Attached files
file | filename |
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EX-32.1 - WORKSTREAM INC | fp0001257_ex32-1.htm |
EX-31.1 - WORKSTREAM INC | fp0001257_ex31-1.htm |
EX-31.2 - WORKSTREAM INC | fp0001257_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended November 30, 2009
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.
(Exact
name of registrant as specified in its charter)
Canada
|
N/A
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
485
N. Keller Road, Suite 500
|
32751
|
Maitland,
Florida
|
(Zip
Code)
|
(Address
of principal executive offices)
|
(407)
475-5500
(Registrant’s
telephone number, including area code)
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 þ No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer,” “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
þ
As of
January11, 2010 there were 56,993,312 common shares, no par value, outstanding,
excluding 108,304 common shares held in escrow.
i
WORKSTREAM
INC.
Page No.
|
|||
Part
I.
|
Financial
Information
|
||
Item
1.
|
Financial
Statements (Unaudited)
|
||
1
|
|||
2
|
|||
3
|
|||
4
|
|||
Item
2.
|
17
|
||
Item
4T.
|
26
|
||
Part
II.
|
Other
Information
|
||
Item
1.
|
27
|
||
Item
1A.
|
27
|
||
Item
6.
|
28
|
||
29
|
ii
WORKSTREAM
INC.
As
of November 30, 2009 and May 31, 2009
(Unaudited)
November
30, 2009
|
May
31, 2009
|
|||||||
ASSETS:
|
(Unaudited)
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,193,634 | $ | 1,643,768 | ||||
Accounts
receivable, net of allowances of $1,133,553 and $928,430
at
|
||||||||
November
30, 2009 and May 31, 2009, respectively
|
3,581,908 | 2,746,360 | ||||||
Prepaid
expenses and other assets
|
139,632 | 146,609 | ||||||
Total
current assets
|
4,915,174 | 4,536,737 | ||||||
Equipment,
net
|
493,365 | 757,050 | ||||||
Other
assets
|
166,778 | 30,990 | ||||||
Acquired
intangible assets, net
|
- | 21,500 | ||||||
Goodwill
|
17,729,448 | 17,729,448 | ||||||
TOTAL
ASSETS
|
$ | 23,304,765 | $ | 23,075,725 | ||||
LIABILITIES
AND SHAREHOLDERS’ DEFICIT:
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 1,129,681 | $ | 1,856,892 | ||||
Accrued
liabilities
|
3,580,850 | 2,924,145 | ||||||
Accrued
compensation
|
675,954 | 526,935 | ||||||
Current
portion of senior secured notes payable and accrued
interest
|
276,250 | 20,158,044 | ||||||
Embedded
put derivative
|
- | 493,693 | ||||||
Current
portion of long-term obligations
|
220,813 | 199,516 | ||||||
Deferred
revenue
|
2,519,216 | 2,591,328 | ||||||
Total
current liabilities
|
8,402,764 | 28,750,553 | ||||||
Senior
secured notes payable and accrued interest, less current
portion
|
21,274,823 | - | ||||||
Long-term
obligations, less current portion
|
220,716 | 124,594 | ||||||
Deferred
revenue – long term
|
146,156 | - | ||||||
Common
stock warrant liability
|
582,400 | - | ||||||
Total
liabilities
|
30,626,859 | 28,875,147 | ||||||
Commitments
and Contingencies
|
||||||||
SHAREHOLDERS’
DEFICIT:
|
||||||||
Preferred
shares, no par value
|
- | - | ||||||
Common
shares, no par value
|
113,668,376 | 113,668,376 | ||||||
Additional
paid-in capital
|
18,001,063 | 18,269,589 | ||||||
Accumulated
deficit
|
(138,114,927 | ) | (136,876,313 | ) | ||||
Accumulated
other comprehensive loss
|
(876,606 | ) | (861,074 | ) | ||||
Total
shareholders’ deficit
|
(7,322,094 | ) | (5,799,422 | ) | ||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
$ | 23,304,765 | $ | 23,075,725 |
See
accompanying notes to these condensed consolidated financial
statements.
WORKSTREAM
INC.
For
the Three and Six Months Ended November 30, 2009 and 2008
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
November
30
|
November
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues:
|
||||||||||||||||
Software
|
$ | 1,739,128 | $ | 1,838,082 | $ | 3,345,455 | $ | 3,631,979 | ||||||||
Professional
services
|
273,567 | 509,169 | 507,905 | 1,231,140 | ||||||||||||
Rewards
|
2,096,257 | 1,435,089 | 3,520,071 | 2,954,004 | ||||||||||||
Career
networks
|
921,167 | 1,361,983 | 1,868,433 | 2,880,086 | ||||||||||||
Revenues,
net
|
5,030,119 | 5,144,323 | 9,241,864 | 10,697,209 | ||||||||||||
Cost
of revenues
|
1,732,050 | 1,499,342 | 3,021,738 | 3,101,812 | ||||||||||||
Gross
profit
|
3,298,069 | 3,644,981 | 6,220,126 | 7,595,397 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
and marketing
|
545,513 | 1,128,676 | 1,002,181 | 2,431,283 | ||||||||||||
General
and administrative
|
1,971,921 | 2,052,077 | 3,993,777 | 4,977,563 | ||||||||||||
Research
and development
|
341,148 | 985,159 | 770,287 | 2,287,260 | ||||||||||||
Amortization
and depreciation
|
300,924 | 446,092 | 582,701 | 926,867 | ||||||||||||
Total
operating expenses
|
3,159,506 | 4,612,004 | 6,348,946 | 10,622,973 | ||||||||||||
Operating
income / (loss)
|
138,563 | (967,023 | ) | (128,820 | ) | (3,027,576 | ) | |||||||||
Other
income / (expense):
|
||||||||||||||||
Interest
income and expense, net
|
(887,502 | ) | (351,025 | ) | (1,401,577 | ) | (347,435 | ) | ||||||||
Change
in fair value of warrants and derivative
|
364,226 | - | 787,693 | - | ||||||||||||
Other
income and expense, net
|
43,620 | (47,297 | ) | 42,018 | (87,721 | ) | ||||||||||
Other
expense, net
|
(479,656 | ) | (398,322 | ) | (571,866 | ) | (435,156 | ) | ||||||||
Loss
before income tax benefits / (expense)
|
(341,093 | ) | (1,365,345 | ) | (700,686 | ) | (3,462,732 | ) | ||||||||
Income
tax expense
|
(39 | ) | 15,725 | (328 | ) | 61,530 | ||||||||||
NET
LOSS
|
$ | (341,132 | ) | $ | (1,349,620 | ) | $ | (701,014 | ) | $ | (3,401,202 | ) | ||||
Loss
per share - basic and diluted
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.06 | ) | ||||
|
||||||||||||||||
Weighted
average number of common shares outstanding - basic and
diluted
|
56,997,415 | 55,120,140 | 56,995,352 | 53,766,928 |
See
accompanying notes to these condensed consolidated financial
statements.
WORKSTREAM
INC.
For
the Six Months Ended November 30, 2009 and 2008
(Unaudited)
Six Months Ended | ||||||||
November 30, | ||||||||
2009
|
2008
|
|||||||
Cash
flows used in operating activities:
|
||||||||
Net
loss
|
$ | (701,014 | ) | $ | (3,401,202 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Amortization
and depreciation
|
582,701 | 926,867 | ||||||
Leasehold
inducement amortization
|
4,778 | (30,497 | ) | |||||
Provision
for bad debt
|
198,642 | 465,999 | ||||||
Stock
related compensation
|
70,274 | 132,702 | ||||||
Change
in fair value of warrants and derivative
|
(787,693 | ) | - | |||||
Net
change in components of working capital:
|
||||||||
Accounts
receivable
|
(1,034,189 | ) | (314,412 | ) | ||||
Prepaid
expenses and other assets
|
6,977 | 187,819 | ||||||
Accounts
payable
|
(639,262 | ) | (723,545 | ) | ||||
Accrued
liabilities
|
2,049,734 | 506,520 | ||||||
Accrued
compensation
|
149,019 | (318,951 | ) | |||||
Deferred
revenue
|
74,043 | 173,093 | ||||||
Net
cash used in operating activities
|
(25,990 | ) | (2,395,607 | ) | ||||
Cash
flows provided by (used in) investing activities:
|
||||||||
Purchase
of equipment
|
(106,761 | ) | (1,922 | ) | ||||
Proceeds
from sale of short-term investments
|
- | 9,091 | ||||||
Net
cash provided by (used in) investing activities
|
(106,761 | ) | 7,169 | |||||
Cash
flows provided by (used in) financing activities:
|
||||||||
Payment
of costs associated with re-financing of senior secured
notes
|
(135,788 | ) | - | |||||
Repayment
of long-term obligations
|
(164,573 | ) | (232,748 | ) | ||||
Net
cash used in financing activities
|
(300,361 | ) | (232,748 | ) | ||||
Effect
of exchange rate changes on cash and cash equivalents
|
(17,022 | ) | 69,410 | |||||
Net
decrease in cash and cash equivalents
|
(450,134 | ) | (2,551,776 | ) | ||||
Cash
and cash equivalents - beginning of period
|
1,643,768 | 3,435,337 | ||||||
Cash
and cash equivalents - end of period
|
$ | 1,193,634 | $ | 883,561 | ||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
Equipment
acquired under capital leases
|
$ | 191,298 | $ | - | ||||
Cumulative
effect of change in accounting principle for warrant
classification
|
$ | 876,400 | $ | - | ||||
Exchange
of warrant liability for senior secured notes payable
|
$ | - | $ | 19,000,000 | ||||
Non-cash
issuance of common stock in connection with the settlement of class action
lawsuits
|
$ | - | $ | 600,000 |
See
accompanying notes to these condensed consolidated financial
statements.
WORKSTREAM
INC.
(Unaudited)
NOTE 1. THE
COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial
Information
The
accompanying condensed consolidated balance sheet as of November 30, 2009, the
condensed consolidated statements of operations for the three and six months
ended November 30, 2009 and 2008, and the condensed consolidated statements of
cash flows for the six months ended November 30, 2009 and 2008 are unaudited but
include all adjustments (consisting of normal recurring adjustments) that are,
in the opinion of management, necessary for a fair presentation of our financial
position at such dates and our results of operations and cash flows for the
periods then ended in conformity with U.S. generally accepted accounting
principles (“US GAAP”). The condensed consolidated balance sheet as
of May 31, 2009 has been derived from the audited consolidated financial
statements at that date but, in accordance with the rules and regulations of the
United States Securities and Exchange Commission (“SEC”), does not include all
of the information and notes required by US GAAP for complete financial
statements. Operating results for the three and six months ended
November 30, 2009 are not necessarily indicative of results that may be expected
for the entire fiscal year. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s Form 10-K for
the fiscal year ended May 31, 2009.
Description of the
Company
Workstream
Inc. (“Workstream” or the “Company”) is a provider of services and 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 has two distinct reportable segments: Enterprise
Workforce Services and Career Networks. The Enterprise Workforce
Services segment offers a suite of HCM software solutions, which includes
performance management, compensation management, development, recruitment,
benefits administration and enrollment, succession planning, and employee reward
programs. The Career Networks segment offers recruitment research,
resume management, and career transition services. In addition,
Career Networks provides 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. Workstream conducts its business primarily in the United
States of America and Canada.
Going Concern and
Management’s Assessment of Liquidity
The
opinion of our independent registered public accounting firm on the audited
financial statements as of and for the year ended May 31, 2009 contained an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern.
The
Company has incurred substantial losses in recent periods and, as a result, has
a shareholders’ deficit of $7,322,094 as of November 30, 2009. Losses
for the six months ended November 30, 2009 were $701,014 and losses for the
years ended May 31, 2009 and 2008 were $4,856,356 and $52,616,875,
respectively. The Company's ability to continue as a going concern
depends upon its ability to successfully refinance approximately $21.6 million
of its senior secured notes payable (the “Notes”), including accrued interest
thereon, generate positive cash flows from operations and obtain sufficient
additional financing, if necessary. The Notes went into default on
May 22, 2009 due to the Company’s suspension of trading on the NASDAQ Stock
Market as a result of its shareholders’ deficit. Such Notes were
restructured on December 11, 2009; please refer to Note 2 to these condensed
consolidated financial statements. The accompanying financial
statements have been prepared on a going concern basis, which assumes continuity
of operations and realization of assets and liabilities in the ordinary course
of business. The financial statements do not include any adjustments
that might result if the Company was forced to discontinue its
operations.
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Due to
significant reductions in operating expenses in the fourth quarter of fiscal
2008 and throughout fiscal 2009, management believes that current operations
will be sufficient to meet its anticipated working capital and capital
expenditure requirements upon the refinancing of the Notes. The
current operating loss is the result of current economic conditions and is a
reflection of the overall health of the economy as a whole. Based on
an analysis of our current contracts, forecasted new business, our current
backlog and current expense level along with the refinancing of the Notes,
management believes the Company will meet its cash flow needs for fiscal
2010. If these measures fall short, management will consider
additional cost savings measures, including cutting back product development
initiatives, further reducing operating expenditures as well as seeking
additional financing, if deemed necessary. We recognize that there
are no assurances that the Company will be successful in meeting its cash flow
requirements, however, management is confident that, if necessary, there are
other alternatives available to fund operations and meet cash requirements
during fiscal 2010.
Use of
Estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions affecting the amounts reported in
the consolidated financial statements and the accompanying
notes. Changes in these estimates and assumptions may have a material
impact on the financial statements and accompanying notes.
Warrant
Liability
On June
1, 2009, the Company adopted the guidance on determining whether an instrument
(or embedded feature) is indexed to an entity’s own stock (primarily codified in
ASC 815, Derivatives and
Hedging). This guidance requires a new 2-step test for
determination of whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock. Step 1 is to evaluate
the instrument's contingent exercise provisions, if any, and step 2 is to
evaluate the instrument's settlement provisions. The Company
evaluated its existing current instruments previously classified as equity
immediately prior to such adoption and determined that the warrants issued in
conjunction with its Senior Secured Notes Payable are not indexed to the
Company’s own stock under the accounting requirements due primarily to the reset
provisions of the warrant in the event of lower priced financing
transactions. Therefore, they were reclassified out of equity to a
liability classification as of June 1, 2009 via a cumulative effect adjustment,
as required. Subsequent changes to the fair value of the liability
after June 1, 2009 will be included in the consolidated statements of
operations. The table below details the effect of the adoption on the
Company’s financial statements as of June 1, 2009:
May
31, 2009
|
Effect
of Adoption
|
June
1, 2009
|
|||||||||||
Common
stock warrant liability
|
- | 876,400 | (1) | 876,400 | |||||||||
Additional
paid-in capital
|
18,269,589 | (338,800 | ) | (2) | 17,930,789 | ||||||||
Accumulated
deficit
|
(136,876,313 | ) | (537,600 | ) | (3) | (137,413,913 | ) |
(1)
|
Fair
value of warrants on May 31, 2009.
|
(2)
|
Fair
value of warrants upon issuance on August 29,
2008.
|
(3)
|
Cumulative
change in fair value of warrants from August 29, 2008 through May 31,
2009.
|
The fair
value of the warrants was valued using a lattice-based valuation model with the
following key inputs:
August
29, 2008
|
May
31, 2009
|
November
30, 2009
|
||||||||||
Stock
Price
|
$ | 0.20 | $ | 0.37 | $ | 0.30 | ||||||
Exercise
Price
|
$ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||
Expected
volatility
|
74%-117% | 94%-194% | 21%-149% | |||||||||
Expected
dividend yield
|
0% | 0% | 0% | |||||||||
Expected
term (in years)
|
3.9 | 3.2 | 2.7 | |||||||||
Risk-free
interest rate
|
1.97%-2.60% | 0.14%-1.42% | 0.08%-0.67% |
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value of Financial
Instruments
The
Company performs fair value measurements in accordance with the guidance
provided by ASC 820, Fair
Value Measurements and Disclosures. ASC 820 defines fair
value, establishes a framework for measuring fair value under GAAP and expands
disclosures about fair value measurements. ASC 820 defines fair value
as the exchange price that would be paid by an external party for an asset or
liability (exit price) and emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. ASC 820 also
establishes a fair value hierarchy which requires an entity to classify the
inputs used in measuring fair value for assets and liabilities as
follows:
·
|
Level 1 – Inputs are
unadjusted quoted market prices in active markets for identical assets or
liabilities available at the measurement
date;
|
·
|
Level 2 – Inputs are
unadjusted quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other than quoted prices that are
observable and inputs that are corroborated by observable market data;
and
|
·
|
Level 3 – Inputs are
unobservable inputs that are supported by little or no market activity,
therefore requiring an entity to develop its own assumptions about the
assumptions that market participants would use in pricing the asset or
liability based on the best available
information.
|
Fair
value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of November 30,
2009. The Company uses the market approach to measure fair value for
its Level 1 financial assets which includes cash equivalents. The
market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities. There were no cash equivalents as of November 30,
2009. The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values due to the short-term
nature of these instruments. These instruments include cash, accounts
receivable, accounts payable and accrued liabilities.
The
Company’s Senior Secured Notes were initially valued using multiple,
probability-weighted cash flow outcomes at credit-risk adjusted market
rates. The fair value of the Notes is being accreted to the Face
Value including accrued interest of $22,835,685 until August 29, 2010 through
interest expense using the effective interest method. The carrying
value of the Notes on November 30, 2009 approximated their fair value, including
accrued interest thereon.
The
embedded put derivative on the Company’s Senior Secured Notes was valued in
accordance with ASC 820 using multiple, probability-weighted cash flow outcomes
(Level 3 inputs) at credit-risk adjusted market rates (Level 2
inputs). The Company’s warrants related to the Notes were valued
using a lattice-based valuation model with the inputs detailed above under
Warrant Liability.
The
following table details the change in the fair value of our financial
instruments using significant unobservable inputs (Level 3) during the three
months ended November 30, 2009:
Embedded
|
Warrant
|
||||||||||||
Put
Derivative
|
Liability
|
Total
|
|||||||||||
Fair
value as of May 31, 2009
|
$ | 493,693 | $ | 876,400 | (1) | $ | 1,370,093 | ||||||
Change
in fair value of warrants and derivative
|
(493,693 | ) | (294,000 | ) | (787,693 | ) | |||||||
Fair
value as of November 30, 2009
|
$ | - | $ | 582,400 | $ | 582,400 |
(1)
|
Fair
value of warrants as of May 31, 2009 recorded as a liability in the
Company’s financial statements upon initial adoption of ASC 815.40 on June
1, 2009.
|
Further,
the Company began applying fair value measurements for all non-financial assets
and non-financial liabilities on June 1, 2009. This application did
not have a significant impact on the Company’s results of operations, financial
position or cash flows for the three or six months ended November 30,
2009.
6
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Derivative Financial
Instruments
The
Company’s Senior Secured Notes contain a contingent put reflected in the
contractual rights of default. Under these provisions, the Holder has
the right to put the Notes back to the Company for 110% of face value in the
event of certain equity-indexed defaults, such as listing failure and
non-delivery of common shares issuable upon exercise of certain
warrants. Under ASC 815, Derivatives and Hedging, the
risks of equity are inconsistent with the risks of the debt host and, therefore,
embedded put derivatives such as these require bifurcation and separate
classification at fair value. The embedded put derivative and certain
Company issued warrants are recorded at fair value, marked-to-market at each
reporting period and classified in the Company’s condensed consolidated balance
sheet as a separate line item.
Accounting for Stock-Based
Compensation
Stock-based
compensation expense for all stock-based compensation awards granted on or
subsequent to June 1, 2006 is based on the grant date fair value estimated in
accordance with ASC 718, Compensation – Stock
Compensation. Compensation expense for stock option awards is
recognized on a straight-line basis over the requisite service period of the
award. We utilize the Black-Scholes option-pricing model to value our
stock option grants. As required, we also estimate forfeitures in
calculating the expense related to stock-based compensation, and it requires us
to reflect cash flows resulting from excess tax benefits related to those
options as a cash inflow from financing activities rather than as a reduction of
taxes paid.
The
assumptions in the following table were used to calculate the fair-value of
share-based payment awards using the Black-Scholes option pricing model, which
values options based on the stock price at the grant date, the expected life of
the option, the estimated volatility of the stock, expected dividend payments,
and the risk-free interest rate over the expected life of the
option.
Six Months Ended | |||
November
30
|
|||
2009
|
2008
|
||
Expected
volatility
|
169%-171%
|
137%
|
|
Expected
dividend yield
|
0%
|
0%
|
|
Expected
term (in years)
|
3.45
|
3.45
|
|
Risk-free
interest rate
|
2.23%-2.71
|
2.90%
|
|
Forfeiture
rate
|
30%
|
0%
|
The
dividend yield was calculated by dividing the current annualized dividend by the
option exercise price of each grant. The expected volatility was
determined considering the Company’s historical stock prices for the fiscal year
the grant occurred and prior fiscal years for a period equal to the expected
life of the option. The risk-free rate represents the US Treasury
bond rate with maturity equal to the expected life of the option. The
expected life of the option was estimated based on the exercise history of
previous grants.
Comprehensive
Loss
Comprehensive
loss consists of the following:
Three Months ended | Six Months ended | |||||||||||||||
November
30,
|
November
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
loss
|
$ | (341,132 | ) | $ | (1,349,620 | ) | $ | (701,014 | ) | $ | (3,401,202 | ) | ||||
Foreign
currency translations gains (losses), net
|
7,184 | 180,639 | (15,532 | ) | 184,551 | |||||||||||
Comprehensive
loss
|
$ | (333,948 | ) | $ | (1,168,981 | ) | $ | (716,546 | ) | $ | (3,216,651 | ) |
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Reclassifications
Certain
prior period amounts have been reclassified in the accompanying fiscal 2009
condensed consolidated financial statements to conform to the current period
presentation.
Subsequent
Events
In
accordance with ASC 855, Subsequent Events, we
evaluated subsequent events through the date and time our condensed consolidated
financial statements were issued on January 14, 2010.
Recent Accounting
Pronouncements
In
September 2009, the FASB ratified ASC Update No. 2009-13, Multiple-Deliverable Revenue
Arrangements (“ASC 2009-13”). ASC 2009-13, amends existing
revenue recognition accounting pronouncements that are currently within the
scope of FASB Accounting Standards Codification, or ASC, Subtopic 605-25
(previously included within EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables). This consensus provides for two significant
changes to the existing multiple element revenue recognition
guidance. First, this guidance deletes the requirement to have
objective and reliable evidence of fair value for undelivered elements in an
arrangement and will result in more deliverables being treated as separate units
of accounting. The second change modifies the manner in which the
transaction consideration is allocated across the separately identified
deliverables. These changes may result in entities recognizing more
revenue up-front, and entities will no longer be able to apply the residual
method and defer the fair value of undelivered elements. Upon adoption of these
new rules, each separate unit of accounting must have a selling price, which can
be based on management’s estimate when there is no other means to determine the
fair value of that undelivered item, and the arrangement consideration is
allocated based on the elements’ relative selling price. This
accounting guidance is effective no later than fiscal years beginning on or
after June 15, 2010 but may be early adopted as of the first quarter of an
entity’s fiscal year. Entities may elect to adopt this accounting
guidance either through prospective application to all revenue arrangements
entered into or materially modified after the date of adoption or through a
retrospective application to all revenue arrangements for all periods presented
in the financial statements. We are currently evaluating the impact
of this revised accounting guidance.
In
September 2009, the FASB ratified ASC No. 2009-14, Applicability of SOP 97-2 to Certain
Arrangements that Include Software Elements (formerly EITF Issue No.
09-3, Certain Revenue
Arrangements that Include Software Elements), which amends the existing
accounting guidance for how entities account for arrangements that include both
hardware and software, which typically resulted in the sale of hardware being
accounted for under the software revenue recognition rules. This
accounting guidance changes revenue recognition for tangible products containing
software elements and non-software elements. The tangible element of
the product is always outside of the scope of the software revenue recognition
rules, and the software elements of tangible products when the software element
and non-software elements function together to deliver the product’s essential
functionality are outside of the scope of the software rules. As a
result, both the hardware and qualifying related software elements are excluded
from the scope of the software revenue guidance and accounted for under the
revised multiple-element revenue recognition guidance. This
accounting guidance is effective for all fiscal years beginning on or after June
15, 2010 with early adoption permitted. Entities must adopt ASC
2009-14 and ASC 2009-13 in the same manner and at the same time. We
are currently evaluating the impact of this revised accounting
guidance.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (codified within ASC 105, Generally Accepted Accounting
Principles) , which establishes the FASB Accounting Standards
Codification as the single source of authoritative U.S. GAAP. The
Codification will supersede all existing non-SEC accounting and reporting
standards. As a result, upon adoption, all references to accounting
literature in our SEC filings will conform to the appropriate reference within
the Codification. The adoption of this standard did not have an
impact on our financial position, results of operations or cash
flows.
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
2. INVESTOR WARRANTS AND SENIOR SECURED NOTES
PAYABLE
On August
29, 2008, we entered into exchange agreements that provided for the exchange of
the aggregate $19,000,000 Special Warrants and Additional Warrants indexed to
3,800,000 shares of common stock, issued August 3, 2007 (“Old Warrants”), for an
aggregate $19,147,191 in Face Value of Senior Secured Notes (collectively, the
“Notes”) and newly issued warrants indexed to 3,800,000 shares of common stock
(“New Warrants”) (the “2008 Exchange Transaction”). Financing costs
of $147,191 incurred by the holders of the Notes (“Holders”) are included in the
face value of the Notes.
The Notes
were secured by a lien on all of our and our subsidiaries’ assets pursuant to
the terms of a Security Agreement with each Note Holder. Interest on
the Notes accrued at an annual rate of 7% until August 29, 2009 and then 12% per
year thereafter. The Notes were to mature on August 29, 2010 and all
unpaid principal and accrued interest was to be due upon maturity.
The New
Warrants were convertible into 3,800,000 shares of common stock at an exercise
price of $0.25. All other material terms of the New Warrants were
substantially the same as those contained in the old warrants that were
exchanged, including the existence of anti-dilution provisions that provide for
a full adjustment of the exercise price and the number of common shares to be
issued in the event we, in certain circumstances, issue securities at a price
below the exercise price of the New Warrants. Each New Warrant must
be exercised on or prior to August 3, 2012 or it will expire by its
terms.
The Notes
also contained a contingent put reflected in the contractual rights of
default. Upon the occurrence of an event of default, as defined in
the Notes, a Holder could require us to redeem all or a portion of such Holder’s
Note at a price equal to 110% of the sum of the principal amount of the Note,
accrued and unpaid interest and late fees, if any, to be redeemed. Under ASC
815, Derivatives and
Hedging, the risks of equity are inconsistent with the risks of the debt
host and, therefore, embedded put derivatives such as these require bifurcation
and separate classification at fair value. Each of our subsidiaries
delivered a Guaranty pursuant to which it agreed to guarantee our obligations
under each Note.
On May
22, 2009, the Company’s stock was suspended from trading on the NASDAQ Stock
Market due to its inability to maintain a minimum of $2.5 million in
stockholders’ equity or $500,000 of net income from continuing operations for
the most recently completed fiscal year or two of the three most recently
completed fiscal years. The suspension constituted an event of
default under the Notes and thereby entitled each Holder of the Notes to require
the Company to redeem all or a portion of the Holder’s Note at a price equal to
110% of the sum of the principal amount of the Note, accrued and unpaid interest
and late fees, if any. Additionally, as a result of the event of
default, the interest rate under each Note was increased by 5% in addition to
the contractual rate of interest due.
The Notes
and the embedded put derivative were valued in accordance with ASC 820 using
multiple, probability-weighted cash flow outcomes at credit-risk adjusted market
rates. The fair value of the Notes was accreted to the Face Value
including accrued interest of $22,835,685 until August 29, 2010 through interest
expense using the effective interest method. Interest expense
on the Notes was $883,878 and $1,393,029 during the three and six months ended
November 30, 2009. Gains on the decrease in the fair value of
$521,026 and $493,693 on the embedded put derivative were recognized in the
condensed consolidated statements of operations during the three and six months
ended November 30, 2009, respectively.
On June
1, 2009, the Company adopted ASC 815.40 which required it to begin accounting
for the New Warrants as a liability due primarily to the reset provisions of the
warrant in the event of lower priced financing
transactions. Therefore, they were reclassified out of equity to a
liability classification as of June 1, 2009 via a cumulative effect
adjustment. Amounts of $(156,800) and $294,000 associated with the
change in the fair value of the New Warrants are recognized in the condensed
consolidated statement of operations for the three and six months ended November
30, 2009, respectively.
In August
2009, the Company signed a term sheet with the Holders, whereby the Holders
agreed to restructure the Notes. On December 11, 2009, the Company entered into
a separate Exchange Agreement (collectively, the “Exchange Agreements”) with
each of the Holders of its senior secured promissory notes pursuant to which,
among other things, each Holder exchanged its existing Note for: (i)
a replacement senior secured non-convertible note (a “Non-Convertible Note”);
(ii) a senior secured convertible note that is convertible into the Company's
common shares at a conversion price of $0.25 (a “$0.25 Convertible Note”); and,
(iii) a senior secured convertible note that is convertible into the Company's
common shares at a conversion price of $0.10 (a “$0.10 Convertible Note,” and
together with the Non-Convertible Notes and the $0.25 Convertible Notes,
collectively, the “New Secured Notes”). Pursuant to the terms of the
separate Exchange
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Agreements,
the Company issued Non-Convertible Notes in an aggregate principal amount of
$9,500,000, $0.25 Convertible Notes in an aggregate principal amount of
$6,650,000, and $0.10 Convertible Notes in an aggregate principal amount of
$5,361,337. The aggregate principal amount of all of the New Secured
Notes issued pursuant to the Exchange Agreements is $21,613,516, which was the
aggregate amount of principal and accrued interest outstanding under the Notes
on December 11, 2009.
Each New
Secured Note continues to be secured by a lien on all of the assets of the
Company and its subsidiaries pursuant to the terms of the existing Security
Agreement with the Investors, as amended in connection with the exchange
transaction. Interest on each New Secured Note accrues at an
annual rate of 9.5%. Interest on the $0.25 Convertible Notes and the
$0.10 Convertible Notes compounds on a quarterly basis and is payable, together
with principal, on July 31, 2012 (the “Maturity Date”). Interest on
the Non-Convertible Notes compounds on a quarterly basis and is payable on the
Maturity Date, while part of the principal is payable on a quarterly basis
pursuant to an agreed upon schedule.
Upon the
occurrence of an event of default, as defined in the New Secured Notes, an
Investor may require the Company to redeem all or a portion of such Investor’s
Notes. Upon a disposition of assets or liquidity event (each as
defined in the New Secured Notes), the Company is required to use 100% of the
net proceeds to redeem the New Secured Notes. Each New Secured Note
contains customary covenants with which the Company must comply. Each
subsidiary of the Company previously agreed to guarantee the obligations of the
Company under the Notes and has reaffirmed such guarantee with respect to the
New Secured Notes by delivering to the Investors a Reaffirmation of
Guaranty. The Company and each of the Investors also entered into a
Second Amended and Restated Registration Rights Agreement principally in order
to include the common shares of the Company into which the $0.25 Convertible
Notes and the $0.10 Convertible Notes are convertible as registrable
securities.
Each of
the New Warrants issued in connection with the 2008 Exchange Transaction
contained anti-dilution protection provisions. As a result of the
Company’s issuance of the $0.10 Convertible Notes, the exercise price of the New
Warrants that remain outstanding was adjusted to $0.10 per share from $0.25 per
share and the number of common shares issuable upon exercise was proportionately
increased.
NOTE 3. COMMITMENTS AND
CONTINGENCIES
Litigation
On or
about August 10, 2005, a class action lawsuit was filed against the Company, its
former Chief Executive Officer and its former Chief Financial Officer in the
United States District Court for the Southern District of New
York. The action, instituted on behalf of a purported class of
purchasers of the Company’s common shares during the period from January 14,
2005 to and including April 14, 2005 (the class period), alleged, among other
things, that management provided the market misleading guidance as to
anticipated revenues for the quarter ended February 28, 2005, and failed to
correct this guidance on a timely basis. The action claimed violations of
Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and
Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act,
and sought compensatory damages in an unspecified amount as well as the award of
reasonable costs and expenses, including counsel and expert fees and costs. The
Court certified the case as a class action.
The
parties agreed to settle the claims in consideration of the payment of $3
million in cash and $600,000 in the Company’s common shares. The $3
million was paid for by the Company’s insurance carrier pursuant to the
Company’s insurance policies. The Court held a hearing on June 24,
2008 to consider the fairness of the settlement after notice of the settlement
and the hearing had been given to the class. No opposition to
approval of the settlement was presented at the hearing. On August
13, 2008, the court entered a final judgment in the case, which became final on
September 12, 2008. The $600,000 was accrued for in fiscal 2007 and
3,636,363 shares were issued in fiscal 2009 on September 24, 2008 after the
issuance of the final judgment.
* *
*
On
February 12, 2008, Workstream, Workstream Merger Sub Inc., Empagio Acquisition
LLC (“Empagio”) and SMB Capital Corporation entered into an Agreement and Plan
of Merger pursuant to which Empagio would merge with and into Workstream,
subject to the terms and conditions of the Merger Agreement, which was approved
by the Boards of Directors
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of both
the companies. Upon the completion of the Merger, the equity interests in
Empagio would be converted into up to 177,397,332 shares of Workstream Inc.
common stock, representing approximately 75% of the Company’s outstanding common
stock on a diluted basis following the Merger.
On June
24, 2008, the Company filed a lawsuit in the Superior Court of the State of
Delaware in and for New Castle County (the “State Court Lawsuit”) against
Empagio Acquisition, LLC (“Empagio”) and SMB Capital Corporation (“SMB”) to
obtain the $5 million termination fee required to be paid by Empagio and SMB
pursuant to Section 7.02 of the Agreement and Plan of Merger dated as of
February 12, 2008 among the Company, Workstream Merger Sub Inc., Empagio and
SMB, which agreement was terminated by the Company on June 13,
2008. On June 25, 2008, Empagio and SMB filed a lawsuit against the
Company in the United States District Court for the District of Delaware (the
“Federal Lawsuit”) alleging entitlement to a $3 million termination fee pursuant
to the Agreement and Plan of Merger. On July 29, 2008, Empagio and
SMB filed a notice of voluntary dismissal of their Federal Lawsuit based on an
understanding that Empagio and SMB would make their claim as part of the
Company’s State Court Lawsuit. In accordance with the voluntary
notice of dismissal of the Federal Lawsuit, Empagio and SMB have now asserted
their claims in the State Court Lawsuit. The Company has denied these
allegations. The parties are proceeding with discovery in this
case. Trial is scheduled for March 7, 2011, with mandatory
alternative dispute resolution to be completed by January 7, 2011.
* *
*
On June
10, 2009, Franklin Drive, LLC filed a lawsuit in the Superior Court of the State
of California against the Company, its former Chief Executive Officer and its
former Chief Financial Officer for a dispute regarding the Company’s lease of
commercial property located at 5000 Franklin Drive, Pleasanton, California which
was for a term commencing on January 1, 2008 and expiring on January 31,
2013. On or about October 2008, we abandoned the property and ceased
making rental payments pursuant to the lease. Franklin Drive, LLC is
claiming termination damages of $1.5 million, but seeking actual settlement at
terms considerably less than this amount. On or about January 8,
2010, the parties entered into an out-of-court, settlement in which the Company
has agreed to pay Franklin Drive, LLC a total of $246,000 comprised of an
initial payment of $80,000 and twelve equal monthly payments of
$13,833. The full amount of this settlement was accrued in the
condensed consolidated balance sheet as of November 30, 2009.
* *
*
The
Company is subject to other legal proceedings and claims which arise in the
ordinary course of business. The Company does not believe that the
resolution of such actions will materially affect the Company’s business,
results of operations, financial condition or cash flows.
NOTE
4. CAPITAL STOCK
Classes of
Stock
The
authorized share capital consists of an unlimited number of no par value common
shares, an unlimited number of no par value Class A Preferred Shares (the “Class
A Preferred Shares”), and an unlimited number of no par value Series A
Convertible Preferred Shares (the “Series A Shares”). There were
56,993,312 common shares issued and outstanding as of November 30,
2009. There were no Class A Preferred Shares or Series A Shares
outstanding as of November 30, 2009.
Stock Plans and Stock-Based
Compensation
The
Company grants stock options to employees, directors and consultants under the
2002 Amended and Restated Stock Option Plan (the “Plan”), which was most
recently amended in November 2007 at the annual shareholders’ meeting. Under the
Plan, as amended, the Company is authorized to issue up to 11,000,000 shares of
common stock upon the exercise of stock options or restricted stock unit
grants. The Audit Committee of the Board of Directors administers the
Plan. Under the terms of the Plan, the exercise price of any stock
options granted shall not be lower than the market price of the common stock on
the date of the grant. Options to purchase shares of common
stock generally vest ratably over a period of three years and expire five years
from the date of grant.
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The
assumptions used to calculate the fair-value of share-based payment awards are
found in Note 1 under Accounting for Stock-Based Compensation. The
Company recognized the following for stock-based compensation expense resulting
from stock options in the consolidated statements of operations under general
and administrative expenses:
Three
Months Ended
|
Six Months Ended | |||||||||||||||
November
30,
|
November
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Stock
compensation expense - options
|
$ | 20,180 | $ | 24,009 | $ | 40,397 | $ | 90,263 |
Stock
option activity and related information is summarized as follows:
Weighted
|
||||||||||||||||||
Weighted
|
Average
|
|||||||||||||||||
Average
|
Weighted
|
Remaining
|
Aggregate | |||||||||||||||
Number
|
Exercise
|
Average
|
Contractual
|
Intrinsic | ||||||||||||||
of
Options
|
Price
|
Fair
Value
|
Term
(in Years)
|
Value | ||||||||||||||
Balance
outstanding - May 31, 2008
|
2,356,548 | $ | 1.23 | |||||||||||||||
Granted
|
27,600 | 0.17 | $ | 0.09 | ||||||||||||||
Exercised
|
- | - | ||||||||||||||||
Forfeited
or expired
|
(957,116 | ) | 1.37 | |||||||||||||||
Balance
outstanding - May 31, 2009
|
1,427,032 | 1.12 | ||||||||||||||||
Granted
|
906,700 | 0.31 | $ | 0.27 | ||||||||||||||
Exercised
|
- | - | ||||||||||||||||
Forfeited
or expired
|
(234,400 | ) | 1.86 | |||||||||||||||
Balance
outstanding - November 30, 2009
|
2,099,332 | $ | 0.75 |
3.2
|
$ |
2,386
|
||||||||||||
Exercisable
- November 30, 2009
|
1,134,717 | $ | 1.07 |
2.3
|
$ |
352
|
The
aggregate intrinsic value in the table above represents total intrinsic value
(of options in the money), which is the difference between the Company’s closing
stock price of $0.21 on November 30, 2009, the last trading day of the reporting
period and the exercise price times the number of shares, that would have been
received by the option holders had the option holders exercised their options on
November 30, 2009.
There
were no options exercised during the six months ended November, 2009 and 2008;
and therefore, no intrinsic value or cash received from option exercises during
the period.
The
following table summarizes information about options outstanding at November 30,
2009:
Range
of Exercise Prices
|
Number
of Options Outstanding
|
Weighted
Average Remaining Contractual Life (in Years)
|
Weighted
Average Exercise Price
|
Number
of Options Exercisable
|
Weighted
Average Remaining Contractual Life (in Years)
|
Weighted
Average Exercise Price
|
||||||||||||||||||||
$0.19 - $0.99 | 1,598,500 | 3.8 | $ | 0.52 | 650,330 | 3.0 | $ | 0.76 | ||||||||||||||||||
$1.00 - $1.99 | 460,301 | 1.5 | 1.34 | 443,856 | 1.5 | 1.34 | ||||||||||||||||||||
$2.00 - $2.99 | 5,000 | 1.2 | 2.04 | 5,000 | 1.2 | 2.04 | ||||||||||||||||||||
$3.00 - $3.25 | 35,531 | 0.1 | 3.25 | 35,531 | 0.1 | 3.25 | ||||||||||||||||||||
2,099,332 | 3.2 | 0.75 | 1,134,717 | 2.3 | 1.07 |
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of
November 30, 2009, $163,005 of total unrecognized compensation costs related to
non-vested stock options is expected to be recognized ratably over the remaining
individual vesting periods up to three years. The realized tax
benefit from stock options and other share based payments was nil for the three
and six months ended November 30, 2009 and 2008 due to the uncertainty of
realizability.
The
Company grants restricted stock units (“RSUs”) to certain management and members
of the Board of Directors. Each restricted stock unit represents one
share of common stock and vests ratably over three years. The Company
will then issue common stock for the vested restricted stock units upon exercise
by the grantee. During the vesting period, the restricted stock units
cannot be transferred, and the grantee has no voting rights. The cost
of the awards, determined as the fair value of the shares on the grant date, is
expensed ratably over the vesting period. The stock-based
compensation expense associated with the restricted stock units included in
general and administrative expenses on the consolidated statements of operations
and in additional paid-in capital on the consolidated balance sheets is as
follows:
Three
Months Ended
|
Six Months Ended | |||||||||||||||
November
30
|
November
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Stock
compensation expense - RSUs
|
$ | 14,939 | $ | 15,007 | $ | 29,877 | $ | 42,440 |
As of
November 30, 2009, $65,572 of total unrecognized compensation costs related to
non-vested restricted stock unit grants is expected to be recognized ratably
over the remaining individual vesting periods up to three years.
Weighted
|
|||||||||
Number
|
Average
|
||||||||
of
Units
|
Fair
Value
|
||||||||
Outstanding
- May 31, 2008
|
486,670 | (1) | |||||||
Granted
|
200,926 | $ | 0.27 | ||||||
Vested
and issued
|
(549,822 | ) | |||||||
Forfeited
or expired
|
(60,000 | ) | |||||||
Outstanding
- May 31, 2009
|
77,774 | ||||||||
Granted
|
160,000 | $ | 0.34 | ||||||
Vested
and issued
|
- | ||||||||
Forfeited
or expired
|
- | ||||||||
Outstanding
- November 30, 2009
|
237,774 | (2) | |||||||
(1)
|
At
May 31, 2008, 486,670 restricted stock units were outstanding including
264,444 that were fully vested, but not
issued.
|
(2)
|
At
November 30, 2009, 237,774 restricted stock units were outstanding
including 46,444 that were fully vested but not
issued.
|
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of
November 30, 2009, the Company had outstanding warrants to purchase shares of
common stock which were issued in connection with past financing
arrangements. Information related to these warrants is summarized as
follows:
Weighted | |||||||||||||||||||
Weighted
|
Average | ||||||||||||||||||
Average
|
Weighted
|
Remaining | Aggregate | ||||||||||||||||
Number
|
Exercise
|
Average
|
Contractual | Intrinsic | |||||||||||||||
of
Warrants
|
Price
|
Fair
Value
|
Term (in Years) | Value | |||||||||||||||
Balance
outstanding - May 31, 2008
|
24,337,501 | $ | 1.70 | ||||||||||||||||
Granted
|
3,800,000 | 0.25 | $ | 0.12 | |||||||||||||||
Exercised
|
(1,000,000 | ) | 0.25 | ||||||||||||||||
Forfeited
or expired
|
(21,987,501 | ) | 2.28 | ||||||||||||||||
Balance
outstanding - May 31, 2009
|
5,150,000 | 0.14 | |||||||||||||||||
Granted
|
- | ||||||||||||||||||
Exercised
|
- | ||||||||||||||||||
Forfeited
or expired
|
- | ||||||||||||||||||
Balance
outstanding - November 30, 2009
|
5,150,000 | $ | 0.14 |
2.3
|
$ |
470,000
|
|||||||||||||
Exercisable
- November 30, 2009
|
5,150,000 | $ | 0.14 |
2.3
|
$ |
470,000
|
NOTE
5. SEGMENT INFORMATION
The
Company has two reportable segments: Enterprise Workforce Services and Career
Networks. Enterprise Workforce Services consists of revenue generated
from HCM software and related professional services. In addition,
Enterprise Workforce Services generates revenue from the sale of various
products through the rewards modules of the HCM software. Career
Networks primarily consists of revenue from career transition, applicant
sourcing and recruitment research services.
The
Company evaluates the performance in each segment based on profit or loss from
operations. There are no inter-segment sales. Corporate
operating expenses are allocated to the segments primarily based on
revenue.
The
Company’s segments are distinct business units that offer different products and
services. Each is managed separately and each has a different client
base that requires a different approach to the sales and marketing
process.
The
Company does not allocate other income and expense items such as interest income
and expense, change in fair value of warrants and derivative, loss on
extinguishment of debt and other income and expense, as well as income tax
expense in the profit and loss presentation for its segments. The
Company deems these costs to be corporate costs that would not necessarily be a
part of the individual segments ordinary course of business or does not record
these assets by segment.
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The
following tables summarize the Company’s operations by business segment for the
three and six months ended November 30, 2009 and 2008:
Three Months Ended November 30, 2009 | Three Months Ended November 30, 2008 | |||||||||||||||||||||||
Enterprise
|
Enterprise
|
|||||||||||||||||||||||
Workforce
|
Career
|
Workforce
|
Career
|
|||||||||||||||||||||
Services
|
Networks
|
Total
|
Services
|
Networks
|
Total
|
|||||||||||||||||||
Software
|
$ | 1,739,128 | $ | - | $ | 1,739,128 | $ | 1,838,082 | $ | - | $ | 1,838,082 | ||||||||||||
Professional
services
|
273,567 | - | 273,567 | 509,169 | - | 509,169 | ||||||||||||||||||
Rewards
|
2,096,257 | - | 2,096,257 | 1,435,089 | - | 1,435,089 | ||||||||||||||||||
Career
services
|
- | 921,167 | 921,167 | - | 1,361,983 | 1,361,983 | ||||||||||||||||||
Revenue,
net
|
4,108,952 | 921,167 | 5,030,119 | 3,782,340 | 1,361,983 | 5,144,323 | ||||||||||||||||||
Cost
of revenues
|
1,700,878 | 31,172 | 1,732,050 | 1,426,837 | 72,505 | 1,499,342 | ||||||||||||||||||
Gross
profit
|
2,408,074 | 889,995 | 3,298,069 | 2,355,503 | 1,289,478 | 3,644,981 | ||||||||||||||||||
Expenses
|
2,091,028 | 767,554 | 2,858,582 | 2,541,052 | 1,624,860 | 4,165,912 | ||||||||||||||||||
Amortization
and depreciation
|
293,582 | 7,342 | 300,924 | 428,131 | 17,961 | 446,092 | ||||||||||||||||||
Business
segment income / (loss)
|
$ | 23,464 | $ | 115,099 | 138,563 | $ | (613,680 | ) | $ | (353,343 | ) | (967,023 | ) | |||||||||||
Other
income and expense and income tax
|
(479,695 | ) | (382,597 | ) | ||||||||||||||||||||
Net
loss
|
$ | (341,132 | ) | $ | (1,349,620 | ) |
Six Months Ended November 30, 2009 | Six Months Ended November 30, 2008 | |||||||||||||||||||||||
Enterprise
|
Enterprise
|
|||||||||||||||||||||||
Workforce
|
Career
|
Workforce
|
Career
|
|||||||||||||||||||||
Services
|
Networks
|
Total
|
Services
|
Networks
|
Total
|
|||||||||||||||||||
Software
|
$ | 3,345,455 | $ | - | $ | 3,345,455 | $ | 3,631,979 | $ | - | $ | 3,631,979 | ||||||||||||
Professional
services
|
507,905 | - | 507,905 | 1,231,140 | - | 1,231,140 | ||||||||||||||||||
Rewards
|
3,520,071 | - | 3,520,071 | 2,954,004 | - | 2,954,004 | ||||||||||||||||||
Career
services
|
- | 1,868,433 | 1,868,433 | - | 2,880,086 | 2,880,086 | ||||||||||||||||||
Revenue,
net
|
7,373,431 | 1,868,433 | 9,241,864 | 7,817,123 | 2,880,086 | 10,697,209 | ||||||||||||||||||
Cost
of revenues
|
2,931,591 | 90,147 | 3,021,738 | 2,921,925 | 179,887 | 3,101,812 | ||||||||||||||||||
Gross
profit
|
4,441,840 | 1,778,286 | 6,220,126 | 4,895,198 | 2,700,199 | 7,595,397 | ||||||||||||||||||
Expenses
|
4,051,426 | 1,714,819 | 5,766,245 | 6,263,149 | 3,432,957 | 9,696,106 | ||||||||||||||||||
Amortization
and depreciation
|
568,772 | 13,929 | 582,701 | 891,634 | 35,233 | 926,867 | ||||||||||||||||||
Business
segment income / (loss)
|
$ | (178,358 | ) | $ | 49,538 | (128,820 | ) | $ | (2,259,585 | ) | $ | (767,991 | ) | (3,027,576 | ) | |||||||||
Other
income and expense and income tax
|
(572,194 | ) | (373,626 | ) | ||||||||||||||||||||
Net
loss
|
$ | (701,014 | ) | $ | (3,401,202 | ) |
15
WORKSTREAM
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
6. NET LOSS PER SHARE
The
following is a reconciliation of basic net loss per share to diluted net loss
per share:
Three Months Ended | Six Months Ended | |||||||||||||||||
November
30,
|
November
30,
|
|||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||
Numerator:
|
||||||||||||||||||
Net
loss
|
$ | (341,132 | ) | $ | (1,349,620 | ) | $ | (701,014 | ) | $ | (3,401,202 | ) | ||||||
Denominator:
|
||||||||||||||||||
Weighted
average shares outstanding used
|
||||||||||||||||||
to
compute basic EPS
|
56,997,415 | 55,120,140 | 56,995,352 | 53,766,928 | ||||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||||
None
|
- | - | - | - | ||||||||||||||
Weighted
average shares outstanding used
|
||||||||||||||||||
to
compute diluted EPS
|
56,997,415 | 55,120,140 | 56,995,352 | 53,766,928 | ||||||||||||||
Basic
net loss per common share
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.06 | ) | ||||||
Diluted
net loss per common share
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.06 | ) |
Because
the Company reported a net loss during the three and six months ended November
30, 2009 and 2008, the Company excluded the impact of its common stock
equivalents in the computation of dilutive earnings per share for these periods,
as their effect would be anti-dilutive. The following outstanding
instruments could potentially dilute earnings per share in the future as of
November 30, 2009:
Total
dilutive instruments:
|
||||
Stock
options
|
2,099,332 | |||
Restricted
stock units
|
237,774 | |||
Escrowed
shares
|
108,304 | |||
Warrants
|
5,150,000 | |||
Total
potential dilutive instruments
|
7,595,410 |
On
December 11, 2009, the Company issued $5,361,337 of $0.10 Convertible Notes and
$6,650,000 off $0.25 Convertible Notes. The principal of these notes
are convertible into a combined 80,213,370 common shares and are potentially
dilutive instruments. Furthermore, these notes accrue interest at
9.5% compounded on a quarterly basis in which the accrued interest is also
convertible into common shares at said conversion rates.
FORWARD
LOOKING STATEMENTS
Certain
statements discussed in Item 2 (Management’s Discussion and Analysis of
Financial Condition and Results of Operations) 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 Items 1A (Risk Factors) and 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, 2009 and in Item 1A of Part II
hereunder. 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 audited
consolidated financial statements and related notes included in our Annual
Report on Form 10-K as filed on September 14, 2009 and in conjunction with our
unaudited condensed consolidated financial statements and related notes included
elsewhere in this Quarterly Report on Form 10-Q. All figures are in
United States dollars, except as otherwise noted.
OVERVIEW
We are a
provider of services and web-based software applications for Human Capital
Management (“HCM”). HCM is the process by which companies recruit,
train, compensate, evaluate performance, motivate, develop and retain their
employees. We offer software and services that address the needs of
companies to more effectively manage their HCM functions. We believe
that our broad array of HCM solutions provide a “one-stop-shopping” approach for
our clients’ human resource needs and is more efficient and effective than
traditional methods of human resource management.
Our
business changed beginning in fiscal 2002. During fiscal 2002, we
completed the acquisitions of Paula Allen Holdings, OMNIpartners,
6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. During
fiscal 2003, we completed the acquisitions of Icarian, PureCarbon and
Xylo. During fiscal 2004, we completed the acquisitions of Perform,
Peopleview and Kadiri. During fiscal 2005, we completed the
acquisitions of Peoplebonus, Bravanta, HRSoft and ProAct. During
fiscal 2006, we acquired Exxceed, Inc. These acquisitions have
enabled us to expand and enhance our HCM software, increase our service
offerings and increase our revenue streams. Subsequent to the
acquisitions, we have concentrated on integrating the acquired entities and
technologies, expanding the reach of the existing business and identifying other
potential acquisition targets. When we complete an acquisition, we
combine the business of the acquired entity into the Company’s existing
operations and expect that this will significantly reduce the administrative
expenses associated with the business prior to the acquisition. The
acquired business is not maintained as a standalone business
operation. Therefore, we do not separately account for the acquired
business, including its profitability. Rather, it is included in one
of our two distinct business segments and is evaluated as part of the entire
segment.
Over the
past three years, we have expended significant resources on further integration
of the acquired software applications. We have enhanced product
functionality, user interface and reporting capabilities. We have
further integrated many of the talent management solutions and provide a portal
based platform for our customers who may elect to contract for a single solution
or multiple applications.
In the
last half of fiscal 2008, we initiated objectives that were a part of a strategy
to align expenses with revenues of the business. Our overall
strategic objective is still to be the premier provider of talent management
solutions in the HCM space. We completed our development of our
seamless integration between our core applications of Compensation, Performance,
and Development. We are capitalizing on the sales and marketing
expenditures and continue to maintain
momentum
of selling to new customers and retaining existing customers. We
believe that sound execution of these initiatives will result in revenue growth
and the ability to take advantage of the scalable nature of our business
model.
We have
two distinct operating segments, which are the Enterprise Workforce Services and
Career Networks segments.
Enterprise Workforce
Services
The
Enterprise Workforce Services segment primarily consists of HCM software,
professional services and additional products sold as part of rewards
programs. Specifically, our Enterprise Workforce segment offers a
complete suite of on-demand HCM software solutions, which address performance,
compensation, development, recruitment, benefits and rewards. Workstream
provides on-demand compensation, performance and talent management solutions and
services that help companies manage the entire employee lifecycle - from
recruitment to retirement. We offer software and services that focus
on talent management and address the needs of companies to more effectively
manage their Human Capital Management (HCM) functions. Talent
Management is the process by which companies recruit, train, evaluate, motivate,
develop and retain their employees. We believe that our integrated
TalentCenter Solution Suite, which brings together our entire modular
stand-alone applications on a common platform, is more efficient and effective
than traditional methods of human resource management. Access to our
TalentCenter Solution Suite is offered on a monthly subscription basis under our
web-based Software-as-a-Service (“SaaS”) delivery model designed to help
companies build high performing workforces, while controlling
costs.
Career
Networks
The
Career Networks segment consists of career transition and applicant sourcing
services.
Career
Transition Services
Our
career transition services provide job search services for displaced
employees. We focus on creating professional career marketing
materials that displaced employees need in order to immediately begin their new
job campaign. This package includes a professionally written résumé, broadcast
letter, custom cover letter and references. This assistance is
provided to thousands of job seekers each year in the areas of information
technology, engineering, finance and marketing.
Applicant
Sourcing
6FigureJobs.com,
Inc., is an online applicant-sourcing portal where job seeking candidates and
companies that are actively hiring and filling positions can
interact. The site provides content appropriate for senior
executives, directors and other managers, as well as containing job postings
that meet their qualifications. We employ screening to create this
exclusive community of job seekers. On the candidate side, each job
seeker is hand reviewed, to ensure they have recent total compensation of
$100,000 per annum, before his or her resume is allowed to reside in the site’s
candidate database. On the recruiting side, all job openings must
have a minimum aggregate compensation of $100,000. We generate
revenue through 6FigureJobs on a subscription basis from employers and
recruiters that access our database of job seekers and use our tools to post,
track and manage job openings. We also generate revenue by charging
companies that advertise on our 6FigureJobs website, which includes charging
certain advertisers a fee based on the number of leads delivered or on a cost
per lead basis. Launched in early calendar 2009, executives who wish
to access additional jobs, or give their resume and profile more exposure than
free membership, may subscribe to a premium service for a small monthly
fee.
RESULTS
OF OPERATIONS
At the
end of fiscal 2008 and the first half of fiscal 2009, management restructured
the entire Company and decreased its employee base by 35% and reduced its usage
of outside consultants as part of its overall plan to reduce costs to better
align them with the Company’s current revenues. Therefore, fiscal
2010 expenses for consulting fees and employment related expenses such as wages,
commissions, bonuses, payroll taxes and health benefits were and are expected to
be sharply lower than fiscal 2009 expenses, particularly in comparison to the
first and second quarters.
To
monitor our results of operations and financial condition, we review key
financial information including net revenues, gross profit, operating income and
cash flow from operations. We have deployed numerous analytical
dashboards across our business to assist in evaluating current performance
against established metrics, budgets and business objectives on an ongoing
basis. We continue to seek methods to more efficiently monitor and
manage our business performance. Such financial information has been
included in the following discussion of the Company’s results of
operations.
Revenues
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||||
Revenues:
|
||||||||||||||||||||||||||||||||||
Software
|
$ | 1,739,128 | $ | 1,838,082 | $ | (98,954 | ) | -5.4 | % | $ | 3,345,455 | $ | 3,631,979 | $ | (286,524 | ) | -7.9 | % | ||||||||||||||||
Professional
services
|
273,567 | 509,169 | (235,602 | ) | -46.3 | % | 507,905 | 1,231,140 | (723,235 | ) | -58.7 | % | ||||||||||||||||||||||
Rewards
|
2,096,257 | 1,435,089 | 661,168 | 46.1 | % | 3,520,071 | 2,954,004 | 566,067 | 19.2 | % | ||||||||||||||||||||||||
Career
networks
|
921,167 | 1,361,983 | (440,816 | ) | -32.4 | % | 1,868,433 | 2,880,086 | (1,011,653 | ) | -35.1 | % | ||||||||||||||||||||||
Total
revenues
|
$ | 5,030,119 | $ | 5,144,323 | $ | (114,204 | ) | -2.2 | % | $ | 9,241,864 | $ | 10,697,209 | $ | (1,455,345 | ) | -13.6 | % | ||||||||||||||||
Percentage
of total revenues:
|
||||||||||||||||||||||||||||||||||
Software
|
34.6 | % | 35.7 | % | 36.2 | % | 34.0 | % | ||||||||||||||||||||||||||
Professional
services
|
5.4 | % | 9.9 | % | 5.5 | % | 11.5 | % | ||||||||||||||||||||||||||
Rewards
|
41.7 | % | 27.9 | % | 38.1 | % | 27.6 | % | ||||||||||||||||||||||||||
Career
networks
|
18.3 | % | 26.5 | % | 20.2 | % | 26.9 | % |
Fiscal Second Quarter 2010 Compared
to Fiscal Second Quarter 2009: Software revenue is comprised of hosting,
license and maintenance fees. Software revenue decreased primarily
due to lower subscriptions as a result of discontinuing support on old software
versions and lack of renewals from existing client base. Professional
services revenues decreased due to less consulting for existing customer
upgrades or specialization work and no new customers. We will be
implementing a new, more targeted approach during the second half of fiscal 2010
in order to attract new customers to coincide with an expected overall economic
recovery and anticipated increase in IT spending. Rewards increased
significantly due to better efficiencies by the Company in shipping product and
higher utilization of the rewards program by existing
customers. Career Networks revenues decreased primarily due to less
employer and recruiter advertising and economic conditions that negatively
affected deals in the recruiting and career transition services segment of the
business along with less availability of financing for its customers.
Additionally, we spent less on marketing and advertising and as a result
received less leads on which to convert to revenues. We have
implemented a more targeted approach and alternative financing terms for our
career transition clients and as a result believe that the third quarter of
fiscal 2010 revenues will begin to improve over the second quarter of fiscal
2010.
First Half Fiscal 2010 Compared to
First Half Fiscal 2009: Software revenue decreased primarily due to lower
subscriptions as a result of discontinuing support on old software versions and
lack of renewals from existing client base. Professional services
revenues decreased due to less consulting for existing customer upgrades or
specialization work and no new customers. We will be implementing a
new, more targeted approach during the second half of fiscal 2010 in order to
attract new customers to coincide with an expected overall economic recovery and
anticipated increase in IT spending. Rewards increased significantly
due to better efficiencies by the Company in shipping product and higher
utilization of the rewards program by existing customers. Career
Networks revenues decreased primarily due to less employer and recruiter
advertising and economic conditions that negatively affected deals in the
recruiting and career transition services segment of the business along with
less availability of financing for its customers. Additionally, we spent less on
marketing and advertising and as a result received less leads on which to
convert to revenues. We have implemented a more targeted approach and
alternative financing terms for our career transition clients and as a result
believe that the third quarter of fiscal 2010 revenues will begin to improve
over the first half of fiscal 2010.
Cost of Revenues & Gross
Profit
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||||
Cost
of revenues
|
||||||||||||||||||||||||||||||||||
Software
|
$ | 139,184 | $ | 108,232 | $ | 30,952 | 28.6 | % | $ | 256,210 | $ | 252,144 | $ | 4,066 | 1.6 | % | ||||||||||||||||||
Professional
services
|
36,338 | 149,378 | (113,040 | ) | -75.7 | % | 66,350 | 326,541 | (260,191 | ) | -79.7 | % | ||||||||||||||||||||||
Rewards
|
1,525,356 | 1,169,227 | 356,129 | 30.5 | % | 2,609,031 | 2,343,240 | 265,791 | 11.3 | % | ||||||||||||||||||||||||
Career
networks
|
31,172 | 72,505 | (41,333 | ) | -57.0 | % | 90,147 | 179,887 | (89,740 | ) | -49.9 | % | ||||||||||||||||||||||
$ | 1,732,050 | $ | 1,499,342 | $ | 232,708 | 15.5 | % | $ | 3,021,738 | $ | 3,101,812 | $ | (80,074 | ) | -2.6 | % | ||||||||||||||||||
Gross
profit
|
$ | 3,298,069 | $ | 3,644,981 | $ | (346,912 | ) | -9.5 | % | $ | 6,220,126 | $ | 7,595,397 | $ | (1,375,271 | ) | -18.1 | % | ||||||||||||||||
Gross
profit as a percentage of total revenues:
|
||||||||||||||||||||||||||||||||||
Software
|
92.0 | % | 94.1 | % | 92.3 | % | 93.1 | % | ||||||||||||||||||||||||||
Professional
services
|
86.7 | % | 70.7 | % | 86.9 | % | 73.5 | % | ||||||||||||||||||||||||||
Rewards
|
27.2 | % | 18.5 | % | 25.9 | % | 20.7 | % | ||||||||||||||||||||||||||
Career
networks
|
96.6 | % | 94.7 | % | 95.2 | % | 93.8 | % | ||||||||||||||||||||||||||
Total
|
65.6 | % | 70.9 | % | 67.3 | % | 71.0 | % |
Fiscal Second Quarter 2010 Compared
to Fiscal Second Quarter 2009: Software costs of revenues increased due
to increases in service provider fees, but decreased as a percentage of revenues
primarily due to this increase and lower subscription base as a result of
discontinuing support on old software versions and lack of renewals from
existing client base. Professional services costs decreased due to
less consulting for existing customer upgrades or specialization work as well as
reductions in employee related expenses due to a reduction in
headcount. Rewards cost of revenues increased due to the higher
volume of revenues and related margins improved primarily by the Company
entering into a consortium to purchase goods from vendors at lower
prices. Gross profit on our rewards business is driven primarily by
the mix of products redeemed by the customers and results typically range
between 20%-30%. Career Networks cost of revenues directly decreased
due to the reduction in revenue levels.
First Half Fiscal 2010 Compared to
First Half Fiscal 2009: Software costs of revenues remained relatively
stable due to reductions in spending by management to control costs, which was
offset by an increases in service provider fees. Further, Software
margins decreased due to this increase and lower subscription base as a result
of discontinuing support on old software versions and lack of renewals from
existing client base. Professional services costs decreased due to
less consulting for existing customer upgrades or specialization work as well as
reductions in employee related expenses due to a reduction in
headcount. Rewards cost of revenues increased due to the higher
volume of revenues and related margins improved primarily by the Company
entering into a consortium to purchase goods from vendors at lower
prices. Gross profit on our rewards business is driven primarily by
the mix of products redeemed by the customers and results typically range
between 20%-30%. Career Networks cost of revenues directly decreased
due to the reduction in revenue levels.
Selling & Marketing
Expense
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||
Selling
and marketing
|
$ | 545,513 | $ | 1,128,676 | $ | (583,163 | ) | -51.7 | % | $ | 1,002,181 | $ | 2,431,283 | $ | (1,429,102 | ) | -58.8 | % | ||||||||||||||
Percentage
of total revenues
|
10.8 | % | 21.9 | % | 10.8 | % | 22.7 | % |
Fiscal Second Quarter 2010 Compared
to Fiscal Second Quarter 2009: Consulting and employment related expenses
decreased by approximately $503,000 primarily as a result of the restructuring
and reduction of headcount at the end of second quarter of fiscal
2009. The additional decrease was due primarily to less trade
shows (and related travel expenses), marketing and advertising programs in the
second quarter of fiscal 2010. Other administrative expenses also
declined due to fewer employees and the cancellation and consolidation of
contracts.
First Half Fiscal 2010 Compared to
First Half Fiscal 2009: Consulting and employment related expenses
decreased by approximately $1,071,000 primarily as a result of the restructuring
and reduction of headcount at the end of first half of fiscal
2009. Further, outside professional fees decreased by
approximately $74,000 to nil during this period. The additional
decrease was due primarily to less trade shows (and related travel expenses),
marketing and advertising programs in the first half of fiscal
2010. Other administrative expenses also declined due to fewer
employees and the cancellation and consolidation of contracts.
General & Administrative
Expense
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||
General
and administrative
|
$ | 1,971,921 | $ | 2,052,077 | $ | (80,156 | ) | -3.9 | % | $ | 3,993,777 | $ | 4,977,563 | $ | (983,786 | ) | -19.8 | % | ||||||||||||||
Percentage
of total revenues
|
39.2 | % | 39.9 | % | 43.2 | % | 46.5 | % |
Fiscal Second Quarter 2010 Compared
to Fiscal Second Quarter 2009: Consulting and employment related expenses
declined by approximately $130,000 as a result of the reduction of
employees. Non-cash stock compensation expense decreased by
approximately $4,000 due to the reduction in headcount resulting in a lower
amount of options and restricted stock awards
outstanding. Professional fees were reduced by approximately $19,000
during this timeframe. Additionally, we reduced our space occupancy
costs, equipment leases and insurance costs by approximately $161,000 by
changing or eliminating office space in various locations. Telephone,
travel and other administrative expenses also declined due to fewer employees
and due to the cancellation and consolidation of contracts.
First Half Fiscal 2010 Compared to
First Half Fiscal 2009: Consulting and employment related expenses
declined by approximately $380,000 as a result of the reduction of
employees. Non-cash stock compensation expense decreased by
approximately
$62,000 due to the reduction in headcount resulting in a lower amount of options
and restricted stock awards outstanding. Professional fees were
decreased by approximately $106,000 during this
timeframe. Additionally, we reduced our space occupancy costs,
equipment leases and insurance costs approximately $295,000 by changing or
eliminating office space in various locations. Telephone, travel and
other administrative expenses also declined due to fewer employees and due to
the cancellation and consolidation of contracts.
Research & Development
Expense
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||
Research
and development
|
$ | 341,148 | $ | 985,159 | $ | (644,011 | ) | -65.4 | % | $ | 770,287 | $ | 2,287,260 | $ | (1,516,973 | ) | -66.3 | % | ||||||||||||||
Percentage
of total revenues
|
6.8 | % | 19.2 | % | 8.3 | % | 21.4 | % |
Fiscal Second Quarter 2010 Compared
to Fiscal Second Quarter 2009: Employment related expenses declined by
approximately $290,000 as a result of the restructuring and reduction in
headcount. Costs associated with consultants and outsourcing of
R&D activities decreased by approximately $168,000 during this
period. Other administrative expenses also declined due to fewer
employees and due to the cancellation and consolidation of
contracts.
First Half Fiscal 2010 Compared to
First Half Fiscal 2009: Employment related expenses declined by
approximately $725,000 as a result of the restructuring and reduction in
headcount. Costs associated with consultants and outsourcing of
R&D activities decreased by approximately $386,000 during this
period. Additionally, we reduced our space occupancy costs by
approximately $99,000 by changing or eliminating office space. Other
administrative expenses also declined due to fewer employees and due to the
cancellation and consolidation of contracts.
Amortization &
Depreciation Expense
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||
Amortization
and depreciation
|
$ | 300,924 | $ | 446,092 | $ | (145,168 | ) | -32.5 | % | $ | 582,701 | $ | 926,867 | $ | (344,166 | ) | -37.1 | % | ||||||||||||||
Percentage
of total revenues
|
6.0 | % | 8.7 | % | 6.3 | % | 8.7 | % |
Fiscal Second Quarter 2010 Compared
to Fiscal Second Quarter 2009: Amortization expense decreased by nearly
$139,000 due to certain acquired intangible assets becoming fully amortized in
prior years. Without additional business acquisitions, we are not
expecting to incur any additional amortization costs during fiscal
2010. Therefore, fiscal 2010 expense will be significantly less than
fiscal 2009. Depreciation expense also decreased by approximately
$6,000 due to many of our fixed assets becoming fully depreciated.
First Half Fiscal 2010 Compared to
First Half Fiscal 2009: Amortization expense decreased by nearly $257,000
due to certain acquired intangible assets becoming fully amortized in prior
years. Without additional business acquisitions, we are not expecting
to incur any additional amortization costs during fiscal
2010. Therefore, fiscal 2010 expense will be significantly less than
fiscal 2009. Depreciation expense also decreased by approximately
$88,000 due to many of our fixed assets becoming fully depreciated.
Interest Income &
Expense, Net
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||
Interest
income and expense, net
|
$ | (887,502 | ) | $ | (351,025 | ) | $ | (536,477 | ) | 152.8 | % | $ | (1,401,577 | ) | $ | (347,435 | ) | $ | (1,054,142 | ) | 303.4 | % |
Fiscal Second Quarter 2010 Compared
to Fiscal Second Quarter 2009: Interest expense on the outstanding Senior
Secured Notes increased significantly due to the default interest rate increase
of 5% caused by the NASDAQ delisting default in May 2009 and the additional
interest rate increase of 5% in late August 2009 due to the failure to repay any
of the Senior Secures Notes principal.
First Half Fiscal 2010 Compared to
First Half Fiscal 2009: Interest expense on the outstanding Senior
Secured Notes increased significantly due to the default interest rate increase
of 5% caused by the NASDAQ delisting default in May 2009 and the additional
interest rate increase of 5% in late August 2009 due to the failure to repay any
of the Senior Secured Notes principal. Further, the Senior Secured
Notes
were outstanding for the full first half of fiscal 2010 while they were only
outstanding for the second quarter of fiscal 2009.
Change in Fair Value of
Warrants & Derivative
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Change
in fair value of warrants and derivative
|
$ | 364,226 | $ | - | $ | 364,226 | N/A | $ | 787,693 | $ | - | $ | 787,693 | N/A |
The Notes
also contain a contingent put reflected in the contractual rights of
default. Upon the occurrence of an event of default, as defined in
the Notes, a Holder may require us to redeem all or a portion of such Holder’s
Note at a price equal to 110% of the sum of the principal amount of the Note,
accrued and unpaid interest and late fees, if any, to be redeemed. Under ASC
815, Derivatives and
Hedging, the risks of equity are inconsistent with the risks of the debt
host and, therefore, embedded put derivatives such as these require bifurcation
and separate classification at fair value. Due to the Exchange
Agreement signed in December 2009, but agreed to in late November 2009, the
value of the put derivative was deemed to be nil at November 30,
2009. Accordingly, we recognized a gain on the decrease in the fair
value of $521,026 and $493,693 for the three and six months ended November 30,
2009, respectively, in the condensed consolidated statement of
operations.
On June
1, 2009, the Company adopted ASC 815, which required it to begin accounting for
the New Warrants as a liability due primarily to the reset provisions of the
warrant in the event of lower priced financing
transactions. Therefore, the fair value of the New Warrants was
reclassified from equity to a liability classification as of June 1, 2009 via a
cumulative effect adjustment. We recognized amounts of $(156,800) and
$294,000 associated with the change in the fair value of the New Warrants in the
condensed consolidated statement of operations for the three and six months
ended November 30, 2009, respectively.
Income
Taxes
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
2009
|
2008
|
$
Change
|
%
Change
|
|||||||||||||||||||||||||
Income
tax expense
|
$ | (39 | ) | $ | 15,725 | $ | (15,764 | ) | -100.2 | % | $ | (328 | ) | $ | 61,530 | $ | (61,858 | ) | -100.5 | % |
Income
taxes continue to be minimal for all periods presented, primarily due to current
operating losses and significant net operating loss carry forwards in various
jurisdictions. Future effective tax rates could be adversely affected
by unfavorable changes in tax laws and regulations, limitations on net operating
loss deductions, or by adverse rulings in any tax related litigation that may
arise.
LIQUIDITY
AND CAPITAL RESOURCES
Working Capital: Working
capital, which represents current assets less current liabilities, was negative
$3.5 million. With the refinancing of the senior secured notes
(discussed subsequently), the long-term portion of the debt was reclassified to
long-term liabilities at November 30, 2009. Further improvement of
working capital is a component of management’s overall plan to better align the
Company’s financial position with its current operational
requirements.
Cash & Cash Equivalents:
As of November 30, 2009, we have approximately $1,194,000 in cash and cash
equivalents, which primarily consists of deposits held with
banks. Cash decreased from May 31, 2009 primarily due to funding for
the rewards programs and seasonal lack of annual billings in the first quarter
of each fiscal year.
Accounts Receivable: Days
sales outstanding (“DSO”) is based upon a rolling 12 month calculation performed
quarterly. It is calculated as total accounts receivable (less Allen
& Associates accounts receivable) divided by average day’s sales, which is
calculated as revenues (less Allen & Associated revenues) divided by the
total number of days in period. The DSO ratio decreased to 54.0 days at November
30, 2009 from 59.3 days at May 31, 2009. The cause for the change
days sales outstanding is primarily due to an increased focus on cash
collections as part of management’s overall plan to better align the Company’s
cash flows with its current operational requirements.
Accounts Payable & Accrued
Liabilities: Management is in the process of systematically reducing
accounts payable and accrued liabilities as part of its overall plan to better
align the Company’s financial position with its current operational
requirements. Further, the Company is in constant negotiations with
its vendors, particularly relating to the rewards programs, for increased credit
limits and improved payment terms to improve cash flows.
Cash Flows: The following is
a summary of cash flow activities for the six months ended November 30, 2009 and
2008:
Six Months Ended November 30, | |||||||||||||||||
2009
|
2008
|
$
Change
|
%
Change
|
||||||||||||||
Cash
used in operating activities
|
$ | (25,990 | ) | $ | (2,395,607 | ) | $ | 2,369,617 | -98.9 | % | |||||||
Cash
provided by / (used in) investing activities
|
(106,761 | ) | 7,169 | (113,930 | ) | -1589.2 | % | ||||||||||
Cash
used in financing activities
|
(300,361 | ) | (232,748 | ) | (67,613 | ) | 29.0 | % |
Cash Flows From Operating
Activities: The reduction in these cash flows primarily relates to
management’s overall plan of better aligning costs with the Company’s revenues
and operations. The reduction primarily centered on reducing
consulting and employment related expenses. Additionally, reductions
in our space occupancy costs, insurance costs, telephone, travel and other
administrative expenses contributed to the reduction of cash used in operating
activities.
Cash Flows From Investing
Activities: The changes in these cash flows relate to the acquisition of
certain IT equipment associated with delivering the Company’s software hosting
services.
Cash Flows From Financing
Activities: The increase in these cash flows primarily relates to the
financing costs incurred to the note exchange and
restructuring of senior secured notes in December 2009 that was partially offset
by a decrease in payments for capital lease obligations outstanding during each
period.
EBITDA: To supplement our
condensed consolidated statements of operations and cash flows, we use non-GAAP
measures of EBITDA. Management believes that EBITDA, as a complement
to US GAAP amounts, allows one to meaningfully trend and analyze the performance
of the Company’s core cash operations. The presentation of this
non-GAAP measure is not meant to be considered in isolation or as an alternative
to net income as an indicator of our performance, or as an alternative to cash
flows from operating activities as a measure of liquidity. EBITDA is
calculated as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
November
30,
|
November
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
loss, as reported under US GAAP
|
$ | (341,132 | ) | $ | (1,349,620 | ) | $ | (701,014 | ) | $ | (3,401,202 | ) | ||||
Effects
of certain transactions:
|
||||||||||||||||
Interest
income and expense, net
|
887,502 | 351,025 | 1,401,577 | 347,435 | ||||||||||||
Income
tax expense
|
39 | (15,725 | ) | 328 | (61,530 | ) | ||||||||||
Amortization
and depreciation
|
300,924 | 446,092 | 582,701 | 926,867 | ||||||||||||
Stock
related compensation
|
35,119 | 39,015 | 70,274 | 132,702 | ||||||||||||
Change
in fair value of warrants and derivative
|
(364,226 | ) | - | (787,693 | ) | - | ||||||||||
Other
income and expense, net
|
(43,620 | ) | 47,297 | (42,018 | ) | 87,721 | ||||||||||
EBITDA,
as adjusted
|
$ | 474,606 | $ | (481,916 | ) | $ | 524,155 | $ | (1,968,007 | ) |
EBITDA is
a non-GAAP financial measure within the meaning of Regulation G promulgated by
the Securities and Exchange Commission. EBITDA is commonly defined as
earnings before interest, taxes, depreciation and
amortization. We believe that EBITDA provides useful
information to investors as it excludes transactions not related to the core
cash operating business activities including non-cash
transactions. We believe that excluding these transactions allows
investors to meaningfully trend and analyze the performance of our core cash
operations. All companies do not calculate EBITDA in the same manner,
and EBITDA as presented by Workstream may not be comparable to EBITDA presented
by other companies. Workstream defines EBITDA as earnings or loss
from continuing operations before interest, taxes, depreciation and
amortization, other income and expense, including effects of foreign currency
gains or losses, non-cash stock related compensation, gain or loss on asset
disposals or impairment, merger and acquisition costs, and non-recurring
goodwill impairment, if applicable.
Off-Balance Sheet
Arrangements: We do not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
Going
Concern
The
opinion of our independent registered public accounting firm on the audited
financial statements as of and for the year ended May 31, 2009 contained an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern.
The
Company has incurred substantial losses in recent periods and, as a result, has
a shareholders’ deficit of $7,322,094 as of November 30, 2009. Losses
for the six months ended November 30, 2009 were $701,014 and losses for the
years ended May 31, 2009 and 2008 were $4,856,356 and $52,616,875,
respectively. The Company's ability to continue as a going concern
depends upon its ability to successfully refinance approximately $21.6 million
of its senior secured notes payable (the “Notes”), including accrued interest
thereon, generate positive cash flows from operations and obtain sufficient
additional financing, if necessary. The Notes went into default on
May 22, 2009 due to the Company’s suspension of trading on the NASDAQ Stock
Market as a result of its shareholders’ deficit. Such Notes were
restructured on December 11, 2009; please refer to subsequent discussion on
Refinancing of Senior Secured Notes Payable.
Due to
significant reductions in operating expenses in the fourth quarter of fiscal
2008 and throughout fiscal 2009, management believes that current operations
will be sufficient to meet its anticipated working capital and capital
expenditure requirements upon the refinancing of the Notes. The
current operating loss is the result of current economic conditions and is a
reflection of the overall health of the economy as a whole. Based on
an analysis of our current contracts, forecasted new business, our current
backlog and current expense level along with the refinancing of the Notes,
management believes the Company will meet its cash flow needs for fiscal
2010. If these measures fall short, management will consider
additional cost savings measures, including cutting back product development
initiatives and further reducing operating expenditures.
To the
extent that existing cash and cash equivalents, and cash from operations, are
insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financing. We may
enter into agreements or letters of intent with respect to potential investments
in, or acquisitions of, complementary businesses, applications or technologies
in the future, which could also require us to seek additional equity or debt
financing. Additional funds may not be available on terms favorable
to us or at all.
Refinancing of Senior
Secured Notes Payable
On
December 11, 2009, the Company entered into a separate Exchange Agreement
(collectively, the “Exchange Agreements”) with each of the Holders of its senior
secured promissory notes pursuant to which, among other things, each Holder
exchanged its existing Notes for: (i) a replacement senior secured
non-convertible note (a “Non-Convertible Note”); (ii) a senior secured
convertible note that is convertible into the Company's common shares at a
conversion price of $0.25 (a “$0.25 Convertible Note”); and, (iii) a senior
secured convertible note that is convertible into the Company's common shares at
a conversion price of $0.10 (a “$0.10 Convertible Note,” and together with the
Non-Convertible Notes and the $0.25 Convertible Notes, collectively, the “New
Secured Notes”). Pursuant to the terms of the separate Exchange
Agreements, the Company issued Non-Convertible Notes in an aggregate principal
amount of $9,500,000, $0.25 Convertible Notes in an aggregate principal amount
of $6,650,000, and $0.10 Convertible Notes in an aggregate principal amount of
$5,361,337. The aggregate principal amount of all of the New Secured
Notes issued pursuant to the Exchange Agreements is $21,613,516, which was the
aggregate amount of principal and accrued interest outstanding under the Notes
on December 11, 2009.
Each New
Secured Note continues to be secured by a lien on all of the assets of the
Company and its subsidiaries pursuant to the terms of the existing Security
Agreement with the Investors, as amended in connection with the exchange
transaction. Interest on each Note accrues at an annual rate of
9.5%. Interest on the $0.25 Convertible Notes and the $0.10 Convertible Notes
compounds on a quarterly basis and is payable, together with principal, on July
31, 2012 (the “Maturity Date”). Interest on the Non-Convertible Notes
compounds on a quarterly basis and is payable on the Maturity Date, while part
of the principal is payable on a quarterly basis pursuant to an agreed upon
schedule.
Upon the
occurrence of an event of default, as defined in the Notes, an Investor may
require the Company to redeem all or a portion of such Investor’s
Notes. Upon a disposition of assets or liquidity event (each as
defined in the New Notes), the
Company
is required to use 100% of the net proceeds to redeem the New Secured
Notes. Each New Secured Note contains customary covenants with which
the Company must comply. Each subsidiary of the Company previously
agreed to guarantee the obligations of the Company under the Prior Secured Notes
and has reaffirmed such guarantee with respect to the Notes by delivering to the
Investors a Reaffirmation of Guaranty. The Company and each of the
Investors also entered into a Second Amended and Restated Registration Rights
Agreement principally in order to include the common shares of the Company into
which the $0.25 Convertible Notes and the $0.10 Convertible Notes are
convertible as registrable securities.
CRITICAL
ACCOUNTING POLICIES
Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with U.S. generally accepted accounting principles (“US
GAAP”). The preparation of these financial statements requires
management to make certain estimates, judgments and assumptions about future
events that affect the amounts reported in the financial statements and
accompanying notes. Management bases its estimates on historical
experience and on various other assumptions that it believes to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources.
An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, if different estimates reasonably could have been
used, or if changes in the estimate that are reasonably likely to occur could
materially impact the financial statements. Management makes
estimates and assumptions that affect the value of assets and the reported
revenues. The accounting policies that reflect our more significant
estimates, judgments and assumptions and which management believes are the most
critical to aid in fully understanding and evaluating the Company’s reported
financial results include: revenue recognition, allowance for trade receivables,
impairment analysis for goodwill, valuation of derivative financial instruments,
valuation of deferred taxes, and valuation of compensation expense on
share-based awards. In many cases, the accounting treatment of a
particular transaction is specifically dictated by U.S. GAAP and does not
require management's judgment in its application. There are also
areas in which management's judgment in selecting among available alternatives
would not produce a materially different result. Management has
discussed the development, selection and disclosure of critical accounting
policies and estimates with our Board of Directors. Management
believes that there have been no significant changes during the six months ended
November 30, 2009 to the items that were disclosed as the Company’s critical
accounting policies and estimates in Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in the Company’s Form
10-K for the fiscal year ended May 31, 2009, except for the identification of
the accounting for contingencies as a critical accounting policy, which is as
follows:
Loss
Contingencies
We are
involved in various lawsuits, claims, investigations and proceedings that arise
in the ordinary course of business. If the potential loss from an
item is considered probable and the amount can be estimated, we accrue a
liability for the estimated loss, as provided in ASC 450, Contingencies. Because
of uncertainties related to these matters, accruals are based only on the best
information available at the time. Periodically, we review the status
of each significant matter and assess our potential financial
exposure. These matters are inherently unpredictable and are subject
to significant uncertainties, some of which are beyond our
control. Should any of the estimates and assumptions utilized to
estimate potential losses change or prove to have been incorrect, it could have
a material impact on our results of operations, financial position or cash
flows. Further, please refer to Note 3 to the accompanying condensed
consolidated financial statements for a description of our material legal
proceedings.
RECENT
ACCOUNTING PRONOUNCEMENTS
See Note
1 of the accompanying condensed consolidated financial statements for
information concerning recent accounting pronouncements.
ITEM
4T. CONTROLS AND
PROCEDURES
Disclosure
controls are controls and procedures designed to reasonably ensure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this report, is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. Disclosure controls
include controls and procedures designed to reasonably ensure that such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure. Because of its
inherent limitations, internal control over financial reporting is not intended
to provide absolute assurance that a misstatement of the Company’s financial
statements would be prevented or detected. Furthermore, the Company’s
controls and procedures could be circumvented by the individual acts of some
persons, by collusion or two or more people or by management override of the
control. Misstatements due to error or fraud may occur and not be
detected on a timely basis.
In the
Annual Report on Form 10-K for the fiscal year ended May 31, 2009, we noted that
we had identified a material weakness in our information technology (IT)
controls because of our inability to test the information technology controls
due to the restructuring of our IT department and relocation and consolidation
of our corporate headquarters in Canada and Florida to new facilities at the end
of our fiscal year. As of November 30, 2009 under the supervision of
and with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934. Based upon our evaluation, management concluded that our
internal control over financial reporting was not effective as of November 30,
2009 because of our continued inability to test the information technology
controls at our new corporate headquarters at such date. In
connection with this evaluation, management identified no other changes in our
internal control over financial reporting that occurred during the most recent
fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
A
material weakness is a control deficiency that results in a more than remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis by employees in
the normal course of their assigned functions. The Company is in the
process of executing its plan to mitigate this material weakness including the
restructuring of key IT personnel and consolidation of IT responsibility.
Despite the existence of this material weakness, we believe our consolidated
financial statements in this Quarterly Report on Form 10-Q fairly present, in
all material respects, our financial condition as of November 30, 2009 and May
31, 2009, and our consolidated results of operations and cash flows for the
three and six months ended November 30, 2009 and 2008, in conformity with U.S.
generally accepted accounting principles.
Further,
it should be noted that Executive Chairman Mr. Michael Mullarkey assumed the
duties of President and Chief Executive Officer of the Company in November 2009
and Mr. Jerome P. Kelliher joined the Company as Chief Financial Officer in
December 2009.
ITEM
1. LEGAL PROCEEDINGS
We are
involved in claims, which arise in the ordinary course of business. In the
opinion of management, we have made adequate provision for potential
liabilities, if any, arising from any such matters. However, litigation is
inherently unpredictable, and the costs and other effects of pending or future
litigation, governmental investigations, legal and administrative cases and
proceedings (whether civil or criminal), settlements, judgments and
investigations, claims and changes in any such matters, and developments or
assertions by or against us relating to intellectual property rights and
intellectual property licenses, could have a material adverse effect on our
business, financial condition, operating results or cash
flows. Please refer to Note 3 to the accompanying
condensed consolidated financial statements for further discussion of litigation
that may be material to our business.
ITEM
1A. RISK FACTORS
In
addition to the information set forth under Item 1A of Part I to our Annual
Report on Form 10-K for the year ended May 31, 2009, you should carefully
consider the following factors, which could have a material adverse effect on
our results of operations, financial condition, cash flows, business or the
market for our common shares. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial may also
materially adversely affect our business, financial condition and future results
of operations. We cannot assure you that we will successfully address
any of these risks or address them on a continuing basis.
We have limited operating
funds, and our ability to continue as a going concern is dependent upon our
ability to obtain additional capital to operate the
business.
The
opinion of our independent registered public accountants on the audited
financial statements as of and for the year ended May 31, 2009 contained an
explanatory paragraph regarding substantial doubt about our ability to continue
as a going concern.
We have
incurred substantial losses in recent years and months and, as a result, have a
shareholders’ deficit of $7,322,094 as of November 30, 2009. Losses
for the six months ended November 30, 2009 were $701,014 and losses for the
years ended May 31, 2009 and 2008 were $4,856,356 and $52,616,875,
respectively.
As of
November 30, 2009, we have $1,193,634 in cash and cash
equivalents. Working capital, which represents current assets less
current liabilities, was negative $3.5 million. Our senior secured
notes payable (the “Notes”) had been classified as current in the Company’s
audited financial statements at May 31, 2009 as a result of our default on the
Notes on May 22, 2009 due to the Company’s suspension of trading on the NASDAQ
Stock Market as a result of its shareholders’ deficit. The suspension
constituted an event of default under the Notes and thereby entitled each Holder
of the Notes to require the Company to redeem all or a portion of the Holder’s
Note at a price equal to 110% of the sum of the principal amount of the Note,
accrued and unpaid interest and late fees, if any. Additionally, as a
result of the event of default, the interest rate under each Note was increased
by 5% in addition to the contractual rate of interest due. Such Notes
were restructured on December 11, 2009. Please refer to Note 2 to the
accompanying condensed consolidated financial statements for more
information.
Our
ability to continue as a going concern depends primarily upon our ability to
generate positive cash flows from operations and obtain sufficient additional
financing, if necessary. There can be no assurance that the Company
will be able to generate the necessary cash flows to sustain current
operations. If these measures fall short, management will consider
additional cost savings measures, including cutting back product development
initiatives, further reducing operating expenditures as well as seek additional
financing, if deemed necessary. If the Company is not successful with
its operations or in otherwise entering into a financing, sale, or business
transaction that infuses sufficient cash resources into the Company in the near
future, any collection actions by the Holders could have a material adverse
affect on the liquidity and financial condition of the Company and its ability
to secure additional financing and continue as a going concern.
Our
ability to obtain financing depends on a number of factors, including our
ability to generate positive cash flow from operations, the amount of our cash
reserves, the amount and terms of our existing debt arrangements, the
availability of sufficient collateral and the prospects of our
business. If financing is not available when required or is not
available on acceptable terms, it may impair our ability to:
·
|
make
principal and/or interest payments on our
indebtedness;
|
·
|
fund
current operations;
|
·
|
keep
up with technological advances;
|
·
|
pursue
acquisition opportunities;
|
·
|
develop
product enhancements;
|
·
|
make
capital expenditures;
|
·
|
respond
to business opportunities;
|
·
|
address
competitive pressures or adverse industry developments;
or
|
·
|
withstand
economic or business downturns.
|
ITEM
6.
|
EXHIBITS
The
following Exhibits are filed as part of this Form 10-Q:
Exhibit No
|
Exhibit
Description
|
*31.1
|
Certification
of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
*31.2
|
Certification
of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
|
*32.1
|
Certifications
of the Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
* Filed
herewith.
Our
internet website address is www.workstreaminc.com. We provide free
access to various reports that we file with or furnish to the United States
Securities and Exchange Commission through our website, as soon as reasonably
practicable after they have been filed or furnished. These reports
include, but are not limited to, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports. Our SEC reports can be accessed through the investor
relations section of our website, or through www.sec.gov. Information on
our website does not constitute part of this 10-Q report or any other report we
file or furnish with the SEC.
Pursuant
to the requirements 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: January
14, 2010
|
By: /s/
Michael Mullarkey
|
Michael
Mullarkey
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
DATE: January
14, 2010
|
By: /s/
Jerome Kelliher
|
Jerome
P. Kelliher
Chief
Financial Officer
(Principal
Financial Officer)
|
29