounts, which are similar to managed care discounts, typically save the individual more than the cost of the program itself.
As part of our marketing program, we are offering memberships to municipalities, charitable foundations, large employers, unions, union benefits funds, associations and insurance companies. Cardholders will be offered discounts for products and services ranging from 10% to 75% depending on the area of coverage and the specific procedures, with an average discounted fee of between 22% and 28%.
In April 2005, we signed our first agreement with a municipal government, Luzerne County, Pennsylvania. In May 2005, we delivered over 300,000 Luzerne County private labeled discount prescription cards to Luzerne County’s Commissioners Offices for distribution to its residents. The agreement calls for Luzerne County to share in a portion of the revenue generated by the utilization of the discount prescription cards by its residents.
On July 13, 2005, the commissioners of Lehigh County, Pennsylvania approved commissioner’s bill #2005-68 approving a professional services agreement with the Company to provide prescription discount cards to the approximate 310,000 residents of the county. The county and the company worked together to have as many of the prescription discount cards distributed subsequent to the delivery date of August 15, 2005.
On September 15, 2005, we signed a contract with Carbon County, Pennsylvania, to deliver approximately 75,000 private labeled Carbon County prescription discount cards to the county’s residents. We fulfilled the contract through the delivery of the county’s private labeled prescription discount cards on October 13, 2005. The initial distribution of the cards began October 13, 2005 at a senior citizen fair within the county which was attended by approximately 2,500 senior citizens and resulted in the distribution of in excess of 2,000 cards on that day.
On September 29, 2005, we executed a contract with Schuylkill County, Pennsylvania to deliver 165,000 Schuylkill County private labeled prescription discount cards to the county by the beginning of November. The county commissioners indicated to us at that time that a distribution of the discount cards would begin to take place in November 2005 throughout the county to its municipal offices, county aging and adult services offices, human resource offices, religious organizations, and other venues.
We have previously disclosed that we have made presentations regarding our prescription discount cards to various other municipalities in Pennsylvania and New York. Although these counties had requested and received contracts as well as information on the cards and we have been in contact with these counties we will not have finalized contracts with these counties until we review the results of utilization in the above named counties. Most counties continue to express interest in proceeding. We will continue to negotiate with these counties during the early part of 2006 and believe that we can be successful in signing contracts with some of the counties and municipalities in Pennsylvania and New York. We are currently analyzing the revenue streams to ascertain whether we will generate revenues and profits and provide us with any appropriate Return on Investment.
Effective December 15, 2005, we entered into a settlement agreement with David and Pamala Streilein in which we agreed to divest our interest in Comprehensive Network Solutions, Inc. (“CNS”). Pursuant to the settlement agreement, we agreed to return our shares of CNS to the Streileins in consideration for the cancellation of the Streileins’ employment agreements with us as well as to forgive all salary past due and any future salary due under their employment agreements. CNS failed to provide the projected sales or revenue that we had anticipated upon execution of the agreement to acquire this entity. Although this acquisition allowed us entry into the discount card marketplace, the expense of operating CNS and paying the employment agreements no longer justified the originally projected benefit to us. Although there are prospects for CNS to reach significant revenue and profitability as a result of the State of Texas passing House Bill #7, which reformed workers’ compensation in Texas. After a review of potential revenue and the continually escalating expenses, management determined that it could not adequately fund these operations.
We believe it is in our best interests to utilize all available funds to expand and implement the current prescriptions and discount card programs being marketed by us.
Critical Accounting Policies and Estimates
We have identified significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. We believe our most significant accounting policies are related to the following areas: estimation of fair value of long-lived assets, revenue recognition and valuation of derivative liabilities. Details regarding our use of these policies and the related estimates are described fully in our 2006 Form 10-KSB. During the current period, there have been no material changes to our significant accounting policies that impacted our financial condition or results of operations.
Recently Issued Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have an impact on the Company’s financial position and results of operations.
THREE MONTHS ENDED MAY 31, 2006 COMPARED TO THREE MONTHS ENDED MAY 31, 2005
Revenue
Revenue for the three months ended May 31, 2006 and 2005 was $142,000 and $137,000, respectively. The increase of approximately $4,000 was due to increased revenue from discount card sales and was partially offset by a decrease in audiological services from $124,000 in the three months ended May 31, 2005 to $114,000 in the three months ended May 31, 2006. This decrease in audiological sales is due to that we have discontinued the servicing of nursing homes.
Cost of sales
Cost of sales was $121,000 and $115,000, in the three months ended May 31, 2006 and 2005, respectively. The cost of sales for audiological services increased from $105,000 to $109,000 despite a slight decrease in revenue. The increase was mainly due to increased cost of products, which we were unable to pass on to our customers, resulting in a slight erosion in our overall margins from 16.1% in the three months ended May 31, 2005 to 14.9% for the same period in 2005.
As a percent of revenue the cost of products increased from 33.1% to 48.4% in the three months ended May 31, 2006 and 2005, respectively,, while direct labor and commission as a percent of revenue decreased from 59.5% to 47.4% in the three months ended May 31, 2005 and 2006, respectively. Gross margins on discount card sales increased from 11.2% to 58.6%, for the same periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A expenses") were $75,000 and $150,000 for the three months ended May 31, 2006 and 2005, respectively, a reduction of $75,000, or 50%. Approximately $65,000 of the decrease was a result of the disposal of the CNS operation, which was sold in the end of calendar year 2005.
Professional fees were also diminished from $92,000 in the three months ended May 31, 2005 as compared to $39,000 for the same period in 2006, due to reduced payments for consultants raising financing, legal and accounting fees. As a percentage of revenue, SG&A expenses decreased from 176.1% to 80.8%.
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Other expense
Other expenses include a gain of $44,000 on derivative liabilities from the outstanding warrants and convertible debentures. Interest expense increased from $3,000 to $24,000 as new financing was put in place after May 31, 2005.
Liquidity and Capital Resources
We incurred significant operating losses in recent years which resulted in severe cash flow problems that negatively impacted our ability to conduct our business as structured and ultimately caused us to become and remain insolvent. We believe that our audiology business should generate sufficient working capital to finance its current operations at existing levels of revenue. However, we do not believe that current cash generated by the audiology business is sufficient to expand its scope of business activities. In addition, current liabilities exceed our current assets, and as such, there is no assurance that we will be able to continue to conduct business without further financing. There exists also the possibility that some of the warrant holders may decide to exercise their warrants which would generate a substantial amount of additional financing.
We estimate that in order for us to achieve our marketing goals successfully for our Solution Card and its other related products we will require between $750,000 and $1,500,000 of additional capital. Management will need to seek external sources of financing in order to support any such expansion plans as the anticipated cash flows from the sale of our cards will not be sufficient to support any expansion plans. If we fail to do so, our growth will continue to be curtailed and we will concentrate on increasing the volume and profitability of our existing outlets, using any surplus cash flow from operations to expand our business as quickly as such resources will support.
We believe we will be able to raise a minimum of $500,000 through the sales of our securities and we will be able to establish credit lines that will further enhance our ability to finance the expansion of our business. There can be no assurance that we will be able to obtain outside financing on a debt or equity basis on favorable terms, if at all. In the event that there is a failure in any of the finance-related contingencies described above, the funds available to us may not be sufficient to cover the costs of our operations, capital expenditures and anticipated growth during the next twelve months.
We believe that our success will be largely dependent upon our ability to raise capital and then use such funds to:
• | expand our marketing presence to other municipalities, charitable organizations, unions, fraternal organizations, religious organizations and other large employer groups; |
• | cover the costs of production and distribution of the additional 5,000,000-750,000,000 cards we anticipate will be sold and or distributed in the next 12-18 months; |
• | hire additional marketing, administrative and service personnel; and | |
• | increase awareness of our medical discount cards at various trade shows. | |
On August 19, 2005, we entered into a consulting and financing agreement with Comprehensive Associates, LLC, a private investment group, pursuant to which we received $217,000 net of legal expenses and other related fees, in consideration for the issuance of two separate convertible debentures of $35,000 and $200,000, which are convertible at $.25 per share. In addition, we entered into an agreement to issue warrants which could raise an additional $2,665,000, if and when, the warrants are exercised. Under the consulting agreement, the investors received warrants to purchase 5 million shares at $0.25 per share. On September 29, 2005, Comprehensive Associates, LLC loaned us $28,000 to be utilized for the printing of cards. Our agreement calls for revenue sharing on all of the cards printed as a result of the utilization of these funds, as well as a nominal rate of interest on the loan.
On September 20, 2005, we entered into a term sheet with Westor Capital Croup, Inc. On November 28, 2005, Westor raised a total of $145,000; shortly thereafter the agreement with Westor Capital was terminated. Pursuant to the term sheet with Westor, we were required to file an SB-2 registration statement by January 15, 2006, which was not completed. We therefore are in breach of this agreement. In addition, pursuant to our original funding agreement
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and subsequent redemption agreement with Comprehensive Associates, LLC we were also required to file a registration statement, and therefore we are also in breach of this agreement.
As of May 31, 2006, our liquidity and capital resources included cash and cash equivalents of $53,000 compared to $46,000 at the beginning of the fiscal year. The $7,000 increase in total cash and cash equivalents from February 28, 2006 to May 31, 2006, was mainly due to the issue of debentures, partially offset by cash used by operating activities.
Cash used in operating activities totaled $83,000 in fiscal 2006 due to continued losses. The cash used in operations for the same period in the prior year was $203,000. The reduction in 2006 was mainly due to diminished losses.
Net cash provided by financing activities in fiscal 2006 totaled $89,000, mainly from issuance of debentures of $75,000.
We have total liabilities of $1.4 million and assets of $142,000. Without new financing, we will be forced to liquidate our businesses. Management is currently working diligently on raising new financing.
The following table provides a summary of the amounts due for our long-term contractual obligations by fiscal year:
| | Total | | 2007 | | 2008 to 2009 | | 2010 to 2011 | | 2012 and beyond |
| | | | | | | | | | |
Convertible debentures | $ | 705,000 | $ | 235,000 | $ | 220,000 | $ | 250,000 | $ | - |
Leases | | 0 | | | | - | | - | | - |
| | | | | | - | | - | | - |
Total | $ | 705,000 | $ | 235,000 | $ | 220,000 | $ | 250,000 | $ | - |
Related Party Transactions
In May, 2006, the Company issued 52,586 shares to John Treglia, the Company's CEO, in compensation for services. During the quarterly period ended May 31, 2006, Mr. Treglia lent the Company an additional $14,495 for working capital and the total outstanding debt is $110,321 at May 31, 2006. The loan does not accrue interest and has no fixed repayment date.
Subsequent Events
As par of our new marketing program we have implemented in June and July several contracts which call for each organization to market our dental vision card as well as distributing our prescription discount card. These contracts call for each organization to be charged a wholesale price for our various medical care discount cards. The organization pays us a net price at which time the cards are issued. We incur no costs for billing the cards, once we are paid an annual fee the card is sent to the member.
In June 2005 we entered into an agreement with the Outlook Group, Inc. based in Forest Hills, NY. This contract was implemented in June of 2006. At the time the original contract was signed management anticipated that organizations represented by Outlook would be excellent venues for the distribution of our prescription discount cards. We have subsequently agreed with each of these organizations that will be marketing our various medical discount cards to their association members and their members’ employees. Some of these organizations include: Empire State Restaurant and Tavern Association, Long Island Gas Retailers Association, Health People, and Suffolk County Restaurant and Tavern Association.
We also signed and implemented a contract with Bronx Manhattan Realtors Association who is marketing our cards in the same manner as outlined above. No card is issued until we receive our annual fee for that particular medical care discount card.
On July 1, 2006 we signed a contract with Insurance Resources Group, LLC (“IRG”). IRG markets defined benefit health insurance plans. IRG will be purchasing our gold card which includes discounts on prescription drugs, dental care, vision care, eye ware, hearing care, alternative and preventative health, chiropractic, diabetic care, 24 hour ask a nurse hotline, physical therapy and health club memberships. Our enhanced Gold Card will be included in every Defined Benefit Health Insurance Plan that is sold by IRG.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in market prices and rates. Our short-term debt bears interest at fixed rates; therefore our results of operations would not be affected by interest rate changes. The valuation of our derivative liabilities uses risk-free interest as one of the factors. A change in the interest rate will not materially affect the fair value of the liability, however, changes in certain other assumptions such as volatility rates used in the determination of fair value of these derivatives could materially affect the value of these warrants. Any resulting change in the fair value of derivative liabilities will be reflected in the Company’s statement of operations as a gain or loss on derivative liabilities in other income (expense).
Item 4. | Controls and Procedures |
Evaluation of disclosure controls and procedures
Our Chief Executive Officer and Chief Financial Officer (collectively the “Certifying Officer”) maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management timely. The Certifying Officer has concluded that the disclosure controls and procedures are not effective at the “reasonable assurance” level. Under the supervision and with the participation of management, as of the end of the period covered by this report, the Certifying Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934). Furthermore, the Certifying Officer concluded that our disclosure controls and procedures in place were not designed to ensure that information required to be disclosed by us, including our consolidated subsidiaries, in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported on a timely basis in accordance with applicable Commission rules and regulations; and (ii) accumulated and communicated to our management, including our Certifying Officer and other persons that perform similar functions, if any, to allow us to make timely decisions regarding required disclosure in our periodic filings.
Changes in internal controls
We have made changes to our internal controls or procedures subsequent to the first quarter of 2006. We have employed an independent outside consultant to assist us in identifying some deficiencies and material weaknesses and other factors that could materially affect these controls or procedures, and therefore, corrective action is being taken to mitigate these weaknesses in controls and procedures.
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PART II — OTHER INFORMATION
Item 1. | Legal Proceedings. |
There are no material legal proceedings pending against us.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Not applicable
Item 3. | Defaults upon Senior Securities. |
Item 4. | Submission of Matters to a Vote of Security Holders. |
Item 5. | Other Information. |
31.1 | Section 302 Certification of Certifying Officer |
32.1 | Section 906 Certification of Certifying Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMPREHENSIVE HEALTHCARE SOLUTIONS, INC. |
By: | /s/ John H. Treglia |
JOHN H. TREGLIA | |
Chief Executive Officer and | |
Chief Financial Officer | |
| | | | |
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