UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
[ ] 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 small business issuer 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
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 13, 2006, the
registrant had 23,274,456 shares of its 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 SEPTEMBER 30, 2006
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2006 (unaudited)
and December 31, 2005 ........................................... 2
Consolidated Statements of Operations for the three months and
nine months ending September 30, 2006 and September 30, 2005
(unaudited) ..................................................... 4
Consolidated Statement of Shareholders' Equity (Deficit) for
the nine months ending September 30, 2006 (unaudited) ........... 5
Consolidated Statements of Cash Flows for the nine months ending
September 30, 2006 and September 30, 2005 (unaudited)............ 6
Notes to Consolidated Financial Statements (unaudited) ............ 7
Item 2. Management's Discussion and Analysis or Plan of Operation ......... 12
Item 3. Controls and Procedures ........................................... 22
PART II. OTHER INFORMATION ................................................. 22
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain disclosures in this Quarterly Report on Form 10-QSB include
forward-looking statements within the meaning 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, implement our business model, increase our revenues 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 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.
When used in this Quarterly Report the terms the "Company," "StarMed," " we,"
"our" and "us" refer to StarMed Group, Inc, a Nevada corporation, and our
wholly-owned subsidiary, Sierra Medicinals, Inc., an Arizona corporation. The
information which appears on our web sites at www.starmedgroup.com and
www.sierramed.com is not part of this Quarterly Report.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
________________________________________________________________________________
September 30, December 31,
2006 2005
----------- -----------
ASSETS
Current assets:
Cash ............................................. $ 231,378 $ 1,019,259
Accounts receivable .............................. 8,156 7,489
Inventory ........................................ 17,523 22,110
Prepaid expenses ................................. 314,342 548,730
Deferred financing costs ......................... - 5,017
----------- -----------
Total current assets ............................. 571,399 1,602,605
Equipment and furniture:
Office furniture and computers ................... 68,059 65,063
Accumulated depreciation ......................... (46,920) (39,734)
----------- -----------
Total equipment and furniture .................... 21,139 25,329
Deposits ........................................... 7,316 700
----------- -----------
Total assets ..................................... $ 599,854 $ 1,628,634
=========== ===========
See accompanying notes to consolidated financial statements
2
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
________________________________________________________________________________
September 30, December 31,
2006 2005
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................. $ 29,557 $ 44,910
Accrued expenses - Related Parties................ 54,430 54,580
Income tax payable ............................... 8,227 9,359
Note payable ..................................... - 259,245
Capital lease obligation ......................... - 7,164
----------- -----------
Total current liabilities ........................ 92,214 375,258
Commitments ........................................ - -
Shareholders' equity (deficit):
Preferred stock (par value $0.01) 25,000,000
shares authorized, no shares issued and
outstanding at September 30, 2006 and
December 31, 2005, respectively ................ - -
Common stock (par value $0.01) 100,000,000
shares authorized; 23,274,456 and 18,453,424
shares issued and outstanding at
September 30, 2006 and December 31, 2005,
respectively ................................... 232,744 184,534
Additional paid in capital ....................... 3,610,480 2,168,566
Accumulated deficit ................................ (3,335,584) (1,099,724)
----------- -----------
Total shareholders' equity (deficit) ............... 507,640 1,253,376
----------- -----------
Total liabilities and shareholders' equity ......... $ 599,854 $ 1,628,634
=========== ===========
See accompanying notes to consolidated financial statements
3
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
______________________________________________________________________________________________________________
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDING SEPTEMBER 30, ENDING SEPTEMBER 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Sales ................................................. $ 14,296 $ 288 $ 26,238 $ 10,019
Revenues from royalties ............................... - 488 3,189 24,486
----------- ----------- ----------- -----------
Total revenues .................................... 14,296 776 29,427 34,505
----------- ----------- ----------- -----------
Cost of sales ......................................... 8,856 12,745 11,518 22,161
----------- ----------- ----------- -----------
Gross profit .......................................... 5,440 (11,969) 17,909 12,344
General, selling and administrative expenses:
Compensation ........................................ 169,276 62,724 1,032,870 141,355
Professional fees ................................... 101,872 41,326 493,737 75,547
Accounting fees ..................................... 14,055 13,981 78,250 30,219
Office .............................................. 32,280 6,466 80,905 15,636
Rent ................................................ 24,688 15,344 83,781 45,595
Insurance ........................................... 10,479 7,289 32,038 17,556
Advertising, marketing and promotion ................ 25,879 814 59,725 2,042
Depreciation ........................................ 2,431 2,324 7,186 6,972
Travel and entertainment ............................ 4,415 1,677 13,908 2,313
----------- ----------- ----------- -----------
Total general, selling and administrative expenses 385,375 151,945 1,882,400 337,235
----------- ----------- ----------- -----------
Income (loss) from operations ......................... (379,935) (163,914) (1,864,491) (324,891)
Total other income and (expense)
Interest income ....................................... 4,934 - 18,249 -
Gain on forgiveness of debt ........................... - - 44,245 -
Interest expense ...................................... 99 (46,730) 761 (48,586)
Common stock and warrants expense ..................... (116,744) - (434,624) -
----------- ----------- ----------- -----------
Total other Income and (expense) ...................... (111,711) (46,730) (371,369) (48,586)
Income (loss) before income taxes ..................... (491,646) (210,644) (2,235,860) (373,477)
(Benefit) provision for income taxes ................. - 2,641 - 107,641
----------- ----------- ----------- -----------
Net income (loss) ..................................... $ (491,646) $ (213,285) $(2,235,860) $ (481,118)
=========== =========== =========== ===========
Net income (loss) per share - basic ................... $ (0.02) $ (0.02) $ (0.10) $ (0.05)
=========== =========== =========== ===========
Net income (loss) per share - diluted ................. $ (0.02) $ (0.02) $ (0.10) $ (0.05)
=========== =========== =========== ===========
Weighted average number of shares outstanding - basic . 22,790,612 9,126,424 21,359,988 9,040,343
=========== =========== =========== ===========
Weighted average number of shares outstanding - diluted 22,790,612 9,126,424 21,359,988 9,040,343
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
_______________________________________________________________________________________________________________________
PREFERRED STOCK COMMON STOCK
--------------------- ----------------------
NUMBER OF PAR VALUE NUMBER OF PAR VALUE PAID IN ACCUMULATED
SHARES ($0.01) SHARES ($0.01) CAPITAL (DEFICIT) TOTAL
--------- --------- ---------- --------- ---------- ----------- -----------
Balance at December 31, 2004
(audited) ................. - $ - 7,056,424 $ 70,564 $ 88,924 $ (293,814) $ (134,326)
--------- --------- ---------- --------- ---------- ----------- -----------
Common shares issued
for services during
2005 ...................... - $ - 2,070,000 $ 20,700 $ - $ - $ 20,700
Issuance of warrants........ - $ - - $ - $ 67,500 $ - $ 67,500
Common shares issued
for services to be
provided ................. - $ - 1,625,000 $ 16,250 $ 552,500 $ - $ 568,750
Common shares issued
for cash................... - $ - 7,702,000 $ 77,020 $1,459,642 $ - $ 1,536,662
Net Loss .................. - $ - - $ - $ - $ (805,910) $ (805,910)
--------- --------- ---------- --------- ---------- ----------- -----------
Balance at December 31, 2005
(audited) ................. - $ - 18,453,424 $ 184,534 $2,168,566 $(1,099,724) $ 1,253,376
--------- --------- ---------- --------- ---------- ----------- -----------
Common shares issued during
nine months ended
September 30, 2006
For cash .................. - $ - 1,740,000 $ 17,400 $ 417,600 $ - $ 435,000
For services provided ..... - $ - 2,225,000 $ 22,250 $ 378,250 $ - $ 400,500
For Penalty common
shares issued ............. - $ - 856,032 $ 8,560 $ 108,820 $ - $ 117,380
For Penalty Warrants
issued .................... - $ - - $ - $ 317,244 $ - $ 317,244
Stock options issued during
nine months ended
September 30, 2006
As compensation ........... - $ - - $ - $ 220,000 $ - $ 220,000
Net Loss .................. - $ - - $ - $ - $(2,235,860) $(2,235,860)
--------- --------- ---------- --------- ---------- ----------- -----------
Balance at September 30, 2006 - $ - 23,274,456 $ 232,744 $3,610,480 $(3,335,584) $ 507,640
========= ========= ========== ========= ========== =========== ===========
See accompanying notes to consolidated financial statements.
5
STARMED GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
________________________________________________________________________________
FOR THE NINE MONTHS ENDING
SEPTEMBER 30, SEPTEMBER 30,
2006 2005
------------- -------------
Cash flows from operating activities:
Net income (loss) .............................. $(2,235,860) $ (481,118)
Adjustments to reconcile net income (loss)
to net cash:
Common Stock and Warrants for penalties ........ 434,624 -
Stock options as compensation .................. 220,000 -
Gain on forgiveness of debt .................... (44,245) -
Depreciation ................................... 7,186 6,972
Amortization of deferred financing costs ....... 5,017 43,466
Deferred Tax Assets ............................ - 105,000
Shares Issued for Services ..................... 400,500 20,700
Operating assets:
Accounts Receivable ............................ (667) 15,599
Increase in Inventory .......................... 4,587 15,521
Prepaid expenses ............................... 234,388 (63,300)
(Decrease) Increase in Deposit ................. (6,616) 250
Increase in Accounts Payable ..................... (15,353) 6,633
Accrued expenses ............................... (150) (9,709)
Income tax payable ............................... (1,132) (12,354)
----------- -----------
Net Cash Used by Operating Activities ............ $ (997,721) $ (352,340)
Cash flows from financing activities:
Payments on note payable ......................... (215,000) -
Payments on capital lease ........................ (7,164) (11,388)
Loans from Shareholders .......................... - -
Issuance of notes payable ........................ - 326,135
Warrants issued .................................. - 123,865
Cash received from issuance of common stock ...... 435,000 -
----------- -----------
Net cash provided (used) by financing activities . $ 212,836 $ 438,612
Cash flows from Investing Activities:
Office furniture and computer .................... (2,996) -
----------- -----------
Net cash provided (used) by investing activities . $ (2,996) $ -
Net increase (decrease) in cash .................. $ (787,881) $ 86,272
Cash, beginning of period ........................ $ 1,019,259 $ 72,708
----------- -----------
Cash, end of period .............................. $ 231,378 $ 158,980
=========== ===========
Supplemental information on non-cash and financing
activities:
Stock issued for compensation and services ....... $ 400,500 $ 20,700
=========== ===========
Stock options issued for compensation ............ $ 220,000 $ -
=========== ===========
Common Stock and Warrants issued ................. $ 434,624 $ -
=========== ===========
Stock Issued for Services to be Provided ......... $ - $ 1,625
=========== ===========
Supplemental cash flow information:
Cash paid for interest ........................... $ - $ 1,911
=========== ===========
Cash paid for Income taxes ....................... $ - $ 12,354
=========== ===========
Supplemental cash flow information:
Cash paid for interest ........................... $ - $ 1,911
=========== ===========
See accompanying notes to consolidated financial statements
6
STARMED GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
________________________________________________________________________________
1. HISTORY AND ORGANIZATION OF THE COMPANY
The Company was incorporated in Nevada on August 13, 1981, under the name Port
Star Industries, Inc. and was organized to succeed to the properties, rights and
obligations of Port Star Industries, Inc., a publicly-held North Carolina
corporation formed on November 3, 1961 under the name of Riverside Homes, Inc.
("Port Star North Carolina").
At the time of our formation, Port Star North Carolina had no assets,
liabilities or operations. In order to change the domicile of Port Star North
Carolina to Nevada:
o Port Star North Carolina caused the Company's formation under the laws of
Nevada, with an authorized capitalization that "mirrored" the authorized
capitalization of Port Star North Carolina, and
o Issued to each stockholder of Port Star North Carolina a number of shares
of our common stock equal to such stockholder's share ownership of Port
Star North Carolina.
At the time of the reincorporation, Herman Rappaport, the founder, president and
chief executive officer was the principal stockholder of Port Star North
Carolina. Port Star North Carolina conducted no operations subsequent to the
reincorporation, and was administratively dissolved in 1988.
The Company engaged in no material operations from the time of its formation in
1981, and, in 1985, Nevada revoked the charter for failing to file required
reports.
On January 10, 2000, the Company revived its Nevada charter and changed its name
to StarMed Group, Inc. At the time of the revival, the Company had no assets or
liabilities, and Mr. Rappaport continued as our majority stockholder, either
directly or through his family trust.
On July 27, 2001, the Company acquired Sierra Medicinals, Inc., an Arizona
corporation incorporated in March 2000, in a share exchange whereby the Company
issued a total of 469,792 shares of common stock for all of the issued and
outstanding shares of Sierra Medicinals, Inc. Mr. Rappaport, either directly or
through his family trust, was a majority stockholder of Sierra Medicinals, Inc.
The Company now operates Sierra Medicinals, Inc. as a wholly owned subsidiary.
On September 10, 2003, the Company formed Vet Medicinals, Inc. as a wholly owned
subsidiary under the laws of the State of Nevada. Vet Medicinals, Inc. is
currently inactive.
Historically, the Company's operations were devoted to formulating and marketing
a line of proprietary over-the-counter vitamins, minerals and other supplements
under the StarMed and SierraMed brand names. Severe competition in the medicinal
product market and the loss of a significant distribution outlet whose revenues
accounted for a substantial portion of the Company's 2004 revenues resulted in a
significant reduction in the Company's product sales. Therefore, during fiscal
2005 the Company's management made a strategic decision to redirect its efforts
to the development and establishment of a network of StarMed Wellness Centers
that would offer preventative, traditional medical and alternative treatments
directed towards achieving "total wellness". From late 2005 until August 2006,
the Company opened three wellness centers and entered into a joint venture
agreement to operate a hyperbaric chamber. In August 2006, however, the Company
7
made a decision to close down two of the wellness centers. The Company is
currently in the process of reassessing the viability of its business model for
the wellness centers, and is actively considering strategic alternatives that
may be available to it with the goal of maximizing stockholder value. These
strategic alternatives may include a variety of different business arrangements,
such as a business combination or a sale of the Company.
BASIS FOR PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal 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 three months
ended September 30, 2006 and the nine months ended September 30, 2006 are not
necessarily indicative of the results to be expected for the full year.
The accompanying consolidated financial statements do not include certain
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/A, filed on July 24, 2006, for
the year ended December 31, 2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company has adopted SEC Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" (SAB 101) and accordingly recognizes
revenue upon shipment of the product to customers, upon fulfillment of
acceptance terms, if any, when no significant contractual obligations remain and
collection of the related receivable is reasonably assured. Our sales of
products 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 in the United States of America 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 and accrued
expenses. 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 based on fair market value, if it should be lower.
8
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. The Company has acquired its computers under a capital lease.
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.
STOCK BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123(R), Share-Based Payment. Prior to January 1, 2006, the Company
accounted for share-based payments under the recognition and measurement
provisions of APB Opinion NO. 25, Accounting for Stock Issued to Employees, and
related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock Based Compensation. In accordance with APB 25, no compensation cost was
required to be recognized for options granted that had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The Company adopted FAS 123R using the modified prospective transition method.
Under this method, compensation cost recognized in the quarter ended September
30, 2006 and the nine months ended September 30, 2006 includes: a) compensation
cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of FAS 123, and b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of FAS 123R. Since no stock
options were granted to employees prior to December 31, 2005, the results for
prior periods have not been restated.
As disclosed in Note 5, the Company issued 1,000,000 stock options to Herman
Rappaport, an officer of the Company, in February 2006. The stock options were
valued on the date of grant. The weighted average fair value of each option was
$0.22. The fair value of the options were measured using the Black Scholes
option pricing model. The model used the following assumptions: exercise price
of $0.35, weighted average life of options of five years, risk free interest
rate of 4.50%, and average dividend yield of 0.00%. The Company charged $220,000
to compensation expense during the first quarter of 2006. No options were
granted during the three months ended September 30, 2006.
ADVERTISING COSTS
The Company expenses advertising costs as incurred.
LOSS 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. The computation of dilutive loss
per common share does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on earnings.
9
RECLASSIFICATIONS
Certain amounts in the prior period presented have been reclassified to conform
to the current period financial statement presentation. These reclassifications
have no effect on previously reported accumulated deficit.
3. CORPORATE CREDIT CARD
The Company has available up to $21,000 from two unsecured corporate credit
cards. The Company had an outstanding balance of $57 as of September 30, 2006,
which is included in accounts payable. The Company intends to pay off all
outstanding credit balances on a monthly basis.
4. DEBT
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 of 82,300 restricted shares of
common stock. The agreement included a guarantee and option whereby the Company
guaranteed 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. At that
time, there was no public market for the Company's common stock.
The Company adopted the accounting provisions of EITF 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Based on this pronouncement, in 2005 the Company reduced
the $288,050 liability included in accrued expenses to $259,245 which resulted
in a gain of $28,805. This gain resulted from the reduction in the guarantee
obligation based on the stock price changing from 1 to 35 cents at December 31,
2005.
On February 7, 2006, the Company entered into a settlement agreement with the
creditor pursuant to which the 2003 agreement was rescinded and cancelled, the
Company paid the creditor $215,000, and the indebtedness was cancelled. The
remaining balance of notes payable was included in Gain on forgiveness of debt
of $44,245.
5. CAPITAL STOCK
Between November 2005 and January 2006, the Company sold an aggregate of
9,442,000 units of our securities to 99 accredited investors in an offering
exempt from registration under the Securities Act in reliance on exemptions
provided by Section 4(2) and Rule 506 of Regulation D of the Securities Act.
Each unit was sold for a purchase price of $0.25, and consisted of one share of
our common stock and one redeemable five year common stock purchase warrant,
exercisable at $1.00 per share, which resulted in the issuance by us of an
aggregate of 9,442,000 shares of common stock and common stock purchase warrants
to purchase an additional 9,442,000 shares of our common stock. Gross proceeds
were $2,360,500. Included in the total of 9,442,000 units are 1,740,000 units of
securities sold on January 17, 2006, which resulted in gross proceeds of
$435,000.
We agreed to file a registration statement with the SEC on or before March 20,
2006 covering the shares of common stock, including the shares underlying the
warrants, issued in this offering so as to permit the resale thereof. We also
agreed to use our best efforts to ensure that the registration statement be
declared effective by the SEC by June 3, 2006. The registration statement was
not filed until with the SEC until June 19, 2006, and it did not become
effective until August 4, 2006. As a result, under the terms of the offering, we
were required to issue an additional 856,032 shares of our common stock and
common stock purchase warrants to purchase an additional 856,117 shares as of
10
August 4, 2006, of which: 635,761 shares and 635,761 warrant shares were
reflected in our consolidated balance sheets and consolidated statement of
shareholders' equity during the quarter ended June 30, 2006, valued at $317,880;
and the remaining 220,271 shares and 220,356 warrant shares are reflected in the
consolidated balance sheets and consolidated statement of shareholders' equity
during the quarter ended September 30, 2006, resulting in expenses of $116,744.
The penalty shares of common stock, including the common stock underlying the
additional warrants, were included in the registration statement.
Subject to certain conditions, from the date the warrants were issued until 30
days prior to the expiration date of the warrants, the Company may require
warrant holders to exercise or forfeit their warrants, provided that (i) the
closing price for our common stock is at least $1.50 per share for 20
consecutive trading days and (ii) trading volume in our common stock exceeds
150,000 shares per day for each trading day during such twenty day period.
For one year following the date of issuance, the Company is obligated to issue
additional shares of Company common stock to purchasers of the units to protect
them against dilution in the event that we issue shares of our common stock
during such one-year period at less than $.25 per share. In addition, for a one
year period following the date of issuance and continuing until the warrants
expire, the exercise price is subject to "weighted-average" anti-dilution
protection for subsequent issuances of common stock or securities convertible
into common stock at less than the then current warrant exercise price,
excluding certain issuances unrelated to capital raising transactions. The
warrants also contain customary anti-dilution adjustments in the event of stock
splits, reorganizations and similar corporate events.
Joseph Stevens & Company, Inc. acted as placement agent for us in the offering.
As compensation for their services we paid Joseph Stevens & Company, Inc.
commissions equal to 10% of the gross proceeds of the offering ($236,500) and a
non-accountable expense allowance equal to 3% of the gross proceeds ($70,815),
and issued Joseph Stevens & Company, Inc. or its designees an aggregate of
2,225,000 shares of our common stock. (The shares of common stock were valued at
$400,500.)
2004 EQUITY COMPENSATION PLAN
In fiscal 2004 the Company established our 2004 Equity Compensation Plan. The
original Plan was approved by our board of directors and a majority of our
shareholders. The purpose of the Plan is to enable the Company to attract and
retain top-quality employees, officers, directors and consultants and to provide
such employees, officers, directors and consultants with an incentive to enhance
stockholder returns. The Plan provides for the grant to Company directors,
officers, employees and consultants of stock based awards and options to
purchase shares of our common stock. All of our executive officers, directors
and employees are eligible to participate in the Plan. The plan is funded with
4,050,000 shares of Company common stock (including an increase of 3,000,000
shares authorized by the board of directors and a majority of our shareholders
in February 2006). In February 2006, our Board of Directors granted Herman
Rappaport an option to purchase 1,000,000 common shares at an exercise price of
$.35. As of September 30, 2006, there were no other options granted under the
Plan. In addition, of the 2,070,000 shares issued for Services in 2005, 400,000
shares in stock awards have been issued under the Plan, and 2,650,000 shares
remained available for issuance.
6. INCOME TAXES
The Company had available unused federal and state operating loss carry-forwards
of approximately $1,490,000 at December 31, 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 December 31, 2005 the Company has determined
that the net operating losses likely will not be utilized. Accordingly, the
Company has increased the valuation allowance to 100% of all deferred tax
assets.
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7. RELATED PARTY TRANSACTIONS
The Company owes two officers/directors a total of $54,430 in expense
reimbursements as of September 30, 2006. These amounts are included in accrued
expenses. In addition, as of September 30, 2006, Dr. Steve Rosenblatt, our
Executive Vice President and director, owes $1,082 to the Company under the
revolving line that we have established with him as part of our arrangement to
manage the medically-supervised portion of StarMed Wellness Centers that is
owned by him.
8. COMMITMENTS AND CONTINGENCIES
OFFICE LEASE
The Company entered into a twelve month lease for office space commencing
November 1, 2003 and expired in October 31, 2004 and was extended for an
additional year until December 31, 2005. The Company extended the lease for
office space for three years commencing January 1, 2006 and expiring December
31, 2008. The current monthly rent is approximately $5668.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW OF THE COMPANY'S BUSINESS
StarMed Group, Inc. is engaged in two businesses: (1) we operate a StarMed
Wellness Center that offers preventative, traditional medical and alternative
treatments directed towards achieving "total wellness," and (2) we market a line
of over-the-counter vitamins, minerals and other supplements under the StarMed
and SierraMed brand names.
Historically our operations were devoted to formulating and marketing a line of
over-the-counter, alternative medicinal products. All of our revenues for fiscal
2005 were from the sale of our products or royalties related to our products.
Our natural medicinal products are intended to address the effects of various
conditions, including arthritis, aging eyesight, obesity and irritable bowel
syndrome. We also market a proprietary starch blocker designed for weight loss
and maintenance and we have licensed various formulations of our proprietary
starch blocker product to third parties. We currently market our medicinal
products directly to consumers over the internet.
Severe competition in the medicinal product market and the loss of a significant
distribution outlet in 2005 resulted in a significant reduction in our product
sales. Therefore, in 2005, our management made a strategic decision to redirect
our efforts to the development and establishment of a network of StarMed
Wellness Centers. Our StarMed Wellness Centers concept was founded on our belief
that traditional Western medicines and treatments may be enhanced by
complementing their use with preventative medicine techniques and the use of
alternative medicinals to address the underlying causes of certain illnesses. In
our opinion, addressing these underlying causes is necessary for good health
maintenance and longevity.
We developed two models for the operation of the wellness center. In one model,
we would establish a wellness center on behalf of a medical clinic, which will
operate as a participant in the StarMed Wellness Center network under the
supervision of the clinic's existing medical director. Under this model, we
would provide management services to the portion of the medical clinic's
practice that was devoted to wellness in exchange for a management fee. In the
second model, we would affiliate with a physician practice to establish a
wellness center that is adjacent or in close proximity to a medical clinic. The
physician practice may or may not have any existing relationship with the
medical clinic and would supervise the physician services at the wellness
center. Under this model, we would provide management services to the physician
practice in exchange for a management fee.
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In February 2006, we began operations at our first wellness center in Encino,
California. We opened our second wellness center in Buena Park, California in
May 2006 and a third wellness center in Santa Ana, California in July 2006. In
August 2006, we closed down the Encino and Santa Ana wellness centers. Our
relations with the physician group at Encino had been strained, and we decided
that it was in our best interest to close down that facility rather than
continue to operate it. As for the Santa Ana wellness center, we decided to
close down the facility after certain compensation issues arose between us and
the Santa Ana physician group with whom we affiliated, which issues could not be
resolved. We continue to operate our wellness center in Buena Park, and we have
a joint venture with a medical practice group in West Los Angeles, California,
to operate a hyperbaric chamber.
We are currently in the process of reassessing the viability of our business
model for the wellness centers and our strategy for continuing our operations.
Our ability to continue operations will depend on our ability to raise
additional capital during the fourth quarter of 2006 and the first quarter of
2007. If we are unable to raise additional capital during that timeframe, we may
have to cease operations. We are also actively considering strategic
alternatives that may become available to us with the goal of maximizing
stockholder value. These strategic alternatives may include a variety of
different business arrangements, such as a business combination or a sale of the
Company.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 2 to the
unaudited consolidated financial statements included elsewhere in this quarterly
report. We believe that the application of these policies on a consistent basis
enables our company to provide useful and reliable financial information about
the company's operating results and financial condition.
The preparation of financial statements in conformity 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 at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2006, we adopted the fair value recognition provisions of
SFAS No. 123(R), Share-Based Payment. Prior to January 1, 2006, we accounted for
share-based payments under the recognition and measurement provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock
Based Compensation. In accordance with APB 25, no compensation cost was required
to be recognized for options granted that had an exercise price equal to the
market value of the underlying common stock on the date of grant. The Company
adopted FAS 123R using the modified prospective transition method. Under this
method, compensation cost recognized during the three months and nine months
ended September 30, 2006 includes: a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions
of FAS 123, and b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of FAS 123R. Since no stock options were granted
to employees prior to December 31, 2005, the results for prior periods have not
been restated.
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
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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 our 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 our financial position or results of operations has been determined
to have no impact.
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 our 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 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 our financial position or results of operations has been determined
to have no impact.
RESULTS OF OPERATIONS
Total Net Revenues
Total revenues for the nine months ended September 30, 2006 were $29,427 as
compared to $34,505 during the same period in 2005, a decrease of $5,078, or
approximately 15%. Total revenues for the three months ended September 30, 2006
were $14,296 as compared to $776 during the same period in 2005, an increase of
$13,520, or approximately 1742%.
Revenues from the sale of products increased to $11,594 during the nine months
ended September 30, 2006 compared to $10,019 during the same period in 2005, and
increased to $6,265 during the three months ended September 30, 2006 compared to
$288 during the same period in 2005. We are not currently expending a
substantial amount of our funds into advertising, marketing and promoting our
products, and we do not have immediate plans to open additional wellness
centers, so we do not anticipate any substantial increase in our product
revenues in the near future.
14
Revenues from royalty payments were $3,189 during the nine months ended
September 30, 2006 compared to $24,486 during the same period in 2005, and was
$0 during the three months ended September 30, 2006 compared to $488 during the
same period in 2005. The decrease in revenues from royalties was the result of
the loss of a distribution channel for our weight loss product. L. Perrigo
Company, the principal distributor for our weight loss products in the U.S.,
orally notified us in 2005 that it will cease to distribute our weight loss
products.
We generated sales of $14,645 during the nine months ended September 30, 2006
and $8,031 during the three months ended September 30, 2006, from services
provided at our wellness centers. Of the sales, $9,921 was generated by our
Encino wellness center, which began operations in February 2006, and $4,730 was
generated by our Buena Park wellness center, which began operations in May 2006.
In August 2006, we closed down our Encino wellness center. In July 2006, we
opened a wellness center in Santa Ana, California, but we closed down that
facility in August 2006 after we and the medical group with whom we affiliated
for that center could not resolve an issue involving compensation. As of
November 2006, we only have one wellness center, which is located in Buena Park,
and we have a joint venture in West Los Angeles to operate a hyperbaric chamber.
Neither the Buena Park wellness center nor the West Los Angeles joint venture is
currently profitable. In order to make them profitable, we will need to expend
more resources towards marketing and promoting both facilities. At this time,
however, we do not have sufficient funds to launch a sustained and effective
marketing program. As a result, we cannot predict when, if ever, our operations
will be able to generate sufficient revenues to cover operational expenses.
We earned interest income of $18,249 and $0 during the nine months ended
September 30, 2006 and 2005, respectively, and $4,934 and $0 during the three
months ended September 30, 2006 and 2005, respectively. The interest income in
2006 reflects the cash balances resulting from the gross proceeds of $2,360,000
from a private equity financing conducted between December 2005 and February
2006 that resulted in the sale of an aggregate of 9,442,000 units of our common
stock.
Total Expenses
We reported total selling, general and administrative expenses of $1,882,400
during the nine months ended September 30, 2006 compared to $337,235 during the
nine months ended September 30, 2005, an increase of $1,545,165, or
approximately 458%. We attribute the increase primarily to: (a) an increase of
$891,515, or 630%, in compensation expenses as a result of: (i) a one-time stock
compensation expense of $400,500 in connection with the issuance of 2,225,000
shares of our common stock valued at $0.18 per share on March 16, 2006 to the
placement agent and its designees in connection with our recent capital raising
efforts completed during the first quarter of 2006 and consulting services; (ii)
the charge of $220,000 to compensation expense for the stock option granted to
Herman Rappaport during the first quarter of 2006, and (iii) the hiring of
personnel to staff and develop our wellness centers and the addition of staff in
our corporate office; (b) an increase of $418,190, or approximately 553%, in
professional fees, and an increase of $48,031, or 359%, in accounting fees,
primarily in connection with our capital raising efforts and the engagement of
consultants for business development and expansion; (c) an increase of $103,455,
or 169%, in rent and office expenses, primarily as a result of the lease of new
space for our wellness centers and the purchase of supply and equipment for
those centers, as well the increase in monthly rent for our corporate office;
(d) an increase of $14,482, or 82%, in insurance expense which reflects an
increase in health and general liability insurance premiums and the acquisition
of a directors and officers insurance policy; (e) an increase of $57,683, or
approximately 2825%, in advertising, marketing and promotional expenses to
market our wellness centers; and (f) an increase of $11,605, or approximately
501%, in travel and entertainment expenses, primarily in connection with our
business development and expansion efforts.
15
For the three months ended September 30, 2006, we reported total selling,
general and administrative expenses of $385,375 compared to $151,945 during the
same period in 2005. We attribute the increase primarily to the following: (a)
an increase of $106,552, or 170%, in compensation expenses as a result of the
hiring of personnel to staff our first and second wellness center and to develop
our wellness center network and the addition of staff in our corporate office;
(b) an increase of $60,546, or approximately 146%, in professional fees, and an
increase of $74, or 1%, in accounting fees, primarily in connection with our
ongoing capital raising efforts and the engagement of consultants for business
development and expansion; (c) an increase of $35,158, or 161%, in rent and
office expenses, primarily as a result of the lease of new space for our first
and second wellness centers and the purchase of supply and equipment for those
centers, as well the increase in monthly rent for our corporate office; (d) an
increase of $3,190, or 44%, in insurance expense which reflects an increase in
health and general liability insurance premiums and the acquisition of a
directors and officers insurance policy; (e) an increase of $25,065, or
approximately 3,079%, in advertising, marketing and promotional expenses,
primarily in connection with the opening of our first two wellness centers; and
(f) an increase of $2,738, or approximately 163%, in travel and entertainment
expenses, primarily in connection with our business development and expansion
efforts.
During the third quarter of 2006, we took significant steps to control and
reduce our general, selling and administrative expenses. By closing down two
wellness centers in August 2006, we reduced expenses relating to rent, supplies,
marketing, and labor. We are also reducing our corporate overhead expenses by
transitioning full-time employees to part-time since October 2006 and not
replacing departing staff. On the other hand, as we continue our capital raising
efforts, we expect an increase in professional fees to our financial advisors,
outside counsel and accountants. Our revenues from our wellness center in Buena
Park and our joint venture in West Los Angeles are not substantial, and we do
not expect them to generate sufficient revenues during the near future to offset
in any substantial way our general, selling and administrative expenses.
Total Other Income (Expense)
We reported total other expense of $371,369 for the nine months ended September
30, 2006 compared to total other expense of $48,586 during same period in 2005,
an increase of $322,783, and $111,711 for the three months ended September 30,
2006 compared to $46,730 during the same period in 2005, an increase of $64,981.
The increase in total other expense is primarily attributable to the expense of
$434,624 associated with our contractual obligation to issue 856,032 shares and
856,117 shares underlying warrants to investors who purchased our securities
during our November 2005 - February 2006 stock offering as a result of our
failure to register the shares and warrants originally purchased and to have the
registration statement be declared effective on a timely basis. Of those penalty
shares and warrants, 220,271 shares and 220,356 shares underlying warrants were
recognized to have been issued as of the third quarter of 2006 resulting in
expenses of $116,744. The shares were valued at $70,487 based on our stock's
last quoted trading price of $.25 on or before September 30, 2006, and the
warrants were valued at $46,257 based on a Black-Scholes valuation using the
following assumptions: market value of $.32 per share, volatility of 71.23%, an
exercise price of $.25, a term of 5 years, interest rate of 4.56% and variance
of 0.50737129. The remaining 635,761 shares and 635,761 shares underlying
warrants were recognized to have been issued as of the second quarter of 2006
resulting in expenses of $317,880. Those shares were valued at $190,728 based on
our stock's last quoted trading price of $.30 on or before June 30, 2006, and
the warrants were valued at $127,152 based on a Black-Scholes valuation using
the following assumptions: market value of $.30 per share, volatility of 71.23%,
an exercise price of $.25, a term of 5 years, interest rate of 5.10% and
variance of 0.50737129. Our total other
16
expense was offset by the following total other income: (i) interest income of
$18,249 and $4,934 during the nine month period and three month period ending
September 30, 2006, respectively, reflecting the cash balances resulting from
the gross proceeds of $2,360,000 from the November 2005 - February 2006 private
equity financing that resulted in the sale of an aggregate of 9,442,000 units of
our common stock; and (ii) a gain of $44,245 from forgiveness of debt during the
first quarter of 2006.
We reported an interest expense credit of $761 for the nine months ended
September 30, 2006 as compared to interest expense of 48,586 for the same period
in 2005, and interest expense credit of $99 for the three months ended September
30, 2006 as compared to interest expense of $46,730 for the same period in 2005.
Interest expense represents interest payable on our corporate credit cards which
now are paid in full at due date.
We reported a net loss of $2,235,860 for the nine months ended September 30,
2006 compared to $481,118 for the same period in 2005, and $491,646 for the
three months ended September 30, 2006 compared to $231,285 during the same
period in 2005. The net loss was primarily attributable to the increase in
expenses relating to our capital raising efforts and the
establishment of three wellness centers, with no corresponding increases in
revenue. We anticipate that we will continue to incur losses in the near future.
Our ability to increase revenues while controlling costs will depend on various
factors, including our ability to implement our business plan and expand
operations, raise sufficient working capital, penetrate our target markets and
establish our brand, deal with competition, comply with federal and state
regulations, manage expenses, and create a successful advertising and
promotional campaign.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current
and future operations, satisfy its obligations and otherwise operate on an
ongoing basis. At September 30, 2006, we had cash on hand of $231,378 as
compared to cash on hand of $158,980 at September 30, 2005 and the December 31,
2005 cash balance of $1,019,259. At September 30, 2006 our working capital was
$571,399 as compared to working capital of $1,602,605 at December 31, 2005.
Net cash used in operating activities during the nine months ended September 30,
2006 was $997,721 as compared to $352,340 during the same period in 2005, an
increase of $645,381, or 184%. We attribute the increase primarily to our
increased expenses, a one-time settlement of $215,000 paid to Citadel Management
Group, Inc., and a charge to prepaid expense of $568,750, which represented the
value of shares issued in exchange for consulting services, amortized over a
period of 23 months beginning the first quarter of 2006 for a charge each
quarter of $74,181.
Net cash used in financing activities during the nine months ended September 30,
2006 was $212,836 compared to the net cash provided by financing activities of
$438,612 during the same period in 2005. The change reflects proceeds received
From our capital raising transactions. In January 2006, we raised $435,000 in
Proceeds from the sale of our securities.
Our working capital is sufficient to satisfy our current obligations and fund
our ongoing expenses for another two to five months, depending on various
factors, including the ability of our remaining wellness center to generate
sufficient revenues to sustain operations, our ability to control and reduce
expenses, and our ability to raise additional capital. In order to continue our
operations, we will need to raise additional working capital. Other than cash on
hand and available borrowings under our corporate credit cards that could
provide us up to $21,000 on an unsecured basis, we do not have any other
external sources of working capital.
17
Implementation of our business plan, including the development of a network of
wellness centers and funding ongoing operations as they become due, will require
substantial additional capital. Until such time, if at all, as our 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. If 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, will be in jeopardy.
RISK FACTORS
An investment in us involves a high degree of risk and should be undertaken only
by persons whose financial resources are sufficient to enable them to assume
such risk and to bear the total loss of their investment. This section sets
forth a brief summary of some of the principal risk factors, and is intended to
supplement the risk factors described in our Form 10-KSB/A for fiscal year 2005.
If the Company is unable to address the risks described below or the Form
10-KSB/A or any other risks which it may face, then its business, operating
results and financial condition will be materially adversely affected, and you
could lose all or part of your investment. For these reasons, prospective
investors should carefully consider the risks described below and in the Form
10-KSB/A as well as any other possible risks that could be important.
IN 2005, OUR MANAGEMENT MADE A STRATEGIC DECISION TO REDIRECT OUR EFFORTS FROM
THE MARKETING OF VITAMINS, MINERALS AND SUPPLEMENTS TO THE DEVELOPMENT OF A
NETWORK OF WELLNESS CENTERS. IN CONNECTION WITH THAT DECISION, WE OPENED THREE
WELLNESS CENTERS. IN AUGUST 2006, WE ANNOUNCED THAT WE WERE CLOSING DOWN TWO OF
OUR THREE WELLNESS CENTERS. AT THIS TIME, WE DO NOT HAVE SUFFICIENT RESOURCES TO
IMPLEMENT OUR PLANS TO DEVELOP A NETWORK OF WELLNESS CENTERS, NOR TO MARKET AND
EXPAND OUR EXISTING LINE OF VITAMINS, MINERALS AND SUPPLEMENTS. IF WE CANNOT
OBTAIN ADDITIONAL FUNDING DURING THE NEXT THREE MONTHS, WE COULD BE FORCED TO
CEASE OUR OPERATIONS.
In 2005, faced with the loss of a distribution channel, strong competition among
companies marketing nutraceuticals and the declining sales of our products, we
made a strategic decision to redirect our efforts from the marketing of
vitamins, minerals and supplements to the development of a network of wellness
centers. In connection with that decision, we devoted a significant portion of
our efforts and financial resources toward the development of wellness centers.
For various reasons, we made a decision to close down two of our three wellness
centers in August 2006. We currently have only one remaining wellness center in
Buena Park, California, and a joint venture to operate a hyperbaric chamber in
West Los Angeles. Neither the remaining wellness center nor the joint venture is
profitable, and our line of vitamins, supplements and minerals does not generate
substantial revenues. At this time, we do not have the resources to develop new
wellness centers or to market and expand our existing line of nutraceuticals. We
will need to raise additional funds over the next three months to continue
operations, but if we cannot raise the necessary funds, we could be forced to
cease operations, which could significantly diminish the value of an investment
in our Company.
SINCE AUGUST 2006, WE HAVE UNDERTAKEN VARIOUS STEPS TO MANAGE OUR REMAINING
RESOURCES. UNLESS WE CAN RAISE ADDITIONAL FUNDS, HOWEVER, THESE STEPS WILL ONLY
HELP ADDRESS OUR CASH NEEDS IN THE SHORT TERM, BUT DOES NOT ADDRESS THE
COMPANY'S LONG-TERM LIQUIDITY NEEDS. IF WE DO NOT RAISE ADDITIONAL FUNDS OVER
THE NEXT THREE MONTHS, WE COULD BE FORCED TO CEASE OPERATIONS.
Since our announcement to close down two wellness centers in August 2006, we
have taken steps to control our expenses by reducing our workforce and by
converting full-time corporate employees to part-time. These steps will help us
to sustain our operations for the short term and will provide us with additional
time to obtain additional funding or pursue strategic alternatives, but it does
not address our long-term liquidity needs. If we cannot raise additional funds
to continue operations or if we cannot find a strategic partner, we could be
forced to cease our operations, which could significantly diminish the value of
an investment in our company.
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WE ARE CURRENTLY SEEKING STRATEGIC ALTERNATIVES FOR THE COMPANY. IF WE ARE
UNSUCCESSFUL IN CONSUMMATING A SUITABLE STRATEGIC ALTERNATIVE, WE COULD BE
FORCED TO CEASE OUR OPERATIONS.
We are actively considering strategic alternatives that may be available to us
with the goal of maximizing stockholder value. These strategic alternatives may
include a variety of different business arrangements, such as a business
combination or a sale of the Company. If we pursue any such business combination
opportunity, any resulting entity may have a substantially, or completely,
different business model, strategy and/or focus. Even if we are able to pursue a
business combination, there can be no assurance that any resulting entity would
be successful. Moreover, any strategic opportunity we may pursue could
disappoint investors and further depress the price of our common stock and the
value of an investment in our common stock. Given our financial condition, we
may not be able to successfully implement any strategic alternative we pursue,
and even if we determine to pursue one or more of the strategic alternatives
described above, we may be unable to do so on acceptable financial terms and
such alternatives may not enhance stockholder value or improve the trading price
of our common stock. Although pursuing a strategic opportunity is subject to the
risks outlined herein, if we are unsuccessful in consummating a suitable
strategic alternative, we could be required to cease our operations, which could
significantly diminish the value of an investment in our company.
THERE ARE NO ASSURANCES THAT WE CAN MAINTAIN OUR LISTING ON THE OTC BULLETIN
BOARD, AND THE FAILURE TO MAINTAIN THIS LISTING COULD ADVERSELY AFFECT THE
LIQUIDITY AND PRICE OF OUR COMMON STOCK.
We are current with all of our SEC filings. The cost to keep our filings
current, which includes accounting, legal and electronic filing costs, are
significant. If we cannot raise additional funds, we may be unable to continue
to comply with all of the SEC reporting requirements, and as a result, our stock
could be delisted from the OTC Bulletin Board. The delisting of our stock from
the OTC Bulletin Board will result in decreased liquidity of our outstanding
shares of common stock and a resulting inability of our stockholders to sell our
stock. The delisting of our stock could also deter broker-dealers from making a
market in or otherwise generating interest in our stock and would adversely
affect our ability to attract investors. Furthermore, our ability to raise
additional capital would be severely impaired. As a result of these factors, the
value of our stock would decline significantly, and our stockholders could lose
some or all of their investment in our company.
OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY DISPOSITIONS OF OUR SHARES
PURSUANT TO A REGISTRATION STATEMENT CURRENTLY IN EFFECT.
Some of our current stockholders hold a substantial number of shares, which they
are currently able to sell in the public market under certain registration
statements currently in effect, or otherwise. Sales of a substantial number of
our shares or the perception that these sales may occur, could cause the trading
price of our common stock to fall and could impair our ability to raise capital
through the sale of additional equity securities. As of November 13, 2006, we
had issued and outstanding 23,274,456 shares of our common stock.
In addition, as of November 10, 2006, we had 1,900,000 option shares outstanding
(including the 850,000 option shares granted to Herman Rappaport and the 50,000
granted to a consultant on October 26, 2006) and approximately 10,298,117 shares
of our common stock issuable upon the exercise of outstanding warrants. If these
options or warrants are exercised and sold, our stockholders may experience
additional dilution and the market price of our common stock could fall.
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WE MUST BE ABLE TO CONTINUE TO SECURE ADDITIONAL FINANCING IN ORDER TO CONTINUE
OUR OPERATIONS, WHICH MIGHT NOT BE AVAILABLE OR WHICH, IF AVAILABLE, MAY BE ON
TERMS THAT ARE NOT FAVORABLE TO US.
We have insufficient working capital to fund our cash needs. Since late 2005, we
have financed our operations primarily through the sale of equity securities. We
do not anticipate generating sufficient revenues from our operations to cover
our expenses for the foreseeable future and we will need to fund our operations
through additional third party financing or other means. If we raise additional
funds by issuing equity securities, substantial dilution to existing
stockholders may result. In addition, new securities may contain certain rights,
preferences or privileges that are senior to those of our common stock. We may
not be able to obtain additional financing on acceptable terms, or at all. Any
failure to obtain an adequate and timely amount of additional capital on
commercially reasonable terms will have a material adverse effect on our
business and financial condition, including our viability as an enterprise. As a
result of these concerns, management is assessing, and may pursue, strategic
alternatives, including a business combination.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT. OUR CONTINUING LOSSES
HAVE RESULTED IN SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS.
For the nine months ended September 30, 2006, our net loss was $2,235,860. For
the three months ended September 30, 2006, our net loss was $491,646. While a
significant portion of our net loss for first three quarters of 2006 was a
result of expenses relating to our capital raising efforts, one-time
compensation expenses relating to a consulting agreement paid with our stock,
and a stock option grant, it also included increased operating expenses without
corresponding increases in our revenues. As of September 30, 2006 we had
approximately $231,378 of cash on hand. We do not presently generate sufficient
revenues to fund our ongoing operations. As a result our continued existence is
dependent upon our ability to raise capital. Without additional capital, we
cannot market and sell our products and services, and we cannot pay our
corporate overhead expenses. In order for us to continue operations, we will
need to raise additional debt or equity capital immediately to provide funding
for ongoing and future operations. No assurances can be given that we will be
successful in obtaining additional capital, or that such capital will be
available on terms acceptable to us. If we are not able to raise working capital
as needed, we will be unable to continue to operate our company.
EVEN IF WE RAISE ADDITIONAL CAPITAL TO DEVELOP A NETWORK OF WELLNESS CENTERS, WE
HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR COMPANY.
Although our company has existed since December 1962, we have only a limited
operating history in alternative medicine on which you can base an
evaluation of our business and prospects. Moreover, we are still in the process
of transitioning the focus of our business away from a product-oriented
marketing company to service-oriented wellness centers. We are still relatively
early in our development and we face substantial risks, uncertainties, expenses
and difficulties. To address these risks and uncertainties, we must do the
following:
- Establish an economically-viable model in a commercial setting for our
StarMed Wellness Centers;
- Develop a number of wellness clinics and expand our reactive medical
services.
- Expand into new areas;
- Establish and enhance our name recognition;
- Continue to expand our products to meet the changing requirements of
our customers;
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- Provide superior customer service;
- Remain attractive to our commercial partners;
- Respond to competitive developments; and
- Attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these goals, which could cause our
business to suffer. In addition, accomplishing one or more of these goals might
be very expensive, which could harm our financial results.
RECENT EVENTS
Closing Down of Two Wellness Centers
In August 2006, we announced that we were closing down our wellness centers in
Encino and Santa Ana, California. We terminated our agreement with Mothers and
Daughters Center in Santa Ana after an issue arose regarding compensation that
could not be resolved between the parties. As for the Encino facility, the
relations between us and Encino Surgical Medical Center had been strained, and
we believed that it was in our best interests to close the facility instead of
continuing to operate it.
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, 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, 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.
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ITEM 3. CONTROLS AND PROCEDURES
Our management has concluded its evaluation of the effectiveness of the design
and operation of our 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 described 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.
Our 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, our Chief Executive Officer and acting Chief
Financial Officer concluded that we maintain disclosure controls and procedures
that are effective in providing reasonable assurance that information required
to be disclosed in our 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 our
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 our 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, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Agreement with ROI Group Associates, Inc.
- -----------------------------------------
We entered into a Service Agreement, dated November 1, 2006, with ROI Group
Associates, Inc., pursuant to which ROI Group shall provide investor relations
services for us and shall assist us in our efforts to raise capital. Under the
Service Agreement, we will pay ROI Group a monthly retainer of $5,000. In the
event that we raise $1.5 million or more through our capital raising efforts,
the monthly retainer thereafter shall be $8,500 per month for a period of 12
months. A payment of $13,500 was made upon the signing of the agreement, which
amount represents the first and last month's payment under the agreement. In
addition to the monthly retainer, we agreed to issue 500,000 shares of our stock
to ROI Group, which they cannot sell for a period of one year, and a warrant to
purchase 500,000 shares of our stock with an exercise price of $0.25 per share
and an expiration date of December 31, 2012. The agreement also provides for
compensation to ROI Group in the event that they make introductions to sources
of capital that result in our obtaining funding. For introductions that result
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in our obtaining funding involving the issuance of equity, convertible debt or
other equity-linked securities, ROI Group's compensation will be either 15% of
the cash proceeds and warrants paid to an intermediary if placed through an
intermediary also receiving a fee, or 10% of cash proceeds and 10% Of the
warrants included in the placement if placed directly. For introductions that
result in our obtaining funding in the form of senior or mezzanine, or
bank/commercial lender debt, ROI Group's compensation will be either 15% of the
compensation paid to an intermediary for debt placed through an intermediary
also receiving a fee, or 3% of the debt if placed directly.
Stock Option Grant to Herman Rappaport
- --------------------------------------
On October 26, 2006, the Board of Directors granted to Herman Rappaport a
non-qualified option to purchase 850,000 shares of our common stock. The stock
option has an exercise price of $0.15 per share, is fully vested as of the date
of grant, and has a term of 10 years.
ITEM 6. EXHIBITS
10.1 Service Agreement, dated November 1, 2006, between StarMed Group, Inc.
and ROI Group Associates, Inc.
10.2 Stock Option Agreement, dated October 26, 2006, between Herman
Rappaport and the Company.
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: November 14, 2006 STARMED GROUP, INC.
By: /s/ Herman Rappaport
--------------------
Herman Rappaport,
Chief Executive Officer and
Acting Chief Financial Officer
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