UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 000-33153
STARMED GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada 52-2220728
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2029 Century Park East, Suite 1112, Los Angeles, CA 90067
---------------------------------------------------------
(Address of principal executive offices)
(310) 226-2555
--------------
(Registrant's telephone number, including area code)
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 preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [_ ]
As of August 12, 2005, the registrant had 9,126,424 shares of its $.01 par value
per share common stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
STARMED GROUP, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED JUNE 30, 2005
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
June 30, 2005 and December 31, 2004...................................... 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2005 and June 30, 2004............... 2
Condensed Consolidated Statement of Shareholders' Equity (Deficit) for
the six months ended June 30, 2005 and the year ended December 31, 2004.. 3
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 2005 and June 30, 2004............... 4
Notes to Interim Condensed Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 14
Item 3. Controls and Procedures............................................ 20
PART II. OTHER INFORMATION
Item 2. Sales of Unregistered Securities and Use of Proceeds .............. 21
Item 6. Exhibits .......................................................... 21
Signatures ................................................................. 22
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
___________________________________________________________________________________________________________
ASSETS
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
Current assets:
Cash .......................................................... $ 347,468 $ 72,708
Accounts receivable ........................................... 62,721 16,561
Inventory ..................................................... 29,196 32,970
Prepaid expenses .............................................. 24,386 2,113
Deferred financing costs ...................................... 40,000 -
--------- ---------
Total current assets ........................................ 503,771 124,352
Equipment and furniture:
Office furniture and computers ................................ 65,063 65,063
Accumulated depreciation ...................................... (35,086) (30,438)
--------- ---------
Total equipment and furniture ............................... 29,977 34,625
--------- ---------
Deferred tax assets .............................................. - 105,000
Deposits ......................................................... 5,016 5,266
--------- ---------
Total assets ................................................ $ 538,764 $ 269,243
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .............................................. $ 33,179 $ 21,381
Accrued expenses .............................................. 339,395 334,105
Income tax payable ............................................ 22,400 25,400
Note payable .................................................. 366,135 -
Loans from shareholders ....................................... 20,000 -
Capital lease obligation - current portion .................... 15,304 15,808
--------- ---------
Total current liabilities ................................... 796,413 396,694
Long term debt:
Capital lease obligation - less current portion ............... - 6,875
--------- ---------
Total long term debt ........................................ - 6,875
--------- ---------
Total liabilities ........................................... 796,413 403,569
Commitments ...................................................... - -
Shareholders' equity (deficit):
Preferred stock (par value $0.01) 25,000,000 shares authorized,
no shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively ............................. - -
Common stock (par value $0.01) 100,000,000 shares authorized;
9,126,424 and 7,056,424 shares issued and outstanding at
June 30, 2005 and December 31, 2004, respectively .......... 91,264 70,564
Additional paid in capital .................................... 233,511 109,646
Accumulated deficit ........................................... (582,424) (314,536)
--------- ---------
Total shareholders' equity (deficit) ........................ (257,649) (134,326)
--------- ---------
Total liabilities and shareholders' equity (deficit) ........ $ 538,764 $ 269,243
========= =========
See accompanying notes to financial statements
1
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
_______________________________________________________________________________________________________________
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Sales ................................................. $ 3,527 $ 324,251 $ 9,731 $ 1,719,539
Revenues from royalties ............................... 12,553 44,720 23,998 64,782
----------- ----------- ----------- -----------
Total revenues ................................... 16,080 368,971 33,729 1,784,321
----------- ----------- ----------- -----------
Cost of sales ......................................... 4,709 267,585 9,416 1,398,436
----------- ----------- ----------- -----------
Gross profit .......................................... 11,371 101,386 24,313 385,885
General, selling and administrative expenses:
Compensation ....................................... 20,518 11,880 78,631 44,515
Salaries ........................................... - 15,480 - 27,765
Professional fees .................................. 19,254 16,077 34,221 26,391
Accounting fees .................................... 11,719 11,383 16,238 22,718
Office ............................................. 5,814 24,076 9,170 38,847
Rent ............................................... 15,353 14,753 30,251 29,621
Insurance .......................................... 5,182 3,861 10,267 6,080
Advertising, marketing and promotion ............... 663 7,984 1,228 30,707
Depreciation ....................................... 2,324 2,324 4,648 4,648
Travel ............................................. 503 1,644 636 1,692
Other expenses ..................................... - 544 - 27,915
----------- ----------- ----------- -----------
Total general, selling and administrative expenses 81,330 110,006 185,290 260,899
----------- ----------- ----------- -----------
Income (loss) from operations ........................ (69,959) (8,620) (160,977) 124,986
Interest expense ...................................... (981) (1,650) (1,911) (3,283)
----------- ----------- ----------- -----------
Income (loss) before income taxes ..................... (70,940) (10,270) (162,888) 121,703
(Benefit) provision for income taxes ................. - (47,000) 105,000 12,000
----------- ----------- ----------- -----------
Net income (loss)
$ (70,940) $ 36,730 $ (267,888) $ 109,703
=========== =========== =========== ===========
Net income (loss) per share - basic .................. $ (0.01) $ 0.01 $ (0.03) $ 0.02
=========== =========== =========== ===========
Net income (loss) per share - diluted ................ $ (0.01) $ 0.01 $ (0.03) $ 0.01
=========== =========== =========== ===========
Weighted average number of shares outstanding - basic . 9,126,424 7,056,424 8,996,590 7,042,633
=========== =========== =========== ===========
Weighted average number of shares outstanding - diluted 9,126,424 7,056,424 8,996,590 7,317,633
=========== =========== =========== ===========
See accompanying notes to financial statements
2
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
______________________________________________________________________________________________________________________
PREFERRED STOCK COMMON STOCK
------------------ ---------------------------- TOTAL
PAR PAR SHAREHOLDERS'
NUMBER OF VALUE NUMBER OF VALUE PAID IN ACCUMULATED EQUITY
SHARES ($0.01) SHARES ($0.01) CAPITAL DEFICIT (DEFICIT)
--------- ------- --------- ------- -------- ----------- -------------
Balance at December 31, 2003 ........... - $ - 6,936,424 $69,364 $ 88,924 $(214,659) $ (56,371)
Common shares issued for services in
January 2004, valued at $0.01 per share - - 110,000 1,100 - - 1,100
Common shares issued for cancellation of
contract and in exchange for accounts
payable in March 2004, valued at $2.08
per share ............................. - - 10,000 100 20,722 - 20,822
Net loss .............................. - - - - - (99,877) (99,877)
--------- ------- --------- ------- -------- --------- ---------
Balance at December 31, 2004 ........... - - 7,056,424 70,564 109,646 (314,536) (134,326)
Common shares issued for services in
during 2005 ............................ - - 2,070,000 20,700 - - 20,700
Issuance of warrants ................... - - - - 123,865 - 123,865
Net loss ............................... - - - - - (267,888) (267,888)
--------- ------- --------- ------- -------- --------- ---------
Balance at June 30, 2005 (unaudited) ... - $ - 9,126,424 $91,264 $233,511 $(582,424) $(257,649)
========= ======= ========= ======= ======== ========= =========
See accompanying notes to financial statements
3
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
___________________________________________________________________________________________________________
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net income (loss) ................................................ $(267,888) $ 109,703
Adjustments to reconcile net income (loss)to net cash:
Depreciation ..................................................... 4,648 4,648
Deferred tax assets .............................................. 105,000 12,000
Shares issued for services ....................................... 20,700 1,100
(Increase) decease in operating assets:
Accounts receivable .............................................. (46,160) (25,059)
Inventory ........................................................ 3,774 25,855
Prepaid expenses ................................................. (22,273) 3,697
Deposit .......................................................... 250 1,047
Increase (decrease) in operating liabilities:
Accounts payable ................................................. 11,797 (83,126)
Accrued expenses ................................................. 5,290 (26,521)
Income tax payable ............................................... (3,000) -
--------- ---------
Net cash provided (used) by operating activities .................... (187,862) 23,344
--------- ---------
Cash flows from financing activities:
Capital lease payments ........................................... (7,378) (11,265)
Loans from shareholders .......................................... 20,000 -
Issuance of notes payable ........................................ 326,135 -
Issued warrants .................................................. 123,865 -
--------- ---------
Net cash (used) provided by financing activities .................... 462,622 (11,265)
--------- ---------
Net increase (decrease) in cash ..................................... 274,760 12,079
Cash, beginning of period ........................................... 72,708 247,288
--------- ---------
Cash, end of period ................................................. $ 347,468 $ 259,367
========= =========
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
AND FINANCIAL ACTIVITIES:
Stock issued for compensation and services ....................... $ 20,700 $ 1,100
========= =========
Stock issued in exchange for accounts payable ................... $ - $ 20,822
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for:
Payments of interest ........................................ $ 1,911 $ 3,283
========= =========
See accompanying notes to financial statements
4
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
1. HISTORY AND ORGANIZATION OF THE COMPANY
The Company develops and sells high quality natural medicines. The
Company's products are formulated by medicinal doctors as the result of
scientific research. The current product line includes Sierra Slim, a
starch blocker and natural weight loss product, Sight D for the slowing
of degeneration of eye tissue and Sight W which promotes blood
circulation to the optic nerve, Colon IB for the relief of symptoms
from irritable bowel syndrome and JT Penetrating Cream to help relieve
arthritis joint pain. Royalty revenue is from formulas for the herbal
health products.
The Company has completed its Proof of Concept to develop a national
chain of Wellness Centers, whereby each is managed by doctors, with a
focus on preventative, integrated medicine with the objective of total
health wellness.
The Company's research was based on the application by practicing
doctors of medical diagnoses and procedures, integrated with
medicinals, supplements and personal physician supervision.
The Company's Wellness Centers concept is founded on the belief that
traditional western medicines and treatments may be enhanced by the use
of alternative medicinals to address the underlying causes of certain
illnesses and that addressing these underlying causes is necessary for
good health maintenance and longevity.
Over the course of the last three years, the Company's management and
medical team has evaluated those proactive and reactive traditional and
alternative medical treatments and procedures, medical equipment and
devices, and medicinal products. The Company has completed plans for
operations of our prototype of what is expected to become a network of
StarMed Wellness Centers that will operate in conjunction with existing
medical clinics.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS FOR PRESENTATION
The financial information included herein is unaudited, however, such
information reflects all adjustments (consisting solely of normal
occurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. The
results of operations for the six months ended June 30, 2005 are not
necessarily indicative of the results to be expected for the full year.
The accompanying consolidated financial statements do not include
footnotes and certain financial presentations normally required under
generally accepted accounting principles; and, therefore, should be
read in conjunction with the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2004.
5
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its wholly-owned subsidiary, Sierra Medicinals, Inc.
All significant intercompany balances and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
The company has adopted SEC Staff Accounting Bulletin Topic 13 "Revenue
Recognition in Financial Statements" (SAB 104) and accordingly
recognizes revenue when persuasive evidence of an agreement exists,
upon shipment of the product to customers, upon fulfillment of
acceptance terms, if any, when no significant contractual obligations
remain, the price to the buyer is determinable, and collection of the
related receivable is reasonable assured.
During the six months ended June 30, 2005 and 2004, the Company had
sales of approximately $9,731 and $23,864, respectively, to customers
through the Company's website. These sales allow customers a 30-day
money back guarantee, less shipping costs, for unused products. The
Company has adopted SFAS 48 "Revenue Recognition When Right of Return
Exists" for the website sales and records revenue net of a provision
for estimated product returns.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash, payables, accrued
expenses and notes payable. The estimated fair value of these
instruments approximate their carrying value.
INVENTORY
The Company contracts a third party to process and package its
formulated herbal products. The Company accounts for its inventory of
finished goods on a first-in, first-out basis or market, if it should
be lower.
6
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EQUIPMENT AND FURNITURE
Equipment and furniture is stated at cost and depreciated using the
straight-line method over the estimated useful life of the assets,
which is seven years.
INCOME TAXES
Deferred income taxes are reported using the liability method. Deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. For the six months
ended June 30, 2005 and 2004, the Company incurred advertising expense
of $1,228 and $30,707 respectively.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128 "Earnings Per Share" which requires the Company to
present basic and diluted earnings per share, for all periods
presented. The computation of loss per common share (basic and diluted)
is based on the weighted average number of shares actually outstanding
during the period.
CONCENTRATIONS
During the six months ended June 30, 2004, a single customer accounted
for 98% of sales.
During the six months ended June 30, 2004, products purchased from a
manufacturer accounted for approximately 97% of purchases.
7
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
3. GOING CONCERN
The accompanying financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United
States of America, contemplates the continuation of the Company as a
going concern. However, the Company has sustained significant recurring
operating losses and has limited capital resources. Continuation of the
Company as a going concern is contingent upon the ability of the
Company to expand its operations, generate increased revenues, and
secure additional sources of financing. However, there is no assurance
that the Company will realize the necessary capital for expansion.
4. CORPORATE CREDIT CARD
The Company has available up to $29,000 on an unsecured corporate
credit card. The minimum payment due was $562 as of June 30, 2005. The
Company had an outstanding balance of $14,813 and $10,040 as of June
30, 2005 and December 31, 2004, respectively, which is included in
accounts payable.
5. NOTES PAYABLE AND CAPITAL LEASE
NOTES PAYABLE
On July 23, 2003, the Company entered into an agreement for the
cancellation of the note payable in the amount of $467,255 including
accrued interest through July 23, 2003, in exchange for the issuance
82,300 restricted shares of common stock. The shares are restricted
pursuant to Rule 144. The agreement includes a guarantee and option
whereby the Company guarantees a market price of $3.50 per share in the
event of the future sale of the shares by the related shareholder in
the form of either cash or additional shares of common stock valued at
the bid price on the date of payment. As of the date of the transaction
there was no public market for the Company's common stock. The
Company's liability associated with the guarantee and option clause of
the agreement of $288,050 is included in accrued expenses on the
accompanying consolidated balance sheets at June 30, 2005 and December
31, 2004, respectively.
On June 28, 2005, the Company issued a $500,000 10% senior secured
convertible promissory note and a stock purchase warrant for a total of
$490,000 as part of a private offering. Principal and interest is
convertible at the holder's option upon an event of default into shares
of the Company's common stock at a price per share that is equal to
seventy percent (70%) of the lower of: (i) the ten (10) day average of
the closing bid price of the Company's common stock on the day prior to
the date of conversion of this note or (ii) the closing bid price of
the Company's common stock on the day prior to the date of conversion.
Principal and interest is due upon the earlier of: (a) June 28, 2006 or
(b) the date upon which the Company sells any of its equity or debt
securities in a financing transaction, or a series of financings, with
gross proceeds equal to one million
8
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
5. NOTES PAYABLE AND CAPITAL LEASE (Continued)
NOTES PAYABLE (Continued)
dollars ($1,000,000) or more. The note has certain financial and
restrictive covenants. The Company is also required to reserve a
sufficient number of shares of common stock to be issuable upon
conversion of this note and exercise of the warrants. As of June 30,
2005, the Company is in compliance with all restrictive covenants. The
stock purchase warrant entitles the holder to purchase, at an exercise
price per share equal to $.40 per share, up to 250,000 shares of the
Company's common stock. The exercise price is subject to an adjustment
related to any dividends, subdivisions, combinations, or issuances of
shares at a discounted price. The fair value of the stock purchase
warrant was approximately $123,865 and was determined using the Black
Scholes pricing model. The warrant can be exercised in whole or in part
and expire on June 28, 2010. No warrants were exercised as of June 30,
2005. The Company's obligations to the note holder are collateralized
by a security interest in all of the Company's assets. A placement fee
totaling $40,000 was deducted from the proceeds of the offering. The
Company will expense this fee over the life of the note.
In accordance with APB No. 14, "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants", the Company has allocated
the proceeds received in the private offering to the warrant and the
note based on their relative fair market values at the time of
issuance. The proceeds allocated to the warrant were accounted for as
additional paid-in capital. This resulted in the note being accounted
for at a discount of $133,865. The discount consists of $123,865
related to the warrants and the discount of $10,000 stated in the
promissory note. The Company will expense this discount over the life
of the note. As of June 30, 2005, the Company had not recorded any
amortization expense related to this discount.
CAPITAL LEASE
The Company has a five-year lease on computers. The monthly payment is
$1,473 per month. The Company will acquire the computers for $1 at the
end of the lease. The Company has calculated the present value of the
computers assuming a 12% interest rate at $62,575 and has capitalized
that value for depreciation. The balance of the capital lease
obligation was $15,304 and $22,683 at June 30, 2005 and December 31,
2004, respectively.
9
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
5. LONG TERM DEBT (Continued)
CAPITAL LEASE (Continued)
The equipment under capital lease is as follows:
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
Computers .......................... $ 62,575 $ 62,575
Less: accumulated depreciation ..... (33,732) (29,262)
-------- --------
$ 28,843 $ 33,313
======== ========
Minimum future minimum lease payments under the capital lease as of
June 30, 2005 are as follows:
FOR THE YEARS ENDED DECEMBER 31,
2005 ................................ $ 8,840
2006 ................................ 7,366
--------
Total minimum lease payments ..................... 16,206
Less: amount representing interest ............... (902)
--------
Present value of total minimum lease payments .... 15,304
Less: current portion ............................ (15,304)
--------
Long term portion ................................ $ -
========
6. CAPITAL STOCK
SHARES ISSUED
On January 13, 2004, the Company issued 110,000 Common shares for
services rendered valued at $1,110.
On March 16, 2004, the Company issued 10,000 common shares in exchange
for accounts payable of $20,822.
During the six months ended June 30, 2005, the Company issued 2,050,000
common shares for services rendered valued at $20,500.
10
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
6. CAPITAL STOCK (Continued)
2004 EQUITY COMPENSATION PLAN
In November 2004, the Board of Directors approved the adoption of the
2004 Equity Compensation Plan. The Plan provides for the grant to
directors, officers, employees and consultants of the Company and its
subsidiaries of stock based awards and options to purchase up to an
aggregate of 20,000,000 shares of common stock.
During January 2005, the Company issued 20,000 shares at $0.01 for
services values at $200 under this plan.
INCREASED AUTHORIZED SHARES
The Company has increased the authorized number of shares of common
stock from 50,000,000 to 100,000,000 and has established 25,000,000
shares of preferred stock to be issued in the future by the Company.
The articles of incorporation have been changed to reflect this
increase in authorized shares.
7. INCOME TAXES
Reconciliation of the differences between the statutory tax and the
effective income tax are as follows:
JUNE 30, 2005 JUNE 30, 2004
------------- -------------
Federal statutory tax .................. 34.00% 8.22%
State taxes, net of federal tax ........ 5.83% 1.64%
Changes in valuation allowance ......... (39.83%) -
------- -----
Effective income tax rate .............. - 9.86%
======= =====
The effective income tax rate differs from the federal statutory rate
primarily due to permanent timing differences and net operating loss
carry forwards.
The Company had available approximately $552,000 of unused federal
operating loss carry-forwards at June 30, 2005, and $839,000 of unused
state operating loss carry-forwards at June 30, 2005 that may be
applied against future taxable income.
SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets will
not be realized. As of June 30, 2005, the Company fully restored its
valuation allowance and will maintain a full valuation allowance until
the Company sustains consistent profitability.
11
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
7. INCOME TAXES (Continued)
The (provision) benefit for income taxes consists of the following as
of and for the six months ended June 30:
2005 2004
--------- ---------
Current:
Federal .............................. $ - $ -
State ................................ - -
--------- ---------
- -
Deferred:
Federal .............................. 79,000 10,000
State ................................ 14,000 2,000
--------- ---------
Total (provision) benefit before valuation
allowance .............................. 93,000 12,000
Change in valuation allowance ............ (198,000) -
--------- ---------
Total (provision) benefit ................ $(105,000) $ 12,000
========= =========
The components of the net deferred income tax asset are as follows as
of:
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
Deferred income tax assets:
Net operating loss carry forward . $ 237,000 $ 144,000
--------- ---------
237,000 144,000
--------- ---------
Deferred income tax asset, net before
valuation allowance ................ 237,000 144,000
Less: valuation allowance ............ (237,000) (39,000)
--------- ---------
Deferred income tax asset, net ....... $ - $ 105,000
========= =========
12
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
8. OFFICE LEASE
The Company entered into a twelve month lease for office space
commencing on November 1, 2003 that expired on October 31, 2004 at
which point the Company paid rent on a month-to-month basis. The
Company entered into a twelve month lease for office space commencing
January 1, 2005 and expiring December 31, 2005. Rent expenses incurred
for the six months ended June 30, 2005 and 2004 was $30,251 and
$29,621, respectively. Future minimum rental payments under the office
lease are $29,796.
9. RELATED PARTY TRANSACTIONS
The Company owes two shareholders a total of $47,635 and 42,344 in
expense reimbursements as of June 30, 2005 and December 31, 2004,
respectively. This balance is included in accrued liabilities on the
consolidated balance sheet as of June 30, 2005 and December 31, 2004,
respectively.
During the six months ended June 30, 2005, the Company received loans
totaling $20,000 from two directors and shareholders of the Company.
The loans are non-interest bearing and are due on demand. The amount
owed related to these loans at June 30, 2005 was $20,000.
10. COMMITMENTS
Under an agreement dated February 4, 2005, the Company engaged a firm
to: arrange market support for the Company's operations and expansion
and to provide the method to optimize and effectuate strategies and
capitalizations in US public markets; assist the Company and its
management with ongoing issues relating to operations in public
markets; provide financial advisory services including but not limited
to mergers and acquisitions; and represent the Company with regard to
introductions to accredited investors, financial institutions,
strategic partners and potential clients. Under the agreement, the
Company is obligated to compensate the consultant through the payment
of cash and warrants, depending upon the nature of the consummated
transaction giving rise to the obligation to pay compensation. As of
the date of this Report, no services have been provided to the Company
under the agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain disclosures in this Quarterly Report on Form 10-QSB include
certain forward-looking statements within the meaning of the safe harbor
protections of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Statements that
include words such as "believe," "expect," "should," intend," "may,"
"anticipate," "likely," "contingent," "could," "may," "estimate," or other
future-oriented statements, are forward-looking statements. Such forward-looking
statements include, but are not limited to, statements regarding our business
plans, strategies and objectives, and, in particular, statements referring to
our expectations regarding our ability to continue as a going concern, generate
increased market awareness of our cholesterol monitor, realize improved gross
margins, and timely obtain required financing. These forward-looking statements
involve risks and uncertainties that could cause actual results to differ from
anticipated results. The forward-looking statements are based on our current
expectations and what we believe are reasonable assumptions given our knowledge
of the markets; however, our actual performance, results and achievements could
differ materially from those expressed in, or implied by, these forward-looking
statements. Factors, within and beyond our control, that could cause or
contribute to such differences include, among others, the following: our ability
to implement our business plan and expand operations, raise sufficient working
capital, penetrate its target market and establish its brand; the effects of
competition; regulatory environments and general economic and business
conditions; the effects of our competition; the success of our operating,
marketing and growth initiatives; operating costs; the amount and effectiveness
of our advertising and promotional efforts; and the prospect of adverse
publicity. Readers are also urged to carefully review and consider the various
disclosures made by us in this report and those detailed from time to time in
our reports and filings with the Securities and Exchange Commission.
OVERVIEW OF THE COMPANY'S BUSINESS
Until recently StarMed Group, Inc., a Nevada corporation, and its
wholly owned subsidiary, Sierra Medicinals, Inc., an Arizona corporation,
developed, formulated and marketed a line of alternative medicinal products. The
substantial portion of revenues for the year ended December 31, 2005 resulted
from product sales of our proprietary starch blocker product. Revenues from
sales of other products were not meaningful.
We have redirected our resources towards completion of plans to
establish the first of what we envision will be a network of StarMed Wellness
Centers. Our management and affiliated physicians have devoted significant time,
and pooled their collective experience, to develop the Company's StarMed
Wellness Center concept. Our business model calls for our entering into
contractual relationships with existing medical clinics. Under the terms of the
agreements, each medical clinic will continue to operate under the direction of
a licensed medical practitioner, and provide the traditional medical services
that it has historically provided. However, the agreements will require us to
provide training, equipment and products to enable the clinics to expand its
array of services to include preventative and alternative medical techniques and
procedures, such as dietician review and consultation; weight loss and diabetes
management services; physical exercise consultation; physical therapy;
anti-aging treatments; acupuncture treatments; doctor prescribed and
personalized vitamin, mineral and herbal regimens; skin rejuvenation and
cosmetology services; and female hormone therapy. We will be responsible for the
collection of all revenues from operation of the Wellness Centers, and to retain
revenues, if any, remaining after our payment of all Wellness Center operating
expenses, including rent, salaries, insurance, utilities, equipment leases and
related operating expenses, professional fees and capital expenditures, as well
as a revenue-sharing allocation to the physician/owner of the medical clinic
with which we contract. StarMed will neither engage in the practice of medicine
nor provide medical services. All medical treatments and other regulated
activities will be performed by the licensed physicians, technicians and other
medical personnel employed by the medical clinic with whom we contract.
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The Company's Wellness Center concept is founded on the belief that
traditional western medicines and treatments may be enhanced by the use of
alternative medicinal products and techniques to address the underlying causes
of certain illnesses, and that addressing these underlying causes will
contribute to good over-all health maintenance and longevity. We are finalizing
an agreement to open our initial Wellness Center in conjunction with an existing
medical clinic in Los Angeles, California. Operations are projected to commence
during the third quarter of fiscal 2005. Our long-term goal is to expand to a
network of StarMed Wellness Centers each of which will provide clients a full
range of preventative, traditional medical and alternative treatments directed
towards achieving "total wellness."
The diversion of our limited financial and management resources away
from product sales and marketing activities, and towards the opening of our
planned Wellness Center, coupled with severe competition in the marketplace for
medicinal products, have contributed to a significant decrease in revenues from
product sales during the first half of 2005. While we anticipate that our
Wellness Centers will become a recurring market for our medicinal products in
the future, we intend to continue to devote our resources to our Wellness
Centers, and do not expect that revenues from product sales will be a
significant source of operating revenues in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. SFAS
151 requires that abnormal amounts of idle facility expense, freight, handling
costs and wasted material be recognized as current period charges. The Statement
also requires that the allocation of fixed production overhead be based on the
normal capacity of the production facilities. The effect of this Statement on
the Company's financial position or results of operations has been determined to
have no impact.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment
("SFAS 123R"), which is effective as of the beginning of the first interim or
annual period beginning after December 31, 2005. SFAS 123R requires all
share-based payments to employees to be expensed over the requisite service
period based on the grant-date fair value of the awards. The Statement allows
for either prospective or retrospective adoption and requires that the unvested
portion of all outstanding awards upon adoption be recognized using the same
fair value and attribution methodologies previously determined under Statement
No 123, "Accounting for Stock-Based Compensation." The Company is currently
evaluating transition alternatives and valuation methodologies for future
grants. The effect of this Statement on the Company's financial position or
results of operations has been determined to have no impact.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 153, "Exchange of Nonmonetary
Assets, an amendment of APB Opinion No. 29" ("SFAS 153"). The guidance in APB
Opinion No. 29, "Accounting for Nonmonetary Transactions" is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. SFAS 153 amends Opinion 29 to
eliminate the exception for nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. The provisions of SFAS 153 shall be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The effect
of this Statement on the Company's financial position or results of operations
has been determined to have no impact.
15
In April 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations", which clarifies that an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liability's fair value can be
reasonably estimated. The fair value of a liability for the conditional asset
retirement obligation should be recognized when incurred, which is generally
upon acquisition, construction, or development and (or) through the normal
operation of the asset. Uncertainty about the timing and (or) method of
settlement of a conditional asset retirement obligation should be factored into
the measurement of the liability when sufficient information exists.
Interpretation No. 47 is effective no later than the end of fiscal years
beginning after December 15, 2005. The effect of this Statement on the Company's
financial position or results of operations has been determined to have no
impact.
In May 2005, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
(SFAS154). This Statement replaces APB Opinion No. 20, "Accounting Changes," and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements," and changes the requirements for the accounting for and reporting
of a change in accounting principle. This Statement requires retrospective
application to financial statements of prior periods for changes in accounting
principle. This Statement is effective January 1, 2006. The effect of this
Statement on the Company's financial position or results of operations has been
determined to have no impact.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
The Company generates revenues from the sale of its products that
include a starch blocker, as well as revenues from royalties for formulas of
herbal health products. Total revenues for the six months ended June 30, 2005
were $33,729 as compared to $1,784,321 for the six months ended June 30, 2004, a
decrease of $1,750,592, or approximately 98%. Included in total revenues for the
six months ended June 30, 2005 is a decrease of $1,709,808, or approximately
99%, in sales of products and a decrease of $40,784, or approximately $63%, in
revenues from royalties. The significant decrease in sales of its products for
the six months ended June 30, 2005 is primarily the result of decreased demand
for its products from its principal customer. Sales to this customer, NHTC,
Inc., had accounted for a significant increase in total revenues reported by the
Company in fiscal 2004. This customer has subsequently advised the Company that
it has changed its internal strategy and it is unknown when, if ever, that this
customer will resume purchasing product from the Company at historical levels.
Also contributing to the decrease in sales is the diversion of the
Company's limited resources from marketing efforts to the finalization of plans
to open the Company's initial Wellness Center. In addition, the Company has
historically marketed and sold its products over the Internet. During the six
months ended June 30, 2005, the Company significantly decreased its adverting,
marketing and promotional expense, resulting in a decrease in online sales
contributing to the overall reduction in total revenues. The decrease in
revenues from royalties for the six months ended June 30, 2005 from the
comparable period in fiscal 2004 is the result of the decease in sales of the
Company's weight loss product and the increasing attention by the Company to the
development of the Wellness Centers program.
The Company is presently focusing its efforts on the opening of its
first Wellness Center. The Company does not anticipate that its total revenues
will return to fiscal 2004 levels based upon its current level of operations and
its business plan is dependent upon the opening of its Wellness Center to
16
increase revenues. The Company anticipates that its revenues will increase at
such time as the Wellness Center is open; however, as described elsewhere
herein, the Company is dependent on its ability to raise additional capital to
implement this part of its business plan. At such time as the Company is able to
open the Wellness Center, the Company also anticipates selling its products
through this outlet. However, neither revenue from Wellness Center operations,
nor the extent of product sales, if any, can be predicted at this time.
The Company reported total selling, general and administrative expenses
of $185,290 for the six months ended June 30, 2005 as compared to $260,899 for
the six months ended June 30, 2004, a decrease of $75,609, or approximately 29%.
The increase in selling, general and administrative expenses for the six months
ended June 30, 2005 as compared to the six months ended June 30, 2004 includes
the following:
o an increase of $6,351, or approximately 9%, in compensation and salary
expenses. This increase reflects the payment of compensation to
management that had been deferred in fiscal 2004,
o an increase of $4,817, or approximately 14%, in rent and insurance
expenses which represents normal escalation in costs,
o a decrease of $6,480, or approximately 29%, in accounting fees,
o a decrease of $29,677, or approximately 76%, in office expense which is
directly attributable to cost cutting implemented during fiscal 2005,
o a decrease of $29,479, or approximately 96%, in advertising, marketing
and promotional expenses, and
o a decrease of $27,915, or 100%, in other expenses.
The Company's recurring total general, selling and administrative
expenses for the period ended June 30, 2005 decreased approximately $87,000, or
approximately 33%, from the comparable six month period in fiscal 2004. The
Company anticipates that its total general, selling and administrative expenses
will remain relatively constant until the opening of its wellness center. The
Company is not able to predict at this time the amount of increase in total
general, selling and administrative expenses which will be attributable to the
Wellness Center, however, management believes that any such increases will
ultimately be offset by increased revenues.
The Company reported a loss from operations of $(160,977) for the six
months ended June 30, 2005 as compared to income from operations of $124,986 for
the six months ended June 30, 2004. This loss is attributable to the decrease in
total revenues.
The Company reported interest expense of $1,911 for the six months
ended June 30, 2005 as compared to interest expense of $3,283 for the six months
ended June 30, 2004, a decrease of $1,372, or approximately 42%. Interest
expense represents interest payable on Company credit cards. As a result of the
$500,000 10% senior secured convertible promissory note issued in June 2005, the
Company anticipates that interest expense will increase during the balance of
fiscal 2005.
The Company reported a net loss of $(267,888) for the six months ended
June 30, 2005 as compared to net income of $109,703 for the six months ended
June 30, 2004. Based upon its current lack of meaningful revenue, and
notwithstanding the cost cutting measures that have been implemented during
fiscal 2005, until such time as the Company is able to open its Wellness Center
and begin generating sufficient revenue to fund its operations, the Company
anticipates that it will continue to incur losses in future periods.
17
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities for the six months ended June 30,
2005 was $(187,862) as compared to net cash provided by operating activities of
$23,344 for the six months ended June 30, 2004. This change is primarily
attributable to:
o an increase of $377,591 in the Company's net loss,
o an increase in deferred tax asset of $93,000 which has been reduced in
conjunction with the loss recorded for the six months ended June 30,
2005.
o an increase in shares issued for services, a non-cash expense, of
$19,600,
o an increase of $21,101 in accounts receivable resulting from an
anticipated refund of $49,000 from a consulting agreement that was
renegotiated,
o an increase of $25,970 in prepaid expenses which is primarily prepaid
legal fees, and
o an increase in accounts payable of $94,923 coupled with an increase in
accrued expenses of $31,811.
Net cash provided by financing activities is $462,622 for the six
months ended June 30, 2005 as compared to net cash used in financing activities
of $(11,265) for the six months ended June 30, 2004. This change reflects a
decrease of $3,887 in funds used for capital lease payments as well as the
proceeds received from the sale of the $500,000 10% senior secured convertible
promissory note and related warrants issued in June 2005.
At June 30, 2005 the Company had cash of $347,468 and a working capital
deficit of $(292,642). Other than available borrowings under its corporate
credit card that could provide it up to $29,000 on an unsecured basis, the
Company does not have any external sources of working capital. The Company is
constantly evaluating its cash needs and burn rate in order to make appropriate
adjustments in operating expenses. In an effort to converse its cash resources,
during the six months ended June 30, 2005, the Company has undertaken certain
cost cutting activities which included a reduction funds spent on marketing and
promotional activities and certain non-essential, general operating expenses.
The Company presently has no commitments for capital expenditures
during the balance of fiscal 2005; however, the principal and interest under the
$500,000 10% senior secured convertible promissory note issued in June 2005
becomes due and payable in June 2006. Implementation of our business plan,
including the development of a network of Wellness Center, funding ongoing
operations and satisfying debt obligations as they become due, will require
substantial additional capital. Until such time, if any, as Wellness Center
operations generate sufficient revenues to sustain operations, we will likely
continue to fund operations through the sale of equity or debt securities, or a
combination of both. While we are engaged in active discussions designed to
provide us with short-term funding, we have no firm commitment from any third
party to provide additional capital. If the we are unable to secure additional
working capital, as needed, our ability to open Wellness Centers, grow revenues,
meet operating and financing obligations as they become due, and continue
business and operations, could be in jeopardy.
18
There are no known trends, events or uncertainties that are reasonably
likely to impact on our liquidity, except that our ability to fund our business
plans and meet our obligations as they become due is dependent upon our ability
to generate revenues from the operation of our planned Wellness Centers and
continued sales of medicinal products, as to which there is no certainty. We
currently fund our operations through limited revenues from (i) sales of our
medicinal products and (ii) sales of our debt and equity securities and, we will
likely continue to do so until our revenues from operations are sufficient to
satisfy all of our cash needs.
OFF BALANCE SHEET ARRANGEMENTS
Under SEC regulations, we are required to disclose our off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors. An off-balance sheet
arrangement means a transaction, agreement or contractual arrangement to which
any entity that is not consolidated with us is a party, under which we have:
o Any obligation under certain guarantee contracts;
o Any retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets;
o Any obligation under a contract that would be accounted for as a
derivative instrument, except that it is both indexed to our stock and
classified in stockholder's equity in our statement of financial
position; and
o Any obligation arising out of a material variable interest held by us
in an unconsolidated entity that provides financing, liquidity, market
risk or credit risk support to us, or engages in leasing, hedging or
research and development services with us.
As of the date of this Report, the Company has no off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
SEASONALITY AND INFLATION
Our business is not seasonal in nature, and management does not believe
that our operations have been materially influenced by inflationary forces. If
the recent increase in oil prices proves to be long lasting, we believe the
interest in fuel cell development will only increase. As previously stated, our
future success is dependent upon the successful development and market
acceptance of fuel cell systems.
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ITEM 3. CONTROLS AND PROCEDURES
The Company's management has concluded its evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Disclosure controls and procedures are controls and procedures
designed to reasonably assure that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
prescribed by SEC rules and regulations, and to reasonably assure that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and acting Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
The Company's management, including the Chief Executive Officer and
acting Chief Financial Officer, does not expect that our disclosure controls and
procedures will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
As of the evaluation date, the Company's Chief Executive Officer and
its acting Chief Financial Officer concluded that the Company maintains
disclosure controls and procedures that are effective in providing reasonable
assurance that information required to be disclosed in the Company's reports
under the Exchange Act is recorded, processed, summarized and reported within
the time periods prescribed by SEC rules and regulations, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and its acting Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
There was no change in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during its
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
In June 2005, we completed a private financing consisting of our
promissory note in the principal amount of $500,000 and warrants to purchase
250,000 shares of common stock. Information concerning this transaction is
described elsewhere in this Quarterly Report, and was previously disclosed in
our Current Report on Form 8-K filed July 5, 2005.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 19, 2005 STARMED GROUP, INC.
By: /s/ Herman Rappaport
--------------------
Herman Rappaport, Chief Executive
Officer and Acting Chief Financial
Officer
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EXHIBIT INDEX
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
23