frm10_q.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
ý
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the quarterly period ended March 31, 2008
|
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 000-30734
ACCOUNTABILITIES,
INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
|
11-3255619
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
195
Route 9 South, Suite 109
Manalapan,
New Jersey 07726
|
(Address
of principal executive offices)
|
|
|
|
(732)
333-3622
|
(Registrant’s
telephone number, including area code)
|
|
|
|
Securities
registered under Section 12(b) of the Exchange Act: Not
Applicable
|
|
|
|
Securities
registered under Section 12(g) of the Exchange Act:
|
Common
Stock, $.0001 par value
|
(Title
of class)
|
Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ý No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of
“accelerated filer” and large accelerated filer in Rule 12b-2 of the Exchange
Act. (Check One)
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non
- Accelerated Filer o
|
Smaller
Reporting Company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No ý
The
number of shares of Common Stock, $.0001 par value, outstanding as of April 23,
2008 was 22,419,451.
ACCOUNTABILITIES,
INC.
INDEX
PART
I – FINANCIAL INFORMATION
|
|
|
|
Item
1. – Financial Statements (Unaudited)
|
3
|
|
|
Balance
Sheets as of March 31, 2008 and September 30, 2007
|
3
|
|
|
Statements
of Operations for the Three and Six Months Ended March 31, 2008 and
2007
|
4
|
|
|
Statement
of Stockholders’ Equity for the Six Months Ended March 31,
2008
|
5
|
|
|
Statements
of Cash Flows for the Six Months Ended March 31, 2008 and
2007
|
6
|
|
|
Notes
to Financial Statements
|
7
|
|
|
Item
2. – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
15
|
|
|
Item
3. – Quantitative and Qualitative Disclosure About Market
Risk
|
27 |
|
|
Item
4. – Controls and Procedures
|
27
|
|
|
PART
II – OTHER INFORMATION
|
|
|
|
Item
1. – Legal Proceedings
|
27
|
|
|
Item
1A. – Risk Factors
|
27 |
|
|
Item
2. – Unregistered Sales of Equity Securities and Use of
Proceeds
|
27 |
|
|
Item
3. – Defaults upon Senior Securities
|
28 |
|
|
Item
4. – Submission of Matters to a Vote of Security Holders
|
28 |
|
|
Item
5. – Other Information
|
28 |
|
|
Item
6. – Exhibits
|
28 |
|
|
Signatures
|
29 |
|
|
Exhibit
10.37
|
|
Exhibit
10.38
|
|
Exhibit
10.39
|
|
Exhibit
10.40
|
|
Exhibit
10.41
|
|
Exhibit
31.1
|
|
Exhibit
31.2
|
|
Exhibit
32.1
|
|
ACCOUNTABILITIES,
INC.
BALANCE
SHEETS
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
33,000
|
|
|
$
|
137,000
|
|
Accounts
receivable – less allowance for doubtful accounts of $497,000 and
$338,000, respectively
|
|
|
1,076,000
|
|
|
|
224,000
|
|
Due
from financial institution
|
|
|
28,000
|
|
|
|
134,000
|
|
Unbilled
receivables
|
|
|
271,000
|
|
|
|
1,182,000
|
|
Prepaid
expenses
|
|
|
278,000
|
|
|
|
268,000
|
|
Due
from related party
|
|
|
51,000
|
|
|
|
51,000
|
|
Total
current assets
|
|
|
1,737,000
|
|
|
|
1,996,000
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
378,000
|
|
|
|
149,000
|
|
Other
assets
|
|
|
8,000
|
|
|
|
34,000
|
|
Intangible
assets, net
|
|
|
1,585,000
|
|
|
|
2,023,000
|
|
Goodwill
|
|
|
3,332,000
|
|
|
|
4,617,000
|
|
Total
assets
|
|
$
|
7,040,000
|
|
|
$
|
8,819,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,457,000
|
|
|
$
|
1,348,000
|
|
Accrued
wages and related obligations
|
|
|
1,518,000
|
|
|
|
1,367,000
|
|
Current
portion of long-term debt
|
|
|
441,000
|
|
|
|
691,000
|
|
Current
portion of related party long-term debt
|
|
|
881,000
|
|
|
|
1,647,000
|
|
Due
to related party
|
|
|
75,000
|
|
|
|
169,000
|
|
Total
current liabilities
|
|
|
4,372,000
|
|
|
|
5,222,000
|
|
|
|
|
|
|
|
|
|
|
Long
term debt, net of current portion
|
|
|
372,000
|
|
|
|
450,000
|
|
Related
party long-term debt, net of current portion
|
|
|
1,346,000
|
|
|
|
2,440,000
|
|
Acquisition
related contingent liability
|
|
|
195,000
|
|
|
|
257,000
|
|
Total
liabilities
|
|
|
6,285,000
|
|
|
|
8,369,000
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 5,000,000 shares authorized; zero shares issued
and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.0001 par value, 95,000,000 shares authorized; 22,674,000 and
17,469,000 shares issued and outstanding as of March 31, 2008 and
September 30, 2007, respectively
|
|
|
2,000
|
|
|
|
2,000
|
|
Additional
paid-in capital
|
|
|
2,902,000
|
|
|
|
1,735,000
|
|
Accumulated
deficit
|
|
|
(2,149,000
|
)
|
|
|
(1,287,000
|
)
|
Total
stockholders’ equity
|
|
|
755,000
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
7,040,000
|
|
|
$
|
8,819,000
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
ACCOUNTABILITIES,
INC.
STATEMENTS
OF OPERATIONS
(unaudited)
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March
31,
2008
|
|
|
March
31,
2007
|
|
|
March
31,
2008
|
|
|
March
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
15,743,000 |
|
|
$ |
12,560,000 |
|
|
$ |
33,891,000 |
|
|
$ |
24,469,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of services
|
|
|
13,304,000 |
|
|
|
10,447,000 |
|
|
|
28,391,000 |
|
|
|
20,519,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,439,000 |
|
|
|
2,113,000 |
|
|
|
5,500,000 |
|
|
|
3,950,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses *
|
|
|
2,747,000 |
|
|
|
1,972,000 |
|
|
|
5,346,000 |
|
|
|
3,633,000 |
|
Depreciation
and amortization
|
|
|
118,000 |
|
|
|
65,000 |
|
|
|
225,000 |
|
|
|
108,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(426,000 |
) |
|
|
76,000 |
|
|
|
(71,000
|
) |
|
|
209,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
229,000 |
|
|
|
182,000 |
|
|
|
543,000 |
|
|
|
387,000 |
|
Loss
on goodwill impairment
|
|
|
148,000 |
|
|
|
- |
|
|
|
148,000 |
|
|
|
- |
|
Net
loss on debt extinguishments
|
|
|
100,000 |
|
|
|
- |
|
|
|
100,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(903,000 |
) |
|
$ |
(106,000 |
) |
|
$ |
(862,000 |
) |
|
$ |
(178,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
Diluted
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,983,000 |
|
|
|
14,803,000 |
|
|
|
17,934,000 |
|
|
|
14,340,000 |
|
Diluted
|
|
|
18,983,000 |
|
|
|
14,803,000 |
|
|
|
17,934,000 |
|
|
|
14,340,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Includes $198,000 and $209,000 for the three and six months ended March 31,
2008, respectively, and $4,000 for the three and six months ended March 31,
2007, in non-cash charges for stock based compensation.
The
accompanying notes are an integral part of these financial
statements.
ACCOUNTABILITIES,
INC.
Statement
of Stockholders’ Equity
(unaudited)
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
March
31, 2008
|
|
|
|
|
|
Common
Stock – Shares:
|
|
|
|
Balance
at beginning of period
|
|
|
17,469,000
|
|
Debt
conversions to restricted common stock
|
|
|
2,194,000
|
|
Stock-based
compensation relating to restricted common stock
|
|
|
1,403,000
|
|
Issuance
of restricted common stock to employees and directors for
cash
|
|
|
1,108,000
|
|
Issuance
of restricted common stock to related party for cash and cancellation of
outstanding invoices
|
|
|
400,000
|
|
Private
placement to independent third parties
|
|
|
100,000
|
|
Balance
at end of period
|
|
|
22,674,000
|
|
|
|
|
|
|
Common
Stock – Par Value:
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
2,000
|
|
|
|
|
-
|
|
Balance
at end of period
|
|
$
|
2,000
|
|
|
|
|
|
|
Additional
Paid-In Capital:
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
1,735,000
|
|
Debt
conversions to restricted common stock
|
|
|
622,000
|
|
Stock-based
compensation relating to restricted common stock
|
|
|
209,000
|
|
Issuance
of restricted common stock to employees and directors for
cash
|
|
|
221,000
|
|
Issuance
of restricted common stock to related party for cash and cancellation of
outstanding invoices
|
|
|
80,000
|
|
Private
placement to independent third parties
|
|
|
35,000
|
|
Balance
at end of period
|
|
$
|
2,902,000
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
(1,287,000
|
)
|
Net
loss
|
|
|
(862,000
|
)
|
Balance
at end of period
|
|
$
|
(2,149,000
|
)
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
ACCOUNTABILITIES,
INC.
STATEMENTS
OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
Six Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(862,000
|
)
|
|
$
|
(178,000
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
225,000
|
|
|
|
108,000
|
|
Stock-based
compensation
|
|
|
209,000
|
|
|
|
4,000
|
|
Bad
debt expense
|
|
|
159,000
|
|
|
|
81,000
|
|
Loss
on goodwill impairment
|
|
|
148,000
|
|
|
|
-
|
|
Net
loss on debt extinguishments
|
|
|
100,000
|
|
|
|
-
|
|
Amortization
of discount on long-term debt
|
|
|
18,000
|
|
|
|
-
|
|
Common
stock issued for fees
|
|
|
-
|
|
|
|
67,000
|
|
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
(100,000
|
)
|
|
|
(142,000
|
)
|
Due
from financial institution
|
|
|
106,000
|
|
|
|
292,000
|
|
Prepaid
expenses
|
|
|
(10,000
|
)
|
|
|
(136,000
|
)
|
Due
from related party
|
|
|
(94,000
|
)
|
|
|
(15,000
|
)
|
Other
assets
|
|
|
26,000
|
|
|
|
(2,000
|
)
|
Accounts
payable and accrued liabilities
|
|
|
464,000
|
|
|
|
103,000
|
|
Net
cash provided by operating activities
|
|
|
389,000
|
|
|
|
182,000
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(244,000
|
)
|
|
|
(44,000
|
)
|
Acquisitions
|
|
|
-
|
|
|
|
(439,000
|
)
|
Net
cash used in investing activities
|
|
|
(244,000
|
)
|
|
|
(483,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
-
|
|
|
|
50,000
|
|
Principal
payments on long-term debt
|
|
|
(137,000
|
)
|
|
|
(118,000
|
)
|
Proceeds
from issuance of long-term debt – related parties
|
|
|
27,000
|
|
|
|
-
|
|
Principal
payments on long-term debt – related parties
|
|
|
(387,000
|
)
|
|
|
(47,000
|
)
|
Payments
on contingent acquisition related liability
|
|
|
(62,000
|
)
|
|
|
(131,000
|
)
|
Proceeds
from issuance of common stock
|
|
|
310,000
|
|
|
|
720,000
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(249,000
|
)
|
|
|
474,000
|
|
|
|
|
|
|
|
|
|
|
Change
in cash
|
|
|
(104,000
|
)
|
|
|
173,000
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
137,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
33,000
|
|
|
$
|
181,000
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
ACCOUNTABILITIES,
INC.
NOTES
TO FINANCIAL STATEMENTS
(unaudited)
1. Description
of the Company and its Business
Nature
of Operations
The
Company is a national provider of temporary commercial staffing in areas such as
light industrial and clerical services, and professional niche consulting and
staffing services in areas such as accounting, pharmaceutical and information
technology. The Company conducts all of its business in the United
States through the operation of 13 staffing and recruiting offices, and through
sales and marketing agreements with nine public accounting firms. The
agreements with the public accounting firms generally provide for the public
accounting firm to market and sell accounting and finance staffing and placement
services to customers in a defined market in exchange for a defined share of
profits generated from those sales. Immediately prior to the Date of
Inception, the Company had no material business operations.
2. Summary
of Significant Accounting Policies
Interim
Financial Information
The
financial information as of and for the three and six months ended March 31,
2008 and 2007 is unaudited, but includes all adjustments (consisting only of
normal recurring adjustments) that the Company considers necessary for a fair
statement of its financial position at such dates and the operating results and
cash flows for those periods. The year-end balance sheet data was
derived from audited financial statements, and certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules or regulations; however, the Company believes the
disclosures made are adequate to make the information presented not
misleading.
The
results of operations for the interim periods presented are not necessarily
indicative of the results of operations to be expected for the fiscal
year. These condensed interim financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended September 30, 2007, which are included in the Company’s Form 10 as filed
with the Securities and Exchange Commission.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Although management believes these estimates and assumptions
are adequate, actual results could differ from the estimates and assumptions
used.
3. Net Loss per Share
The
Company presents both basic and diluted loss per share amounts (“EPS”) in
accordance with SFAS No. 128, “Earnings Per Share.” This
pronouncement establishes standards for the computation, presentation and
disclosure requirements for EPS for entities with publicly held common shares
and potential common shares. Basic and diluted EPS are calculated by
dividing net income by the weighted average number of common shares outstanding
during the period. Common stock equivalent shares are excluded from
the computation in periods in which they have an anti-dilutive
effect. The weighted average number of common shares
outstanding does not include the anti-dilutive effect of approximately 1,355,000
and 981,000 common stock equivalent shares for the three and six months ended
March 31, 2008 and 2007, respectively, representing warrants, convertible debt
and non-vested shares.
4. Acquisitions
ReStaff
Services, Inc. Offices Acquisition
On
February 26, 2007, the Company acquired the operations, including three offices
of ReStaff Services, Inc. (“ReStaff”), for a total purchase price of
$4,710,000. A portion of the purchase price was subject to reduction
if ReStaff’s audited net income for the year ending December 31, 2006 was less
than $1,350,000. On February 28, 2008, the Company completed its
analysis of ReStaff’s results and reduced the original purchase price by
$1,398,000. The reduction in the purchase price was accomplished
through the restructuring of the remaining indebtedness to the former owner of
ReStaff and the issuance of 250,000 shares of
restricted
common stock with a fair value of $50,000 on the restructuring
date. The restructuring involved the exchange of notes payable with
outstanding principal balances of $3,090,000 and related accrued interest of
$158,000 for two new notes. A $1,700,000 note was issued February 28,
2008, bearing an annual interest rate of 6%. The note is due on May
1, 2012 and is payable in equal monthly installments of $39,925. A
$100,000 note was issued February 28, 2008 bearing an annual interest rate of
6%. The principal and interest on this note are due on March 5,
2009. All results of operations of ReStaff have been included in the
accompanying Statements of Operations since the date of
acquisition.
During
the second quarter of fiscal 2008, the Company obtained independent third-party
valuations of the intangible assets acquired in the ReStaff
acquisition. The Company has made adjustments to decrease the
previously estimated amount assigned to the customer list acquired by $262,000
and increase the amount assigned to the non-competition agreement by $1,000
based upon these final valuations with a corresponding increase in
goodwill. Amortization of these revalued intangible assets is being
reflected prospectively as a change in estimate as of the final valuation
date. The following table summarizes the final fair values of the
assets acquired and the liabilities assumed at the date of the acquisition and
the adjustments to the original purchase price made during the second quarter of
fiscal 2008.
Property
and equipment
|
|
$
|
5,000
|
|
Non-competition
agreement
|
|
|
81,000
|
|
Accounts
receivable
|
|
|
200,000
|
|
Customer
lists and relationships
|
|
|
1,199,000
|
|
Goodwill
|
|
|
1,889,000
|
|
Total
assets acquired
|
|
|
3,374,000
|
|
Accrued
liabilities
|
|
|
62,000
|
|
Total
purchase price
|
|
$
|
3,312,000
|
|
|
|
|
|
|
Customer
lists and relationships, and the non-competition agreement are being amortized
over weighted average useful lives of seven years and three years,
respectively.
US
Temp Services, Inc. Offices Acquisition
On March
31, 2006, the Company acquired the operations of five offices from US Temp
Services, Inc. (“US Temp Acquisition”) for a total purchase price of
$1,723,000. All results of operations of the acquired offices have
been included in the accompanying Statements of Operations since the date of
acquisition.
Stratus
Services Group, Inc. Offices Acquisition
On
November 28, 2005, the Company acquired the operations of three offices from
Stratus Services Group, Inc. (“Stratus Acquisition”) in exchange for an earnout
consisting of a.) 2% of revenue for the first twelve months, b) 1% of revenue
for the second twelve months, and c) 1% of revenue for the third twelve months
(“Stratus Earnout”). All results of operations of the acquired
offices have been included in the accompanying Statements of Operations since
the date of acquisition. Because the purchase price includes only the Stratus
Earnout which is based upon future revenues, the total fair value of the
acquired assets is greater than the purchase price as of the day of the
acquisition, which was zero as the Stratus Earnout had yet to be
earned. Consequently, the total fair value of the acquired assets of
$678,000 was recorded as a liability (“Acquisition related contingent
liability”) as of the day of the acquisition in accordance with SFAS
141. Through March 31, 2008, $483,000 has been paid relating to the
Stratus Earnout.
The
following unaudited pro forma information shows the Company’s results of
operations for the six months ended March 31, 2008 and 2007, as if the ReStaff
Acquisition had occurred on October 1, 2006. These pro forma
statements have been prepared for comparative purposes only and are not intended
to be indicative of what the Company’s results would have been had the
acquisition occurred at the beginning of the periods presented or the results
which may occur in the future.
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31, 2008
|
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
33,891,000 |
|
|
$ |
32,786,000 |
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(862,000 |
) |
|
$ |
(366,000 |
) |
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
(0.05 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
5. Intangible
Assets and Goodwill
The
following table presents detail of the Company’s intangible assets, estimated
lives, related accumulated amortization and goodwill :
|
|
As
of March 31, 2008
|
|
|
As
of September 30, 2007
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
lists and relationships (7 years)
|
|
$
|
2,007,000
|
|
|
$
|
(484,000
|
)
|
|
$
|
1,523,000
|
|
|
$
|
2,269,000
|
|
|
$
|
(325,000
|
)
|
|
$
|
1,944,000
|
|
Non-competition
agreements (3
years)
|
|
|
111,000
|
|
|
|
(49,000
|
)
|
|
|
62,000
|
|
|
|
110,000
|
|
|
|
(31,000
|
)
|
|
|
79,000
|
|
Total
|
|
$
|
2,118,000
|
|
|
$
|
(533,000
|
)
|
|
$
|
1,585,000
|
|
|
$
|
2,379,000
|
|
|
$
|
(356,000
|
)
|
|
$
|
2,023,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
(indefinite life)
|
|
$
|
3,332,000
|
|
|
|
|
|
|
$
|
3,332,000
|
|
|
$
|
4,617,000
|
|
|
|
|
|
|
$
|
4,617,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
February 26, 2008, the Company obtained independent third-party valuations of
the customer list and non-competition agreement acquired in the ReStaff
acquisition. The Company has made adjustments to decrease the previously
estimated amount assigned to the customer list acquired by $262,000 and increase
the amount assigned to the non-competition agreement by $1,000 based upon these
final valuations with a corresponding increase in
goodwill. Amortization of these revalued intangible assets is being
reflected prospectively as a change in estimate as of the final valuation
date. The Company recorded amortization expense for the six months
ended March 31, 2008 and 2007 of $177,000 and $82,000,
respectively. Estimated intangible asset amortization expense (based
on existing intangible assets) for the remaining six months of fiscal 2008 is
$159,000 and for the fiscal years ending September 30, 2009, 2010, 2011, 2012
and 2013 is $313,000, $292,000, $280,000, $280,000 and $192,000,
respectively.
The
Company accounts for its goodwill and other intangible assets in accordance with
SFAS 142, “Goodwill and Other Intangible Assets”. Under this
standard, goodwill and other intangible assets deemed to have indefinite lives
are not amortized but are subject to annual impairment tests. As
discussed in Note 10 “Subsequent Event”, the Company recorded a $148,000
goodwill impairment charge during the second quarter of fiscal 2008 relating to
the write off of costs capitalized in connection with a planned reverse-merger
which will not occur. Goodwill balances and adjustments made during
the second quarter of fiscal 2008 are as follows:
Goodwill
as of September 30, 2007
|
|
$ |
4,617,000 |
|
ReStaff
purchase price adjustment
|
|
|
(1,398,000 |
) |
Final
valuation of ReStaff intangible assets
|
|
|
261,000 |
|
Impairment
|
|
|
(148,000 |
) |
Goodwill
as of March 31, 2008
|
|
$ |
3,332,000 |
|
6. Long-Term
Debt
Long-term
debt at March 31, 2008 and September 30, 2007 is summarized as
follows:
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
|
16.25%
subordinated note (i)
|
|
$ |
102,000 |
|
|
$ |
93,000 |
|
3%
convertible subordinated note (ii)
|
|
|
472,000 |
|
|
|
527,000 |
|
18%
unsecured note (iii)
|
|
|
80,000 |
|
|
|
80,000 |
|
Long
term capitalized consulting obligations (v)
|
|
|
81,000 |
|
|
|
159,000 |
|
Long
term capitalized lease obligation (xiv)
|
|
|
28,000 |
|
|
|
- |
|
10%
convertible subordinated note (xiii)
|
|
|
- |
|
|
|
232,000 |
|
Other
debt
|
|
|
50,000 |
|
|
|
50,000 |
|
Total
|
|
|
813,000 |
|
|
|
1,141,000 |
|
Less
current maturities
|
|
|
441,000 |
|
|
|
691,000 |
|
Non-current
portion
|
|
|
372,000 |
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
Related
party long-term debt
|
|
|
|
|
|
|
|
|
13%
unsecured demand note (iv)
|
|
|
104,000 |
|
|
|
101,000 |
|
Long
term capitalized consulting obligations (vi)
|
|
|
32,000 |
|
|
|
46,000 |
|
18%
unsecured convertible note (vii)
|
|
|
100,000 |
|
|
|
270,000 |
|
Demand
loan (viii)
|
|
|
48,000 |
|
|
|
30,000 |
|
6%
unsecured note (ix)
|
|
|
100,000 |
|
|
|
300,000 |
|
6%
unsecured note (x)
|
|
|
1,700,000 |
|
|
|
2,846,000 |
|
9%
unsecured note (xi)
|
|
|
143,000 |
|
|
|
210,000 |
|
Unsecured
loan (xii)
|
|
|
- |
|
|
|
284,000 |
|
Total
|
|
|
2,227,000 |
|
|
|
4,087,000 |
|
Less
current maturities
|
|
|
881,000 |
|
|
|
1,647,000 |
|
Non-current
portion
|
|
|
1,346,000 |
|
|
|
2,440,000 |
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
|
3,040,000 |
|
|
|
5,228,000 |
|
Less
current maturities
|
|
|
1,322,000 |
|
|
|
2,338,000 |
|
Total
non-current portion
|
|
$ |
1,718,000 |
|
|
$ |
2,890,000 |
|
|
|
|
|
|
|
|
|
|
US
Temp Services, Inc. Acquisition Notes and Long Term Consulting
Obligations
As
partial consideration associated with the US Temp Acquisition four notes were
issued.
(i) A
$175,000 subordinated note was issued March 31, 2006, and was due January 30,
2007. The note has an annual interest rate of 8% with principal and
interest payable in equal monthly installments of $18,150. The note
is secured by office equipment and other fixed assets. Due to the
failure to make timely payments under the terms of the note, the holder has
elected the option of declaring the note in technical default and began
assessing interest, beginning April 1, 2007, at the rate of 11.25% per annum,
and to impose a 5% late charge on the overdue balance outstanding. On
October 31, 2007, the Company entered into a forbearance agreement with the
holder of the note wherein the holder agreed to waive defaults and refrain from
exercising its rights and remedies against the Company until October 31, 2008 in
exchange for an increase in the interest rate to 16.25%.
(ii) A
$675,000 convertible subordinated note was issued March 31, 2006 and is due
March 31, 2012. The note bears interest at an annual rate of 3%, and
is convertible in part or in whole into common shares at any time at the option
of the holder at the specified price of $1.50 per share. The note is
secured by office equipment and other fixed assets.
(iii) A
$80,000 unsecured non-interest bearing note was issued March 31, 2006, and was
due June 29, 2006. Due to the failure to make timely payments under
the terms of the note, on April 1, 2007, the holder elected the option of
declaring the note in technical default and began charging interest at a rate of
18% per annum. On October 31, 2007, the Company entered into a
forbearance agreement with the holder of the note wherein the holder agreed to
waive defaults and refrain from exercising its rights and remedies against the
Company until October 31, 2008 in exchange for an increase in the interest rate
to 18% per annum.
(iv) A
$150,000 unsecured demand note was issued March 31, 2006, to a principal
shareholder of the Company as a finder’s fee in consideration for sourcing and
completing the US Temp Acquisition. The note bears an annual interest
rate of 8%. On October 31, 2007, the Company entered into a
forbearance agreement with the holder of the note wherein the holder agreed to
waive defaults and refrain from exercising its rights and remedies against the
Company until October 31, 2008 in exchange for an increase in the interest rate
to 13% per annum.
On March
31, 2006, in connection with the US Temp Acquisition, the Company entered into
three long term consulting obligations which require the Company to pay fixed
recurring amounts but which do not require the other party to provide any
minimum level of services. Consequently, the agreements have been
treated as debt obligations in the accompanying financial statements and
capitalized, net of interest imputed at a rate of 8.75% per year. The
imputed interest was determined by reference to terms associated with credit
available to the Company at that time. All three agreements expire on
March 31, 2009.
(v) Two
of the agreements were entered into with the principals of US Temps and each
require annual payments of $60,000 in the first two years and $30,000 in the
final year, payable in fixed weekly amounts. These two agreements in
total were initially recognized at a fair value of $292,000 using a discount
rate of 8.75%.
(vi) The
third agreement was entered into with a major shareholder of the Company and
requires annual payments of $30,000 in each of three years, payable in fixed
weekly amounts. The agreement was initially recorded at a fair value
of $84,000 using an interest rate of 5%.
18%
Unsecured Convertible Note
(vii) A
$280,000 unsecured convertible note was issued on April 1, 2006 to a shareholder
and director of the Company. The note was due April 1, 2007, bearing
an annual interest rate of 12%. On October 31, 2007, the Company
entered into a forbearance agreement with the holder of the note wherein the
holder agreed to waive defaults and refrain from exercising its rights and
remedies against the Company until October 31, 2008 in exchange for an increase
in the interest rate to 18%. On January 31, 2008, the shareholder and director
exchanged the note, with an outstanding principal balance of $200,000 for
600,000 shares of restricted common stock with a fair value on the date of
exchange of $177,000 and a new unsecured convertible note in the principal
amount of $100,000 due October 31, 2008. The new note bears interest
at an annual rate of 18% and is convertible at any time at the option of the
holder at a specified price of $0.40 per share. The Company recorded
a loss of $77,000 on the extinguishment of the debt representing the difference
between the fair value of the shares issued on the date of conversion and the
remaining principal balance outstanding on the note.
Demand
Loan
(viii) In
October 2005 a major shareholder advanced the Company $30,000 to fund its
initial operations. During the six months ended March 31, 2008, the shareholder
advanced an additional $18,000. The amount is classified as a
short-term loan and is due and payable upon demand by the
shareholder.
ReStaff
Inc., Acquisition Notes
As
partial consideration associated with the ReStaff Acquisition the following
notes and loan were issued. The notes described in (ix) and (x) below
were issued to the then sole shareholder of ReStaff who was also issued 600,000
shares of common stock as partial consideration and who also became an employee
of the company. A portion of the purchase price was subject to reduction if
ReStaff’s audited net income for the year ending December 31, 2006 was less than
$1,350,000. On February 28, 2008, the Company completed its analysis
of ReStaff’s results and reduced the original purchase price by $1,398,000. The
reduction in the purchase price was accomplished through the restructuring of
the remaining indebtedness to the former owner of ReStaff and the issuance of
250,000 shares of restricted common stock with a fair value of $50,000 on the
restructuring date. The restructuring involved the exchange of notes
payable with outstanding principal balances of $3,090,000 and related accrued
interest of $158,000 for the two new notes described in (ix) and (x)
below. In addition, the note in (x) below is subject to proportionate
reduction in principal in the event the acquired operations generate less than
$1,000,000 in net income (as defined in the asset purchase agreement) in any
year during the term of the note. The debt described in (xi) and
(xii) below was issued to two separate major shareholders of the
Company.
(ix) As described above,
in February 2008 a $100,000 unsecured note was issued. The
note is due March 5, 2009, and bears an annual interest rate of 6%.
(x) As described above,
in February 2008, a $1,700,000 unsecured note was issued. The
note bears an annual interest rate of 6% with principal and interest payable in
equal monthly installments of $39,925 over four years beginning May 1,
2008. As mentioned above, the note is subject to proportionate
reduction in principal in the event the acquired operations generate less than
$1,000,000 in net income (as defined in the asset purchase agreement) in any
year during the term of the note.
(xi) In
February 2007, a $275,000 unsecured note was issued as partial finder’s fee
consideration, bearing annual interest of 9%, with principal and interest
payable in equal monthly installments of $2,885 over 104 months.
(xii) In
order to finance portions of the purchase price, the Company entered into a
borrowing arrangement with another major stockholder. Under the terms
of the agreement, up to $950,000 may be borrowed without interest. As
consideration for the loan, the stockholder was granted 600,000 shares of
restricted common stock. The Company borrowed and subsequently repaid
$450,000 in March, 2007, and borrowed the balance of $500,000 in June, 2007
which is payable in equal weekly installments of $10,000. The Company
followed the guidance in Accounting Principles Board Opinion No. 14, Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants, by treating
the relative fair value of the restricted common stock granted as a discount to
the debt, with a corresponding increase in additional paid-in
capital. Accordingly, a relative fair value associated with the
granted common stock of $119,000 was calculated, $4,000 of which was apportioned
to the initial $450,000 borrowed and repaid in March, 2007 and recorded as
interest expense, and $115,000 was apportioned to the $500,000 balance and
recorded as deferred financing costs to be amortized as interest expense
beginning in June, 2007. In March, 2008, the Company issued 600,000
of restricted common stock with a fair value of $159,000 in exchange for the
cancellation of the remaining principal balance of $120,000 outstanding on the
date of exchange. The Company recorded a loss of $47,000 on the extinguishment
of the debt representing the difference between the fair value of the shares
issued on the date of conversion and the remaining principal balance outstanding
on the note, net of remaining deferred financing costs of $8,000.
(xiii) A
$250,000 convertible subordinated note was issued August 6, 2007 and was to
become due on February 16, 2008. The note bore interest at an annual
rate of 10% and was convertible in whole or in part into common shares at any
time at the option of the holder. The conversion price per share was
equal to the greater of 75% of the closing price of the common stock on the
trading day preceding the conversion or the Per Share Enterprise
Value. Enterprise Value was defined as the sum of the aggregate
market price of all of the Company’s common stock outstanding and aggregate
outstanding indebtedness immediately prior to the conversion
date. Per Share Enterprise Value was determined by dividing the
Enterprise Value by the total number of shares of common stock outstanding
immediately prior to the conversion date, provided that the Enterprise Value was
not to be less than $18,000,000. In January, 2008, the holder
exchanged the note for 744,031 shares of restricted common stock and a
three-year warrant to purchase 100,000 shares of common stock at an exercise
price of $0.50 per share. On the date of the exchange there was $250,000 in
principal and accrued interest of $10,000 outstanding on the
note. The Company recorded a gain of $24,000 on the extinguishment of
the debt representing the difference between the fair value of the shares and
warrants issued on the date of conversion and the remaining principal and
accrued interest outstanding on the note.
(xiv) In
November, 2007, the Company entered into a capital lease agreement to purchase
computer equipment. The original principal of $33,000 is payable over
a lease term of 24 months in equal monthly installments of $1,843.
Reliance
on Related Parties
The
Company has historically relied on funding from related parties in order to meet
its liquidity needs, such as the debt described in (iv), (vi), (vii), (viii),
(ix), (x), (xi) and (xii) above. Management believes that the terms
associated with these instruments would not differ materially from those that
might have been negotiated with independent parties. However,
management believes that the advantages the Company derived from obtaining
funding from related parties include a shortened length of time to identify and
obtain funding sources due to the often pre-existing knowledge of the Company’s
business and prospects possessed by the related party, and the lack of agent or
broker compensation often deducted from gross proceeds available to the
Company. Management anticipates the Company will continue to have
significant working capital requirements in order to fund its growth and
operations, and to the extent the Company does not generate sufficient cash flow
from operations to meet these working capital requirements it will continue to
seek other sources of funding including the issuance of related party
debt.
7. Stock-Based
Compensation
In
September, 2007, the Board adopted the Accountabilities, Inc. Equity Incentive
Plan (“the Plan”). The Plan provides for the grant of stock options,
stock appreciation rights and restricted stock awards to employees, directors
and other persons in a position to contribute to the growth and success of the
Company. A total of 2,000,000 shares of common stock have been
reserved for issuance under the Plan, and as of March 31, 2008 grants with
respect to 1,403,000 shares had been made.
During
April 2007, 585,000 shares of restricted common stock had been granted to
certain employees prior to the adoption of the Plan as restricted stock
awards. Restricted stock award vesting is determined on an individual
grant basis. Of the shares granted, 500,000 vest over five years and
85,000 vest over three years.
A summary
of the status of the Company’s nonvested shares as of March 31, 2008 and the
changes during the six months ended March 31, 2008 is presented
below:
Nonvested
Shares
|
|
Shares
|
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Nonvested
at October 1, 2007
|
|
|
585,000 |
|
|
$ |
0.34 |
|
Granted
|
|
|
1,403,000 |
|
|
$ |
0.30 |
|
Vested
|
|
|
(298,000 |
) |
|
$ |
0.32 |
|
Nonvested
at March 31, 2008
|
|
|
1,690,000 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
Compensation
expense is measured as the fair value of the shares granted and is recognized on
a straight-line basis over the required vesting period. Fair value is
determined as a discount from the current market price quote to reflect a) lack
of liquidity resulting from the restricted status and low trading volume and, b)
recent private placement valuations. For six months ended March 31,
2008 and 2007, compensation expense relating to restricted stock awards under
the Plan was $92,000 and $4,000, respectively. As of March 31, 2008,
there was $458,000 of total unrecognized compensation cost. That cost
is expected to be recognized as an expense over a weighted-average period of 3.1
years. The total fair value of shares vested during the six months
ended March 31, 2008 was $128,000.
In March,
2008, the Company issued 400,000 shares of common stock to the related party
that had made the $950,000 unsecured loan in March, 2007 as described in (xii)
of Note 6, in exchange for the cancellation of $26,000 of outstanding invoices
payable and $54,000 in cash. The shares had a fair value of $108,000
on the date of issuance. The difference between the fair value of the
shares issued and the consideration received has been recorded as stock-based
compensation expense of $26,000.
During
the second quarter of fiscal 2008, the Company issued 1,108,000 shares of
restricted common stock to certain employees and directors at a price of $0.20
per share. The shares had a fair value of $312,000 on the date of
issuance. The difference between the fair value of the shares issued
and the cash received from the employees and directors has been recorded as
stock-based compensation expense of $91,000.
8. Stockholders’
Equity
As of the
Date of Inception, a stockholders’ deficit of $1,765,000 existed relating to
remaining liabilities associated with the discontinued Humana Businesses, and
was recognized in Additional paid-in capital with a corresponding amount in
Accounts payable and accrued liabilities. From the Date of Inception
through September 30, 2007 approximately 6,536,000 shares of common stock of the
Company were issued in satisfaction of these liabilities. As stock
issuances to settle these liabilities were completed, both the stockholders’
deficit and Accounts payable and accrued liabilities were reduced. As
of March 31, 2008 and September 30, 2007 the total remaining amount of these
liabilities outstanding was $700,000 relating to unremitted payroll tax
withholdings of the subsidiary conducting the discontinued employee leasing and
benefit processing business.
During
the second quarter of fiscal 2008, the Company completed a private placement to
independent third parties of 100,000 shares of common stock at a price of $0.35
per share with warrants to purchase an aggregate 9,800 shares of common stock at
an exercise price of $0.50 per share.
9. Supplemental
Disclosure of Cash Flow Information
Non-cash
investing and financing activities:
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
444,000
|
|
|
$
|
425,000
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
ReStaff
Acquisition: issuance of restricted common stock
|
|
|
|
|
|
|
307,000
|
|
Restricted
common stock issued to satisfy Humana Businesses’
liabilities
|
|
|
|
|
|
|
89,000
|
|
Restricted
common stock issued for future services
|
|
|
|
|
|
|
66,000
|
|
ReStaff
Acquisition purchase price adjustment and debt reduction
|
|
|
1,398,000
|
|
|
|
|
|
Debt
converted to restricted common stock at fair value
|
|
|
622,000
|
|
|
|
|
|
Stock-based
compensation
|
|
|
209,000
|
|
|
|
4,000
|
|
Capital
lease obligation for computer equipment
|
|
|
33,000
|
|
|
|
|
|
Issuance
of shares for related-party outstanding invoices
|
|
|
26,000
|
|
|
|
|
|
|
|
$
|
2,732,000
|
|
|
$
|
891,000
|
|
10. Subsequent
Event
In July,
2007 the Company entered into an Asset Purchase Agreement with a “blank check”
company, Hyperion Energy, Inc. (“Hyperion”) whereby Hyperion agreed to purchase
the Staffing and Workforce Solutions Business of the Company in exchange for a
number of shares of Hyperion common stock equal to the number of shares of the
Company’s stock outstanding at the time of the transaction’s
closing. The shares of Hyperion common stock that were to be issued
to the Company would have represented 100% of Hyperion’s outstanding common
stock. The Hyperion shares were to be registered with the Securities
and Exchange Commission under a Form S-4 Registration statement for distribution
to the Company’s shareholders upon closing of the transaction. The
transaction was to be accounted for as a reverse merger with the Company
considered to be the acquirer. Costs relating to the reverse merger
amounting to $148,000 had been capitalized as goodwill. In March,
2008, the Company filed a Form 10 registration statement with the Securities and
Exchange Commission which later became effective. As a result of the
successful filing and execution of the Form 10 filing, the Company has requested
the withdrawal of the Form S-4 Registration Statement and terminated its plan to
reverse merge with Hyperion. On May 7, 2008, the
Company terminated the Asset Purchase Agreement with Hyperion
and executed a transfer of the Hyperion common stock to the
Company. The Company has recorded goodwill impairment of $148,000
during the second quarter of fiscal 2008 relating to the previously capitalized
costs relating to the reverse merger.
Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion and analysis contains “forward-looking
statements,” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements relate to expectations concerning matters that are not
historical facts. Such forward-looking statements may be identified by words
such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,”
“expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or
“will” or the negative of these terms or other comparable terminology. These
statements, and all phases of our operations, are subject to known and unknown
risks, uncertainties and other factors as identified in our amended Form 10
registration statement filed April 15, 2008 (File No. 000-30734). Readers are
cautioned not to place undue reliance on these forward-looking statements. Our
actual results, levels of activity, performance or achievements and those of our
industry may be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. We undertake no obligation to update the
forward-looking statements in this filing. References in this filing to
“Accountabilities,” the “Company,” “we,” “us,” and “our” refer to
Accountabilities, Inc. and its subsidiaries.
Overview
Description
of the Company
Our
objective is to provide both niche professional services as well as general
staffing services to the business community. Niche professional
services include project management, interim contract, consulting and executive
search, in the areas of accounting, information technology, engineering,
biotechnology and biopharmaceutical. General temporary staffing
services are provided to a variety of clientele in the areas of clerical and
light industrial services. As of March 31, 2008, we provide these
services in key markets across the United States, through the operation of 13
offices in 11 states and through cooperative sales and marketing arrangements
with nine different regional public accounting firms through our Partner on
Premise Program. A more detailed description of our service offerings
is as follows:
▪
|
CPA Partner on Premise
Program
|
Through
our Partner on Premise Program, we have agreements with leading regional public
accounting firms to function as our sales and marketing presence in pre-defined
markets. These public accounting firms offer to provide our
non-attest related finance and accounting services to their current client base
as well as any other client in the pre-defined market area. This
relationship provides us with the ability to provide our professional accounting
and finance services immediately to an established client base in that market,
and to co-brand, utilizing the recognized name of the public accounting firm as
well as ours in the solicitation of new clients, while the public accounting
firm derives both an additional source of revenue as well as the ability to
provide these additional services to their clients. As of March 31,
2008 we have agreements with nine different regional public accounting firms,
which to date through March 31, 2008 have historically generated less than 10%
of our total revenues. While the CPA Firm acts as a marketing and
sales arm for us and provides access to their client base, we retain control of
the clients, employees, systems and processes. We provide, among
other things, industry expertise, business plans, market analysis, management
and technical services, back office support, including enterprise-wide
financial, accounting and human resources systems, personnel and assistance in
training to our CPA Partners. As compensation, the CPA firm receives
a commission equal to the profits calculated by us, less 10% of the revenues
which is retained by us.
▪ Direct Professional
Services
Our
Direct Professional Services include Staff Augmentation and Consulting
Services. Staff Augmentation services include executive search,
interim contract and project management in the areas of Accounting and Finance,
IT/Technology, Engineering, Biotechnology and
Biopharmaceutical. Consulting services include accounting and finance
consulting services in the areas of Sarbanes-Oxley compliance, mergers and
acquisitions, corporate reorganizations, information systems and tax related
matters. We provide these services directly through the operations of
our two wholly owned offices and national network of consultants and through our
CPA Partner on Premise Program whereby our services are marketed and sold
through our network of affiliated CPA firms. Management’s intention
is to continue to expand on the provision of direct professional services which
typically produce gross margins averaging between 30% to 50% at the job level
versus those of general temporary staffing, such as in our Staffing Abilities
service offering, which typically average between 10% to 20% at the job
level. Direct professional services to be emphasized include those in
the fields of accounting and information technology, which we have begun
marketing through our CPA Partner on Premise Program affiliated CPA firms, as
well as marketing directly to clients. Additionally, management
intends to explore cross-selling opportunities with our Staffing Abilities
clients. Through March 31, 2008 direct professional services have
historically constituted less than 20% of our revenues.
▪
Staffing
Abilities
We
provide general temporary staffing in the areas of light industrial services and
administrative support to a diverse range of clients ranging from sole
proprietorships to Fortune 500 companies. Light industrial includes
assignments for warehouse work, manufacturing work, general factory and
distribution. Administrative support services include placements
satisfying a range of general business needs including data entry processors,
customer service representatives, receptionists and general office
personnel. The Staffing Abilities business has grown largely through
the acquisition of established offices from general staffing companies, such as
those from Stratus Services Group, Inc., US Temp Services, Inc and ReStaff
Services, Inc. as explained in more detail elsewhere in this
document. Through March 31, 2008, the Staffing Abilities service
offering has historically constituted approximately 80% of our
revenues. The Staffing Abilities service offerings have provided us
with a predictable source of revenues to aid in supporting the growth of our CPA
Partner on Premises Program and Direct Professional Service offerings, and
functions as a potential client base from which to cross-sell higher margin
professional services. Although management currently intends to
emphasize the growth of higher margin direct professional services, management
currently intends to continue to provide our Staffing Abilities services for the
foreseeable future, and to continue to explore ways to profitably grow our
Staffing Abilities business.
We also
augment revenues from the above lines of business with the
following:
|
▪
|
National
Recruiting Center – Through our national recruiting center, we receive and
complete job orders for candidates for any market in the
U.S. Through this center, we also obtain overflow orders from
our CPA firm affiliates and orders outside of their designated area,
splitting the fees 50/50, thereby further capitalizing on our CPA
relationships, but at higher margins than those derived through our
Partner on Premise agreements.
|
|
▪
|
Job
Board – Through our job board AccountingEmployees.com, we are able to
capitalize on one of the fastest growing segments of the staffing
industry. CPA members post jobs for free while all other
postings are fee based.
|
The
contribution of each service offering to net income is primarily dependent on
the respective gross margin provided by each offering, which is described
above. The Staffing Abilities service offerings, although producing
lower margins, currently comprise the largest component of our revenue at
approximately 80%, and consequently the largest component of our gross
profit. Additionally, these service offerings are more mature
and we are not currently incurring significant amounts of up front expenses or
capital expenditure towards future growth as we are to develop our other service
offerings. In our CPA Partner on Premise and Direct Professional
Services offerings, which together currently comprise approximately 20% of our
revenue, we have incurred and expect to continue to incur for the foreseeable
future, up front expenditures in senior management, consultants and other client
service associates, development of processes and procedures, and marketing
expenditures in order to build the necessary infrastructure and brand awareness
in anticipation of future revenue growth for these service
offerings.
Our
future profitability and rate of growth, if any, will be directly affected by
our ability to continue to expand our service offerings at acceptable gross
margins, and to achieve economies of scale, through the continued introduction
of differentiated marketing and sales channels, such as our CPA Partner on
Premise Program, and through the successful completion and integration of
acquisitions. Our ability to sustain profitability will also be
affected by the extent to which we must incur additional expenses to expand our
sales, marketing, and general and administrative capabilities to expand our
business. The largest component of our operating expenses is
personnel costs. Personnel costs consist of salaries, benefits and
incentive compensation, including bonuses and stock-based compensation, for our
employees. Management expects our operating expenses will continue to
grow in absolute dollars, assuming our revenues continue to grow. As
a percentage of revenue, we expect these expenses to decrease, although we have
no assurance that they will.
The
following are material trends that are creating opportunities and risks to our
business, and a discussion of how management is responding.
|
▪
|
Management
believes that the CPA Partner on Premise sales and marketing agreements
represents a significant marketing differentiator to our current and
potential clients in that the services are associated with the trusted
name of known regional public accounting firms, and represents an
important part of our strategy of growing our Direct Professional Services
offering. In recognition of this, we are continuing to invest
in efforts to support the identification and procurement of additional CPA
firm affiliates nationwide, as well as investing in the continued
improvement and refinement of our operations and general and
administrative activities to support our current relationships going
forward.
|
|
▪
|
A
significant component of our growth to date has come through
acquisitions. Management continues to invest resources in
activities to seek, complete and integrate acquisitions that enhance
current service offerings and effectively assimilate into our CPA Partner
on Premise marketing and sales strategy. Additionally,
management seeks acquisitions in desired geographical markets and which
have minimal costs and risks associated with integration. Management
believes that effectively acquiring businesses with these attributes will
be critical to carrying out our strategy of capitalizing on the CPA
Partner on Premise Program and other sales and marketing
initiatives.
|
|
▪
|
Our
success depends on our ability to provide our clients with highly
qualified and experienced personnel who possess the skills and experience
necessary to satisfy their needs. Such individuals are in great
demand, particularly in certain geographic areas, and are likely to remain
a limited resource for the foreseeable future. Management is
responding to this demand through proactive recruiting efforts, targeted
marketing, the use of our job board, AccountingEmployees.com, and the
continued expansion of the CPA Partner on Premise Program which management
believes is also an attractive differentiator to prospective
candidates.
|
|
▪
|
We
have financed our growth largely through the issuance of debt and have
incurred negative working capital. As of March 31, 2008 we had
negative working capital of ($2,634,000), for which the component
constituting the current portion of long term debt was
$1,322,000. Total outstanding debt as of March 31, 2008 was
$3,040,000, $334,000 of which is past due or due upon demand, whereas
$1,700,000 of which is subject to proportionate reduction in the event the
associated acquired businesses for which the debt was issued do not
produce agreed upon levels of profitability. In order to
service our debt, maintain our current level of operations, as well as
fund the increased costs of becoming a reporting company and our growth
initiatives, we must be able to generate sufficient amounts of cash flow
and working capital. Management is engaged in several
activities, as explained further in the Working Capital section below, to
effectively accomplish these
objectives.
|
|
▪
|
As
a result of becoming a fully reporting public company, we will experience
increases in certain general and administrative expenses to comply with
the laws and regulations applicable to public companies. These laws and
regulations include the provisions of the Sarbanes-Oxley Act of 2002 and
the rules of the Securities and Exchange Commission and the Nasdaq Stock
Market. To comply with the corporate governance and operating
requirements of being a public company, we will incur increases in such
items as personnel costs, professional services fees, and fees for
independent directors.
|
Mergers
and Acquisitions
One of
our key strategies is to focus on mergers and acquisitions of companies that
either complement our existing service offerings, expand our geographic presence
and/or further expand and strengthen our existing infrastructure.
In fiscal
2006 we consummated the following two material acquisitions:
▪
|
Stratus Services Group, Inc.
Offices Acquisition (“Stratus Acquisition”). In November
2005, we acquired the operations of three general staffing offices from
Stratus Services Group, Inc. in exchange for certain future earn-out
payments.
|
▪
|
US Temp Services, Inc. Offices
Acquisition (“US Temp Acquisition”). On March 31, 2006,
we acquired the operations, including five general staffing offices, of US
Temp Services, Inc. in exchange for cash, notes and shares of our common
stock.
|
In fiscal
2007 we consummated the following material acquisition:
▪
|
ReStaff Services, Inc. Offices
Acquisition (“ReStaff Acquisition”). On February 26,
2007, we acquired the operations, including three general staffing
offices, of ReStaff Services, Inc. in exchange for, cash, notes and shares
of our common stock.
|
The
purchase price associated with the ReStaff Services, Inc., offices acquisition
was subject to purchase allocation adjustments based upon the final
determination of the acquired tangible and intangible net asset values as of
their respective closing dates. Adjustments have been recorded to reduce the
original purchase price and restructure the related debt issued for the
acquisition. Final independent third-party valuations of the acquired
intangible assets have also been completed during the second quarter of fiscal
2008 and reflected in the accompanying interim financial
statements.
All
of our acquisitions have been accounted for as purchases and the results of
operations of the acquired operations have been included in our results since
the dates of acquisition.
As
mentioned above, management continues to invest resources in activities to seek,
complete and integrate acquisitions that enhance our current service offerings
and effectively assimilate into our CPA Partner on Premise marketing and sales
strategy. Completing such acquisitions, however, will likely be
limited by our ability to negotiate purchase terms and/or obtain third party
financing on terms acceptable to us, given our current working capital deficit,
as discussed below. Given these limitations, management is currently
focusing on acquisitions for which the purchase price can be structured with
emphasis on equity consideration
and earnings based contingent payments. Currently, management expects
acquisitions to continue to constitute a significant portion of our future
growth, if any, and is emphasizing acquisitions in the areas of professional
accounting temporary and consulting services, with a secondary emphasis on
information technology temporary consulting services. Management
believes that acquisitions of these types of businesses will experience greater
growth potential when combined with our CPA Partner on Premise Program and
existing infrastructure, than when operated independently. Should we
be successful at acquiring businesses with the appropriate characteristics, upon
terms acceptable to us, and successfully integrate such acquired businesses into
our operations, management expects acquisitions to contribute significantly
toward the growth in our professional service offerings resulting in a greater
proportion of our revenue over time compared to our Staffing Abilities general
staffing service offerings.
Critical
Accounting Policies
The
following discussion and analysis of the financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States
and the rules of the Securities and Exchange Commission. As a result
of the dispositions of all operations associated with the Humana Businesses,
which were conducted in separate subsidiaries, and the subsequent formation and
startup of Accountabilities, Inc., the financial statements have been prepared
based upon a change in reporting entity wherein only the accounts and related
activity beginning with the Date of Inception have been included, and all
accounts and related operating activity of the discontinued Humana Businesses
have been excluded, in order to reflect this reorganization of the
Company. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
The
following represents a summary of the critical accounting policies, which
management believes are the most important to the portrayal of the financial
condition and results of operations and involve inherently uncertain issues that
require management’s most difficult, subjective or complex
judgments.
Revenue
Recognition. We recognize staffing and consulting revenues
when professionals deliver services. Permanent placement revenue is
recognized when the candidate commences employment, net of an allowance for
those not expected to remain with clients through a 90-day guarantee period,
wherein we are obligated to find a suitable replacement.
Allowance for Doubtful
Accounts. We maintain an allowance for doubtful accounts for
estimated losses resulting from our clients failing to make required payments
for services rendered. Management estimates this allowance based upon
knowledge of the financial condition of our clients, review of historical
receivable and reserve trends and other pertinent information. If the
financial condition of any of our clients deteriorates or there is an
unfavorable trend in aggregate receivable collections, additional allowances may
be required.
Stock-Based
Compensation. We calculate stock-based compensation expense in
accordance with SFAS No. 123 Revised, “Share-Based Payment” (“SFAS
123(R)”). This pronouncement requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and
directors including employee stock options, stock appreciation rights and
restricted stock awards to be based on estimated fair values. Fair value for
restricted stock is determined as a discount from the current market price quote
to reflect a) lack of liquidity resulting from the restricted status and low
trading volume and, b) recent private placement valuations. Under SFAS
123(R), the value of the portion of the award that is ultimately expected to
vest is recognized as an expense over the requisite service
periods. We recognize stock-based compensation expense on a
straight-line basis.
Income Taxes. We
record an estimated provision for income taxes in accordance with SFAS 109,
“Accounting for Income Taxes”. Under SFAS 109, deferred income taxes
are recognized for the estimated tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. If necessary, valuation allowances are established to
reduce deferred tax assets to the amount expected to be realized when, in
management’s opinion, it is more likely than not that some portion of the
deferred tax assets will not be realized. The estimated provision for
income taxes represents current taxes that would be payable net of the change
during the period in deferred tax assets and liabilities.
Intangible
Assets. In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” goodwill and other intangible assets with indefinite lives
are not subject to amortization but are tested for impairment annually or
whenever events or changes in circumstances indicate that the asset might be
impaired. We performed our annual impairment analysis as of May 31,
2007 and will continue to test for impairment annually. No impairment
was indicated as of May 31, 2007. Other intangible assets with finite
lives are subject to amortization, and impairment reviews are performed in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.”
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
141(revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) will
significantly change how business combinations are accounted for and will be
effective for business combinations consummated on June 1, 2009 and
thereafter.
In June
2007, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues
Task Force (“EITF”) Issue No. 06-11 (“EITF Issue No. 06-11”), “Accounting for
Income Tax Benefits of Dividends on Shared-Based Payment Awards”. EITF Issue No.
06-11 requires that tax benefits generated by dividends paid during the vesting
period on certain equity-classified share-based compensation awards be treated
as additional paid-in capital and included in a pool of excess tax benefits
available to absorb tax deficiencies from share-based payment
awards. EITF Issue No. 06-11 is effective beginning with the 2009
fiscal year. We do not expect the adoption of EITF Issue No. 06-11 to
have an impact on our financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FAS 115”
(“SFAS 159”), which permits companies to measure certain financial assets and
financial liabilities at fair value. Under SFAS 159, companies that
elect the fair value option will report unrealized gains and losses in earnings
at each subsequent reporting date. The fair value option may be
elected on an instrument-by-instrument basis. SFAS 159 establishes
presentation and disclosure requirements to clarify the effect of a company’s
election on its earnings but does not eliminate disclosure requirements of other
accounting standards. Assets and liabilities that are measured at
fair value must be displayed on the face of the balance sheet. SFAS
159 is effective as of the beginning of our 2009 fiscal year. We do
not expect the adoption of SFAS 159 to have a material impact on our
consolidated financial position or results of operations.
In
September 2006, the EITF issued EITF Issue No. 06-03, “How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation).” This EITF
requires that companies disclose how they report, within their financial
statements, taxes assessed by a governmental authority that involve a specific
revenue producing transaction between a seller and a customer. These
types of taxes may include, but are not limited to, sales, use, value added and
excise taxes. These taxes collected from customers may be presented
either on a gross basis (that is, included in revenue and cost of services) or
on a net basis (excluded from revenue and cost of services but included as a
liability in the balance sheet until the tax has been remitted to the
appropriate governmental authority). We have historically accounted
for such taxes on a net basis and therefore adoption of EITF Issue No. 06-03 did
not have a material impact on our fiscal 2007 financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which provides guidance for using fair value to measure assets and
liabilities. The pronouncement clarifies (1) the extent to which companies
measure assets and liabilities at fair value; (2) the information used to
measure fair value; and (3) the effect that fair value measurements have on
earnings. SFAS 157 will apply whenever another standard requires (or permits)
assets or liabilities to be measured at fair value. SFAS 157 is effective as of
the beginning of our 2009 fiscal year. We do not expect the
adoption of SFAS 157 to have a material impact on our consolidated financial
position or results of operations.
In
September 2006 the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108 (“SAB 108”) which provides interpretive guidance on
how the effects of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement. SAB 108 is
effective for fiscal years ending after November 15, 2006. Adoption
of this pronouncement did not have a material impact on our financial
statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Pension and Other Postretirement Plans.” This Statement requires
recognition of the funded status of a single-employer defined benefit
post-retirement plan as an asset or liability in its statement of financial
position. Funded status is determined as the difference between the
fair value of plan assets and the benefit obligation. Changes in that
funded status should be recognized in other comprehensive
income. This recognition provision and the related disclosures were
effective as of the end of the fiscal year ending after December 15,
2006. The Statement also requires the measurement of plan assets and
benefit obligations as of the date of the fiscal year-end statement of financial
position. This measurement provision is effective for fiscal years
ending after December 15, 2008. We do not expect adoption of this new
standard to have a material impact on our financial position, results of
operations or cash flows.
In July
2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes”,
which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that we recognize in our financial statements, the
impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the
position. This pronouncement is effective for fiscal years beginning
after December 15, 2006. Adoption of this pronouncement did not have
a material impact on our financial statements.
In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS 156”). SFAS 156 provides relief for entities that use derivatives
to economically hedge fluctuations in the fair value of their servicing rights
and changes how gains and losses are computed in certain transfers or
securitizations. SFAS 156 is effective as of the beginning of the
first
fiscal year that begins after September 15, 2006. Adoption of this
pronouncement did not have a material impact on our financial position, results
of operations or cash flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments” (“SFAS 155”). SFAS 155 allows financial instruments that
have embedded derivatives to be accounted for as a whole, eliminating the need
to bifurcate the derivative from its host, if the holder elects to account for
the whole instrument on a fair value basis. This statement is
effective for all financial instruments acquired or issued after the beginning
of an entity’s first fiscal year that begins after September 15,
2006. Adoption of this pronouncement did not have a material impact
on our financial position, results of operations or cash flows.
Results
of Operations
Three
months ended March 31, 2008 compared to three months ended March 31,
2007
Revenues
For the
three months ended March 31, 2008, revenue increased $3,183,000, or 25%, to
$15,743,000, as compared to $12,560,000 in the same period of the prior
year. Of this increase, $1,895,000 was provided by the operations
acquired in connection with the ReStaff Acquisition, which occurred on February
26, 2007. Excluding the ReStaff Acquisition, revenue increased
$1,288,000. This increase was primarily attributable to the growth in
our Partner on Premise program as well as an increase in the revenues provided
by the offices acquired in the US Temps and Stratus Acquisitions.
Direct
cost of services
For the
three months ended March 31, 2008, direct cost of services increased $2,857,000,
or 27%, to $13,304,000, as compared to $10,447,000 in the same period of the
prior year. Of this increase, $1,676,000 was attributed to the
ReStaff Acquisition. Excluding the ReStaff Acquisition, direct cost
of services increased $1,181,000. This increase was primarily
attributable to the growth in our Partner on Premise program as well as an
increase in the business provided by the offices acquired in the US Temps and
Stratus Acquisitions.
Gross
profit
For the
three months ended March 31, 2008 gross profit increased $326,000, or 15%, to
$2,439,000, as compared to $2,113,000 in the same period in the prior
year. Of this increase, $219,000 was provided by the operations
acquired in connection with the ReStaff Acquisition. Excluding the
ReStaff Acquisition, gross profit increased $107,000. This increase
was primarily attributable to the growth in our Partner on Premise
program. As a percentage of revenue gross profit for the three months
ended March 31, 2008 decreased to 15.5% as compared to 16.8% in the same period
in the prior year, primarily as a result of lower margins in our Staffing
Abilities service offering.
Selling,
general and administrative expenses
For the
three months ended March 31, 2008, selling, general and administrative expenses
increased $775,000, or 39%, to $2,747,000, as compared to $1,972,000 in the same
period in the prior year. As a percentage of revenue, selling,
general and administrative expenses were17.4% for the three months ended March
31, 2008 compared to 15.7% during the same period in the prior year reflecting
stock-based compensation expense recorded of $198,000 for the three months ended
March 31, 2008 as compared with $4,000 in the same period in the prior
year. The increased expenses also reflect the growth in our Partner
on Premise program. The remaining overall increase in selling,
general and administrative expenses in the current period reflects the overall
increase in business activity, as well as continued investments throughout the
organization to support strategic initiatives.
Depreciation
and amortization
For the
three months ended March 31, 2008, depreciation and amortization increased
$53,000, or 82%, to $118,000, as compared to $65,000 in the same period in the
prior year. The increase is attributable to amortization associated
with acquired assets from the ReStaff Acquisition, acquired in February
2007.
(Loss)
income from operations
As a
result of the above, the loss from operations was ($426,000) for the three
months ended March 31, 2008 versus income from operations of $76,000 for the
same period in the prior year, representing a decrease of 661%.
Interest
expense
Interest
expense includes the net discounts associated with the sales of accounts
receivable, as well as interest on debt associated with acquired companies and
financing our operations. We have historically issued debt as a
primary means of funding our growth. Consequently, interest expense
for the three months ended March 31, 2008 was $229,000, as compared to $182,000
during the same period in the prior year, primarily reflecting an overall
increase in the volume of our business and consequently net discounts associated
with sales of our receivables, as well as debt issued for the ReStaff
Acquisition.
Loss
on goodwill impairment
Loss on
goodwill impairment of $148,000 relates to the write off of costs capitalized in
connection with a planned reverse merger with Hyperion Energy, Inc. which will
not occur.
Net
loss on debt extinguishment
Net loss
on debt extinguishment of $100,000 was measured as the difference between the
fair value of restricted common stock issued and the remaining outstanding
principal and accrued interest on the debt that was converted during the second
quarter of fiscal 2008.
Net
loss
The
factors described above resulted in a net loss for the three months ended March
31, 2008 of ($903,000), as compared to a net loss of ($106,000) during the same
period in the prior year.
Six
months ended March 31, 2008 compared to six months ended March 31,
2007
Revenues
For the
six months ended March 31, 2008, revenue increased $9,422,000, or 39%, to
$33,891,000, as compared to $24,469,000 in the same period of the prior
year. Of this increase, $6,167,000 was provided by the operations
acquired in connection with the ReStaff Acquisition, which occurred on February
26, 2007. Excluding the ReStaff Acquisition, revenue increased
$3,255,000. This increase was primarily attributable to the growth in
our Partner on Premise program as well as an increase in the revenues provided
by the offices acquired in the US Temps and Stratus Acquisitions.
Direct
cost of services
For the
six months ended March 31, 2008, direct cost of services increased $7,872,000,
or 38%, to $28,391,000, as compared to $20,519,000 in the same period of the
prior year. Of this increase, $5,289,000 was attributed to the
ReStaff Acquisition. Excluding the ReStaff Acquisition, direct cost
of services increased $2,583,000. This increase was primarily
attributable to the growth in our Partner on Premise program as well as an
increase in the business provided by the offices acquired in the US Temps and
Stratus Acquisitions.
Gross
profit
For the
six months ended March 31, 2008 gross profit increased $1,550,000, or 39%, to
$5,500,000, as compared to $3,950,000 in the same period in the prior
year. Of this increase, $878,000 was provided by the operations
acquired in connection with the ReStaff Acquisition. Excluding the
ReStaff Acquisition, gross profit increased $672,000. This increase
was primarily attributable to the growth in our Partner on Premise
program. As a percentage of revenue gross profit for the six months
ended March 31, 2008 remained consistent at 16.2% as compared to 16.1% in the
same period in the prior year.
Selling,
general and administrative expenses
For the
six months ended March 31, 2008, selling, general and administrative expenses
increased $1,713,000, or 47%, to $5,346,000, as compared to $3,633,000 in the
same period in the prior year. As a percentage of revenue, selling,
general and administrative expenses were higher at 15.8% for the six months
ended March 31, 2008 compared to 14.8% during the same period in the prior year
reflecting stock-based compensation expense recorded of $209,000 for the six
months ended March 31, 2008 as compared with $4,000 in the same period in the
prior year. The increased expenses also reflect the growth in our
Partner on Premise program. The remaining overall increase in
selling, general and administrative expenses in the current period reflects the
overall increase in business activity, as well as continued investments
throughout the organization to support strategic initiatives.
Depreciation
and amortization
For the
six months ended March 31, 2008, depreciation and amortization increased
$117,000, or 108%, to $225,000, as compared to $108,000 in the same period in
the prior year. The increase is attributable to amortization
associated with acquired assets from the ReStaff Acquisition, acquired in
February 2007.
(Loss)
income from operations
As a
result of the above, the loss from operations was ($71,000) for the six months
ended March 31, 2008 versus income from operations of $209,000 for the same
period in the prior year, representing a decrease of 134%.
Interest
expense
Interest
expense includes the net discounts associated with the sales of accounts
receivable, as well as interest on debt associated with acquired companies and
financing our operations. We have historically issued debt as a
primary means of funding our growth. Consequently, interest expense
for the six months ended March 31, 2008 was $543,000, as compared to $387,000
during the same period in the prior year, primarily reflecting an overall
increase in the volume of our business and consequently net discounts associated
with sales of our receivables, as well as debt issued for the ReStaff
Acquisition.
Loss
on goodwill impairment
Loss on
goodwill impairment of $148,000 relates to the write off of costs capitalized in
connection with a planned reverse merger with Hyperion Energy, Inc. which will
not occur.
Net
loss on debt extinguishment
Net loss
on debt extinguishment of $100,000 was measured as the difference between the
fair value of restricted common stock issued and the remaining outstanding
principal and accrued interest on the debt that was converted during the second
quarter of fiscal 2008.
Net
loss
The
factors described above resulted in a net loss for the six months ended March
31, 2008 of ($862,000), as compared to a net loss of ($178,000) during the same
period in the prior year.
Liquidity
and Capital Resources
Cash
Flows
We have
historically relied on cash flows from operations, borrowings under debt
facilities and proceeds from sales of stock to satisfy our working capital
requirements as well as to fund acquisitions. In the future, we may
need to raise additional funds through public and/or additional private debt or
equity financings to take advantage of business opportunities, including
existing business growth and mergers and acquisitions.
At March
31, 2008, cash was $33,000, a decrease of ($104,000) from $137,000 as
of September 30, 2007.
Net cash
provided by operating activities during the six months ended March 31, 2008
increased $207,000 to $389,000, from $182,000 during the same period of the
prior year. This was primarily due to a significant increase in
outstanding accounts payable and accrued liabilities as of March 31, 2008, which
was offset by decreased profitability and reduction in due to a related
party.
Net cash
used in investing activities during the six months ended March 31, 2008
decreased ($239,000) to $244,000 from $483,000 during the same period of the
prior year, primarily as a result of cash paid for the ReStaff Acquisition in
the prior year.
Net cash
used in financing activities during the six months ended March 31, 2008
increased $723,000 to ($249,000) from $474,000 provided by financing activities
during the same period of the prior year, primarily as a result of increased
principal payments on long-term debt in the current period, and a decrease in
the current period in proceeds from issuance of common stock.
Working
Capital
We have
financed our growth largely through the issuance of debt and have incurred
negative working capital. As part of funding this growth, as of March
31, 2008 we had negative working capital of ($2,634,000), for which the
component constituting the current portion of long- term debt was
$1,322,000. Within the current portion of long-term debt $334,000 is
past due or due upon demand as explained further below. Total
outstanding debt as of March 31, 2008 was $3,040,000. In order to
service our debt, maintain our current level of operations, as well as fund the
increased costs of becoming a reporting company and our growth initiatives, we
must be able to generate sufficient amounts of cash flow and working
capital. Management is engaging in the following activities to
effectively accomplish these objectives:
a)
|
In
October 2007, we entered into forbearance agreements totaling $286,000 out
of the $334,000 past due. These short term debt holders have
agreed to waive defaults and refrain from exercising their rights and
remedies against us until October 31, 2008, in exchange for an increased
interest rate,
|
b)
|
As
explained further below, pursuant to the agreement with the former owner
of ReStaff, we have successfully negotiated a reduction of $1,398,000 in
the purchase price of ReStaff. The reduction in the purchase price was
accomplished through the restructuring of the remaining indebtedness to
the former owner of ReStaff and the issuance of 250,000 shares of
restricted common stock valued at $50,000 on the restructuring
date. Notes payable with outstanding principal balances of
$3,090,000 and related accrued interest of $158,000 were exchanged
for two new notes. In addition, one of the new notes
issued is subject to proportionate reduction in principal in the event the
acquired operations generate less than $1,000,000 in net income (as
defined in the asset purchase agreement) in any year during the term of
the note.
|
c)
|
In
January 2008 the holder of the $250,000, 10% convertible subordinate note
issued in August 2007, as described in (xiii) of the section
captioned “Debt” below, agreed to exchange the note and accrued interest
for 744,031 shares of common stock and warrants to purchase 100,000 shares
of common stock at $0.50,
|
d)
|
In
January 2008 the holder of the $280,000 unsecured convertible note
issued April 1, 2006, as described in (vii) of the section
captioned “Debt” below, agreed to exchange $100,000 of the outstanding
principal for 600,000 shares of common
stock.
|
e)
|
In
March, 2008 the related party described in (xii) of the section
captioned “Debt” below agreed to exchange $120,000 of outstanding
principal on the note for 600,000 shares of common
stock.
|
f)
|
During
the second quarter of 2008 we issued 1,107,500 shares of restricted common
stock to certain employees and directors at a price of $0.20 per share
raising gross proceeds of $221,500.
|
g)
|
In
January 2008 we commenced a private offering to sell up to $200,000
of common stock and warrants, at no more than a 25% discount to the
average closing market price for the five days preceding the transaction,
and limiting the number of warrants issued to no more than 10% of the
common shares issued, and through February 29, 2008, $35,000 in proceeds
have been received in exchange for 100,000 shares of common stock and
warrants to purchase an additional 9,800 shares of common stock at $0.50
per share,
|
h)
|
In
December 2007 we retained an outside financial advisory and investment
banking firm to advise and assist us in raising
capital. Through March 31, 2008 we have completed the planning
phase and we are actively pursuing the raising of
capital.
|
i)
|
We
are aggressively managing cash and expenses, including the increased costs
of becoming a reporting company, with activities such as seeking
additional efficiencies in our operating offices and corporate functions
including headcount reductions if appropriate, improving our accounts
receivable collection efforts, obtaining more favorable vendor terms, and
using our finance and accounting consultants when available to aid in the
necessary obligations associated with becoming a reporting company,
and
|
j)
|
We
are continuing our efforts at expanding our higher margin professional
services.
|
The
working capital deficit of ($2,634,000) as of March 31, 2008, represents a
decrease of $592,000 as compared to a working capital deficit of ($3,226,000) as
of September 30, 2007. This working capital deficit decrease was
primarily the result of a significant effort on the part of management to reduce
the level of debt outstanding through the conversion and restructuring of
outstanding balances.
Because
our revenue depends primarily on billable labor hours, most of its charges are
invoiced weekly, bi-weekly or monthly depending on the associated payment of
labor costs, and are due currently, with collection times typically ranging from
30 to 60 days. We sell our accounts receivable to a financial
institution as a means of managing our working capital. Under the
terms of our receivable sale agreement the maximum amount of trade receivables
that can be sold is $8,000,000. As collections reduce previously sold
receivables, we may replenish these with new receivables. Net
discounts per the agreement are represented by an interest charge at an annual
rate of prime plus 1.5% (“Discount Rate”) applied against outstanding
uncollected receivables sold. The risk we bear from bad debt losses
on trade receivables sold is retained by us, and receivables sold may not
include amounts over 90 days past due. The agreement is subject to a
minimum discount computed as minimum sales per month of $3,000,000 multiplied by
the then effective Discount Rate, and a termination fee applies of 3% of the
maximum facility in year one of the agreement, 2% in year two, and 1%
thereafter. In addition, an overadvance of $500,000 was received, is
secured by outstanding receivables, and is being repaid in weekly payments of
$5,000. As of May 9, 2008, the amount of sold receivables outstanding
was $5,350,000, which includes $475,000 of the overadvance.
Debt
Long-term
debt at March 31, 2008 and September 30, 2007 is summarized as
follows:
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
|
16.25%
subordinated note (i)
|
|
$ |
102,000 |
|
|
$ |
93,000 |
|
3%
convertible subordinated note (ii)
|
|
|
472,000 |
|
|
|
527,000 |
|
18%
unsecured note (iii)
|
|
|
80,000 |
|
|
|
80,000 |
|
Long
term capitalized consulting obligations (v)
|
|
|
81,000 |
|
|
|
159,000 |
|
Long
term capitalized lease obligation (xiv)
|
|
|
28,000 |
|
|
|
- |
|
10%
convertible subordinated note (xiii)
|
|
|
- |
|
|
|
232,000 |
|
Other
debt
|
|
|
50,000 |
|
|
|
50,000 |
|
Total
|
|
|
813,000 |
|
|
|
1,141,000 |
|
Less
current maturities
|
|
|
441,000 |
|
|
|
691,000 |
|
Non-current
portion
|
|
|
372,000 |
|
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
Related
party long-term debt
|
|
|
|
|
|
|
|
|
13%
unsecured demand note (iv)
|
|
|
104,000 |
|
|
|
101,000 |
|
Long
term capitalized consulting obligations (vi)
|
|
|
32,000 |
|
|
|
46,000 |
|
18%
unsecured convertible note (vii)
|
|
|
100,000 |
|
|
|
270,000 |
|
Demand
loan (viii)
|
|
|
48,000 |
|
|
|
30,000 |
|
6%
unsecured note (ix)
|
|
|
100,000 |
|
|
|
300,000 |
|
6%
unsecured note (x)
|
|
|
1,700,000 |
|
|
|
2,846,000 |
|
9%
unsecured note (xi)
|
|
|
143,000 |
|
|
|
210,000 |
|
Unsecured
loan (xii)
|
|
|
- |
|
|
|
284,000 |
|
Total
|
|
|
2,227,000 |
|
|
|
4,087,000 |
|
Less
current maturities
|
|
|
881,000 |
|
|
|
1,647,000 |
|
Non-current
portion
|
|
|
1,346,000 |
|
|
|
2,440,000 |
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
|
3,040,000 |
|
|
|
5,228,000 |
|
Less
current maturities
|
|
|
1,322,000 |
|
|
|
2,338,000 |
|
Total
non-current portion
|
|
$ |
1,718,000 |
|
|
$ |
2,890,000 |
|
|
|
|
|
|
|
|
|
|
US
Temp Services, Inc. Acquisition Notes and Long Term Consulting
Obligations
As
partial consideration associated with the US Temp Acquisition four notes were
issued.
(i) A
$175,000 subordinated note was issued March 31, 2006, and was due January 30,
2007. The note has an annual interest rate of 8% with principal and
interest payable in equal monthly installments of $18,150. The note
is secured by office equipment and other fixed assets. Due to the
failure to make timely payments under the terms of the note, the holder has
elected the option of declaring the note in technical default and began
assessing interest, beginning April 1, 2007, at the rate of 11.25% per annum,
and to impose a 5% late charge on the overdue balance outstanding. On
October 31, 2007, we entered into a forbearance agreement with the holder of the
note wherein the holder agreed to waive defaults and refrain from exercising its
rights and remedies against us until October 31, 2008 in exchange for an
increase in the interest rate to 16.25%.
(ii) A
$675,000 convertible subordinated note was issued March 31, 2006 and is due
March 31, 2012. The note bears interest at an annual rate of 3%, and
is convertible in part or in whole into common shares at any time at the option
of the holder at the specified price of $1.50 per share. The note is
secured by office equipment and other fixed assets.
(iii) A
$80,000 unsecured non-interest bearing note was issued March 31, 2006, and was
due June 29, 2006. Due to the failure to make timely payments under
the terms of the note, on April 1, 2007, the holder elected the option of
declaring the note in technical default and began charging interest at a rate of
18% per annum. On October 31, 2007, we entered into a forbearance
agreement with the holder of the note wherein the holder agreed to waive
defaults and refrain from exercising its rights and remedies against us until
October 31, 2008 in exchange for an increase in the interest rate to 18% per
annum.
(iv) A
$150,000 unsecured demand note was issued March 31, 2006 to a principal
shareholder as a finders fee in consideration for sourcing and completing the US
Temp Acquisition. The note bears an annual interest rate of
8%. On October 31, 2007, we entered into a forbearance agreement with
the holder of the note wherein the holder agreed to waive defaults and refrain
from exercising its rights and remedies against us until October 31, 2008 in
exchange for an increase in the interest rate to 13% per annum.
On March
31, 2006, in connection with the US Temp Acquisition, we entered into three long
term consulting obligations which require us to pay fixed recurring amounts but
which do not require the other party to provide any minimum level of
services. Consequently, the agreements have been treated as debt
obligations in the accompanying financial statements and capitalized, net of
interest imputed at a rate of 8.75% per year. The imputed interest
was determined by reference to terms associated with credit available to us at
that time. All three agreements expire on March 31,
2009.
(v) Two
of the agreements were entered into with the principals of US Temps and each
require annual payments of $60,000 in the first two years and $30,000 in the
final year, payable in fixed weekly amounts. These two agreements in
total were initially recognized at a fair value of $292,000 using a discount
rate of 8.75%.
(vi) The
third agreement was entered into with a major shareholder and requires annual
payments of $30,000 in each of three years, payable in fixed weekly
amounts. The agreement was initially recorded at a fair value of
$84,000 using an interest rate of 5%.
18%
Unsecured Convertible Note
(vii) We
issued a $280,000 unsecured convertible note on April 1, 2006 to a shareholder
and director of the Company. The note was due April 1, 2007, bearing
an annual interest rate of 12%. On October 31, 2007, we entered into
a forbearance agreement with the holder of the note wherein the holder agreed to
waive defaults and refrain from exercising its rights and remedies against us
until October 31, 2008 in exchange for an increase in the interest rate to 18%.
On January 31, 2008, the shareholder and director exchanged the note, with an
outstanding principal balance of $200,000 for 600,000 shares of restricted
common stock with a fair value on the date of exchange of $177,000 and a new
unsecured convertible note in the principal amount of $100,000 due October 31,
2008. The new note bears interest at an annual rate of 18% and is
convertible at any time at the option of the holder at a specified price of
$0.40 per share. We recorded a loss of $77,000 on the
extinguishment of the debt representing the difference between the fair value of
the shares issued on the date of conversion and the remaining principal balance
outstanding on the note.
Demand
Loan
(viii) In
October 2005 a major shareholder advanced us $30,000 to fund our initial
operations. During the six months ended March 31, 2008, the shareholder advanced
an additional $18,000. The amount is classified as a short-term loan
and is due and payable upon demand by the shareholder.
ReStaff
Inc., Acquisition Notes
As
partial consideration associated with the ReStaff Acquisition the following
notes and loan were issued. The notes described in (ix) and (x) below
were issued to the then sole shareholder of ReStaff who was also issued 600,000
shares of common stock as partial consideration and who also became our
employee. A portion of the purchase price was subject to reduction if ReStaff’s
audited net income for the year ending December 31, 2006 was less than
$1,350,000. On February 28, 2008, we completed our analysis of
ReStaff’s results and reduced the original purchase price by $1,398,000. The
reduction in the purchase price was accomplished through the restructuring of
the remaining indebtedness to the former owner of ReStaff and the issuance of
250,000 shares of restricted common stock with a fair value of $50,000 on the
restructuring date. The restructuring involved the exchange of notes
payable with outstanding principal balances of $3,090,000 and related accrued
interest of $158,000 for the two new notes described in (ix) and (x)
below. In addition, the note in (x) below is subject to proportionate
reduction in principal in the event the acquired operations generate less than
$1,000,000 in net income (as defined in the asset purchase agreement) in any
year during the term of the note. The debt described in (xi) and
(xii) below was issued to two of our major shareholders.
(ix) As described above,
in February 2008 a $100,000 unsecured note was issued. The
note is due March 5, 2009, and bears an annual interest rate of 6%.
(x) As described above,
in February 2008, a $1,700,000 unsecured note was issued. The
note bears an annual interest rate of 6% with principal and interest payable in
equal monthly installments of $39,925 over four years beginning May 1,
2008. As mentioned above, the note is subject to proportionate
reduction in principal in the event the acquired operations generate less than
$1,000,000 in net income (as defined in the asset purchase agreement) in any
year during the term of the note.
(xi) In
February 2007, a $275,000 unsecured note was issued as partial finder’s fee
consideration, bearing annual interest of 9%, with principal and interest
payable in equal monthly installments of $2,885 over 104
months.
(xii) In
order to finance portions of the purchase price, we entered into a borrowing
arrangement with another major stockholder. Under the terms of the
agreement, up to $950,000 may be borrowed without interest. As
consideration for the loan, the stockholder was granted 600,000 shares of
restricted common stock. We borrowed and subsequently repaid $450,000
in March, 2007, and borrowed the balance of $500,000 in June, 2007 which is
payable in equal weekly installments of $10,000. We followed the
guidance in Accounting Principles Board Opinion No. 14, Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants, by treating the
relative fair value of the restricted common stock granted as a discount to the
debt, with a corresponding increase in additional paid-in
capital. Accordingly, a relative fair value associated with the
granted common stock of $119,000 was calculated, $4,000 of which was apportioned
to the initial $450,000 borrowed and repaid in March, 2007 and recorded as
interest expense, and $115,000 was apportioned to the $500,000 balance and
recorded as deferred financing costs to be amortized as interest expense
beginning in June, 2007. In March, 2008, we issued 600,000 of
restricted common stock with a fair value of $159,000 in exchange for the
cancellation of the remaining principal balance of $120,000 outstanding on the
date of exchange. We recorded a loss of $47,000 on the extinguishment of the
debt representing the difference between the fair value of the shares issued on
the date of conversion and the remaining principal balance outstanding on the
note, net of remaining deferred financing costs of $8,000.
(xiii) A
$250,000 convertible subordinated note was issued August 6, 2007 and was to
become due on February 16, 2008. The note bore interest at an annual
rate of 10% and was convertible in whole or in part into common shares at any
time at the option of the holder. The conversion price per share was
equal to the greater of 75% of the closing price of the common stock on the
trading day preceding the conversion or the Per Share Enterprise
Value. Enterprise Value was defined as the sum of the aggregate
market price of all of our common stock outstanding and aggregate outstanding
indebtedness immediately prior to the conversion date. Per Share
Enterprise Value was determined by dividing the Enterprise Value by the total
number of shares of common stock outstanding immediately prior to the conversion
date, provided that the Enterprise Value was not to be less than
$18,000,000. In January, 2008, the holder exchanged the note for
744,031 shares of restricted common stock and a three-year warrant to purchase
100,000 shares of common stock at an exercise price of $0.50 per share. On the
date of the exchange there was $250,000 in principal and accrued interest of
$10,000 outstanding on the note. We recorded a gain of $24,000 on the
extinguishment of the debt representing the difference between the fair value of
the shares and warrants issued on the date of conversion and the remaining
principal and accrued interest outstanding on the note.
(xiv) In
November, 2007, we entered into a capital lease agreement to purchase computer
equipment. The original principal of $33,000 is payable over a lease
term of 24 months in equal monthly installments of $1,843.
Reliance
on Related Parties
We have
historically relied on funding from related parties in order to meet its
liquidity needs, such as the debt described in (iv), (vi), (vii), (viii), (ix),
(x), (xi) and (xii) above. Management believes that the terms
associated with these instruments would not differ materially from those that
might have been negotiated with independent parties. However,
management believes that the advantages that we derived from
obtaining funding from related parties include a shortened length of time to
identify and obtain funding sources due to the often pre-existing knowledge of
our business and prospects possessed by the related party, and the lack of agent
or broker compensation often deducted from gross proceeds available to
us. Management anticipates that we will continue to have significant
working capital requirements in order to fund its growth and operations, and to
the extent we do not generate sufficient cash flow from operations to meet these
working capital requirements we will continue to seek other sources of funding
including the issuance of related party debt.
Sales
of Common Stock
In
January, 2008, the holder of the $250,000 convertible subordinated note issued
on August 6, 2007, exchanged the note for 744,031 shares of restricted common
stock and a three-year warrant to purchase 100,000 shares of our common stock at
an exercise price of $0.50 per share. The number of restricted common
shares issued was determined by dividing the unpaid principal and accrued
interest by $0.35 per share.
In
January, 2008, the related party that held the $280,000 12% unsecured
convertible note dated April 1, 2006, with an outstanding principal balance of
$200,000, exchanged the note for 600,000 shares of our common stock and a new
unsecured note in the principal amount of $100,000 due October 31, 2008 and
bearing an annual interest rate of 18%.
In
February, 2008 we issued 250,000 shares to the former owner of ReStaff in
connection with the restructuring of outstanding indebtedness incurred during
the acquisition in exchange for a decrease in indebtedness of
$50,000.
During
the second quarter of 2008 we issued 1,107,500 shares of restricted common stock
to certain employees and directors at a price of $0.20 per
share.
During
the second quarter of 2008 we completed a private placement to independent third
parties of 100,540 shares of our common stock at a price of $0.35 per share with
warrants to purchase an aggregate 9,800 shares of our common stock at an
exercise price of $0.50 per share.
In March,
2008, we issued 1,000,000 shares of our common stock to the related party that
had made the $950,000 unsecured loan in March 2007 as described in (xii) above,
in exchange for consideration of $200,000 which consisted of the cancellation of
the remaining outstanding principal balance of the loan of $120,000, the
cancellation of $26,000 of outstanding invoices payable and $54,000 in
cash.
Item
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Our
receivable sale agreement is subject to variable rate interest which could be
adversely affected by an increase in interest rates. As of September
30, 2007 outstanding uncollected receivables sold were
$6,195,000. Our weighted average outstanding uncollected receivables
sold for the year ending September 30, 2007 was
$5,079,000. Management estimates that had the average interest rate
increased by two percentage points during the year ending September 30, 2007,
interest expense would have increased by approximately $102,000.
We
believe that our business operations are not exposed to market risk relating to
foreign currency exchange risk or commodity price risk.
Item
4. CONTROLS AND
PROCEDURES
Under the
supervision and with the participation of management, including our Chief
Executive Officer and our Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the 1934 Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this
report. There were no changes in our internal controls during the
quarter ended March 31, 2008 that have materially affected, or are reasonably
likely to have materially affected our internal controls over financial
reporting.
Our
management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent all error and all
fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected.
Part
II Other
Information
Item
1. Legal
Proceedings
We are
involved, from time to time, in routine litigation arising in the ordinary
course of business, including the matters described in our latest Amended Form
10 Registration Statement filed on April 15, 2008. There have been no
material changes in the status of such matters since the filing of that
registration statement.
Item
1A. Risk Factors
There
have been no material changes with respect to the risk factors disclosed in our
latest Amended Form 10 Registration Statement filed on April 15,
2008.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
During
the quarter ending March 31, 2008, we issued an aggregate of 1,107,500 shares of
common stock to 9 employees and directors at a price of $0.20 per
share. We relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933 in making such issuances.
During
the quarter ending March 31, 2008, we made restricted stock awards with respect
to 1,403,000 shares of common stock to 50 employees and
directors. These awards were made without any payment being required
of the recipients and thus did not constitute “sales” under Section 5 of the
Securities Act of 1933.
During
the quarter ending March 31, 2008, we issued 100,540 shares of common stock at a
price of $0.35 per share and warrants to acquire an aggregate of 9,800 shares of
our common stock to 3 investors. We relied upon the exemption
provided by Section 4(2) of the Securities Act of 1933 in making such
issuances.
In March
2008, we issued 1,000,000 shares of common stock to Tri-State Employment
Services, Inc. in exchange for the cancellation of an aggregate of $146,000 of
indebtedness and $54,000 of cash. We relied upon the exemption
provided by Section 4(2) of the Securities Act of 1933 in making such
issuance.
Item
3. Defaults Upon
Senior Securities
We are
currently in default under promissory notes in the principal amounts of
$175,000, $80,000 and $150,000, respectively, as a result of our failure to make
timely payments of principal and/or interest. Each of the holders of these
notes has entered into a forbearance agreement with us and agreed to refrain
from exercising rights and remedies against us in exchange for an increase in
the interest rate of the note. As of March 31, 2008, the aggregate amount
of payments due but not made under the notes was $286,000.
Item
4. Submission of
Matters to a Vote of Security Holders
No
matters were submitted to a vote of stockholders during the quarter ended March
31, 2008.
Item
5. Other
Information
None
Item
6. Exhibits
Number
|
Description
|
|
|
10.37 |
Exchange
Agreement dated February 28, 2008 between Accountabilities, Inc. and
ReStaff Services, Inc. |
|
|
10.38 |
Promissory
Note dated February 28, 2008 issued by Accountabilities, Inc. to ReStaff
Services, Inc., in principal amount of $100,000. |
|
|
10.39 |
Promissory
Note dated February 28, 2008 issued by Accountabilities, Inc. to ReStaff
Services, Inc. in principal amount of $1,700,000. |
|
|
10.40 |
Clarification
Addendum to the Asset Purchase Agreement between Accountabilities, Inc.,
and ReStaff Services, Inc. |
|
|
10.41 |
Termination
of Asset Purchase Agreement; Transfer of Hyperion Energy Common
Stock. |
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
|
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ACCOUNTABILITIES,
INC. |
|
|
|
|
|
Date:
May 15, 2008
|
By:
|
/s/ Jeffrey
J. Raymond |
|
|
|
Name:
Jeffrey J. Raymond |
|
|
|
Title:
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
Date:
May 15, 2008
|
By:
|
/s/
Stephen DelVecchia |
|
|
|
Name:
Stephen DelVecchia |
|
|
|
Title:
Chief Financial Officer |
|
|
|
|
|
29