10QSB 1 v09062_10qsb.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (MARK ONE) |X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 2004 |_| Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ TO _______ COMMISSION FILE NO. 000-23967 MEDICAL STAFFING SOLUTIONS, INC. (Name of Small Business Issuer in Its Charter) NEVADA 91-2135006 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 8150 LEESBURG PIKE, SUITE 1200, VIENNA, VIRGINIA 22182 (Address of Principal Executive Offices) (Zip Code) (703) 641-8890 (Issuer'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 Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as to the latest practicable date: OUTSTANDING SHARES CLASS ON NOVEMBER 18, 2004 Common Stock 76,326,266 PART I ITEM 1. FINANCIAL STATEMENTS MEDICAL STAFFING SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 2004 ASSETS
Current Assets: Cash and cash equivalents $ 10,235 Accounts receivable, net of allowance for doubtful accounts of $50,070 2,206,897 Prepaid expenses and other current assets 128,699 ----------- Total Current Assets 2,345,831 ----------- Fixed assets, net of depreciation 67,187 Loan commitment fees 78,750 Deposits 27,643 ----------- TOTAL ASSETS $ 2,519,411 =========== LIABILITIES AND STOCKHOLDERS' (DEFICIT) LIABILITIES Current Liabilities: Note payable - current portion $ 1,618,454 Convertible debentures 475,000 Promissory note payable 850,000 Due to related parties 140,000 Accounts payable and accrued expenses 770,456 Loan payable - officer / Litigation settlement payable 850,920 ----------- Total Current Liabilities 4,704,830 ----------- TOTAL LIABILITIES 4,704,830 ----------- STOCKHOLDERS' (DEFICIT) Preferred Stock, $.001 Par Value; 30,000,000 shares authorized 0 shares issued and outstanding -- Common Stock, $.001 Par Value; 300,000,000 shares authorized 68,096,538 shares issued and 58,308,357 shares outstanding 68,097 Additional Paid-in Capital 2,465,916 Deficit (4,719,432) ----------- TOTAL STOCKHOLDERS' (DEFICIT) (2,185,419) ----------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 2,519,411 ===========
See accompanying notes to condensed consolidated financial statements. 1 MEDICAL STAFFING SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ OPERATING REVENUES Revenue $ 5,174,378 $ 6,779,920 $ 1,795,920 $ 2,057,339 COST OF SALES 3,851,861 4,814,199 1,140,223 1,384,457 ------------ ------------ ------------ ------------ GROSS PROFIT 1,322,517 1,965,721 655,697 672,882 ------------ ------------ ------------ ------------ OPERATING EXPENSES Administrative payroll, benefits and overhead costs 1,851,011 1,722,108 798,042 578,839 General and administrative expenses 697,580 374,011 10,632 115,048 Depreciation and amortization 43,157 9,629 19,208 3,219 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 2,591,748 2,105,748 827,882 697,106 ------------ ------------ ------------ ------------ (LOSS) BEFORE OTHER INCOME (EXPENSES) (1,269,231) (140,027) (172,185) (24,224) OTHER INCOME (EXPENSES) Amortization of discount on conversions (21,924) -- (12,962) -- Interest income 705 6,323 206 1,625 Interest expense (112,116) (97,325) (48,314) (36,967) ------------ ------------ ------------ ------------ TOTAL OTHER INCOME (EXPENSES) (133,335) (91,002) (61,070) (35,342) ------------ ------------ ------------ ------------ NET LOSS BEFORE PROVISION FOR INCOME TAXES $ (1,402,566) $ (231,029) $ (233,255) $ (59,566) PROVISION FOR INCOME TAXES -- -- -- -- ------------ ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON SHARES $ (1,402,566) $ (231,029) $ (233,255) $ (59,566) ============ ============ ============ ============ NET LOSS PER BASIC AND DILUTED SHARES $ (0.02384) $ (0.05776) $ (0.00444) $ (0.01489) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 58,837,564 4,000,000 52,545,334 4,000,000 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 2 MEDICAL STAFFING SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003 ---- ---- CASH FLOW FROM OPERATING ACTIVITIES Net loss $(1,402,566) $ (231,029) ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities Depreciation and Amortization 43,157 9,629 Amortization of discount on conversions 21,924 -- Common stock issued for services 1,400 -- CHANGES IN ASSETS AND LIABILITIES (Increase) in accounts receivable (783,178) (589,908) (Increase) in prepaid expenses and other current assets (73,723) (43,889) (Increase) in deposits -- (1,000) Increase (decrease) in accounts payable and and accrued expenses (494,936) 158,598 ----------- ----------- Total adjustments (1,285,356) (466,570) ----------- ----------- NET CASH (USED IN) OPERATING ACTIVITIES (2,687,922) (697,599) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (13,489) (56,782) Increase (decrease) in amounts due related parties 40,007 (103,892) ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 26,518 (160,674) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITES Common stock issuances for cash and subscriptions receivable 653,223 232,500 Proceeds from convertible debentures 600,000 -- Proceeds from standby equity distribution agreement 150,000 -- Proceeds from promissory note, net of repayments 850,000 -- Net payments from loan payable - officer / litigation settlement payable (25,000) (112,500) Net proceeds of notes payable 366,348 767,414 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,594,571 887,414 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (66,833) 29,141 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 77,068 10,402 ----------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 10,235 $ 39,543 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: Interest expense $ 99,356 $ 32,442 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON - CASH INFORMATION: Common stock issued for services $ 1,400 $ -- =========== =========== Common stock issued for loan commitment fees $ 105,000 $ -- =========== =========== Common stock issued for conversion of debt $ 275,000 $ -- =========== =========== Amortization of discount on conversions $ 21,924 $ -- =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION The condensed consolidated unaudited interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated financial statements and notes are presented as permitted on Form 10-QSB and do not contain information included in the Company's annual consolidated statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2003 audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year. These condensed consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the consolidated operations and cash flows for the periods presented. Medical Staffing Solutions, Inc. (the "Company") ("MSSI"), was incorporated in the State of Nevada on June 21, 2001. The Company had no revenues, operations and was considered a development stage company until September 26, 2003 when they entered into a reverse merger with TeleScience International, Inc. Prior to the transaction, MSSI had 10,499,333 shares of common stock. Upon the merger, MSSI cancelled 9,953,333 of these shares and issued 2,200,000 shares to acquire TeleScience for 100% of the outstanding stock of TeleScience. Upon the share exchange, the Board of Directors approved a stock dividend in the amount of 14 for 1 stock or 1400% on September 29, 2003, increasing the outstanding shares of the Company to 41,200,005. As of September 30, 2004, the Company had 68,096,538 shares of common stock issued and 58,308,357 shares outstanding. 4 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) For accounting purposes, the transaction has been accounted for as a reverse acquisition under the purchase method of accounting. Accordingly, TeleScience will be treated as the continuing entity for accounting purposes, and the condensed consolidated financial statements presented herein are those of TeleScience. The Company is a provider of medical personnel to state and federal government agencies, primarily hospital and medical facilities. The Company's business plan anticipates diversification into building up a technology division, which includes developing a Homeland Security operation. The Company has expensed some start-up costs relating to this in the past year. In October 2003, the Company announced plans to enter into the Home Health Care Industry and provide services to the private sector as well as expand services in the public sector. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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 could differ from those estimates. 5 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue and Cost Recognition Revenue is recognized under the accrual method of accounting when the services are rendered rather than when cash is collected for the services provided. Cost is recorded on the accrual basis as well, when the services are incurred rather than paid for. Cash and Cash Equivalents The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents. The Company maintains cash and cash equivalent balances at several financial institutions that are insured by the Federal Deposit Insurance Corporation up to $100,000. Fixed Assets Fixed assets are stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful life of the assets. Furniture and fixtures 7 Years Office equipment 5 Years Income Taxes The income tax benefit is computed on the pretax loss based on the current tax law. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates. Advertising Costs of advertising and marketing are expensed as incurred. Advertising and marketing costs are included in general and administrative costs in the condensed consolidated statements of operations for the nine months ended September 30, 2004 and 2003, respectively. 6 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value of Financial Instruments The carrying amount reported in the condensed consolidated balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for notes payable approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates. START-UP COSTS In accordance with Statement of Position 98-5, "Accounting for Start-up Costs", the Company has expensed all of their costs relating to the start-up of their Homeland Security division in the period in which those costs related to. The Company has expensed approximately $200,000 as of September 30, 2003, and these costs are included in the accompanying condensed consolidated statements of operations. Deferred Financing Fees In March 2004, the Company issued 750,000 shares of common stock valued at $105,000 in connection with the Standby Equity Distribution Agreement. The Standby Equity Distribution Agreement is for a period of 24-months, and commencing April 2004, the Company began amortizing this deferred financing fee at the rate of $4,375 per month. Amortization for the nine months ended September 30, 2004 is $26,250. EARNINGS (LOSS) PER SHARE OF COMMON STOCK Historical net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be antidilutive for the periods presented. 7 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS (LOSS) PER SHARE OF COMMON STOCK (CONTINUED) The following is a reconciliation of the computation for basic and diluted EPS:
September 30, 2004 2003 ---- ---- Net Loss $ (1,402,565) $ (231,029) ------------ ------------ Weighted-average common shares outstanding (Basic) 58,837,564 4,000,000 Weighted-average common stock equivalents: Stock options and warrants -- -- ------------ ------------ Weighted-average common shares outstanding (Diluted) 58,837,564 4,000,000 ============ ============
Options and warrants outstanding to purchase stock were not included in the computation of diluted EPS because inclusion would have been antidilutive. RECLASSIFICATIONS Certain amounts for the nine months ended September 30, 2003 have been reclassified to conform to the presentation of the September 30, 2004 amounts. The reclassifications have no effect on net income for the nine months ended September 30, 2003. RECENT ACCOUNTING PRONOUNCEMENTS In September 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, the pooling of interests method of accounting for business combinations are no longer allowed and goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company adopted these new standards effective January 1, 2002. 8 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) On October 3, 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of Accounting Principles Board Opinion 30, "Reporting the Results of Operations." This Standard provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This Standard also requires expected future operating losses from discontinued operations to be displayed in the period (s) in which the losses are incurred, rather than as of the measurement date as presently required. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This statement amends SFAS No. 13, Accounting for Leases, to eliminate inconsistencies between the required accounting for sales-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions. Also, this statement amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Provisions of SFAS No. 145 related to the rescissions of SFAS No. 4 were effective for the Company on November 1, 2002 and provisions affecting SFAS No. 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have a significant impact on the Company's results of operations or financial position. 9 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In June 2003, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement covers restructuring type activities beginning with plans initiated after December 31, 2002. Activities covered by this standard that are entered into after that date will be recorded in accordance with provisions of SFAS No. 146. The adoption of SFAS No. 146 did not have a significant impact on the Company's results of operations or financial position. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123"("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting", to require disclosure about those effects in interim financial information. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company will continue to account for stock-based employee compensation using the intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees," but has adopted the enhanced disclosure requirements of SFAS 148. In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, except for certain hedging relationships designated after June 30, 2003. Most provisions of this Statement should be applied prospectively. The adoption of this statement did not have a significant impact on the Company's results of operations or financial position. 10 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities, if applicable. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of this statement did not have a significant impact on the Company's results of operations or financial position. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantees and elaborates on existing disclosure requirements related to guarantees and warranties. The recognition requirements are effective for guarantees issued or modified after December 31, 2002 for initial recognition and initial measurement provisions. The adoption of FIN 45 did not have a significant impact on the Company's results of operations or financial position. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company' results of operations or financial position. 11 NOTE 3- ACCOUNTS RECEIVABLE A majority of the Company's revenues are derived from government contracts for personnel at various state and federal agencies including hospitals, medical facilities and penitentiaries. As such, payment for services rendered is based on negotiated terms. The Company does provide for an allowance of doubtful accounts and often evaluates receivables for collectibility. At September 30, 2004, the Company has $2,206,897 due to them for their services. Additionally, the Company has established an allowance for doubtful accounts of $50,070 at September 30, 2004. The accounts receivable are being used as collateral on a line of credit the Company has with a factor (See Note 5). NOTE 4- PROPERTY AND EQUIPMENT Property and equipment consist of the following at September 30, 2004: Furniture, fixtures and equipment $ 154,120 Less: accumulated depreciation (86,933) --------- Net book value $ 67,187 ========= Depreciation expense for the nine months ended September 30, 2004 and 2003 was $16,907 and $5,128, respectively. NOTE 5- NOTES PAYABLE In May 2002, the Company entered into a line of credit agreement with a factor. The loan, which is due on demand bears interest at prime plus 1.00%. The factor lends up to 90% of the receivable balance to the Company, and receives payment directly on the outstanding receivables and the remaining balance is remitted to the Company. The outstanding balance at September 30, 2004 was $1,618,455. The balance is reflected net of a 10% reserve that the factor has established which is adjusted on each funding. Additionally, the Company maintains a small credit line with a bank. At September 30, 2004 there was no amounts outstanding under this line. 12 NOTE 5- NOTES PAYABLE (CONTINUED) In May 2002, the Company borrowed $220,000 from an individual to be used in developing the Company's business plan, including the Homeland Security division. The note payable was non-interest bearing until May 2003 and now bears interest at 7%. During the nine months ended September 30, 2004, this balance was paid back. In 1997, the Company borrowed $300,000 plus interest at 10% from an individual and had started repayments of that note with interest and paid down the balance to $163,000. The Company received notice in 2002 that the lender filed a lawsuit against the Company, and in 2002 recorded the full settlement amount due the lender. The remaining balance of $163,000 is included in that settlement amount as of December 2002 (see Note 11). In November 2003, the amount was paid back through a private stock transaction. NOTE 6- CONVERTIBLE DEBENTURES On March 11, 2004, the Company entered into a Securities Purchase Agreement with Cornell Capital Partners. Under the Securities Purchase Agreement, Cornell Capital Partners was obligated to purchase $600,000 of secured convertible debentures from the Company. On March 11, 2004, Cornell Capital Partners purchased $250,000 of convertible debentures and purchased $350,000 additional debentures on May 3, 2004. These debentures accrue interest at a rate of 5% per year and mature two years from the issuance date. The debentures are convertible into the Company's common stock at the holders' option any time up to maturity at a conversion price equal to the lower of (i) 115% of the closing bid price of the common stock as of the closing date or (ii) 85% of the lowest closing bid price of the common stock the five trading days immediately preceding the conversion date. The debentures are secured by the assets of the Company. At maturity, the Company has the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price similar to the terms described above. The Company has the right to redeem the debentures upon fifteen (15) business days notice for 115% of the amount redeemed. Upon such redemption, the holder shall receive warrants equal to 10,000 shares of common stock for each $100,000 redeemed with an exercise price equal to 120% of the closing bid price of the common stock on the closing date. During the nine months ended September 30, 2004, Cornell converted $125,000 into 2,323,603 shares of common stock, and the Company recognized $21,924 of amortization of discount on the debenture conversions. At September 30, 2004, there remains $475,000 of debentures outstanding. Through September 30, 2004, there is $12,760 in accrued interest on the convertible debentures. 13 NOTE 7- INVESTMENT Beginning in 2001, the Company started investing in a private airstrip in Branson, Missouri. The project after the Company funded approximately $387,269 as of September 30, 2004, ran out of funding, and the project has since ceased. Management has reserved an allowance for the entire amount, as the investment value is not known. NOTE 8- DUE TO RELATED PARTIES The Company has outstanding at September 30, 2004, $140,000 non-interest bearing to related parties. These amounts have no specific repayment terms, and were provided to the Company to cover some of the costs of completing the merger. These amounts are reflected in the condensed consolidated balance sheet as current liabilities. The Company has also advanced related parties certain amounts, mostly in the form of employee advances. There was no balance due at September 30, 2004 for these advances. NOTE 9- PROVISION FOR INCOME TAXES Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company's assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company's consolidated tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. At September 30, 2004, deferred tax assets approximated the following: Net operating loss carryforwards $ 1,664,391 Less: valuation allowance (1,664,391) ----------- $ -0- =========== At September 30, 2004, the Company had accumulated deficits approximating $4,755,402, available to offset future taxable income through 2023. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods. 14 NOTE 10- STOCKHOLDERS' EQUITY (DEFICIT) The Company has two classes of stock; a preferred class with a par value of $.001 and 30,000,000 shares authorized, and a common class with a par value of $.001 and 300,000,000 shares authorized. The board of directors increased these levels on March 9, 2004 from 5,000,000 and 50,000,000, respectively. The Company has not issued any shares of preferred stock. The Company had 68,096,538 common shares issued and 58,308,357 shares outstanding as of September 30, 2004. Upon the merger with Telescience, the Company cancelled 9,953,333 of the 10,499,333 shares then issued and outstanding and issued 2,200,000 shares to acquire 100% of the outstanding stock of TeleScience. Upon the share exchange, the Board of Directors of the Company approved a stock dividend in the amount of 14 for 1 or 1400% on September 29, 2003, increasing the outstanding shares of the Company to 41,200,005. On January 27, 2004 and February 18, 2004, the Company issued 2,000,000 S-8 shares on each date for a total of 4,000,000 shares. The price of these shares ranged between $.10 and $.16 for a total value of $505,000. The Company paid a one-time placement agent fee of 10,000 restricted shares of common stock equal to approximately $1,400 based on the Company's stock price on March 11, 2004. The Company issued 2,416,667 shares of common stock for $75,017 in the first quarter of 2004. The Company issued 750,000 shares of common stock in March 2004 to Cornell Capital Partners, L.P. as a commitment fee for the Standby Equity Distribution Agreement. The value of these shares is $105,000 and has been reflected as loan commitment fee (net of amortization) in the condensed consolidated balance sheet at September 30, 2004. The Company has issued 2,625,107 shares of common stock for cash and conversions of payables valued at $495,206 in the second quarter of 2004. The Company issued 15,000,000 shares of common stock to an escrow agent relating to future advances under a Standby Equity Distribution Agreement with Cornell Capital Partners, LP (see Note 14). 15 NOTE 11- LOAN PAYABLE - OFFICER / LITIGATION The Company had advances from an officer of the Company to help fund operations in the amount of $71,379 at December 31, 2002. The officer has not been charging interest, and the amounts were classified as current liabilities as they are due on demand. The loan was repaid in 2003. The Company was party to a claim pursuant to which an individual was seeking damages under an agreement the Company entered into in 2002. The Company eventually settled this claim, and consequently recorded a liability for the settled amount of $1,092,156, which included attorney's fees. The payout of this settlement was to be over forty-two months in semi-monthly installments of $12,500 commencing February 2003. The settlement accrued interest at 12% upon any default of the agreement. As part of this agreement the individual can seek no further damages against the Company. The Company paid $216,236 of this amount, and then in November 2003, the President of the Company in a private stock transaction, signed over personal shares of Medical Staffing Solutions, Inc. stock in consideration for this liability. As such, the Company has recorded a loan payable to the President for the unpaid liability at that time, $875,920. In 2004, the Company has paid down $25,000 of this liability and the total outstanding at September 30, 2004 is $850,920. NOTE 12- COMMITMENTS The Company had established a 401(k) Plan for its employees and agreed to match a portion of the contribution. Effective January 1, 2004, the Company discontinued its matching portion of the contribution. In October 2003, the Company extended their agreement with the California State Department of Corrections for Contract Nursing Staff. This agreement has an annual estimated value of 2.5 million dollars. In November 2003, the Company was awarded a three-year 2.6 million dollar contract with the Department of Health and Human Services to provide nursing staff to the U.S. Public Health Service in support of the National Hansen's Disease Programs based in Louisiana. This is the second such contract won by the Company. 16 NOTE 12- COMMITMENTS (CONTINUED) The Company entered into a letter of intent to acquire a Virginia company operating in a similar industry. There is doubt that this transaction will close. NOTE 13- STANDBY EQUITY DISTRIBUTION AGREEMENT On March 11, 2004, the Company entered into a Standby Equity Distribution Agreement with Cornell Capital Partners. Under the agreement, the Company may issue and sell to Cornell Capital Partners common stock for a total purchase price of up to $15.0 million. The purchase price for the shares is equal to 100% of the market price, which is defined as the lowest volume weighted average price of the common stock during the five trading days following the notice date. The Company has placed 15,000,000 shares of common stock into escrow for future draws under the Standby Equity Distribution Agreement. During the nine months ended September 30, 2004, the Company has drawn down $150,000 under the Standby Equity Distribution Agreement, issuing 5,211,819 shares of common stock out of escrow. The Company used the proceeds to repay $150,000 of a promissory note held by Cornell Capital Partners (Note 14). converted the $150,000 into 5,211,819 shares of common stock. Cornell Capital Partners received a one-time commitment fee of 750,000 shares of the Company's common stock, valued at $105,000 on March 11, 2004. Cornell Capital Partners is entitled to retain a fee of 5% of each advance. In addition, the Company entered into a placement agent agreement with Newbridge Securities Corporation, a registered broker-dealer. Pursuant to the placement agent agreement, the Company paid a one-time placement agent fee of 10,000 restricted shares of common stock equal to approximately $1,400 based on the Company's stock price on March 11, 2004. NOTE 14- PROMISSORY NOTE On June 11, 2004, the Company entered into a promissory note in the amount of $1,000,000 with Cornell Capital. As of September 30, 2004, the Company has utilized $150,000 of the proceeds from Standby Equity Distribution Agreement to repay part of the note. As of September 30, 2004, the balance outstanding under this note is $850,000. 17 NOTE 15- GOING CONCERN As shown in the accompanying condensed consolidated financial statements, the Company incurred substantial net losses for the years ended December 31, 2003 and 2002, and additional losses in the nine months ended September 30, 2004. There is no guarantee whether the Company will be able to generate enough revenue and/or raise capital to support those operations. This raises doubt about the Company's ability to continue as a going concern. Management states that they are confident that they can improve operations and raise the appropriate funds needed through their recent contracts the Company has entered into in the past few months, as well as the completed reverse merger with which the Company now has the ability to raise money in the public markets. On March 11, 2004, the Company entered into a Standby Equity Distribution Agreement. Under this agreement, the Company may issue and sell to Cornell Capital shares of common stock for a total purchase price of $15,000,000. In addition to the Standby Equity Distribution Agreement, on March 11, 2004, the Company entered into a Convertible Debenture agreement for $600,000. Cornell advanced $250,000 of this amount at closing and advanced the remaining $350,000 on May 3, 2004. With the proceeds of the Standby Equity Distribution Agreement for up to 15 million dollars, the Company believes that it should be able to grow and acquire companies that will contribute to the development of providing nurses to the private sector as well as government contracts. The Company received $1,000,000 from Cornell Capital on June 11, 2004 pursuant to a promissory note. The Company intends to repay the promissory note with cash proceeds under the Standby Equity Distribution Agreement. The Company is looking at several companies as potential acquisition candidates. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. NOTE 16- SUBSEQUENT EVENTS Subsequent to September 30, 2004, through November 18, 2004, Cornell Capital Partners has converted $125,000 of convertible debentures into 5,443,169 shares of the Company's common stock. The Company received $315,000 from Cornell Capital on October 6, 2004 pursuant to a promissory note. The Company intends to repay the promissory note with cash proceeds under the Standby Equity Distribution Agreement. Subsequent September 30, 2004, through November 18, 2004, the Company has received advances under the Standby Equity Distribution Agreement in the amount of $410,000, issuing 12,574,740 shares out of escrow. These proceeds were used to repay portions of the promissory note held by Cornell Capital Partners. The principal balance of the promissory notes as of November 18, 2004 is $755,000. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION - FORWARD LOOKING STATEMENTS In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Medical Staffing Solutions, Inc. and its subsidiaries, (collectively, the "Company" or "Medical Staffing") is hereby providing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions of future events or performance are not statements of historical facts and may be forward-looking. These forward-looking statements are based largely on Medical Staffing's expectations and are subject to a number of risks and uncertainties, including but not limited to, economic, competitive, regulatory, growth strategies, available financing and other factors discussed elsewhere in this report and in documents filed by Medical Staffing with the Securities and Exchange Commission ("SEC"). Many of these factors are beyond Medical Staffing's control. Actual results could differ materially from the forward-looking statements made. In light of these risks and uncertainties, there can be no assurance that the results anticipated in the forward-looking information contained in this report will, in fact, occur. Any forward-looking statement speaks only as of the date on which such statement is made, and Medical Staffing undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. GENERAL The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, and the Notes thereto included herein. The information contained below includes statements of Medical Staffing's or management's beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. GOING CONCERN As reflected in the Company's financial statements as of September 30, 2004, the Company's accumulated deficit of $4,719,432 and its working capital deficiency of $2,358,999 raise doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional debt or capital, including the ability to raise capital under the Standby Equity Distribution Agreement. The financial statements for September 30, 2004, do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonably based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments and assumptions and actual results, our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: 19 o Revenue recognition; o Allowance for doubtful accounts; and o Accounting for income taxes. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures. See Notes to Condensed Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP. REVENUE RECOGNITION Revenue on time-and-materials contracts is recognized based upon hours incurred at contract rates plus direct costs. Revenue on fixed-price contracts is recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Anticipated losses are recognized as soon as they become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. ALLOWANCE FOR DOUBTFUL ACCOUNTS We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer's current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We make judgments as to our ability to collect outstanding receivables based on these factors and provide allowances for these receivables when collections become doubtful. Provisions are made based on specific review of all significant outstanding balances. ACCOUNTING FOR INCOME TAXES We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS No. 109, deferred income taxes are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts, and the tax bases of existing assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any deferred tax asset has been reserved by the Company with an offsetting valuation allowance adjustment. RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2004, COMPARED TO QUARTER ENDED SEPTEMBER 30, 2003 REVENUES Revenues for the quarter ended September 30, 2004, were $1,795,920, a decrease of $261,419, as compared to revenues of approximately $2,057,339 for the quarter ended September 30, 2003. The decrease in revenues in 2004 was primarily attributable to the completion of a significant government contract for the providing of services in the nursing industry to a government facility. COST OF SALES Cost of sales for the quarter ended September 30, 2004, was approximately $1.1 million, or 63% of revenues, as compared to approximately $1.4 million, or 67% of revenues, for the quarter ended September 30, 2003. The percentage decrease in cost of sales for the quarter ended September 30, 2004, was primarily attributable to the fact that some labor cost was incurred and recognized in prior periods (vacation and sick leave), but billed (and respectively revenue recognized) in the third quarter of 2004. 20 GROSS PROFIT Gross profit for the quarter ended September 30, 2004, was $655,697, or 37% of revenues, as compared to gross profit of $672,882, or 33% of revenues, for the quarter ended September 30, 2003. OPERATING EXPENSES Operating expenses for the quarter ended September 30, 2004, were $827,882, or 46% of revenues, as compared to $697,106, or 34% of revenues, for the quarter ended September 30, 2003. The increase in operating expenses in 2004 was primarily attributable increased cost of administrative payroll, benefits, and overhead costs. OTHER INCOME (EXPENSE) Other expense for the quarter ended September 30, 2004, was $61,070, as compared to $35,342 for the quarter ended September 30, 2003. Increase was due to interest expense increase and a charge for amortization of discount on conversions. NET LOSS The Company had a net loss of $233,255 for the three months ended September 30, 2004, compared to a net loss of $59,566 for the three months ended September 30, 2003. The increase of $173,689 was mainly attributable to lower revenues and increased operating expenses. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003 REVENUES Revenues for the nine months ended September 30, 2004, were $5,174,378, a decrease of $1,605,542, as compared to revenues of $6,779,920 for the nine months ended September 30, 2003. The decrease in revenues in 2004 was primarily attributable to the completion of a significant government contract for the providing of services in the nursing industry to a government facility. COST OF SALES Cost of sales for the nine months ended September 30, 2004, was approximately $3.9 million, or 74% of revenues, as compared to approximately $4.8 million, or 71% of revenues, for the nine months ended September 30, 2003. The percentage increase in cost of sales was primarily attributable to the increased labor costs associated with fulfilling the Company's contracts. GROSS PROFIT Gross profit for the nine months ended September 30, 2004, $1,322,517, or 26% of revenues, as compared to gross profit of $1,965,721, or 29% of revenues, for the nine months ended September 30, 2003. OPERATING EXPENSES Operating expenses for the nine months ended September 30, 2004, were $2,591,748, or 50% of revenues, as compared to $2,105,748, or 31% of revenues, for the nine months ended September 30, 2003. The increase in operating expenses in 2004 was primarily attributable to professional fees associated with the filings of the registration statement and annual report and increased cost of administrative payroll, benefits, and overhead costs, an increase in general and administrative expenses and an increase in depreciation and amortization. OTHER INCOME (EXPENSE) Other expense for the nine months ended September 30, 2004, was $133,335, as compared to $91,002 for the nine months ended September 30, 2003. Increase was due to interest expense increase and a charge for amortization of discount on conversions. 21 NET LOSS The Company had a net loss of $233,255 for the three months ended September 30, 2004, compared to a net loss of $59,566 for the three months ended September 30, 2003. The increase of $173,689 was mainly attributable to lower revenues and increased operating expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's financial statements have been prepared on a going concern basis that contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $1,402,566 and $231,029 for the nine months ended September 30, 2004 and 2003, respectively, and has an accumulated deficit of $4,719,432 at September 30, 2004. Management recognizes that they must generate additional resources to enable them to continue operations. Management is planning to obtain additional capital principally through the sale of equity securities. The realization of assets and satisfaction of liabilities in the normal course of business is dependent upon Medical Staffing obtaining additional equity capital and ultimately obtaining profitable operations. However, no assurances can be given that the Company will be successful in these activities. Should any of these events not occur, the accompanying consolidated financial statements will be materially affected. The Company is at present meeting its current obligations from its monthly cash flows and cash proceeds from sale of equity securities and debt, which during 2002, 2003 and to date in 2004 has included cash from operations, investor capital, loans from related parties and from other lenders. However, due to insufficient cash generated from operations, the Company currently does not internally generate cash sufficient to pay all of its incurred expenses and other liabilities. As a result, the Company is dependent on investor capital and loans to meet its expenses and obligations. Although investor funds and related party loans have allowed the Company to meet its obligations in the recent past, there can be no assurances that the Company's present methods of generating cash flow will be sufficient to meet future obligations. Historically, the Company has, from time to time, been able to raise additional capital from sales of its capital stock, but there can be no assurances that the Company will be able to raise additional capital in this manner. Cash used in operating activities was $2,687,922 for the nine months ended September 30, 2004, compared to $697,599 for the same period in 2003. The increase in cash used was due primarily to the increased loss from operations and increase in accounts receivable. Cash provided by investing activities was $26,518 for the nine months ended September 30, 2004, compared to cash used in investing activities of $160,674 for the same period in 2003. This increase was principally due to a decrease in amounts funded to related parties and lower capital expenditures in 2004. Cash provided by financing activities was $2,594,571 for the quarter ended September 30, 2004, compared to $887,414 during the same period in 2003. This increase was mainly due to the funding through the convertible debentures and promissory note. In May 2002, the Company entered into a line of credit agreement with a factor. The loan, which is due on demand bears interest at prime plus 1.00%. The factor lends up to 90% of the receivable balance to the Company, and receives payment directly on the outstanding receivables and the remaining balance is remitted to the Company. The outstanding balance at September 30, 2004 was approximately $1,618,454. The balance is reflected net of a 10% reserve that the factor has established which is adjusted on each funding. Additionally, the Company maintains a small credit line with a bank. There was no balance outstanding as of September 30, 2004. In May 2002, the Company borrowed $220,000 from an individual to be used in developing the Company's business plan, including the Homeland Security operations. The note payable was non-interest bearing until May 2003 and bore interest at 7% going forward. The note was fully paid in May 2004. In 1997, the Company borrowed $300,000 plus interest at 10% from an individual and had started repayments of that note with interest and paid down the balance to $163,000. The Company received notice in 2002 that the lender filed a lawsuit against the Company, and in 2002 recorded the full settlement amount due the lender. 22 The remaining balance of $163,000 is included in that settlement amount as of December 2002. This amount was paid back from a private stock transaction by an officer in November 2003. On March 11, 2004, the Company entered into a Securities Purchase Agreement with Cornell Capital Partners. Under the Securities Purchase Agreement, Cornell Capital Partners was obligated to purchase $600,000 of secured convertible debentures from the Company. On March 11, 2004, Cornell Capital Partners purchased $250,000 of convertible debentures. In April 2004, Cornell Capital Partners purchased $350,000 of additional debentures. These debentures accrue interest at a rate of 5% per year and mature two years from the issuance date. The debentures are convertible into the Company's common stock at the holders' option any time up to maturity at a conversion price equal to the lower of (i) 115% of the closing bid price of the common stock as of the closing date or (ii) 85% of the lowest closing bid price of the common stock the five trading days immediately preceding the conversion date. The debentures are secured by the assets of the Company. At maturity, the Company has the option to either pay the holder the outstanding principal balance and accrued interest or to convert the debentures into shares of common stock at a conversion price similar to the terms described above. The Company has the right to redeem the debentures upon fifteen business days notice for 115% of the amount redeemed. Upon such redemption, the holder shall receive warrants equal to 10,000 shares of common stock for each $100,000 redeemed with an exercise price equal to 120% of the closing bid price of the common stock on the closing date. During the nine months ended September 30, 2004, Cornell converted $125,000 into 2,323,603 shares of common stock, and the Company recognized $21,924 of amortization of discount on the debenture conversions. At September 30, 2004, there remains $475,000 of debentures outstanding. Through September 30, 2004, there is $12,760 in accrued interest on the convertible debentures. Subsequent to September 30, 2004, through November 18, 2004, Cornell Capital Partners has converted $125,000 of convertible debentures into 5,443,169 shares of the Company's common stock. On March 11, 2004, the Company entered into a Standby Equity Distribution Agreement with Cornell Capital Partners. Under the agreement, the Company may issue and sell to Cornell Capital Partners common stock for a total purchase price of up to $15.0 million. The purchase price for the shares is equal to 100% of the market price, which is defined as the lowest volume weighted average price of the common stock during the five trading days following the notice date. The amount of each advance is subject to an aggregate maximum advance amount of $250,000, with no advance occurring within seven trading days of a prior advance. Cornell Capital Partners received a one-time commitment fee of 750,000 shares of the Company's common stock. Cornell Capital Partners is entitled to retain a fee of 5% of each advance. In addition, the Company entered into a placement agent agreement with Newbridge Securities Corporation, a registered broker-dealer. Pursuant to the placement agent agreement, the Company paid a one-time placement agent fee of 10,000 restricted shares of common stock equal to approximately $1,400 based on the Company's stock price on March 11, 2004. Through September 30, 2004, the Company has drawn $150,000 under the Standby Equity Distribution Agreement issuing 5,211,819 shares of common stock. The proceeds have been utilized to repay principal of the $1,000,000 promissory note issued to Cornell Capital Partners on June 11, 2004. Subsequent September 30, 2004 and through November 18, 2004, the Company received $315,000 from Cornell Capital on October 6, 2004 pursuant to a promissory note. During this period the Company has received advances under the Standby Equity Distribution Agreement in the amount of $410,000, issuing 12,574,740 shares out of escrow. These proceeds were used to repay portions of the promissory notes held by Cornell Capital Partners. The principal balance of the promissory notes as of November 18, 2004 is $755,000. On June 11, 2004, the Company received $1,000,000 in return for a promissory note to Cornell Capital Partners. The note has a 229-day term. As of September 30, 2004, $850,000 remains outstanding. The principal balance as of November 18, 2004 is $500,000. On October 6, 2004 the Company received $315,000 in return for a promissory note to Cornell Capital. The note has a 114-day term. As of November 18, 2004 the principal balance is $255,000. From time to time, the Company may evaluate potential acquisitions involving complementary businesses, content, products or technologies. The Company's future capital requirements will depend on many factors, including the success of our operations, economic conditions and other factors including the results of future operations. If the Company is unable to raise sufficient funds to meet its long-term capital needs, there is a risk that the Company will be required to cease operations. PLAN OF OPERATIONS The Company, through its TeleScience subsidiary, will continue to provide: 23 o medical staffing services, o information technology and telecommunications services, and o Homeland Security products and services. TeleScience provides two categories of services: o Medical Systems o Technology The Medical Systems operations specialize in the long-term staffing of medical personnel, including physicians, nurses, technicians, and dental assistants, for various federal and state government medical facilities throughout the country. In 2004, the Company intends to expand to provide long-term staffing of nurses (RNs and LPNs) to private hospitals in the tri-state area (Virginia, Maryland, D.C.), as well as sections of Pennsylvania. The Technology operations specialize in long-term professional consulting and staffing of experienced and qualified IT personnel in the government and private sectors. We provide systems integration and information technology (IT) services. We also serve homeland security efforts with emergency equipment, decontamination products, vehicles, and supplies within the federal government, particularly the Department of Defense and the Veteran's Administration. In May 2002, the Company was awarded a three-year $2.6 million dollar contract with the Department of Health and Human Services to provide nursing staff to the U.S. Public Health Service in support of the National Hansen's Disease Programs based in Louisiana. This is the second such contract won by the Company. In October 2003, the Company extended their agreement with the California State Department of Corrections for Contract Nursing Staff. This agreement has an annual estimated value of $2.5 million dollars. At the end of September 2003, the Company completed its contract to provide medical staffing for the Walter Reed Army Medical Center in Washington, D.C. In September 2004, the Company signed new master contract with the California State Department of Corrections for Contract Nursing Staff. This contract, a multiple award vendor award, has an estimated ceiling value of $50 million and is effective for three years starting October 1, 2004. In the same period MSSI was awarded an extension of contracts for medical services that MSSI holds on a number of Air Force Bases. MANAGEMENT STRATEGY The Company's management has taken several initiatives to attempt to grow and expand its current businesses of medical and technology services and to develop and market its homeland security business. MANAGEMENT STRATEGIC PLAN FOR FUTURE GROWTH AND EXPANSION The Management's strategic plan for future growth and expansion is fourfold: 1) expand its medical services into the private sector; 2) enhance recruitment; 3) develop a homeland security marketing plan; and 4) acquire suitable companies. EXPANSION OF MEDICAL SERVICES INTO THE PRIVATE SECTOR. In January 2004, the Company hired a seasoned executive to direct the Company's expansion of its medical services into the private health care sector. We believe this expansion will provide long-term part-time staffing of registered nurses (RNs) and licensed professional nurses (LPNs) to private health care facilities in the tri-state area (Virginia, Maryland, DC), as well as parts of Pennsylvania. Examples of such facilities are hospitals, nursing homes, private clinics, and assisted living centers. ENHANCING RECRUITMENT. The Company is embarking on a long-range plan for recruiting ancillary and professional level staff for medical contracts. This plan is geared toward expanding the business of the Company's most active services, the Medical Systems Operations. The Medical Systems operations presently provide long-term medical staffing services for a wide array of 24 military, federal, and state government health care facilities, such as hospitals and clinics. Medical Staffing is also moving into similar staffing arrangements with the private sector. We believe that our long-range recruiting plans will support both of these initiatives. These initiatives arise from the recognition of the opportunities provided by the well known and chronic shortage of health care professionals -especially nurses (RNs) in this country. OVERSEAS RECRUITING OF REGISTERED NURSES. The largest shortage in terms of vacancies and intractability of recruiting domestic personnel exists in the nursing profession. This profession, historically dominated by women, is experiencing nurse shortages that are closely related to the opening of many alternative career fields to a younger generation of women. This situation is unlikely to change, leading to the intractability of attracting a large number of American women into nursing. The Company perceives an opportunity in this situation, which we believe can provide business expansion for many years. It is the Company's plan to aggressively recruit nurses from suitable countries overseas over the next few years. DOMESTIC RECRUITING OF HEALTH CARE PROFESSIONALS. The Company has a constant need for recruiting medical and non-medical professionals for filling positions created by newly won contracts or for filling vacancies caused by turnover, terminations, or relocations. The Company has an established recruiting department for the recruitment of health care professionals to meet such needs on a regular basis, as well as its future contract requirements on a proactive basis. This department uses newspaper and internet media extensively for this purpose. The Company's website is also being updated to attract these professionals to apply for jobs directly for open or future upcoming positions. COST REDUCTION. As part of a plan for streamlining of operations, the Company laid off three employees, restructured it recruiting department and outsourced some benefit management and personnel functions to C2 Portfolio, Inc. ACQUISITION OF SUITABLE COMPANIES. A letter of intent was issued at the beginning of the third quarter 2004 to acquire a company in a medically related area. The two companies are currently in the due-diligence phase of the transaction, however there is doubt that this transaction will close. A letter of intent was issued at the beginning of the third quarter 2004 to acquire a company in a medically related area. There is doubt that this transaction will close. DEVELOP A HOMELAND SECURITY MARKETING PLAN The Company views this market sector as an opportunity for growth. The Company has invested significant resources to build an infrastructure and to generate an initial presence in this sector. During the first quarter of 2004, the Company formed a strategic alliance with Mobile Healthcare Solutions (MHS), a provider of deployable, mobile medical treatment facilities. The two companies intend to partner for joint bidding on select projects in homeland security arenas that fit their combined expertise. The Company's initial marketing plan in the homeland security arena is to utilize the power and expertise of its alliances to market its decontamination products. This marketing plan further extends marketing of emergency equipment, decontamination products, vehicles, and personal protective equipment to federal, state, and local governments. The Company was named as one of the participants in a $1,000,000,000 IDIQ contract in the homeland security area with the state of Pennsylvania, and this contract has recently been renewed for another year. CURRENT ACCOUNTING PRONOUNCEMENTS In September 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, the pooling of interests method of accounting for business combinations are no longer allowed and goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company adopted these new standards effective January 1, 2002. On October 3, 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of Accounting 25 Principles Board Opinion 30, "Reporting the Results of Operations." This Standard provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This Standard also requires expected future operating losses from discontinued operations to be displayed in the period (s) in which the losses are incurred, rather than as of the measurement date as presently required. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This statement amends SFAS No. 13, Accounting for Leases, to eliminate inconsistencies between the required accounting for sales-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions. Also, this statement amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Provisions of SFAS No. 145 related to the rescissions of SFAS No. 4 were effective for the Company on November 1, 2002 and provisions affecting SFAS No. 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have a significant impact on the Company's results of operations or financial position. In June 2003, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement covers restructuring type activities beginning with plans initiated after December 31, 2002. Activities covered by this standard that are entered into after that date will be recorded in accordance with provisions of SFAS No. 146. The adoption of SFAS No. 146 did not have a significant impact on the Company's results of operations or financial position. In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123"("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting", to require disclosure about those effects in interim financial information. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company will continue to account for stock-based employee compensation using the intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees," but has adopted the enhanced disclosure requirements of SFAS 148. In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, except for certain hedging relationships designated after June 30, 2003. Most provisions of this Statement should be applied prospectively. The adoption of this statement did not have a significant impact on the Company's results of operations or financial position. In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities, if applicable. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of this statement did not have a significant impact on the Company's results of operations or financial position. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value 26 of obligations assumed under the guarantees and elaborates on existing disclosure requirements related to guarantees and warranties. The recognition requirements are effective for guarantees issued or modified after December 31, 2002 for initial recognition and initial measurement provisions. The adoption of FIN 45 did not have a significant impact on the Company's results of operations or financial position. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company' results of operations or financial position. 27 ITEM 3. CONTROLS AND PROCEDURES (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer/Acting Principal Financial Officer (one person), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives. The Company's Principal Executive Officer/Acting Principal Financial Officer has concluded that the Company's disclosure controls and procedures are, in fact, effective at this reasonable assurance level. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last valuation or from the end of the reporting period to the date of this Form 10-QSB. (B) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING In connection with the evaluation of the Company's internal controls during the Company's last fiscal quarter, the Company's Principal Executive Officer/Acting Principal Financial Officer (one person) has determined that there are no changes to the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, the Company's internal controls over financial reporting. 28 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not currently involved in any material legal proceedings. However, in 2003, we settled a claim against the Company from an individual who was a former officer and investor. In satisfaction of that settlement, 2,655,678 restricted shares of Medical Staffing common stock were delivered to the individual in November of 2003. The Company may become involved in litigation, from time to time, in the ordinary course of business. ITEM 2. CHANGES IN SECURITIES The Company issued 2,416,667 shares of common stock during the first quarter of 2004 for $362,500 for cash paid to the company. The Company issued 2,625,107 shares of common stock for cash and conversions of payables valued at $495,206 during the second quarter of 2004. The Company issued 1,623,061 shares of common stock during the third quarter of 2004 for $75,000. ITEM 3. DEFAULT UPON SENIOR SECURITIES None. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS:
EXHIBIT NO. 2.1 Articles of Incorporation, as amended Incorporated by reference to Exhibit 3(a) to the Company's Registration Statement on Form SB-2 as filed with the United States Securities and Exchange Commission on October 9, 2001 3.1 By-laws Incorporated by reference to Exhibit 3(b) to the Company's Registration Statement on Form SB-2 as filed with the United States Securities and Exchange Commission on October 9, 2001 3.2 Articles of Amendment Incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on March 27, 2003
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EXHIBIT NO. 3.3 Articles of Amendment Incorporated by reference to Exhibit 3 to the Company's Annual Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on March 27, 2003 10.1 Sublease Agreement dated December 23, 2002 by and Incorporated by reference to Exhibit 10.1 to the among InterAmerica Technologies, Inc., Kemron Company's Annual Report on Form 10-KSB as filed with Environmental Services and Telescience the United States Securities and Exchange Commission International, Inc. on April 9, 2004 10.2 Promissory Note in the principal amount of Incorporated by reference to Exhibit 10.2 to the $875,920 made by the Company in favor of B. B. Company's Annual Report on Form 10-KSB as filed with Sahay the United States Securities and Exchange Commission on April 9, 2004 10.3 Memorandum of Understanding dated March 10, 2004, Incorporated by reference to Exhibit 10.3 to the by and between Silver Star Technologies, Inc. and Company's Annual Report on Form 10-KSB as filed with TeleScience International, Inc. the United States Securities and Exchange Commission on April 9, 2004 10.4 Memorandum of Understanding by and between Incorporated by reference to Exhibit 10.4 to the Telescience International, Inc. and Chesapeake Company's Annual Report on Form 10-KSB as filed with Government Technologies, Inc. the United States Securities and Exchange Commission on April 9, 2004 10.5 Proposal dated January 7, 2004 from Professional Incorporated by reference to Exhibit 10.5 to the Nursing Resources, Inc. to Telescience Company's Annual Report on Form 10-KSB as filed with International, Inc. the United States Securities and Exchange Commission on April 9, 2004 10.6 Standby Equity Distribution Agreement dated Incorporated by reference to Exhibit 10.6 to the March 11, 2004 between Medical Staffing and Company's Annual Report on Form 10-KSB as filed with Cornell Capital Partners LP the United States Securities and Exchange Commission on April 9, 2004 10.7 Registration Rights Agreement dated March 11, Incorporated by reference to Exhibit 10.7 to the 2004 between Medical Staffing and Cornell Capital Company's Annual Report on Form 10-KSB as filed with Partners LP the United States Securities and Exchange Commission on April 9, 2004 10.8 Escrow Agreement dated March 11, 2004 among Incorporated by reference to Exhibit 10.8 to the Medical Staffing, Cornell Capital Partners LP, Company's Annual Report on Form 10-KSB as filed with Butler the United States Securities and Exchange Commission on April 9, 2004 10.9 Securities Purchase Agreement dated March 11, Incorporated by reference to Exhibit 10.9 to the 2004 among Medical Staffing and the Buyers Company's Annual Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on April 9, 2004 10.10 Escrow Agreement dated March 11, 2004 among Incorporated by reference to Exhibit 10.10 to the Medical Staffing, the Buyers and Butler Gonzalez, Company's Annual Report on Form 10-KSB as filed with LP the United States Securities and Exchange Commission on April 9, 2004
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EXHIBIT NO. 10.11 $250,000 Convertible Debenture dated March 11, Incorporated by reference to Exhibit 10.11 to the 2004 between Medical Staffing and Cornell Capital Company's Annual Report on Form 10-KSB as filed with Partners LP the United States Securities and Exchange Commission on April 9, 2004 10.12 Investors Registration Rights Agreement dated Incorporated by reference to Exhibit 10.12 to the March 11, 2004 between Medical Staffing and the Company's Annual Report on Form 10-KSB as filed with Investors the United States Securities and Exchange Commission on April 9, 2004 10.13 Placement Agent Agreement dated March 11, 2004 Incorporated by reference to Exhibit 10.13 to the among Medical Staffing and Cornell Partners, L.P. Company's Annual Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on April 9, 2004 10.14 Renewal Agreement dated February 5, 2004, from Incorporated by reference to Exhibit 10.14 to the Commonwealth of Pennsylvania to Telescience Company's Annual Report on Form 10-KSB as filed with International, Inc. regarding Contract 2550-09 the United States Securities and Exchange Commission Personal Protection Equipment PPE on April 9, 2004 10.15 Memorandum of Understanding dated February 23, Incorporated by reference to Exhibit 10.15 to the 2004, to Mobile Healthcare Solutions, Inc. from Company's Annual Report on Form 10-KSB as filed with Telescience International, Inc. the United States Securities and Exchange Commission on April 9, 2004 10.16 Purchase Orders Incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on April 9, 2004 10.17 Master Contract dated April 1, 2004, by and Incorporated by reference to Exhibit 10.17 to the between Telescience International, Inc. and State Company's Annual Report on Form 10-KSB as filed with of California Department of Corrections the United States Securities and Exchange Commission on April 9, 2004 10.18 Contract for Commercial Items dated May 19, 2002, Incorporated by reference to Exhibit 10.18 to the by and between Department of Health & Human Company's Annual Report on Form 10-KSB as filed with Services and Telescience International, Inc. the United States Securities and Exchange Commission on April 9, 2004 10.19 Master Contract dated March 4, 2002, by and Incorporated by reference to Exhibit 10.19 to the between California Department of Corrections and Company's Annual Report on Form 10-KSB as filed with Telescience International, Inc. the United States Securities and Exchange Commission on April 9, 2004 10.20 Memorandum dated March 26, 2003 regarding Branch Incorporated by reference to Exhibit 10.20 to the Office Location Company's Annual Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on April 9, 2004 14.1 Code of Ethics Incorporated by reference to Exhibit 14.1 to the Company's Annual Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on April 9, 2004
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EXHIBIT NO. 31.1 Certification by Chief Executive Provided herewith Officer/Principal Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification by Chief Executive Officer and Provided herewith Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(B) CURRENT REPORT ON FORM 8-K DURING THE QUARTER ENDED SEPTEMBER 30, 2004: None. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Medical Staffing has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized November 22, 2004. November 22, 2004 MEDICAL STAFFING SOLUTIONS, INC. By: /s/ Brajnandan B. Sahay ----------------------------------- Brajnandan B. Sahay, President, Chief Executive Officer, Principal Financial Officer and Director 33