UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSACTION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 000-49915
Monarch Staffing, Inc.
--------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Nevada 88-0477056
- --------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
18301 VON KARMAN, SUITE 250, IRVINE, CA, 92612
------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(949) 260-0150
------------------
(ISSUER'S TELEPHONE NUMBER)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The registrant had 9,869,361 shares of common stock outstanding as of May
23, 2006.
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ----
INDEX
PART I FINANCIAL INFORMATION PAGE
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets
as of March 31, 2006 . . . . . . . . . . . . . . . . . . . . . .3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2006 and 2005 . . . . . . .4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2006 and 2005 . . . . . . .6
Notes to Unaudited Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . .7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . .9
ITEM 3. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . 34
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 35
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . 35
ITEM 3. DEFAULTS ON SENIOR SECURITIES. . . . . . . . . . . . . . . . . 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. . . . . 36
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 6. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 37
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
MONARCH STAFFING, INC. AND SUBSIDIARIES
(Formerly MT Ultimate Healthcare Corp.)
Consolidated Balance Sheet
<Table>
<Caption>
ASSETS
-------
March 31,
2006
------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 321,924
Accounts receivable, net 1,640,272
------------
Total Current Assets 1,962,196
------------
OTHER ASSETS
Other receivable 20,863
Goodwill 1,245,481
------------
Total Other Assets 1,266,344
------------
TOTAL ASSETS $ 3,228,540
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 726,477
Accounts payable - related party 30,167
Accrued expenses 477,926
Derivatives 30,621
Factoring liability 717,851
Notes payable - current portion 55,395
------------
Total Current Liabilities 2,038,436
------------
LONG-TERM DEBT
Notes payable 166,190
Callable secured convertible notes payable 3,075,000
------------
Total Long-Term Debt 3,241,190
------------
Total Liabilities 5,279,625
------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 par value; 400,000,000 shares
authorized, 9,862,690 outstanding 9,863
Additional paid-in capital 1,566,447
Accumulated deficit (3,627,397)
------------
Total Stockholders' Equity (Deficit) (2,051,086)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,228,540
============
</Table>
The accompanying notes are an integral part of these financial statements
4
MONARCH STAFFING, INC. AND SUBSIDIARIES
(Formerly MT Ultimate Healthcare Corp.)
Consolidated Statements of Operations
(unaudited)
<Table>
<Caption>
For the Three Months Ended
March 31,
--------------------------
2006 2005
------------ ------------
REVENUES $ 1,883,567 $ 176,489
COST OF REVENUES 1,599,705 106,255
------------ ------------
GROSS PROFIT $ 283,862 $ 70,234
------------ ------------
OPERATING EXPENSES
General and administrative 275,778 68,050
Bad debt expense 880 -
------------ ------------
Total Operating Expenses 276,658 68,050
------------ ------------
INCOME (LOSS) FROM OPERATIONS 7,204 2,184
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 835 -
Gain on debt settlement 30,000 -
Gain (loss) on derivative valuation (10,000) -
Interest expense (99,784) -
------------ ------------
Total Other Income (Expense) (78,949) -
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (71,745) 2,184
Provision for income taxes - -
------------ ------------
NET INCOME (LOSS) $ (71,745) $ 2,184
============ ============
BASIC INCOME (LOSS) PER SHARE $ (0.01) $ 0.00
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 9,862,690 9,203,704
============ ============
</Table>
The accompanying notes are an integral part of these financial statements
5
MONARCH STAFFING, INC. AND SUBSIDIARIES
(Formerly MT Ultimate Healthcare Corp.)
Consolidated Statements of Cash Flows
(unaudited)
<Table>
<Caption>
For the Three Months Ended
March 31,
--------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (71,747) $ 2,184
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Changes in operating assets and liabilities:
Accounts receivable (903,725) (42,399)
Other assets (20,863) -
Accounts payable (182,448) (847)
Accrued expenses and other current liabilities (49,955) 9,000
Derivatives 10,000 -
------------ ------------
Net Cash Provided by (Used in)
Operating Activities (1,218,738) (32,062)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary - -
Cash paid for property and equipment - -
------------ ------------
Net Cash (Used in) Investing Activities - -
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on notes payable (308,489) -
Net advances from factored receivables 382,719 -
Proceeds received on convertible debt 425,000 -
------------ ------------
Net Cash Provided by (Used in)
Financing Activities 499,230 -
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (719,509) (32,062)
CASH AND CASH EQUIVALENTS AT BEG OF YEAR 1,041,433 37,165
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 321,924 $ 5,103
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Payments For:
Interest $ 6,336 $ -
Income taxes $ - $ -
</Table>
The accompanying notes are an integral part of these financial statements
6
MONARCH STAFFING, INC. AND SUBSIDIARIES
(Formerly MT Ultimate Healthcare Corp)
Notes to the Condensed Consolidated Financial Statements
March 31, 2006
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted in accordance with such rules and regulations.
The information furnished in the interim condensed financial
statements includes normal recurring adjustments and reflects all
adjustments, which, in the opinion of management, are necessary for a
fair presentation of such financial statements. Although management
believes the disclosures and information presented are adequate to
make the information not misleading, it is suggested that these
interim condensed financial statements be read in conjunction with the
Company's audited financial statements and notes thereto included in
its December 31, 2005 Annual Report on Form 10-KSB. Operating results
for the three months ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2006.
NOTE 2 - BASIC INCOME (LOSS) PER SHARE
The computations of basic income (loss) per share of common stock are
based on the weighted average number of common shares outstanding
during the period of the consolidated financial statements. Common
stock equivalents, consisting of stock warrants, have been considered
but have not been included in the calculation as their effect is
anti-dilutive for the periods presented.
<Table>
<Caption>
March 31,
--------------------------
2006 2005
------------ ------------
Numerator income (loss) $ (71,745) $ 2,184
Denominator - weighted average number
of shares outstanding 9,862,690 9,203,704
------------ ------------
Income (loss) per share $ (0.01) $ 0.00
============ ============
</Table>
NOTE 3 - GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going concern
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has an
accumulated deficit of $3,627,397 at March 31, 2006. These factors
combined, raise substantial doubt about the Company's ability to
continue as a going concern. 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.
7
MONARCH STAFFING, INC. AND SUBSIDIARIES
(Formerly MT Ultimate Healthcare Corp)
Notes to the Condensed Consolidated Financial Statements
March 31, 2006
NOTE 3 - GOING CONCERN (Continued)
In view of the matters described above, recoverability of a major
portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to
raise additional capital, obtain financing and to succeed in its
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.
NOTE 4 - SUBSEQUENT EVENTS
On May 15, 2006, the Company entered into Amendment No. 2 to the
Securities Purchase Agreement with the investors. Pursuant to
Amendment No.2, the deadline for filing a registration statement
covering the resale of the shares of common stock issuable upon
conversion of the Company's secured convertible notes and the exercise
of the warrants issued to the note investors was changed to June 15,
2006 and the deadline for effectiveness of the registration statement
was changed to September 15, 2006 (or October 10, 2006 if the Company
is making a good faith effort to respond to SEC comments on the
registration statement).
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The 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.
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:
- - anticipated trends in our financial condition and results of
operations (including expected changes in our gross margin and
general, administrative and selling expenses);
- - our ability to finance our working capital and other cash
requirements;
- - our business strategy for expanding our presence in the markets we
serve; and
- - our ability to distinguish ourselves from our current and future
competitors.
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:
- - changes in external competitive market factors or in our internal
budgeting process that might impact trends in our results of
operations;
- - changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the markets; and
- - various other factors that may prevent us from competing successfully
in the marketplace.
OVERVIEW
We provide medical and technical staffing services to both commercial and
government sector customers. We are focused on building a nationally
recognized medical staffing company by growing our current customer bases,
expanding our service offerings, and acquiring and growing profitable
staffing services companies.
9
We operate our medical staffing services business through our wholly owned
subsidiary Drug Consultants, Inc. DCI furnishes personnel to perform a
range of pharmacy technician, nursing and other health care services in
support of the operations of government and commercial facilities,
including its largest client, the State of California (which accounted for
approximately 95% of DCI's 2005 revenue). DCI currently operates under
three master contracts with the State of California. The master contracts
are for terms of three years and currently expire between June 30, 2006 and
September 30, 2007. Historically, DCI has been able to obtain replacement
contracts for its services to the State of California upon expiration of
its master contracts. DCI's contracts with the State of California do not
provide for a minimum purchase commitment of our services and can be
terminated by the State at any time on 30 days' notice.
We operate our technical staffing services through our wholly owned
subsidiary, iTechexpress, Inc. iTech places technicians into technical
jobs on a national basis. iTech has performed IT and staffing services for
clients such as Best Buy, Equant NV and Office Depot.
Our revenues generally consist of fees received from clients to whom we
provide temporary healthcare professionals or technicians.
Our costs of revenue generally consist of amounts paid to the temporary
healthcare professionals and technicians who provide services to our
clients.
On November 4, 2005, we acquired 100% of the issued and outstanding shares
of iTechexpress, Inc. in exchange for shares of our Common Stock
representing approximately 93% of our outstanding Common Stock after
issuance. As a result, we have accounted for the iTech acquisition as a
reverse takeover of the Company by the shareholders of iTech and a
recapitalization of iTech. Accordingly, our consolidated financial
statements represent a continuation of iTech and the discussion below
relates to the financial results of iTech.
COMPARISON OF OPERATING RESULTS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 2005
Revenues for the three months ended March 31, 2006 were $1,883,567. This is
an increase of approximately 970% over revenues of $176,489 realized for
the three months ended March 31, 2005. This increase in revenues is
attributable to the acquisition of DCI in November 2005 and inclusion of
DCI's results of operations in our 2006 revenues.
Costs of revenues for the three months ended March 31, 2006 were
$1,599,705, which is an increase of approximately 1409% over the $106,255
in costs of revenues for the three months ended March 31, 2005. This
increase in costs of revenues is attributable to the acquisition of DCI in
November 2005 and inclusion of DCI's results of operations in our 2006
costs of revenues.
Based on the above, the Company realized a gross profit for the three
months ended March 31, 2006 of $283,862, versus a gross profit for the
three months ended March 31, 2005 of $70,234.
10
General and Administrative (G&A) operating expenses for the three months
ended March 31, 2006 were $276,658. This is an increase in G&A expenses of
approximately 307% over the $68,050 in G&A operating expenses for the three
months ended March 31, 2005. This increase is primarily attributable to the
acquisition of DCI in November 2005 and inclusion of DCI's results of
operations in our 2006 G&A operating expenses.
As a result, the Company had a net operating profit for the three months
ended March 31, 2006 of $7,204 compared to an operating profit of $2,184
for the three months ended March 31, 2005.
The Company had other expenses of $78,949 for the three months ended March
31, 2006, versus $ 0 of other expenses for the three months ended March 31,
2005. The increase in other expenses is primarily attributable to an
increase in interest expense related to our outstanding convertible secured
notes (and the beneficial conversion feature associated with the notes).
As a result, our net loss for the three months ended March 31, 2006 was
$71,745 versus net income of $2,184 for the three months ended March 31,
2005.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, we had negative net working capital of $76,240. Our
current assets of $1,962,196 consisted of cash and cash equivalents of
$321,924 and accounts receivable net of $1,640,272. Our current
liabilities of $2,038,436 consisted of accounts payable and accrued
expenses of $1,234,570; a factoring liability of $717,851, notes payable,
current of $55,395; and derivatives liability of $30,621.
As of March 31, 2006, we had long-term debt of $3,241,190, consisting of
$3,075,000 outstanding under our convertible secured notes and $166,190 in
notes payable.
Net cash used in operating activities for the three months ended March 31,
2006 was $1,218,738, compared to net cash used in operating activities for
the three months ended March 31, 2005 of $32,062. Our increase of cash
used in operating activities in 2006 is primarily attributable to our
increased net loss for the period and repayment of other liabilities.
Net cash provided by financing activities for the three months ended March
31, 2006 was $499,230 compared with $ 0 for the three months ended March
31, 2005. The increase reflects the additional convertible debt proceeds
and proceeds from our Systran factoring line.
Our consolidated financial statements are prepared using the accrual method
of accounting in accordance with GAAP, 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 an
accumulated deficit of $3,627,397 at March 31, 2006. 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.
11
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 believe that our receivables factoring facility with Systran and the
proceeds of sales of convertible secured notes under the 2005 securities
purchase agreement will provide us with sufficient liquidity to meet our
capital expenditures and working capital requirements for the near term.
However, the operations of iTech 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.
We had an operating cash flow deficit three months ended March 31, 2006.
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 likely acquire significant
additional capital.
As a result, our continued operations, ability to repay outstanding
liabilities and growth strategy all depend on our ability to access the
capital markets. We do not have any commitments or identified sources of
additional capital from third parties, other than the commitment from the
convertible secure note investors and Systran mentioned above, or from its
officers, directors or majority shareholders. 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.
Receivables Factoring Facility
On November 8, 2005, iTech and DCI entered into a Factoring and Security
Agreement to sell accounts receivables to Systran Financial Services
Corporation. The purchase price for each account sold is the face amount
of the account less a discount of 1.5%. All accounts sold are with
recourse by Systran. Systran may defer making payment to iTech 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).
12
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 (700,000
pre-split) 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
(15,000,000 pre-split) shares of our Common Stock at $9.00 per share.
As of May 23, 2006, we had issued under the two securities purchase
agreements:
- - $3,075,000 aggregate principal amount of secured convertible notes,
- - Warrants to purchase 5,556 shares of our Common Stock at $40.50 per
shares, and
- - Warrants to purchase 143,056 shares of our Common Stock at $9.00 per
share.
The investors are required to purchase an additional $625,000 principal
amount of secured convertible notes and warrants to purchase 2,222 shares
of our Common Stock at $40.50 per share and warrants to purchase 23,611
shares of our Common Stock at $9.00 per share five days following the date
that the registration statement for the resale of the shares of common
stock issuable upon conversion of the secured convertible notes and
exercise of the warrants is declared effective by the Securities and
Exchange Commission and if other conditions are satisfied, including: (i)
the Company's representations and warranties contained in the 2005
securities purchase agreement being true and correct in all material
respects on the date when made and as of the date of such purchase; (ii)
the Company having performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by the 2005
agreement; (iii) there being no litigation, statute, rule, regulation,
executive order, decree, ruling or injunction that has been enacted,
entered, promulgated or endorsed by or in any court or government authority
of competent jurisdiction or any self-regulatory organization having
requisite authority which prohibits the transactions contemplated by the
2005 agreement; (iv) no event having occurred which could reasonably be
expected to have a material adverse effect on the Company; and (v) the
shares of Common Stock issuable upon conversion of the secured convertible
notes and exercise of the warrants having been authorized for quotation on
the OTC Bulletin Board and trading in our Common Stock on the OTC Bulletin
Board having not been suspended by the Securities and Exchange Commission
or the OTC Bulletin Board.
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:
13
- - 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.
14
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.
15
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;
- - failure to obtain 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 on
or before September 15, 2006 (or October 10, 2006 if the Company is
making a good faith effort to respond to the Securities and Exchange
Commission's comments), or an effective registration statement
covering such shares ceases to be effective for any ten consecutive
days or any twenty days in any twelve month period;
- - 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.
16
The warrants also contain a cashless exercise, whereby after February 2,
2006, and if a registration statement covering the warrants is not
effective, 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.
Registration Rights Agreement
We also entered into a registration rights agreement with the investors
that grants the investors demand registration rights with respect to 200%
of the Common Stock underlying the secured convertible notes and 200% of
the Common Stock underlying the warrants. The Company will be subject to
the payment of certain damages in the event that it does not satisfy its
obligations including its obligation to have a registration statement with
respect to the Common Stock underlying the secured convertible notes and
warrants declared effective by the Securities and Exchange Commission on or
prior to September 15, 2006; in the event that after the registration
statement is declared effective, sales of the Company's securities cannot
be made pursuant to the registration statement; and in the event that the
Company's Common Stock is not listed on the OTC Bulletin Board or the
NASDAQ, New York of American stock exchanges. The damages are equal to
0.02 times the number of months (prorated for partial months) that any such
event occurs (subject to adjustment as provided in the registration rights
agreement).
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 thereunder 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.
17
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, iTechexpress, Inc. (iTech) and Drug Consultants,
Inc. (DCI), and iTech's wholly-owned subsidiary, Success Development Group,
Inc. (SDC). All material intercompany accounts and transactions have been
eliminated in the consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and expenses during the reporting period. In these
financial statements, assets, liabilities and expenses involve extensive
reliance on management's estimates. Actual results could differ from those
estimates.
Cash
Cash equivalents include short-term, highly liquid investments with
maturities of three months or less at the time of acquisition.
Accounts Receivable
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.
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.
18
Goodwill
Goodwill represents the excess of acquisition cost over the net assets
acquired in a business combination. Management reviews, on an annual
basis, the carrying value of goodwill in order to determine whether
impairment has occurred. Impairment is based on several factors including
the Company's projection of future undiscounted operating cash flows. If
an impairment of the carrying value were to be indicated by this review,
the Company would adjust the carrying value of goodwill to its estimated
fair value.
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 (see Note 8). The embedded derivatives
include the conversion feature, monthly payment options, variable interest
features, 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
Revenue is recognized when earned. Revenues and costs of revenues from
services are recognized during the period in which the service is
performed.
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.
19
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.
Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for options and warrants
issued pursuant to its stock option plans under the recognition and
measurement provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations, as permitted by SFAS No. 123, "Accounting for Stock Based
Compensation." Effective January 1, 2006, on the first day of the Company's
fiscal year 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123(R), "Share Based Payments," using the modified-prospective
transition method. Under this transition method, compensation cost
recognized in the period of initial adoption includes: (a) compensation
cost for all share-based payments granted and not yet vested prior to
January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, and (b) compensation cost for
all share-based payments granted subsequent to December 31, 2005 based on
20
the grant-date fair value estimated in accordance with the provisions of
SFAS No. 123(R). Results for prior periods have not been restated. Since
stock-based compensation expense recognized in the statements of operations
is based on awards ultimately expected to vest, the compensation expense
has been reduced for estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates.
The Company calculates stock-based compensation by estimating the fair
value of each option using the Black-Scholes option pricing model. The
Company's determination of fair value of share-based payment awards are
made as of their respective dates of grant using that option pricing model
and is affected by the Company's stock price as well as assumptions
regarding a number of subjective variables. These variables include, but
are not limited to the Company's expected stock price volatility over the
term of the awards and actual and projected employee stock option exercise
behavior. The Black-Scholes option pricing model was developed for use in
estimating the value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because the Company's employee
stock options have certain characteristics that are significantly different
from traded options, the existing valuation models may not provide an
accurate measure of the fair value of the Company's employee stock options.
Although the fair value of employee stock options is determined in
accordance with SFAS No. 123(R) using an option-pricing model, that value
may not be indicative of the fair value observed in a willing buyer/willing
seller market transaction. The calculated compensation cost is recognized
on a straight-line basis over the vesting period of the option.
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 March 31, 2006, we had $3,627,397
in accumulated deficit. There is a risk that our medical and technical
staffing services businesses 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.
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.
21
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 five 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 to
include medical and technical staffing and to focus our activities on
growing profitable operations. We have begun to implement this strategy by
acquiring iTech and DCI.
The operations of iTech 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. We may encounter risks and
difficulties frequently encountered by companies that have grown rapidly
through acquisition, including the risks described elsewhere in this
section. 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 and have agreed to
sell an additional $625,000 of secured convertible notes to the note
investors. 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.
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.
22
Assuming the sale of all of our secured convertible notes, we will owe
approximately $3,700,000 to the holders of the notes (not including any
accrued interest). Additionally, we still owe approximately $221,585
under a promissory note with Abundant, and approximately $218,180 under a
SBA loan and line of credit, which was assumed by Marathon as part of the
disposition of Marathon (but with respect to which the lender claims we
remain liable). 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.
iTech 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"). The factoring agreement provides for
iTech and DCI to sell their accounts receivables to Systran at a discount
of 1.5%. 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.
23
The secured convertible notes become immediately due and payable upon an
event of default including:
- - failure to obtain effectiveness of the registration statement covering
the resale of the shares of our Commons Stock issuable upon conversion
of the secured convertible notes and exercise of the warrants on or
before September 15, 2006 (or October 10, 2006 if the Company is
making good faith efforts to respond to Securities and Exchange
Commission comments with respect to the registration statement);
- - 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.
24
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 the May
23, 2006, the outstanding amount of the secured convertible notes was
$3,075,000. 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 as its major
customer.
We anticipate approximately 90% of our revenues for the foreseeable future
will come from the operations of DCI, which we acquired in November, 2005.
Approximately 95% of DCI's revenue comes from the State of California.
DCI's agreements with the State of California do not provide for a minimum
purchase commitment of our services and can be terminated by the State at
any time on 30 days' notice. Our dependence on the State of California as
our major customer subjects us to significant financial risks in the
operation of our business if the State of California were to terminate or
materially reduce, for any reason, its business relationship with us.
Further, the State of California is subject to unique political and
budgetary constraints and has special contracting requirements that may
affect our ability to obtain additional contacts. In addition, future
sales to the State of California 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
State of California 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.
We have been notified by the Internal Revenue Service that our temporary
healthcare professionals should be classified as employees and not
independent contractors
We have received notice from the Internal Revenue Service (the "IRS") that
the IRS had concluded that our subsidiary DCI was a third-party payer to
and thus employer of a pharmacist who provided services to DCI's client,
the California Department of Corrections. Although the IRS notice applies
only to the case of the individual pharmacist, if unchanged, it could
require DCI to classify other pharmacists and nurses in its registry who
provide services to DCI's clients as employees of DCI. Accordingly,
compensation payable to such pharmacists and nurses would be subject to
federal income tax withholding, Federal Insurance Contributions Act (FICA)
tax, and Federal Unemployment Tax Act (FUTA) tax. This result would have
a material adverse effect on our business, financial condition and results
of operations. The Company is evaluating its response to the IRS notice
25
We face significant competition for our services and as a result, we may be
unable to compete in the medical and technical staffing industries.
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 iTech and DCI
in November 2005. Although we currently have no commitments with respect
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:
26
- - 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 Chief Executive Officer and Director, David
Walters and our Director Keith Moore.
The success of the Company heavily depends upon the personal efforts and
abilities of David Walters and Keith Moore. Mr. Walters serves as the
Company's Chief Executive Officer and Director and Keith Moore serves as
our Director and together they are primarily responsible for the operation
of the Company's wholly owned subsidiaries iTech and DCI. If either were
to leave unexpectedly, we may not be able to execute our business plan. Our
future performance depends in significant part upon the continued service
of Mr. Walters and Mr. Moore as they have acquired specialized knowledge
and skills with respect to our business. Additionally, because we have a
relatively small number of employees when compared to other leading
companies in the same industry, our dependence on maintaining our
relationship with Mr. Walters and Mr. Moore is particularly significant.
We cannot be certain that we will be able to retain Mr. Walters or Mr.
Moore in the future. The loss of Mr. Walters or Mr. Moore could have a
material adverse effect on our business and operations and cause us to
expend significant resources in finding a replacement, which could cause
the value of our Common Stock to decline or become worthless.
27
David Walters and Keith Moore can vote an aggregate of 83.9% of our Common
Stock and can exercise control over corporate decisions including the
appointment of new Directors.
David Walters and Keith Moore can vote an aggregate of 8,283,334 shares (or
83.9%) of our outstanding Common Stock. 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.
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.
28
Risks Relating to Our Current Financing Arrangement
If the registration statement covering the resale of the shares of our
Commons Stock issuable upon conversion of the secured convertible notes and
exercise of the warrants is not declared effective before September 15,
2006, we may be forced to incur substantial penalties.
The Company is subject to a $53,000 per month penalty payable to the
secured convertible note holders, if the registration statement fails to
become effective on or before September 15, 2006 (or October 10, 2006 if
the Company is making good faith efforts to respond to Securities and
Exchange Commission comments with respect to the registration statement).
If this penalty becomes payable, the Company will likely be forced to pay
this amount out of the proceeds of the sale of the secured convertible
notes. This will likely have a materially adverse affect on the Company's
financial condition, and could force the Company to curtail its business
plan.
The issuance and sale of Common Stock underlying the secured convertible
notes and the warrants may depress the market price of our Common Stock.
As of May 23, 2006, we had 9,869,361 shares of Common Stock issued and
outstanding. We plan to register the shares of Common Stock issuable upon
conversion of $3,700,000 of secured convertible notes and related warrants
(7,400,000 shares as of May 23, 2006). As sequential conversions and sales
take place, the price of our Common Stock may decline, and as a result, the
holders of the secured convertible notes 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 this Offering. All of the shares issuable
upon conversion of the secured convertible notes and upon exercise of the
warrants, may be sold without restriction. The sale of these shares may
adversely affect the market price of our Common Stock.
The issuance and sale of Common Stock underlying the secured convertible
notes and the warrants represent overhang.
In addition, the Common Stock issuable upon conversion of the secured
convertible notes 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 may be converted at a
conversion price of $0.50 per share, as of May 23, 2006. Warrants to
purchase 5,556 shares of our Common Stock may be exercised at a price of
$40.50 per share and warrants to purchase 143,056 shares of our Common
Stock may be exercised at a price of $9.00 per share. As of May 23, 2006,
the market price for one share of our Common Stock was $1.00. Therefore,
the secured convertible notes and warrants 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
the warrants will cause immediate and substantial dilution.
29
The issuance of Common Stock upon conversion of the secured convertible
notes and exercise of the warrants by the holders of the notes and warrants
will result in immediate and substantial dilution to the interests of other
stockholders since the note holders may ultimately receive and sell the
full amount issuable on conversion or exercise. Although the note holders
may not convert their secured convertible notes 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
note 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 note holders could
sell more than this limit while never actually holding more shares than
this limit allows. If the note 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 could 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
investment upon conversion of the secured convertible notes and exercise of
the warrants by the holders thereof. 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. If converted on May 23,
2006, the secured convertible notes would be convertible into approximately
7,400,000 shares of Common Stock based upon a conversion price of $0.50.
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 the secured convertible notes and
exercise of the warrants 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 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.
The following is an example of the amount of shares of our Common Stock
that are issuable upon conversion of the secured convertible notes based on
conversion prices that are 25%, 50% and 75% below the conversion price as
of May 23, 2006 of $0.50.
(1) Includes shares of Common Stock issuable upon conversion of the
secured convertible notes. Does not include 148,611 shares of Common Stock
issuable upon exercise of outstanding warrants.
(2) As of May 23, 2005, we had 9,869,361 shares of Common Stock issued and
outstanding.
30
As illustrated, the number of shares of Common Stock issuable upon
conversion of the secured convertible notes 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 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.
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 notice of
conversion. The significant downward pressure on the price of our Common
Stock as the note holders convert and sell material amounts of our Common
Stock could encourage investors, including the selling stockholders, 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 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.
We must satisfy certain conditions before the investors are obligated to
purchase the remaining secured convertible notes and warrants.
As of May 23, 2006, we had issued to the secured convertible note investors
$3,075,000 aggregate principal amount of secured convertible notes,
warrants to purchase 5,556 shares of our Common Stock at $40.50 per share,
and warrants to purchase 143,056 shares of our Common Stock at $9.00 per
share. The investors are required to purchase an additional $625,000
principal amount of secured convertible notes and warrants to purchase
2,222 shares of our Common Stock at $40.50 per share and warrants to
purchase 23,611 shares of Common Stock at $9.00 per share five days
following the date that the registration statement for the resale of the
shares of common stock issuable upon conversion of the secured convertible
notes and exercise of the warrants is declared effective by the Securities
and Exchange Commission and conditioned upon certain other conditions,
including: (i) the Company's representations and warranties contained in
the 2005 securities purchase agreement being true and correct in all
material respects on the date when made and as of the date of such
purchase; (ii) the Company having performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by
the 2005 agreement; (iii) there being no litigation, statute, rule,
regulation, executive order, decree, ruling or injunction that has been
enacted, entered, promulgated or endorsed by or in any court or government
authority of competent jurisdiction or any self-regulatory organization
having requisite authority which prohibits the transactions contemplated by
the 2005 agreement; (iv) no event having occurred which could reasonably be
expected to have a material adverse effect on the Company; and (v) the
shares of Common Stock issuable upon conversion of the secured convertible
notes and exercise of the warrants having been authorized for quotation on
the OTC Bulletin Board and trading in our Common Stock on the OTC Bulletin
Board having not been suspended by the Securities and Commission or the OTC
Bulletin Board.
If the registration statement is not declared effective within the
agreed-upon time frame or we fail to satisfy these additional conditions,
the investors have no obligation to purchase the remaining secured
convertible notes and warrants. If the investors do not purchase the
remaining secured convertible notes and warrants, the Company may be
required to curtail or abandon its business plan, which would decrease the
value of our Common Stock.
31
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 issuances 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 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.
32
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.
33
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934
(the "Exchange Act"), we carried out an evaluation of the effectiveness of
the design and operation of our disclosure controls as of the end of the
period covered by this report, March 31, 2006. This evaluation was carried
out under the supervision and with the participation of our CEO and CFO,
Mr. David Walters (the "Certifying Officer"). Based upon that evaluation,
our Certifying Officer concluded that as of the end of the period covered
by this report, March 31, 2006, our disclosure controls and procedures are
effective in timely alerting management to material information relating to
us and required to be included in our periodic filings with the Securities
and Exchange Commission (the "Commission").
Disclosure controls and procedures are controls and procedures that are
designed to ensure that information required to be disclosed in our
periodic reports under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in our periodic reports that we file under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Internal Control Over Financial Reporting
Further, as required by Rule 13a-15(d) of the Exchange Act and under the
supervision and with the participation of our Certifying Officer, we
carried out an evaluation as to whether there has been any change in our
internal control over financial reporting during our fiscal quarter ended
March 31, 2006. Based upon this evaluation, we have concluded that there
has not been any change in our internal control over financial reporting
during our fiscal quarter ended March 31, 2006, that has materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, our
principal executive and principal financial officers, or persons performing
similar functions, and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial statements. See: RISKS FACTORS.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 19, 2006, Community Capital Bank filed a complaint in the
Supreme Court of the State of New York (Kings County) against the Company,
Macdonald S. Tudeme (our former CEO) and Marguerite Tudeme (our former
Secretary). The complaint seeks payment of three loans made by Community
Capital Bank having a total outstanding principal amount of $202,527.67
plus unpaid interest. The Company believes that the Community Capital Bank
loans were made to M.T. Marketing Int. Corp., a former subsidiary that was
disposed of on December 15, 2005 as part of the Company's disposition of
Marathon Healthcare Corp, and are guaranteed by the Tudemes. As a result,
the Company does not believe it is obligated to repay any amounts due under
the Community Capital Bank loans.
On January 25, 2006, we received notice from the Internal Revenue Service
(the "IRS") that the IRS had concluded that our subsidiary Drug
Consultants, Inc. ("DCI") was a third-party payer to and thus employer of a
pharmacist who provided services to DCI's client, the California Department
of Corrections. Although the IRS notice applies only to the case of the
individual pharmacist, if unchanged, it could require DCI to classify other
pharmacists and nurses in its registry who provide services to DCI's
clients as employees of DCI. Accordingly, compensation payable to such
pharmacists and nurses would be subject to federal income tax withholding,
Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment
Tax Act (FUTA) tax. This result would have a material adverse effect on
our business, financial condition and results of operations. The Company
disagrees with the conclusion of the IRS notice, believes that the
pharmacist in question was properly classified as an independent contractor
and is in the process of contesting the conclusion of the IRS.
On March 6, 2006, we received notice that the U.S. Department of Labor,
Employment Standards Administration, Wage & Hour Division ("DOL") was
conducting an investigation of work performed by our subsidiary DCI for the
California Department of Corrections and Rehabilitation during the period
from February 24, 2004 through February 24, 2006. The Company believes the
DOL inquiry relates to the applicability of the Fair Labor Standards Act
and related overtime pay obligations. The Company is cooperating with the
DOL inquiry.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective March 31, 2006, pursuant to written consent executed by our
stockholders holding 75.2% of our outstanding common stock, we took the
following corporate actions:
(a) We changed our corporate name to Monarch Staffing, Inc. from MT
Ultimate Healthcare Corp.;
(b) We effected a one-for-ninety reverse stock split of our common stock;
(c) We re-authorized (after giving effect to the reverse stock split)
400,000,000 shares of our common stock, par value $.001 per share;
(d) We authorized 5,000,000 shares of "blank check" preferred stock.; and
(e) We approved our 2005 Stock Incentive Plan.
Each of these corporate actions is described in more detail in our
Information Statement dated, and mailed to our stockholders on, March 6,
2006.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------ ------------------------
31.1 Certification pursuant to Section 302
32.1 Certification pursuant to Section 906
36
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATED: May 26, 2006 Monarch Staffing, Inc.
/s/ David Walters
--------------------------------------
By: David Walters
Chairman and Chief Executive Officer
Title:
37