UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number 001-15503
WORKSTREAM INC.
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(Exact name of Registrant as specified in its charter)
N/A Canada
- --------------------------------- --------------------------------
(IRS Employer Identification No.) (State or Other Jurisdiction of
Incorporation or Organization)
495 March Road, Suite 300, Ottawa, Ontario K2K 3G1
- ------------------------------------------- -------
(Address of Principal Executive Offices) (Zip Code)
(613) 270-0619
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 31, 2004, there were 41,276,162 common shares, without par
value, outstanding, excluding 1,046,549 common shares held in escrow.
WORKSTREAM INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of
August 31, 2004 and Audited May 31, 2004...................2
Unaudited Consolidated Statements of Operations for
the Quarters Ended August 31, 2004 and 2003................3
Unaudited Consolidated Statements of Comprehensive Loss
for the Quarters Ended August 31, 2004 and 2003............4
Unaudited Consolidated Statements of Cash Flows
for the Quarters Ended August 31, 2004 and 2003...........5
Notes to Unaudited Consolidated Financial Statements..........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................27
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...39
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds ....................40
Item 6. Exhibits and Reports on Form 8-K .............................42
Signatures ......................................................................43
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORKSTREAM INC.
CONSOLIDATED BALANCE SHEETS
(United States dollars)
AUGUST 31, 2004 MAY 31, 2004
UNAUDITED AUDITED
-------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,089,609 $ 4,338,466
Restricted cash 3,012,718 2,760,259
Short-term investments 146,970 301,194
Accounts receivable, net of allowance for doubtful
accounts of $60,827 (May 31, 2004 - $21,509) 2,785,102 1,379,610
Prepaid expenses 383,553 606,370
Other assets 199,820 147,009
----------------------------
15,617,772 9,532,908
CAPITAL ASSETS 1,363,066 1,429,143
OTHER ASSETS 114,614 79,073
ACQUIRED INTANGIBLE ASSETS 10,180,822 9,242,617
GOODWILL 36,234,287 28,598,706
----------------------------
$ 63,510,561 $ 48,882,447
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,756,806 $ 1,332,036
Accrued liabilities 1,168,776 2,969,248
Line of credit 2,221,125 1,972,218
Accrued compensation 1,474,756 1,241,441
Current portion of capital lease obligations 108,534 54,003
Current portion of leasehold inducements 50,547 49,533
Current portion of long-term obligations 30,461 29,335
Current portion of related party obligation 72,560 170,369
Deferred revenue 2,294,405 2,065,604
----------------------------
9,177,970 9,883,787
DEFERRED INCOME TAX LIABILITY 423,915 839,265
CAPITAL LEASE OBLIGATIONS 17,438 31,530
LEASEHOLD INDUCEMENTS 176,196 185,200
LONG-TERM OBLIGATIONS 50,770 56,226
RELATED PARTY OBLIGATIONS -- 147,257
----------------------------
9,846,289 11,143,265
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding, no par value - 41,276,162
common shares (May 31, 2004 - 33,574,883) 91,100,829 72,705,603
Additional paid-in capital 3,562,688 3,605,224
Accumulated other comprehensive loss (991,576) (1,072,302)
Accumulated deficit (40,007,669) (37,499,343)
----------------------------
53,664,272 37,739,182
----------------------------
$ 63,510,561 $ 48,882,447
============================
The accompanying notes are an integral part of these unaudited financial
statements.
2
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(United States dollars)
THREE MONTHS ENDED AUGUST 31,
2004 2003
----------------------------
REVENUE $ 5,719,129 $ 4,178,514
COST OF REVENUES (exclusive of
depreciation, shown below) 1,071,827 443,350
----------------------------
GROSS PROFIT 4,647,302 3,735,164
----------------------------
EXPENSES
Selling and marketing 1,727,105 1,067,331
General and administrative 3,488,015 2,424,432
Research and development 404,693 111,028
Amortization and depreciation 1,863,604 1,404,436
----------------------------
7,483,417 5,007,227
----------------------------
OPERATING LOSS (2,836,115) (1,272,063)
----------------------------
OTHER INCOME AND (EXPENSE)
Interest and other income 8,595 1,697
Interest and other expense (91,526) (919,665)
----------------------------
(82,931) (917,968)
----------------------------
LOSS BEFORE INCOME TAX (2,919,046) (2,190,031)
Recovery of deferred income taxes 418,285 439,513
Current income tax (expense) recovery (7,565) 959
----------------------------
NET LOSS FOR THE PERIOD $ (2,508,326) $ (1,749,559)
============================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 37,140,857 21,777,379
============================
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.07) $ (0.08)
=============================
The accompanying notes are an integral part of these unaudited financial
statements.
3
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(United States dollars)
THREE MONTHS ENDED AUGUST 31,
2004 2003
-----------------------------
Net loss for the period $(2,508,326) $(1,749,559)
Other comprehensive income (loss):
Cumulative translation adjustment
(net of tax of $nil) 80,726 (1,081)
--------------------------
Comprehensive loss for the period $(2,427,600) $(1,750,640)
==========================
The accompanying notes are an integral part of these unaudited financial
statements.
4
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States dollars)
THREE MONTHS ENDED AUGUST 31,
2004 2003
-----------------------------
CASH USED IN OPERATING ACTIVITIES
Net loss for the period $(2,508,326) $(1,749,559)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 1,851,115 1,399,872
Non-cash interest on convertible notes and notes payable 51,636 833,423
Recovery of deferred income taxes (418,285) (439,513)
Net change in operating components of working capital (1,485,955) (365,284)
--------------------------
(2,509,815) (321,061)
--------------------------
CASH USED IN INVESTING ACTIVITIES
Acquisition of capital assets (47,093) --
Cash paid for business acquisitions (2,146,679) (169,971)
(Increase)/decrease in restricted cash (158,414) 74,658
Sale (purchase) of short-term investments 158,414 (74,658)
--------------------------
(2,193,772) (169,971)
--------------------------
CASH FROM FINANCING ACTIVITIES
Proceeds from exercise of warrants 51,455 --
Proceeds from share and warrants issuance 9,999,988 950,000
Cost related to the registration and issuance of common stock (64,834) --
Capital lease payments (21,675) (42,091)
Shareholder loan repayment (392,499) (52,500)
Repayment of bank debt (48,342) (67,316)
Proceeds from bank financing 234,027 --
Repayment Bravanta bridge loan (335,863) --
Repayment related to lease settlement -- (75,000)
Long-term debt repayments (7,537) (7,342)
--------------------------
9,414,720 705,751
--------------------------
EFFECT OF EXCHANGE RATE CHANGES 40,010 7,574
--------------------------
INCREASE IN CASH AND
CASH EQUIVALENTS FOR THE PERIOD 4,751,143 222,293
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 4,338,466 255,173
--------------------------
CASH AND CASH EQUIVALENTS, END OF
THE PERIOD $ 9,089,609 $ 477,466
==========================
SUPPLEMENTAL CASH FLOW INFORMATION
Non cash payments to consultants $ -- $ 331,250
Interest paid $ 39,892 $ 133,490
The accompanying notes are an integral part of these unaudited financial
statements.
5
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Workstream Inc. ("Workstream" or the "Company"), formerly E-Cruiter.com,
is a provider of services and Web-based software for Human Capital Management
("HCM"). HCM is the process by which companies recruit, train, evaluate,
motivate and retain their employees. Workstream offers software and services
that address the needs of companies to more effectively manage their human
capital management function. Workstream's software provides a range of solutions
for their needs, including creating and managing job requisitions, advertising
job opportunities, tracking candidates, screening applicants, searching resumes,
operating customized career web sites, processing hiring information, creating
internal and external reports to evaluate the staffing process, evaluating and
managing employee's job performance, managing corporate compliance and offering
rewards and benefits that promote employee retention. Workstream also provide
services through a web-site where job-seeking senior executives can search job
databases and post their resumes, and companies and recruiters can post position
openings and search for qualified senior executive candidates. In addition,
Workstream offers recruitment research, resume management and outplacement
services.
NOTE 2: BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
by Workstream in accordance with United States generally accepted accounting
principles. All amounts presented in these financials statements are presented
in United States dollars unless otherwise noted. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. The earnings of the subsidiaries are included from the date of
acquisition. At August 31, 2004, the Company's subsidiaries are Workstream USA
Inc., 3451615 Canada Inc., Paula Allen Holdings, Inc., OMNIpartners, Inc.,
RezLogic, Inc., 6FigureJobs.com, Inc., Icarian Inc., Xylo, Inc., Kadiri, Inc and
Bravanta, Inc. In management's opinion, all adjustments necessary for fair
presentation are reflected in the financial statements. All adjustments made are
normal and recurring in nature.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
6
Significant estimates are made in the methodology used to assess goodwill
impairment. These estimates include future cash flows as well as future
short-term and long-term growth rates. It is reasonably possible that those
estimates may change in the near-term, significantly affecting future
assessments of goodwill impairment.
Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments are stated at cost plus
accrued interest, which approximates fair value. Cash equivalents are defined as
highly liquid investments with terms to maturity at acquisition of three months
or less. Short-term investments are defined as highly liquid investments with
terms to maturity of one year or less. All cash equivalents and short-term
investments are classified as available for sale.
Investment Tax Credits
Investment tax credits, which are earned as a result of qualifying
research and development expenditures, are recognized when the expenditures are
made and their realization is reasonably assured and are applied to reduce the
related research and development capital costs and expenses in the year.
Capital Assets
Capital assets are recorded at cost. Amortization is based on the
estimated useful life of the asset and is recorded as follows:
Furniture and fixtures........................... 5 years straight line
Office equipment................................. 5 years straight line
Computers and software........................... 3 years straight line
Leasehold improvements........................... Term of lease
Capital assets are tested for impairment when evidence of a decline in
value exists and are adjusted to estimated fair value if the asset is impaired.
The carrying values are reviewed for impairment whenever events or changes in
events indicate that the carrying amounts of such assets may not be recoverable.
The determination of any impairment includes a comparison of estimated
undiscounted future cash flows anticipated to be generated during the remaining
life of the asset to the net carrying value of the asset. The amount of any
impairment recognized is the difference between the carrying value and the fair
value.
7
Lease Inducements
Lease inducements are amortized over the term of the lease as a reduction
of rent expense.
Income Taxes
The Company accounts for income taxes under the asset and liability method
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and tax basis of assets and liabilities. The Company provides a
valuation allowance on net deferred tax assets when it is more likely than not
that such assets will not be realized.
Capital Stock
Capital stock is recorded as the net proceeds received on issuance after
deducting all share issue costs.
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met:
persuasive evidence of an agreement exists, the services have been provided, the
price is fixed and determinable and collection is reasonably assured.
Consequently, revenue is generally recognized as services are performed, which
is in accordance with SAB 104.
The Company's Enterprise Workforce Services revenue consists of
Recruitment Systems Services, Recruitment Services, Applicant Sourcing and
Exchange Services, Performance Management Services, Employee Portal Services,
Rewards Services and Resume Management software services.
The Company makes sales to Recruitment Systems Services and Performance
Management Systems Services' clients based on contracts typically for a one-year
term with automatic renewal. Clients are charged a monthly subscription fee for
concurrent user access licenses, career site hosting, on-line reporting and
other services. Revenue is recognized ratably over the contract period. The
Company recognizes revenue from the sale of software licenses in accordance with
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") No. 97-2 Software Revenue Recognition, and SOP No. 98-9,
Modification of SOP 97-2, with Respect to Certain Transactions when all of the
following conditions are met: a signed contract or purchase order; the software
has been shipped or electronically delivered; the license fee is fixed or
determinable; and the Company believes that the collection of these fees is
reasonably assured. For contracts, which involve significant implementation or
other services which are essential to the functionality of the software and
which are reasonably estimable, the license and services revenue is recognized
over the period of each implementation, primarily using the
percentage-of-completion method. Labor hours incurred are used as the measure of
progress towards completion. A provision for estimated losses on engagements is
made in the period in which the losses become probable and can be reasonably
estimated. In cases where a sale of a license does not include significant
implementation services, license revenue is recorded upon delivery with an
appropriate deferral for maintenance services, if applicable, provided all of
the other relevant conditions have been met. The total fee from the arrangement
is allocated based on Vendor Specific Objective Evidence ("VSOE") of fair value
of each of the undelivered elements. Maintenance agreements are typically priced
based on a percentage of the product license fee and have a one-year term,
renewable annually. VSOE of fair value for maintenance is established based on
the stated renewal rates. Services provided to customers under maintenance
agreements include technical product support and unspecified product upgrades.
VSOE of fair value for the professional service element is based on the standard
hourly rates the Company charges for services when such services are sold
separately. Deferred revenues from advanced payments for maintenance agreements
are recognized ratably over the term of the agreement, which is typically one
year. For Recruitment Services, the Company bills its clients based on a
per-hour fee and recognizes the revenue once the project is completed. For
Applicant Sourcing and Exchange Services and Employee Portal Services, the
Company bills based on a subscription basis and recognizes the revenue ratably
over the term of the subscription. The Company also bills its clients for
product sales through some of its websites. The Company recognizes the related
revenue when the product has been shipped. For the Rewards Services, the Company
bills its clients for consulting and technology services related to the sale of
enterprise incentive and recognition programs and for product sales used as
awards by the client for its employees. The service and technology revenue is
recognized ratably over the expected life of the underlying customer contract.
The award product revenue is recognized as the related award is sold and
shipped, title has transferred to the customer and collection is reasonably
assumed. For the Resume Management Services, the Company bills its clients for
job postings and matching of resumes per descriptions that the client provides,
or for quantity-based job posting packages. The revenue is recognized when the
service is provided.
8
For Career Transition Services, the Company bills the client 50% when the
assignment starts and the remaining 50% when the assignment is completed. The
Company recognizes this revenue when services have been completed.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, defines a fair value method of accounting for issuance
of stock options and other equity investments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Pursuant to SFAS No. 123, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but if they do so they are required to disclose in a note to the
financial statements pro forma net income amounts as if the Company had applied
the fair value method of accounting.
9
The Company accounts for employee stock-based compensation under APB No.
25 and has complied with the disclosure requirements of SFAS No. 123.
Research and Development Costs
The Company expenses all research and development costs as incurred.
Software development costs are expensed in the year incurred unless a
development project meets the criteria under generally accepted accounting
principles for deferral and amortization. No amounts have been capitalized to
date. Research and development expenses consist mainly of payroll related costs.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of the costs over the estimated fair value
of the net assets of businesses acquired. During 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, "Business Combinations". This
standard is effective for all business combinations initiated after June 30,
2001, and requires that the purchase method of accounting be used for all
business combinations initiated after that date. The Company has applied SFAS
No. 141 to each of its acquisitions completed during fiscal 2002, fiscal 2003,
fiscal 2004 and the three months ended August 31, 2004.
During 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This standard is effective for fiscal years beginning after December
15, 2001. The Company adopted SFAS No. 142 on June 1, 2001, the start of fiscal
2002. Under SFAS No. 142, goodwill, including goodwill recorded in past business
combinations, and intangible assets deemed to have indefinite lives are no
longer amortized, but are subject to annual impairment tests in accordance with
the new guidelines. Other intangible assets continue to be amortized over their
useful lives.
Management assesses goodwill related to reporting units for impairment at
least annually, and writes down the carrying amount of goodwill as required. The
Company estimates the fair value of each reporting unit by preparing a
discounted cash flow model. An impairment charge is recorded if the implied fair
value of goodwill of a reporting unit is less than the book value of goodwill
for that unit.
Intangible assets with a finite useful life recorded as a result of
acquisition transactions are amortized over their estimated useful lives as
follows:
Acquired technologies................. 3 years straight line
Customer base......................... 3 years straight line
Intellectual property................. 5 years straight line
10
The Company evaluates its intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying value of such assets may
not be recoverable. To determine recoverability, the Company compares the
carrying value of the assets to the estimated future undiscounted cash flows. If
the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Reporting Currency
The Company uses the US dollar as its reporting currency.
Foreign Currency Translation and Foreign Transactions
The financial statements of the parent company have been translated into
United States dollars in accordance with SFAS No. 52, Foreign Currency
Translation. The Company's subsidiaries use their local currency, which is the
United States dollar, as their functional currency. The functional currency of
the parent company is the Canadian dollar, and all balance sheet amounts of the
parent company with the exception of Shareholders' Equity have been translated
using the exchange rates in effect at year-end. Shareholder's Equity accounts
are translated using the exchange rate in effect at the time of each equity
transaction. Income statement amounts have been translated using the average
exchange rate for the period. The gains and losses resulting from the
translation of foreign currency statements into the United States dollar are
reported in comprehensive income for the period and accumulated other
comprehensive income.
Gains or losses on foreign currency transactions are recognized in income
when incurred.
NOTE 4: RESTRICTED CASH AND SHORT-TERM INVESTMENTS
The following is a summary of the Company's restricted cash and short-term
investments as at August 31, 2004 and May 31, 2004:
August 31, 2004 May 31, 2004
---------------------------------
Restricted cash $3,012,718 $2,760,259
Short-term investments $ 146,970 $ 301,194
Excess funds are used to purchase units of an investment trust established
by a Canadian chartered bank, as well as bonds issued by Canadian corporations.
The investment trust holds various short-term, low-risk instruments that accrue
interest daily, and monies held in trust can be withdrawn without penalty at any
time.
11
Restricted cash is held in term deposits to support mainly the current
credit card activity and the Company's line of credit. The Company's customer
credit card accounts and its line of credit form part of its current operations
and accordingly, the restricted cash has been classified as a current asset.
NOTE 5: ALLOWANCE FOR DOUBTFUL ACCOUNTS
August 21, 2004 May 31, 2004
-------------------------------
Balance at beginning of the period $ 21,509 $ 55,828
Charged to costs and expenses 39,262 55,966
Write-offs and effect of exchange rate 56 (90,285)
-------------------------------
Balance at end of the period $ 60,827 $ 21,509
===============================
NOTE 6: ACQUISITION TRANSACTIONS
Acquisition of Peoplebonus.com LLC.
On June 21, 2004, the Company acquired certain assets of Peoplebonus.com
LLC ("Peoplebonus"), a Delaware limited liability company. As consideration for
the sale, the Company issued 180,506 common shares (72,202 common shares valued
at $200,000 and 108,304 common shares held in escrow) , made a cash payment of
$25,000 held in escrow and assumed a promissory note for $100,000. In addition,
the Company made a cash payment of $105,000 to Peoplebonus. The primary reason
for the Peoplebonus acquisition is the expansion and enhancement of our HCM
solutions that the Peoplebonus' products and services enables us to achieve.
Peoplebonus' products and services are designed to streamline the way a company
processes and handles resumes. Peoplebonus' artificial intelligence data mining
software can search for key words and phrases from within a resume and score the
resume based on learned search criteria.
The consolidated financial statements presented herein include the results
of operations of Peoplebonus from June 22, 2004.
Management prepared a valuation of the net tangible and intangible assets
acquired.
12
The preliminary purchase price has been allocated as follows:
Share consideration $200,000
Cash consideration 105,000
Note payable (discounted) 95,798
Escrow funds 25,000
Acquisition costs 23,775
--------
Total purchase costs $449,573
========
Current assets $ 3,080
Tangible long term assets 9,080
Current liabilities (644)
Acquired technology 438,057
---------
Total net identifiable assets $ 449,573
=========
Acquisition of Bravanta, Inc.
On July 27, 2004, the Company acquired Bravanta, Inc., a Delaware
corporation. As consideration for the sale, the Company issued Bravanta
2,427,125 common shares, and 244,939 additional common shares will be issued to
the former management of Bravanta upon receipt by the Company of completed and
satisfactory accredited investor questionnaires and other related documentation
from them. The total aggregate value of the shares is $7,107,693. 400,000 of the
issued shares are being held in escrow to cover indemnity obligations covering
breaches of representations and warranties. These shares are not considered
contingent and therefore have been included in the purchase price at the time of
acquisition. In addition, the Company made cash payments in an amount equal to
$2,051,120 to meet some of Bravanta's obligations prior to the finalization of
the asset purchase agreement with Bravanta. Bravanta is a provider of enterprise
incentive and recognition programs. The primary reason for the Bravanta
acquisition is that it enables the Company to expand its customer base, expand
rewards and incentives products and services, and increase recurring revenues.
The consolidated financial statements presented herein include the results
of operations of Bravanta from July 28, 2004.
Management obtained an independent valuation of intangible assets acquired
and prepared a valuation of net tangible assets acquired. The excess of the
purchase price over the value of the net tangible and identifiable intangible
assets acquired has been allocated to goodwill.
13
The preliminary purchase price has been allocated as follows:
Share consideration $ 7,107,693
Cash consideration 2,051,120
Closing costs 155,000
-----------
Total purchase costs $ 9,313,813
===========
Current assets $ 982,089
Tangible long-term assets 86,310
Other assets 35,005
Deferred tax asset 861,000
Current liabilities (1,191,555)
Intangible assets:
Trademarks 645,000
Customer relationship 837,000
Acquired technology 670,000
Future tax liabilities (861,000)
Other liabilities (61,624)
Goodwill 7,311,588
-----------
Total net identifiable assets $ 9,313,813
===========
CONTINGENT CONSIDERATION
As of August 31, 2004, a total of 1,046,549 common shares were held in
escrow relating to acquisitions as further described below. This total consists
of 323,625 common shares relating to the Company's acquisition of
6FigureJobs.com, 614,620 common shares relating to the Company's acquisition of
Kadiri, and 108,304 relating to the Company's acquisition of Peoplebonus.
Management believes that the common shares related to the 6FigureJobs.com
acquisition will not be released from escrow and issued to the former
shareholders of 6FigureJobs.com.
Pursuant to the purchase agreement with 6FiguresJobs.com, 323,625 common
shares were to be released from escrow to the former shareholders of
6FigureJobs.com provided that certain revenue and profit targets for the twelve
month period ending September 30, 2002 were achieved. The Company determined
that the revenue and profit targets were not achieved, but the representative of
the former 6FigureJobs.com shareholders disputed that determination and filed a
lawsuit against the Company with regard to the escrowed shares. Management
continues to believe that the targets were not met and that the shares currently
held in escrow will be cancelled.
As of May 31, 2004, there were 950,000 common shares held in escrow
pursuant to the purchase agreement with Kadiri. In July 2004, 335,380 shares
valued at $828,389 that were held in escrow were released as a result of the
resolution of a dispute between Kadiri and one of its clients, Bank of America
Technology and Operations, Inc, reducing the common shares held in escrow to
614,620 as of August 31, 2004. These shares are to be released from escrow if
certain revenue and cash generation targets are achieved during each fiscal
quarter through November 30, 2005 or if there is not any indemnification claims
for breaches of representation and warranties.
14
Pursuant to the purchase agreement with Peoplebonus, 108,304 additional
common shares are being held in escrow and will be released if certain revenue
and cash generation targets of the acquired business are met or if there are not
any indemnification claims for breaches of representations and warranties.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the significant acquisitions (Kadiri and Bravanta) made subsequent to first
quarter 2004 by Workstream as if the transactions occurred as of June 1, 2003.
For the three months ended
August 31,
2004 2003
------------ ------------
REVENUE $ 6,905,477 $ 6,080,220
COST OF REVENUES (exclusive of
depreciation, shown below) 1,897,768 1,783,355
------------ ------------
GROSS PROFIT 5,007,709 4,296,865
------------ ------------
EXPENSES
Selling and marketing 1,728,373 2,011,035
General and administrative 4,346,035 4,643,369
Research and development 404,693 682,865
Amortization and depreciation 1,994,730 2,000,041
------------ ------------
8,473,831 9,337,310
------------ ------------
OPERATING LOSS (3,466,122) (5,040,445)
------------ ------------
OTHER INCOME AND (EXPENSE)
Interest and other income 8,595 10,631
Interest and other expense (352,832) (971,748)
------------ ------------
(344,237) (961,117)
------------ ------------
LOSS BEFORE INCOME TAX (3,810,359) (6,001,562)
Recovery of deferred income taxes 418,285 439,513
Current income tax (expense) recovery (7,565) 959
------------ -----------
NET LOSS FOR THE PERIOD $ (3,399,639) $ (5,561,090)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 37,140,857 29,399,916
============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.09) $ (0.19)
============ ============
15
NOTE 7: CAPITAL ASSETS
Property and equipment consists of the following:
August 31, 2004 May 31, 2004
-------------------------- -------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------------------------- -------------------------
Furniture, equipment
and leaseholds $ 1,425,136 $ 772,788 $ 1,393,844 $ 695,967
Office equipment 299,922 239,907 293,814 226,992
Computers and software 4,282,530 3,631,827 4,049,582 3,385,138
-------------------------- -------------------------
6,007,588 $ 4,644,522 5,737,240 $ 4,308,097
-------------------------- -------------------------
Less accumulated amortization (4,644,522) (4,308,097)
-------------------------- -------------------------
Net capital assets $ 1,363,066 $ 1,429,143
=========================== =========================
As of August 31, 2004 capital assets include net assets under capital lease of
$58,844 (May 2004 - $13,938) which is net of accumulated amortization of
$331,952 (May 2004 - $121,161).
NOTE 8: ACQUIRED INTANGIBLE ASSETS
Depreciable intangible assets consists of the following:
August 31, 2004 May 31, 2004
--------------- ------------
Customer base $ 5,023,182 $ 4,186,182
Acquired technologies 15,599,578 14,513,943
Trademarks, domain names and intellectual property 1,322,760 677,760
--------------- ------------
Total cost 21,945,520 19,377,885
--------------- ------------
Accumulated amortization:
Customer base (3,275,833) (2,930,512)
Acquired technologies (8,189,741) (6,950,270)
Trademarks, domain names and intellectual property (299,124) (254,486)
--------------- ------------
Total accumulated amortization (11,764,698) (10,135,268)
--------------- ------------
Net acquired intangible assets $ 10,180,822 $ 9,242,617
==============================
16
Amortization of intangible assets was $1,629,430 and $1,182,244 for the
three months ended August 31, 2004 and August 31, 2003, respectively. The
estimated amortization expense related to intangible assets in existence as of
August 31, 2004, over the next fiscal periods is as follows:
Remainder of fiscal 2005: $ 4,562,946
Fiscal 2006: $ 2,935,007
2007: $ 2,231,509
2008: $ 256,861
2009: $ 173,000
2010: $ 21,499
NOTE 9: GOODWILL
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
---------------------------------------
Goodwill at May 31, 2003 $ 9,570,100 $ 7,813,337 $17,383,437
---------------------------------------
Acquisitions during the year 11,125,760 -- 11,125,760
Purchase price allocation
adjustments made within
one year of acquisition date 89,509 -- 89,509
---------------------------------------
Goodwill at May 31, 2004 20,785,369 7,813,337 28,598,706
---------------------------------------
Acquisitions during the period 7,311,588 -- 7,311,588
Purchase price allocation adjustments
made within one year
of acquisition date 323,993 -- 323,993
---------------------------------------
Goodwill at August 31, 2004 $28,420,950 $ 7,813,337 $36,234,287
---------------------------------------
17
NOTE 10: LINES OF CREDIT
At August 31, 2004, the Company had an aggregate of $2,221,125 outstanding
on a line of credit from the Bank of Montreal ("BMO").
August 31, 2004 May 31, 2004
-------------------------------
Line of credit - Bank of Montreal $2,221,125 $1,972,218
===============================
The line of credit with the Bank of Montreal bears interest at the bank's
prime rate plus 1%. The Company is permitted to draw up to CDN (Canadian
dollars) $3,000,000 against this facility based on compensating balances on
deposit with the bank. The Company has drawn CDN $2,916,340 as of August 31,
2004. The Company has provided collateral of CDN $3,000,000, leaving CDN $83,660
available to be drawn on this line.
As of August 31 and May 31, 2004, a total of $3,012,718 and $2,760,259,
respectively, of short-term deposits were pledged to the institutions below as
collateral for the line of credit, credit card reserve, term loan, letters of
credit for facility leases, as well as for Workstream's credit card with the
Bank of Montreal and therefore were restricted from the Company's use:
August 31, 2004 May 31, 2004
-----------------------------
Bank of America - credit card reserve $ 199,786 $ 199,786
Silicon Valley Bank - letter of credit for facility lease 77,594 77,594
Bank of Montreal - term loan, line of credit and letters
of credit for facility leases, and BMO credit card 2,735,338 2,482,879
-----------------------------
$3,012,718 $2,760,259
==============================
NOTE 11: LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
August 31, 2004 May 31, 2004
---------------------------------
Term loan $81,231 $85,561
Less: current portion 30,461 29,335
---------------------------------
$50,770 $56,226
=================================
Long-term obligations represents a five year term loan maturing in May
2007 with monthly principal payments of CDN $3,333 with the Bank of Montreal
that bears interest at the Bank's prime rate plus 2.0%. Collateral has been
provided as described in note 10.
18
As of August 31, 2004 the maturities for long-term obligations are as
follows:
Remainder of fiscal 2005: $22,846
Fiscal 2006: 30,461
2007: 27,924
-------
$81,231
=======
NOTE 12: RELATED PARTY OBLIGATIONS
Related party obligations consist of the following:
August 31, 2004 May 31, 2004
--------------------------------
Note payable $ 72,560 --
Shareholder loans -- $317,626
--------------------------------
72,560 317,626
Less: current portion 72,560 170,369
--------------------------------
-- $147,257
================================
As of August 31, 2004, the note payable consists of a note payable assumed
as part of the acquisition of Peoplebonus which is non-interest bearing and is
repayable in monthly installments of $8,333 beginning in June 2004 and ending in
May 31, 2005. The Company recorded the present value of the note payable at the
time of the acquisition utilizing an 8% discount rate. Imputed interest is
charged to expense over the term to maturity. As of August 31, 2004 this
obligation matures in fiscal 2005.
As of May 31, 2004 the shareholder loans consisted of a term loan assumed
as part of the acquisition of Paula Allen Holdings which was non-interest
bearing and was repayable in quarterly installments of $52,500 beginning in
April 2001 and ending in January 2006. The Company recorded the present value of
these shareholder notes at the time of the acquisition utilizing a 15% discount
rate. Imputed interest was charged to expense over the term to maturity. As of
August 31, 2004, the Company has paid the loans in full and expensed the
remaining unamortized interest during the first three months of fiscal 2005.
NOTE 13: CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following:
August 31, 2004 May 31, 2004
-------------------------------
Capital leases $125,972 $ 85,533
Less: current portion 108,534 54,003
-------------------------------
$ 17,438 $ 31,530
===============================
Capital lease obligations relate to office equipment, computers and
software and bear interest at rates that range from 7.5% to 32.2% per annum.
These leases mature at various times through October 2005.
19
NOTE 14: CONTINGENCIES
OMNIpartners filed a lawsuit against U.S. Vehicle and its principals
alleging a breach of its sublease agreement with OMNIpartners. This action was
filed on April 18, 2002 in the Clark County District Court in Nevada. In this
action, OMNIpartners seeks approximately $115,000 for unpaid rents, maintenance
charges and other charges as well as an undetermined amount for attorneys' fees.
The Company is currently involved in a lawsuit with the former
shareholders of 6FigureJobs.com, Inc., a company acquired in October 2001. Under
the terms of the purchase agreement pursuant to which the Company acquired
6FigureJobs.com, 323,625 common shares were held in escrow to be issued to the
former shareholders of 6FigureJobs.com provided that certain revenue and profit
targets were achieved. The Company determined that the revenue and profit
targets were not achieved, but the representative of the former 6FigureJobs.com
shareholders disputed that determination and filed a lawsuit against the Company
with regard to the escrowed shares.
The Company is subject to other legal proceedings and claims which arise
in the ordinary course of our business. The Company does not believe that the
resolution of such actions will materially affect the Company's business,
results of operations or financial condition.
NOTE 15: FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including accounts
receivable, accounts payable, restricted cash and other accrued charges, the
carrying amounts approximate the fair value. Cash equivalents, short-term
investments, bank line of credit, capital lease obligations and long-term
obligations are carried at cost which management believes approximates their
fair value due to their short-term to maturity and the relative stability of
fixed interest rates. The terms of the Company's related party obligations are
set out in note 12.
Interest rate and Foreign Exchange Risk
The Company has short-term investments and deposits that earn interest at
fixed rates ranging from 1.75% to 2.25%.
As explained in note 10, the Company has a line of credit with the Bank of
Montreal that bears interest based on the bank's prime rate plus 1%.
Fluctuations in the Bank's prime rate or exchange rates would result in an
impact on financial results. The Company also has letters of credit with a
Canadian bank based on a fixed rate of 1.2% and fluctuations in exchange rates
would have a financial impact.
20
Concentrations of Credit Risk
Concentrations of credit risk consist primarily of cash, short-term
investments and accounts receivable. Management believes the use of credit
quality financial institutions minimizes the risk of loss associated with cash
and short-term investments. Accounts receivable primarily represent amounts due
under the Company's contracts with its customers. The Company generally does not
require collateral from its customers.
NOTE 16: SHARE CAPITAL
The authorized share capital consists of an unlimited number of no par
value common shares, an unlimited number of Class A Preferred Shares, no par
value per share (the "Class A Preferred Shares"), and an unlimited number of
Series A Convertible Preferred Shares, no par value per share (the "Series A
Shares"). There were 41,276,162 common shares outstanding as of August 31, 2004
(May 31, 2004 - 33,574,883). As of August 31, 2004, an additional 1,046,549
shares were being held in escrow for contingent considerations as a result of
the terms of acquisitions. (See note 6) These shares are to be released from
escrow if certain revenue, profit, and/or cash generation targets are achieved
or if there are not any indemnification claims for breaches of representation
and warranties. Management believes that the profit and/or revenue targets of
the 6FigureJobs.com have not been met, and believes that the escrow shares
related to the 6FigureJobs.com acquisition will be cancelled. The periods
covered by the escrow agreements extend until November 30, 2005. As of August
31, 2004, there were no Class A Preferred Shares or Series A Shares outstanding.
In June 2004, the Company released from escrow 50,000 common shares held
in escrow pursuant to the purchase agreement entered into in connection with the
Company's acquisition of Peopleview, Inc. These shares were valued at $139,500.
In June 2004, the Company acquired certain assets of Peoplebonus.com LLC,
a resume management services provider. As consideration for the sale, the
Company issued 72,202 common shares valued at $200,000. An additional 108,304
shares are held in escrow. In addition, the Company made a cash payments of
$25,000 to be held in escrow and assumed a promissory note for $100,000. In
addition, the Company made a cash payment of $105,000.
In July 2004, 335,380 shares valued at $828,389 that were held in escrow
were released as a result of the resolution of a pre-acquisition liability
between Kadiri and one of its clients, Bank of America Technology and
Operations, Inc.
21
In July 2004, the Company issued an aggregate of 4,444,439 common shares
at $2.25 per common share to William Blair & Company and entities for which it
serves as investment advisor and Crestview Capital Fund L.P. in a private
placement resulting in aggregate proceeds of $9,999,988. The proceeds from the
sale will be used for working capital and future acquisitions. The private
placement was exempt from registration under Rule 506 of the Securities Act of
1933.
In July 2004, the Company acquired Bravanta, Inc., a provider of
enterprise incentive and recognition programs. As consideration for the sale,
the Company issued 2,427,125 common shares and 244,939 common shares will be
issued to the former management of Bravanta upon receipt by the Company of
completed and satisfactory accredited investor questionnaires and other related
documentation from them. The common shares had an aggregate value of $7,107,693.
400,000 of the issued shares are held in escrow to cover indemnity obligations
covering breaches of representations and warranties contained in the merger
agreement. In addition, the Company made cash payments in the amount of
$2,051,120 to meet some of Bravanta's obligations prior to the finalization of
the purchase agreement.
In July 2004, 92,891 common shares valued at $230,000 were issued to the
former shareholders of Trimbus, Inc., a company acquired by Kadiri prior to the
Company's acquisition of Kadiri. The shares were issued as fulfillment for
Kadiri's commitment to Trimbus per their original acquisition agreement.
Note 17: SEGMENTED AND GEOGRAPHIC INFORMATION
The following is a summary of the Company's operations by business segment
and by geographic region for the three month period ended August 31, 2004 and
August 31, 2003.
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
-------------------------------------------
BUSINESS SEGMENT
THREE MONTHS ENDED AUGUST 31, 2004
Revenue $ 4,180,715 $ 1,538,414 $ 5,719,129
Expenses 6,432,459 1,769,743 8,202,202
-------------------------------------------
Business segment loss $(2,251,744) $ (231,329) (2,483,073)
===========================================
Corporate overhead, other revenues
And expenses (25,253)
-------------
Net loss $(2,508,326)
=============
22
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
-------------------------------------------
AS AT AUGUST 31, 2004
Business segment assets $ 8,625,128 $ 307,996 $ 8,933,124
Intangible assets 10,065,822 115,000 10,180,822
Goodwill 28,420,949 7,813,338 36,234,287
-------------------------------------------
$47,111,899 $ 8,236,334 55,348,233
===========================================
Assets not allocated to business
segments 8,162,328
-------------
Total assets $63,510,561
=============
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
-------------------------------------------
BUSINESS SEGMENT
THREE MONTHS ENDED AUGUST 31, 2003
Revenue $ 2,672,814 $ 1,505,700 $ 4,178,514
Expenses 3,246,289 1,788,498 5,034,787
-------------------------------------------
Business segment loss $ (573,475) $ (282,798) (856,273)
===========================================
Corporate overhead, other revenues
and expenses (893,286)
-------------
Net loss $(1,749,559)
=============
AS AT AUGUST 31, 2003
Business segment assets $ 3,372,037 $ 129,452 $ 3,501,489
Intangible assets 7,483,451 420,770 7,904,221
Goodwill 9,633,247 7,813,338 17,446,585
-------------------------------------------
$20,488,735 $ 8,363,560 28,852,295
===========================================
Assets not allocated to business
segments 1,334,032
-------------
Total assets $30,186,327
=============
23
CANADA USA TOTAL
-------------------------------------------
GEOGRAPHY
THREE MONTHS ENDED
AUGUST 31, 2004
Revenue $ 534,790 $ 5,184,339 $ 5,719,129
Expenses 504,796 8,050,448 8,555,244
-------------------------------------------
Geographical loss $ 29,994 $(2,866,109) (2,836,115)
===========================================
Other revenues and expenses 327,789
-------------
Net loss $(2,508,326)
=============
CANADA USA TOTAL
-------------------------------------------
AS AT AUGUST 31, 2004
Geographic segment assets
excluding goodwill and
intangibles $ 5,050,636 $58,459,925 $63,510,561
===========================================
CANADA USA TOTAL
-------------------------------------------
GEOGRAPHY
THREE MONTHS ENDED
AUGUST 31, 2003
Revenue $ 444,370 $ 3,734,144 $ 4,178,514
Expenses 579,442 4,870,794 5,450,236
-------------------------------------------
Geographical loss $ (135,072) $(1,136,650) (1,271,722)
===========================================
Other revenues and expenses (477,837)
-------------
Net loss $(1,749,559)
=============
AS AT AUGUST 31, 2003
Geographic segment assets $ 2,725,195 $27,461,132 $30,186,327
===========================================
24
Note 18: RECENT ACCOUNTING PRONOUNCEMENTS
None.
Note 20: EARNINGS PER SHARE
For all the periods presented, diluted net loss per share equals basic net
loss per share due to the antidilutive effect of employee stock options,
warrants and escrowed shares. The following outstanding instruments could
potentially dilute basic earnings per share in the future:
August 31, 2004
---------------
Stock options 2,263,213
Escrowed shares 1,046,549
Warrants issued to investors 133,333
Warrants issued with convertible notes 712,179
Warrants issued to private placement agents 412,500
Warrants issued to consultant 100,000
Warrants issued through acquisition 50,000
Underwriter warrants 440,000
---------------
Potential increase in number of shares from dilutive instruments 5,157,774
===============
The weighted average price of the options exercisable at August 31, 2004 was
$1.80
Note 21: STOCK BASED COMPENSATION PLANS
Pro forma information regarding compensation expense related to employee
stock options is required by SFAS No. 123 and SFAS No. 148, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of those statements. The fair value of options granted was
estimated at the date of grant using the Black Scholes option pricing model with
the following assumptions:
Three Months Ended August 31,
2004 2003
----- ------
Risk free interest rates 3.73% 2.37%
Expected dividend yield 0% 0%
Expected volatility 70% 111%
Expected lives (in years) 3.5 3.5
25
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense ratably over the option's vesting period.
Because the determination of the fair value of all options is based on the
assumptions described in the preceding paragraph, and because additional option
grants are expected to be made in future periods, this pro forma information is
not likely to be representative of the pro forma effects on reported net income
or loss for future years.
The following reflects the impact on results of operations if the Company
had recorded additional compensation expense relating to the employee stock
options:
For the Three Months Ended August 31,
2004 2003
-------------------------------------
Net loss, as reported $ (2,508,326) $ (1,749,559)
Estimated incremental share based
compensation expense (129,176) (175,930)
-------------------------------------
Pro forma net loss $ (2,637,502) $ (1,925,489)
=====================================
Weighted average common shares
outstanding during the period 37,140,857 21,777,379
=====================================
Basic and diluted loss per share, as
Reported $ (0.07) $ (0.08)
=====================================
Pro forma basic and diluted loss
per share $ (0.07) $ (0.09)
=====================================
Note 22: SUBSEQUENT EVENTS
In October 2004, the Company signed a definitive agreement to acquire the
assets of privately held HRSoft, LLC, a provider of Talent Management software
and services for Global 2000 companies.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements discussed in Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations), and Item 3
(Quantitative and Qualitative Disclosures About Market Risk) and elsewhere in
this Form 10-Q constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements concerning Management's expectations, strategic objectives, business
prospects, anticipated economic performance and financial condition and other
similar matters involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or
achievements of results to differ materially from any future results,
performance or achievements discussed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors are described
in Item 7 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) of the Company's Form 10-K for the fiscal year ended May
31, 2004. The words "estimate," "project," "intend," "believe," "plan" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements speak only as of the date of the document in which
they are made. The Company disclaims any obligation or undertaking to provide
any updates or revisions to any forward-looking statement to reflect any change
in the Company's expectations or any change in events, conditions or
circumstances on which the forward-looking statement is based.
The following discussion and analysis should be read in conjunction with
our unaudited consolidated financial statements and accompanying notes for the
three month period ended August 31, 2004. All figures are in United States
dollars, except as otherwise noted.
Management has prepared unaudited pro forma financial information which
can be found in Note 6 of the unaudited financial statements. Management's
discussion and analysis refers to this information. All pro forma financial
information gives effect to the acquisitions made by us as if the transactions
had occurred as of June 1, 2003.
OVERVIEW
We are a provider of services and Web-based software for Human Capital
Management ("HCM"). HCM is the process by which companies recruit, train,
evaluate, motivate and retain their employees. We offer software and services
that address the needs of companies to more effectively manage their human
capital management function. We believe that our "one-stop-shopping" approach
for our clients' HCM needs is more efficient and effective than traditional
methods of human resource management.
We have two distinct operating segments, which are the Enterprise
Workforce Services and Career Transition Services segments. The Enterprise
Workforce Services segment consists of recruiting systems, recruitment services,
applicant sourcing and exchange, employee portal, rewards systems, resume
management systems, performance management systems services and compensation
management systems services. The Career Transition Services segment consists of
outplacement services.
27
Our business changed significantly beginning in fiscal 2002. During fiscal
2002, we completed the acquisition of Paula Allen Holdings, OMNIpartners,
6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. During fiscal 2003, we
completed the acquisition of Icarian, PureCarbon and Xylo. During fiscal 2004,
we completed the acquisitions of Perform, Peopleview and Kadiri. During the
first three months of fiscal 2005, we completed the acquisitions of Peoplebonus
and Bravanta. Subsequent to the acquisitions, we have concentrated on
integrating the acquired entities and expanding the reach of the existing
business. These acquisitions have enabled us to increase our service offerings
and revenue streams.
Due to the substantive change these acquisitions have made to our
business, this management's discussion and analysis includes comparisons of pro
forma results of operations for the three months ended August 31, 2004 ("first
quarter 2005") and for the three months ended August 31, 2003 ("first quarter
2004"). These pro forma results assume that the significant acquisitions (Kadiri
and Bravanta) had been completed as of June 1, 2003 and therefore compare
revenues and expenses for both periods.
To monitor our results of operations and financial condition, we review
key financial information including net revenues, gross profit, earnings per
share, and cash flow from operations. As our businesses are integrated, we
continue to seek ways to more efficiently manage and monitor our business
performance. We review other key operating metrics such as sales per employee,
days of sales outstanding1, liquidity ratio2, and debt to equity ratio3. In
addition, we review the number of clients and revenue per client in both the
Enterprise Workforce Services and Career Transition Services segments and the
number of listings in our Applicant Sourcing and Exchange business. As our
business is impacted by the job market, we also review economic indicators such
as the unemployment rate.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies relate to revenue recognition for
software, the assessment of goodwill impairment, impairments in intangible
assets and the valuation of deferred tax assets. Management applies judgment to
value these assets. Changes in assumptions used would impact our financial
results.
The Company recognizes revenue from the sale of Kadiri software licenses
in accordance with American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") No. 97-2 Software Revenue Recognition, and SOP No.
98-9, Modification of SOP 97-2, with Respect to Certain Transactions when all of
the following conditions are met: a signed contract or purchase order; the
software has been shipped or electronically delivered; the license fee is fixed
or determinable; and the Company believes that the collection of these fees is
reasonably assured. For contracts, which involve significant implementation or
other services which are essential to the functionality of the software and
which are reasonably estimable, the license and services revenue is recognized
over the period of each implementation, primarily using the
percentage-of-completion method. Labor hours incurred are used as the measure of
progress towards completion. A provision for estimated losses on engagements is
made in the period in which the losses become probable and can be reasonably
estimated. In cases where a sale of a license does not include significant
implementation services, license revenue is recorded upon delivery with an
appropriate deferral for maintenance services, if applicable, provided all of
the other relevant conditions have been met. The total fee from the arrangement
is allocated based on Vendor Specific Objective Evidence ("VSOE") of fair value
of each of the undelivered elements. Maintenance agreements are typically priced
based on a percentage of the product license fee and have a one-year term,
renewable annually. VSOE of fair value for maintenance is established based on
the stated renewal rates. Services provided to customers under maintenance
agreements include technical product support and unspecified product upgrades.
VSOE of fair value for the professional service element is based on the standard
hourly rates the Company charges for services when such services are sold
separately. Deferred revenues from advanced payments for maintenance agreements
are recognized ratably over the term of the agreement, which is typically one
year.
28
Goodwill is assessed for impairment on an annual basis or more frequently
if circumstances warrant. We assess goodwill related to reporting units for
impairment, and write down the carrying amount of goodwill as required. We
estimate the fair value of each business unit by preparing a discounted cash
flow model, using a 15% discount rate. The model is prepared by projecting
results for five years making different assumptions for each business unit. At
the end of fiscal 2004, we assumed that the economy would continue to improve in
fiscal 2005, that individual business unit revenue growth rates would range from
10% to 146%, that gross profit would generally be higher than current trends,
and that operating expense would be reduced. An impairment charge is recorded if
the implied fair value of goodwill of a reporting unit is less than the book
value of goodwill for that unit. Changes in the discount rate used, or in other
assumptions in the model, would result in wide fluctuations in the value of
goodwill that is supported. Any such changes may result in additional impairment
write-downs.
- ----------
1 Days of sales outstanding represents both the age, in terms of days, of a
company's accounts receivable and the average time it takes to turn the
receivables into cash. It is calculated by dividing accounts receivables by
daily revenue. Daily revenue is calculated by dividing revenue for a month by
the number of days in that month.
2 Liquidity ratio represents the number of times that current assets can cover
current liabilities and it is calculated by dividing current assets by current
liabilities.
3 Debt to equity ratio represents the level of debt in relation to shareholders'
equity measuring a company's financial leverage. The ratio is calculated by
dividing total liabilities by shareholders' equity.
29
We value intangible assets, such as a customer base acquired in an
acquisition, based on estimated future income applying historical customer
retention rates. If the customer base acquired discontinues using our service
earlier than historical experience, we may be required to record an impairment
of intangible assets. Changes in circumstances impacting other assumptions used
to value intangible assets could also lead to future impairments.
We apply significant judgment in recording net deferred tax assets, which
result from the loss carry forwards of companies that we acquire. The recording
of deferred tax assets requires estimates of future profits from the acquired
company to be forecast. Actual results may differ from amounts estimated.
The table below sets forth pro forma results and the percentage difference
between first quarter 2005 and first quarter 2004, assuming that the Kadiri and
Bravanta acquisitions were acquired as of June 1, 2003.
2004 2003 Variance % change
------------------------------------------------------------
REVENUE $ 6,905,477 $ 6,080,220 $ 825,257 14%
COST OF REVENUES (exclusive of
depreciation, shown below) 1,897,768 1,783,355 114,413 6%
----------------------------- ------------
GROSS PROFIT 5,007,709 4,296,865 710,844 17%
----------------------------- ------------
EXPENSES
Selling and marketing 1,728,373 2,011,035 (282,662) -14%
General and administrative 4,346,035 4,643,369 (297,334) -6%
Research and development 404,693 682,865 (278,172) -41%
Amortization and depreciation 1,994,730 2,000,041 (5,311) 0%
----------------------------- ------------
8,473,831 9,337,310 (863,479) -9%
----------------------------- ------------
OPERATING LOSS (3,466,122) (5,040,445) 1,574,323 31%
----------------------------- ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 8,595 10,631 (2,036) -19%
Interest and other expense (352,832) (971,748) 618,916 64%
----------------------------- ------------
(344,237) (961,117) 616,880 64%
----------------------------- ------------
LOSS BEFORE INCOME TAX (3,810,359) (6,001,562) 2,191,203 37%
Recovery of deferred income taxes 418,285 439,513 (21,228) -5%
Current income tax (expense) recovery (7,565) 959 (8,524) -889%
----------------------------- ------------
NET LOSS FOR THE PERIOD $ (3,399,639) $ (5,561,090) $ 2,161,451 39%
============================= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 37,140,857 29,399,916
============================
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.09) $ (0.19)
============================
30
Following completion of all of our acquisitions, we focused on integrating
the acquired entities and expanding the reach of the existing businesses. We
have also made efforts to reduce costs by consolidating operations, resulting in
staff reductions of redundant positions and related overhead and reducing
research and development expenditures. In the first quarter 2005, operating
expenses of non-acquired operations declined $243,264 or 5%.
REVENUES
Consolidated revenues were $5,719,129 for first quarter 2005 compared to
$4,178,514 for first quarter 2004, an increase of $1,540,615 or 37%. Revenues
from Perform, Peopleview, Kadiri, Peoplebonus, and Bravanta ("companies we
acquired subsequent to first quarter 2004") represented $1,651,269 for the first
quarter 2005. Revenues from all other companies ("existing companies") declined
3% to $4,067,860 in first quarter 2005 from $4,178,514 in first quarter 2004
mainly due to a decrease in Enterprise Workforce Service revenues ($143,367 for
existing companies) caused by lower Recruitment Systems services revenue which
we believe is due to the weak job market and to a transition of our clients from
our higher priced Icarian product to our less expensive E-cruiter software. The
E-cruiter software is less costly for us to maintain than the Icarian software
and therefore generates higher gross profits as a percentage of sales for us.
Career Transition Services revenues for first quarter 2005 were $1,538,414
compared to $1,505,700 for first quarter 2004, an increase of $32,714 or 2%. The
major reason for the increase was due to improved efficiencies in the speed and
quality of the delivery of our services resulting in fewer cancellations. The
improved efficiencies have been accomplished through the hiring of more
professional personnel involved in the preparation of the product and
implementing better software tools to track customer leads as well as to monitor
the status of projects.
Enterprise Workforce Services revenues for first quarter 2005 were
$4,180,715 compared to $2,672,814 for first quarter 2004, an increase of
$1,507,901 or 57%. $1,651,269 of revenues for first quarter 2005 was contributed
by the companies we acquired subsequent to first quarter 2004. This increase as
a result of acquisitions was partially offset by a decline in sales in
Recruiting Systems services which we believe is due in part to the weak job
market and to the transition of Icarian clients from our Icarian software to our
E-cruiter software, which is less expensive for the client but results in a
greater profit as a percentage of sales for Workstream.
31
Pro forma revenues for first quarter 2005 were $6,905,477 compared to
$6,080,220, an increase of $825,257 or 14%. The increase is mainly due to higher
participation by Bravanta clients in the awards programs.
During first quarter 2005, the amount of sales per employee increased to
$25,762 compared to $24,579 sales per employee for first quarter 2004. We
believe that the increase is due to improved efficiencies and the elimination of
redundant positions.
By the end of first quarter 2005, the total number of clients for our
software services, consisting of our Recruitment Systems, Performance
Management, Resume Management, Reward Services and Employee Portal were 14%
higher than at first quarter 2004 mainly as a result of the new clients acquired
through the acquisitions. At the end of first quarter 2005, the total number of
clients for our Career Transition Services increased 2% since August 31, 2003.
The average number of job postings in our Applicant Sourcing and Exchange
business increased 2% in first quarter 2005 compared to first quarter 2004.
By the end of first quarter 2005, our revenue per client for our software
services, consisting of our Recruitment Systems, Performance Management, Resume
Management, Reward Services and Employee Portal Services increased 128% since
the end of first quarter 2004 mainly due the high revenue clients associated
with some of the companies acquired subsequent to first quarter 2004. Our
revenue per client for our Career Transition Services decreased 8% at the end of
first quarter 2005 compared to the end of first quarter 2004, however quarterly
revenue per total clients during the quarter remained at approximatetly the same
level (0.6% increase). The end of the period revenue per client figures are
calculated by dividing revenue for the last month in the quarter by the number
of clients serviced during that month. The quarterly figure is calculated by
dividing total revenue for the fiscal quarter by the number of clients serviced
during that period .
We believe that our business is impacted by the job market. The
unemployment rate in the United States, as disclosed by the U.S. Bureau of Labor
Statistics, as of August 31, 2004 was 5.4% slightly down from 5.6% as of May 31,
2004, but still significantly higher than the pre-recession rate of 3.9% for
December 2000. When businesses reduce the number of employees being hired, as
evidenced by a higher unemployment rate, we believe that the demand for our
services decreases mainly in the areas of our recruitment software and
recruitment services.
COST OF REVENUES
Cost of revenues for first quarter 2005 were $1,071,827 compared to
$443,350 for first quarter 2004, an increase of $628,477 or 142%. Career
Transition Services cost of revenues accounted for $145,844 and Enterprise
Workforce Services cost of revenues accounted for $925,983 of the total cost of
revenues for first quarter 2005. Cost of revenues in the Enterprise Workforce
Services segment increased $655,224 from first quarter 2004 as a result of
additional costs of revenues of $698,001 incurred by the companies we acquired
subsequent to first quarter 2004, partially offset by lower cost of revenue in
the Recruitment systems and Applicant Sourcing and Exchange services. Cost of
revenues for the Career Transition Services segment decreased $26,746 from first
quarter 2004 as a result of reduction of staffing in an effort to improve
productivity through automation.
32
Pro forma cost of revenues for first quarter 2005 were $1,897,768 compared
to $1,783,355 for first quarter 2004, an increase of $114,413 or 7%. The
increase is mainly due to the additional cost of revenues associated with the
increase in sales for the Bravanta's award programs. This increase was partially
offset by a decrease in cost in the non-acquired companies as a result of
efforts to eliminate redundant operations and costs and to pursue more
profitable business and changing marketing strategies.
GROSS PROFITS
Consolidated gross profits were $4,647,302 for first quarter 2005 or 81%
of revenues compared to $3,735,164 or 89% of revenues for first quarter 2004.
Career Transition Services gross profit was $1,392,570 or 91% of Career
Transition Service revenues compared to $1,333,110 or 89% of Career Transition
Services revenues for first quarter 2004. Enterprise Workforce Services gross
profit was $3,254,732 or 78% of Enterprise Workforce Services revenues for first
quarter 2005 compared to $2,402,054 or 90% of Enterprise Workforce Services
revenues for first quarter 2004. The decrease in the gross profit as a percent
of revenues is due to the lower gross profit margins (58% of revenue) generated
by the companies that we acquired subsequent to first quarter 2004. Gross profit
margins for existing companies was 91% of revenues for first quarter 2005
compared to 89% of revenues for first quarter 2004. The improvement in gross
profit for existing companies was due to efforts to eliminate redundant
operations and costs and to pursue more profitable business by shifting to more
profitable products.
Pro forma gross profits for first quarter 2005 were $5,007,709 or 73% of
revenues, compared to $4,296,865 or 71% of revenues for first quarter 2004. The
improvement in the gross profit percentage is due to the improvement in gross
profit of existing companies as explained above.
OPERATING EXPENSES
Total operating expenses were $7,483,417 for first quarter 2005 compared
to $5,007,227 for first quarter 2004, an increase of $2,476,190 or 50%.
Companies that we acquired subsequent to first quarter 2004 accounted for
$2,719,454 in total operating expenses. Operating expenses for existing
companies were $4,763,963 for first quarter 2005, representing an approximate 5%
decline compared to first quarter 2004. The primary reason for the decline in
operating expenses for existing companies is the consolidation of operating
functions as well as lower depreciation and amortization expense as some capital
assets and intangible assets became fully amortized. We believe that operating
expenses generally continue to increase in the first three to twelve months
after we complete an acquisition but that operating expenses will decrease after
that as a result of the consolidation of operations. Any future acquisition will
increase operating expenses from the date of acquisition, in which case we
believe that pro forma results would provide a more comparable analysis.
33
Pro forma operating expenses were $8,473,831 for first quarter 2005
compared to $9,337,310 for first quarter 2004, an decrease of $863,479 or 9%.
The decrease is mainly due to consolidation of operations in selling and
marketing, research and development and general and administrative expenses due
to efforts to reduce costs mainly in the form of employee costs.
SELLING AND MARKETING
Selling and marketing expenses were $1,727,105 for first quarter 2005
compared to $1,067,331 for first quarter 2004, an increase of $659,774 or 62%.
This increase is attributed mainly to selling and marketing expenses of $598,577
incurred by the companies we acquired subsequent to first quarter 2004. Existing
companies were $61,196 higher than first quarter 2004 mainly as a result of
higher advertising expense of $94,164 incurred for advertising online and for
obtaining sales leads in the Career Transition services segment partially offset
by a decrease of $41,247 in sales and marketing travel and entertainment.
Pro forma selling and marketing expenses were $1,728,373 for first quarter
2005 compared to $2,011,035, a decrease of $282,662 or 14%. The decrease in pro
forma selling and marketing expenses is mainly due to a reduction in selling and
marketing personnel at Kadiri in efforts to reduce costs and consolidate
operations.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3,488,015 for first quarter 2005
compared to $2,424,432 for first quarter 2004, an increase of $1,063,583 or 44%.
The companies we acquired subsequent to first quarter 2004, contributed
$1,149,792 of this increase mainly for employee costs, rent, travel and
entertainment, and consulting fees. General and administrative expenses for
existing companies decreased $86,209 due principally to a decrease of $194,202
in space occupancy as a result of a negotiation of existing or new leases at
current lower market rates, a decrease of $98,705 in equipment lease expense due
to the termination and buyout of lease equipment contracts, and a decrease of
$264,038 due to the allocation of corporate expenses to the acquisitions made
subsequent to first quarter 2004. These decreases are partially offset by an
increase of $164,799 in employee costs as a result of an increase in personnel
at our headquarters in Ottawa, Canada, in corporate support functions, an
increase of $121,200 in professional fees mainly for legal expense associated
with litigation related to the former shareholders of 6figureJobs, and by an
additional $133,610 reserved for a sales tax audit being conducted for periods
prior to us acquiring 6figureJobs. We believe that general and administrative
expenses will continue to increase in the first three to twelve months after we
complete an acquisition but that general and administrative expenses will
decrease after that as a result of our effort to eliminate redundant costs. Any
future acquisitions will increase general and administrative expenses from the
date of the acquisition, in which case we believe that pro forma results would
provide a more comparable analysis.
34
Pro forma general and administrative expenses were $4,346,035 in first
quarter 2005 compared to $4,643,369 for first quarter 2004, a decrease of
$297,334 or 6%. The decrease in pro forma general and administrative expenses is
mainly due to a lower Bravanta general and administrative expenses mainly in the
form of lower headcount, lower consulting expense and a one time charge in first
quarter 2004 related to the abandonment of facility leases.
RESEARCH AND DEVELOPMENT
Research and development costs were $404,693 for first quarter 2005 and
$111,028 for first quarter 2004, an increase of $293,665 or 265%. $355,020 of
the research and development costs incurred in first quarter 2005 was
attributable to the companies we acquired subsequent to first quarter 2004.
Research and development costs for existing companies declined $61,185. The
decline in research and development costs for existing operations is primarily
due to our strategy to acquire new technology through acquisitions. We believe
that we can acquire new technology at a lower cost in the long-term and more
efficiently than developing new software platforms with internal resources. We
implemented this strategy in fiscal 2002. Since fiscal 2002 most of our research
and development efforts have been incurred in the Enterprise Workforce Services
segment.
Pro forma research and development costs were $404,693 for first quarter
2005 compared to $682,865 for first quarter 2004, a decrease of $278,172 or 41%.
The decrease in pro forma research and development costs is due mainly to a
decrease in research and development employee costs in Kadiri as a result of
reduction in personnel in efforts to reduce costs and consolidate operations.
AMORTIZATION AND DEPRECIATION EXPENSE
Amortization and depreciation expense was $1,863,604 for first quarter
2005 compared to $1,404,436 for first quarter 2004, an increase of $459,168 or
33%. Companies we acquired subsequent to first quarter 2004 incurred $588,612
for amortization and depreciation expense. Amortization and depreciation expense
for existing companies decreased $129,444 due mainly to some capital and
intangible assets becoming fully amortized. Amortization and depreciation
expense for the Enterprise Workforce Services Segment increased $477,843 mainly
as a result of the increase in amortization due to the companies we acquired
subsequent to first quarter 2004. In first quarter 2005, the Career Transition
Services segment's amortization and depreciation expense decreased by $18,575.
During first quarter 2005, through the acquisitions of Bravanta, and Peoplebonus
we acquired capital assets of $95,390 and intangible assets of $2,590,058. The
amortization of these acquired assets is based on the estimated useful lives of
the assets as described in note 3 of our consolidated financial statements.
35
Pro forma amortization and depreciation expense were $1,994,730 for first
quarter 2005 compared to $2,000,041 for first quarter 2004, a decrease of $5,311
or 0%.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $8,595 for first quarter 2005 compared to
$1,697 for first quarter 2004, an increase of $ 6,898 or 407%. The increase in
interest and other income was due to higher short term investment and restricted
cash balances compared to first quarter 2004.
Pro forma interest income and other income was $8,595 for first quarter
2005 compared to $10,631 for first quarter 2004, a decrease of $2,036 or 19%.
The decrease in interest and other income was due to Kadiri's interest income in
first quarter 2004.
INTEREST EXPENSE AND OTHER EXPENSE
Interest and other expense was $91,526 for first quarter 2005 compared to
$919,665 for first quarter 2004, a decrease of $828,139 or 90%. The primary
reason for the decrease in interest and other expense was due to expense
incurred in first quarter 2004 for the cessation of the amortization of the
discount related to 8% Senior Subordinated Convertible notes held in first
quarter 2004. The 8% Senior Subordinated Convertible notes were paid in full in
fiscal 2004 and are not relevant for first quarter 2005.
Pro forma interest and other expense was $352,832 for first quarter 2005
compared to $971,748 for first quarter 2004, a decrease of $618,916 or 64%. The
decrease in interest and other expense is mainly due the expense incurred in
first quarter 2004 for the cessation of the amortization of the discount related
to the 8% Senior Subordinated Convertible notes, partially offset by interest
expense associated with issued warrants incurred by Bravanta in first quarter
2004.
GOODWILL
Goodwill was $36,234,287 as of August 31, 2004 compared to $28,598,706 as
of May 31, 2004, an increase of $7,635,581 or 27%. $7,311,588 of the increase
relates to the Bravanta acquisition completed during first quarter 2005, and
$323,993 of the increase was due as a result of additional liabilities for
Kadiri, such as the issuance of shares to Trimbus, and additional payments made
and severance related to periods prior to the acquisitions and recorded as part
of the purchase equation within twelve months after the acquisition in
accordance with FASB 142.
36
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2004, we had $12,249,297 in cash and cash equivalents,
restricted cash and short-term investments and a working capital of $6,439,802.
The receipt of $10 million for the issuance of stock during first quarter 2005
improved our working capital. At the end of fiscal 2004, we acquired Kadiri, and
during first quarter 2005, we acquired Bravanta and Peoplebonus. As a result of
those acquisitions, we assumed current liabilities which exceeded acquired
current assets by $1,612,298 as of the respective dates of acquisition. As a
result of the acquisition, we made cash payments of $2,051,120 and $130,000
related to the Bravanta and Peoplebonus acquisition, respectively.
At August 31, 2004, $3,012,718 of short-term investment balances were
restricted from use because they were collateral for various borrowing or
leasing arrangements. Merchant banks have required us to place reserve deposits
on our merchant accounts due to the high volume of credit card usage by our
clients. These reserve deposits serve as guarantees to the Merchant banks for
chargebacks that may be issued to our clients that request a cancellation of our
services and that previously paid for our services with a credit card. As of
August 31, 2004, approximately $199,786 was held as guarantees by such banks.
These deposits are reviewed quarterly and may be returned to us or increased
based on the activity surrounding chargebacks and credit card usage. We expect
the level of chargebacks and credit card usage to remain consistent with levels
experienced in the past. Therefore, we believe that our reserve deposits will
not change significantly and will not impact our liquidity in a material way.
Additional deposits of $2,812,932 are restricted by three banks as security for
an outstanding term loan, a line of credit and letters of guarantee provided to
three landlords for facility leases. Since these restricted cash balances are
held as guarantees of the borrowings and leases mentioned above, as any of the
borrowings or the leases change, the restricted cash balance guaranteeing them
will change accordingly. The line of credit will increase or decrease according
to our working capital needs, and therefore the restricted cash guaranteeing the
line of credit will change accordingly. We expect to reduce the principal amount
of the term loan on a monthly basis according to the loan agreement, and as we
do so, the restricted cash balance guaranteeing the loan will decrease. We also
expect that as we make lease payments, the restricted cash guaranteeing the
leases will decrease on an annual basis according to the lease agreements.
37
For first quarter 2005, cash used by operations totaled $2,509,815,
consisting primarily of the net loss for the first quarter 2005 of $2,508,326,
cash used for working capital of $1,485,955, and the non-cash recovery of
deferred income taxes of $418,285 offset mainly by non-cash expenses such as
amortization ($1,851,115) and amortization of note discount of ($51,636). Our
acquisitions made from July 2001 until August 2004, have reduced our working
capital. Prior to the acquisitions, the majority of these companies experienced
losses generating working capital deficits. As we integrate them and consolidate
costs, we expect to generate operating cash flow, therefore reducing our working
capital deficit. However, any future acquisitions that result in our acquiring
working capital deficiencies will contribute to increasing our working capital
deficit.
Net cash used for investing activities during first quarter 2005 was
$2,193,772. Investing outflows consisted mainly of cash paid of $2,146,679, net
of cash acquired, for the acquisitions made in first quarter 2005 and $47,093
used for the acquisition of capital assets.
Net cash provided by financing activities was $9,414,720 for first quarter
2005. During first quarter 2005, we received $9,999,988 in exchange for
4,444,439 of our common shares in a private placement sold to William Blair &
Company and entities for which it serves as investment advisor and Crestview
Capital Fund L.P. In addition, we received $51,455 in cash from institutional
investors as a result of their exercise of warrants to purchase our common
stock. As a result of drawing on our credit line, we received proceeds of
$234,027. Financing outflows consisted primarily of the repayments of
shareholder notes of $392,499, repayment of a loan assumed through the
acquisition of Bravanta of $335,863, repayments of the line of credit of
$48,342, costs related to the registration and issuance of the common stock of
$64,834, and capital lease payments of $21,675.
We have had operating losses since our inception, and during first quarter
2005 we continued to have operating losses as a result of non-cash charges such
as amortization and depreciation, and additional expenses incurred by the
acquisitions made subsequent to the first quarter 2004. However, management
believes that our operations will generate operating cash flow in the future as
a result of the elimination of redundant costs in the businesses we have
acquired in first quarter 2005 and in the prior fiscal years, the consolidation
of ongoing operations, and improved efficiencies in the delivery of our services
38
We believe that our financial strength was improved at the end of this
first quarter 2005 as a result of the funds we raised through the sale of $10
million of our common shares in July 2004. We believe that our liquidity ratio,
which improved from 1.0X as of May 31, 2004 to 1.7X as of August 31, 2004, and
our debt to equity ratio, which improved from .61 as of May 31, 2004 to .18 as
of August 31, 2004, reflect our increased financial strength. Our Days of Sales
Outstanding for August 31, 2004 was 36 compared to 29 for May 31, 2004. The
increase in the Days of Sales Outstanding as a result of Kadiri invoices that
were brought in as part of the acquisition without the resulting revenue. In
addition, Kadiri and Bravanta have had higher DSO trends than those experienced
at Workstream. We anticipate that as we integrate the Kadiri and Bravanta
acquisitions, we will be able to improve DSO.
Management believes the proceeds from the sale of $10 million of our
common shares in July 2004, the reduction of costs made in fiscal 2002, fiscal
2003, fiscal 2004, along with further consolidation of cost centers and
elimination of redundant costs will result in improvement of our working capital
and positive generation of cash flows from operations which, together with
current cash reserves, will be sufficient to meet our working capital and
capital expenditure requirements through at least August 31, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are primarily exposed to market risks associated with fluctuations in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
Our exposure to interest rate fluctuations relates primarily to our
short-term investment portfolio and our bank loans. We invest our surplus cash
in an investment trust established by a Canadian chartered bank and in a
Certificate of Deposit in a bank in the United States. The investment trust
holds various short-term, low-risk instruments, and can be withdrawn without
penalty at any time. The interest income from these investments is subject to
interest rate fluctuations which our management believes will not have a
material impact on our financial position.
We have established a CDN $3,000,000 line of credit with the Bank of
Montreal which bears interest at the bank's prime rate plus 1%. We have drawn
CDN $2,916,340 on this facility as of August 31, 2004. We can draw an additional
CDN $83,660 before additional collateral would be required. We also have a term
loan with the bank in the amount of CND $106,656 as of August 31, 2004. The term
loan bears interest at the bank's prime rate plus 2%. Additionally, we have a
letter of credit issued in May 2002 as collateral on leased facilities in the
amount of CND $400,000 that will renew annually. We pay an annual fee of 1.2% on
this letter of credit.
The majority of our interest rates are variable, and therefore we have
exposure to risks associated with interest rate fluctuations. However,
management believes that the exposure is limited as the majority of the exposure
is related to the CDN $3,000,000 line of credit, which is fully collateralized
with our restricted cash and therefore can be liquidated immediately if faced
with a rising interest rate environment.
The impact on net interest income of a 100 basis point change in interest
rates for the quarter ended August 31, 2004 would have been less than $41,000.
39
FOREIGN CURRENCY RISK
We have monetary assets and liability balances denominated in Canadian
Dollars. As a result, fluctuations in the exchange rate of the Canadian dollar
against the U.S. dollar will impact our reported net asset position. A 10%
change in foreign exchange rates would result in a change in the our reported
net asset position of approximately $174,000
ITEM 4. CONTROLS AND PROCEDURES
As of August 31, 2004, our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There were no changes during the quarter
ended August 31, 2004 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In June 2004, 50,000 common shares, valued at $139,500, that were held in
escrow under the purchase agreement pursuant to which the Company acquired,
Peopleview, Inc. were released from escrow. The issuance of these common shares
was exempt from registration under Rule 506 of the Securities Act of 1933.
In June 2004, the Company acquired certain assets of Peoplebonus.com LLC,
a resume management services provider. As consideration for the sale, the
Company issued 72,202 common shares, valued at $200,000, and an additional
108,304 shares are being held in escrow. The issuance of these common shares was
exempt from registration under Rule 506 of the Securities Act of 1933.
40
In July 2004, 335,380 common shares, valued at $828,389, that were held in
escrow were released as a result of the resolution of a dispute between Kadiri
and one of its clients, Bank of America Technology and Operations, Inc. The
issuance of these common shares was exempt from registration under Rule 506 of
the Securities Act of 1933.
In July 2004, the Company issued an aggregate of 4,444,439 common shares
at $2.25 per common share to William Blair & Company and entities for which it
serves as investment advisor and Crestview Capital Fund L.P. in a private
placement resulting in aggregate proceeds of $9,999,988. The proceeds from the
sale will be used for working capital and future acquisitions. The private
placement was exempt from registration under Rule 506 of the Securities Act of
1933. These common shares were exempt from registration under Rule 506 of the
Securities Act of 1933.
In July 2004, the Company acquired Bravanta, Inc., a provider of
enterprise incentive and recognition programs. As consideration for the sale,
the Company issued 2,427,125 common shares, and 244,939 common shares will be
issued to the former management of Bravanta upon receipt by the Company of
completed and satisfactory accredited investor questionnaires and other related
documentation from them. The shares had an aggregate value of $7,107,693.
400,000 of such shares are held in escrow to cover indemnity obligations
covering breaches of representations and warranties contained in the merger
agreement. In addition, the Company made cash payments in the amount of
$2,051,120 to meet some of Bravanta's obligations prior to the finalization of
the purchase agreement. The issuance of these common shares was exempt from
registration under Rule 506 of the Securities Act of 1933.
In July 2004, 92,891 common shares, valued at $230,000, were issued to the
former shareholders of Trimbus, Inc., a company acquired by Kadiri prior to the
Company's acquisition of Kadiri. The shares were issued as fulfillment for
Kadiri's commitment to Trimbus per their agreement with Kadiri. The issuance of
these common shares was exempt from registration under Section 4(2) of the
Securities Act of 1933 as a transaction not involving a public offering.
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10.1 Asset Purchase Agreement dated June 10, 2004, among Workstream Inc.,
Workstream USA, Inc. and Peoplebonus.com, LLC.
10.2 Agreement and Plan of Merger dated June 29, 2004, among Workstream
Inc., Workstream Acquisition IV, Inc. and Bravanta, Inc.
(incorporated by reference to Exhibit 2.1 of the Current Report on
Form 8-K filed August 11, 2004).
10.3 Securities Purchase Agreement dated as of July 16, 2004, among
Workstream Inc., William Blair & Company and entities for which it
serves as investment advisor and Crestview Capital Fund L.P.
31.1 Certification of Michael Mullarkey pursuant to Rule
13a-14(a)/15d-14(a).
31.2 Certification of David Polansky pursuant to Rule
13a-14(a)/15d-14(a).
32.1 Certification of Michael Mullarkey pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of David Polansky pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the last
quarter of the period covered by this report:
(1) Current Report on Form 8-K dated June 14, 2004 with respect to Items
2 and 7;
(2) Current Report on Form 8-K dated June 23, 2004 with respect to Item
5;
(3) Current Report on Form 8-K dated July 6, 2004 with respect to Items
5 and 7;
(4) Current Report on Form 8-K dated July 21, 2004 with respect to Items
5 and 7;
(5) Current Report on Form 8-K dated August 11, 2004 with respect to
Items 2 and 7;
(6) Current Report on Form 8-K dated August 11, 2004 with respect to
Items 5 and 7;
(7) Current Report on Form 8-K dated August 20, 2004 with respect to
Items 5 and 7; and
(8) Current Report on Form 8-K dated August 27, 2004 with respect to
Items 8.01 and 9.01.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Workstream Inc.
(Registrant)
DATE: October 15, 2004 By: /s/ Michael Mullarkey
-------------------------------------
Michael Mullarkey,
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
DATE: October 15, 2004 By: /s/ David Polansky
-------------------------------------
David Polansky,
Chief Financial Officer and Secretary
(Principal Financial Officer)
43