-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EV3WthAaG77iFrINCNFjkQBDxkINqaH1oJh44+DGOajBhFXWFaP0xzUe76TTafqv vQYZ+nKXXIcU7ucu20Dsyw== 0001144204-09-002985.txt : 20090122 0001144204-09-002985.hdr.sgml : 20090122 20090122165722 ACCESSION NUMBER: 0001144204-09-002985 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20081130 FILED AS OF DATE: 20090122 DATE AS OF CHANGE: 20090122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORKSTREAM INC CENTRAL INDEX KEY: 0001095266 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 000000000 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15503 FILM NUMBER: 09539694 BUSINESS ADDRESS: STREET 1: 495 MARCH RD STE 300 STREET 2: OTTAWA ONTARIO CITY: CANADA K2K 3G2 STATE: A6 ZIP: 00000 BUSINESS PHONE: 6132362263 MAIL ADDRESS: STREET 1: 495 MARCH RD SE 300 STREET 2: OTTAWA ONTARIO CITY: CANADA K2K 3G2 STATE: A6 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: E CRUITER COM INC DATE OF NAME CHANGE: 19990917 10-Q 1 v137376_10q.htm Unassociated Document
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
 
FORM 10-Q
 
(Mark One)
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 30, 2008
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________________ to ____________________________
 
Commission file number 001-15503

WORKSTREAM INC.

(Exact name of Registrant as specified in its charter)
 
Canada
 
N/A
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer Identification No.)
495 March Road, Suite 300, Ottawa, Ontario
 
K2K 3G1
(Address of Principal Executive Offices)
 
(Zip Code)

(613) 270-0619 

(Registrant’s Telephone Number, Including Area Code)


(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.   See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ 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 ¨ No x
 
As of January 20, 2009, there were 56,079,181 common shares, no par value, outstanding, excluding 108,304 common shares held in escrow.
 
 
 

 

WORKSTREAM INC.
 
TABLE OF CONTENTS
 
     
Page No.
Part I.
Financial Information
 
 
Item 1.
Unaudited Consolidated Financial Statements
 
   
Unaudited Consolidated Balance Sheets as of
 
   
November 30, 2008 and May 31, 2008
2
   
Unaudited Consolidated Statements of Operations for
 
   
the Three and Six  Months ended November 30, 2008 and 2007
3
   
Unaudited Consolidated Statement of Stockholders’ Equity (Capital Deficiency)
for the Six Months ended November 30, 2008
4
   
Unaudited Consolidated Statements of Cash Flows
 
   
for the Six Months ended November 30, 2008 and 2007
5
   
Notes to Unaudited Consolidated Financial Statements
6
 
Item 2.
Management’s Discussion and Analysis of Financial
 
   
Condition and Results of Operations
21
       
 
Item 4T.
Controls and Procedures
29
Part II.
Other Information
 
 
Item 1.
Legal Proceedings
30
 
Item 1A.
Risk Factors
30
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
 
Item 3.
Defaults Upon Senior Securities
33
 
Item 4.
Submission of Matters to a Vote of Security Holders
33
 
Item 5.
Other Information
33
       
 
Item 6.
Exhibits
33
 
Signatures
 
34
 
 
1

 

PART 1 – FINANCIAL INFORMATION

ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS

WORKSTREAM INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
   
November 30, 2008
   
May 31, 2008
 
ASSETS
           
Current assets:
           
   Cash and cash equivalents
  $ 883,561     $ 3,435,337  
   Restricted cash
    322,920       391,415  
   Short-term investments
    58,892       67,983  
   Accounts receivable, net
    3,326,128       3,293,279  
   Prepaid expenses and other assets
    363,343       501,970  
  Assets held-for-sale
    3,707,195       3,890,865  
         Total current assets
    8,662,039       11,580,849  
                 
Equipment, net
    1,411,123       1,955,887  
Other assets
    24,245       75,737  
Acquired intangible assets, net
    171,867       449,975  
Goodwill
    14,324,734       14,324,734  
                 
TOTAL ASSETS
  $ 24,594,008     $ 28,387,182  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (CAPITAL DEFICIENCY)
               
Current liabilities:
               
   Accounts payable
  $ 2,346,243     $ 3,114,565  
   Accrued liabilities
    2,871,568       2,971,645  
   Accrued compensation
    798,098       1,124,384  
   Current portion of long-term obligations
    330,076       541,141  
   Deferred revenue
    2,710,503       2,396,002  
   Liabilities related to assets held-for-sale
    684,616       823,371  
         Total current liabilities
    9,741,104       10,971,108  
                 
Long-term obligations less current portion
    144,214       272,300  
Deferred revenue – long term
    161,865       113,000  
Common stock warrant liability
    -       19,000,000  
Notes payable
    19,000,000       -  
         Total liabilities
    29,047,183       30,356,408  
                 
Contingencies (Note 4)
               
                 
STOCKHOLDERS’ EQUITY (CAPITAL DEFICIENCY)
               
   Preferred stock, no par value
    -       -  
Common stock, no par value: 56,079,181 and 52,442,818 shares issued and outstanding, respectively
    113,188,378       112,588,378  
   Additional paid-in capital
    18,394,245       18,261,543  
   Accumulated other comprehensive loss
    (614,639 )     (799,190 )
   Accumulated deficit
    (135,421,159 )     (132,019,957 )
         Total stockholders’ equity (capital deficiency)
  $ (4,453,175 )   $ (1,969,226 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (CAPITAL DEFICIENCY)
  $ 24,594,008     $ 28,387,182  
 
See accompanying notes to these consolidated financial statements.

 
2

 

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Three Months ended
   
Six Months ended
 
    
November 30,
   
November 30,
 
    
2008
   
2007
   
2008
   
2007
 
                         
Revenues:
                       
Software
  $ 1,836,478     $ 2,210,799     $ 3,627,935     $ 4,757,258  
Professional services
    509,169       845,605       1,231,140       1,820,737  
Rewards and discount products
    1,435,089       1,587,061       2,954,004       2,957,341  
Career networks
    805,488       1,512,317       1,708,579       3,155,096  
Revenues, net
    4,586,224       6,155,782       9,521,658       12,690,432  
Cost of revenues:
                               
Rewards and discount products
    1,169,228       1,160,706       2,343,240       2,176,083  
Other
    325,966       704,678       753,168       1,423,083  
Cost of revenues (exclusive of amortization and depreciation expense noted below)
    1,495,194       1,865,384       3,096,408       3,599,166  
                                 
Gross profit
    3,091,030       4,290,398       6,425,250       9,091,266  
                                 
Operating expenses:
                               
Selling and marketing
    907,668       2,688,380       1,901,447       5,101,436  
General and administrative
    1,890,846       4,009,733       4,557,838       8,736,817  
Research and development
    985,159       1,437,543       2,287,261       2,922,179  
Amortization and depreciation
    445,326       1,106,938       925,334       2,406,601  
Total operating expenses
    4,228,499       9,242,594       9,671,880       19,167,033  
                                 
Operating loss
    (1,137,469 )     (4,952,196 )      (3,246,630     (10,075,767 )
                                 
Interest and other income
    1,506       5,435,421       141,762       6,976,612  
Interest and other expense
    (348,952 )     (157,073 )     (422,784 )     (2,138,112 )
Other income (expense), net
    (347,446 )     5,278,348        (281,022     4,838,500  
                                 
Income (loss) before income tax expense
    (1,484,915 )     326,151       (3,527,652 )     (5,237,268 )
Current income tax (expense) benefit
    (7,075 )     32,542       (17,754 )     (17,366 )
Net income (loss) from continuing operations
  $ (1,491,990 )   $ 358,693     $ (3,545,406 )   $ (5,254,634 )
                                 
Income from discontinued operations, net of taxes
    142,370       423,718       144,204       536,010  
                                 
NET (LOSS) INCOME
  $ (1,349,620 )   $ 782,411     $ (3,401,202 )   $ (4,718,624 )
                                 
Weighted average number of common shares outstanding -basic
    55,120,140       51,571,152        53,766,928       51,571,152  
                                 
Weighted average number of common shares outstanding -diluted
    55,120,140       55,629,959       53,766,928       51,571,152  
                                 
Basic earnings (loss) per share from continuing operations
  $ (0.02 )   $ 0.01     $ (0.06 )   $ (0.10 )
                                 
Diluted earnings (loss) per share from continuing operations
  $ (0.02 )   $ 0.01     $ (0.06 )   $ (0.10 )
                                 
Basic earnings per share from discontinued operations
  $ 0.00     $ 0.01     $ 0.00     $ 0.01  
                                 
Diluted earnings per share from discontinued operations
  $ 0.00     $ 0.01     $ 0.00     $ 0.01  

See accompanying notes to these consolidated financial statements.

 
3

 
 
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
For the six Month ended November 30, 2008
(Unaudited)

                
Additional
   
Accumulated
Other
         
Total
Stockholders'
 
    
Common Stock
   
Paid-In
   
Comprehensive
   
Accumulated
   
Equity (Capital
 
    
Shares
   
Amount
   
Capital
   
Loss
   
Deficit
   
Deficiency)
 
Balance at May 31, 2008
    52,442,818       112,588,378       18,261,543       (799,190 )     (132,019,957 )   $ (1,969,226 )
                                                 
Issuance of common shares
    3,636,363       600,000       -       -       -       600,000  
Stock-based compensation
    -       -       90,262       -       -       90,262  
Expensing of restricted stock unit grants
    -       -       42,440       -       -       42,440  
Net loss
    -       -       -       -       (3,401,202 )     (3,401,202 )
Cumulative translation adjustment
    -       -       -       184,551       -       184,551  
Balance at November 30, 2008
  $ 56,079,181     $ 113,188,378     $ 18,394,245     $ (614,639 )   $ (135,421,159 )   $ (4,453,175 )

See accompanying notes to these consolidated financial statements.

 
4

 

WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended
 
    
November 30,
 
    
2008
   
2007
 
Cash flows used in operating activities:
           
Net loss
  $ (3,401,202 )   $ (4,718,624 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Amortization and depreciation
    926,867       2,408,237  
Leasehold inducement amortization
    (30,497 )     (28,720 )
Provision for bad debts
    465,999       128,835  
Loss on sale or disposal of fixed asset
    -       12,622  
Stock based compensation
    132,702       876,856  
Non-cash interest expense
    (729 )     (6,733,799 )
Change in long-term portion of deferred revenue
    48,865       (88,207 )
Net change in components of working capital:
               
Accounts receivable
    (314,412 )     (617,410 )
Prepaid expenses and other assets
    187,819       387,485  
Accounts payable and accrued expenses
    (216,296 )     (490,255 )
Accrued compensation
    (318,951 )     484,588  
Deferred revenue
    124,228       549,709  
Net cash used in operating activities
    (2,395,607 )     (7,828,683 )
                 
Cash flows provided by (used in) investing activities
               
Purchase of property and equipment
    (1,922 )     (380,437 )
Decrease in restricted cash
    -       130,923  
Decrease in short-term investments
    9,091       1,558  
Net cash provided by (used in) investing activities
    7,169       (247,956 )
                 
Cash flows provided by (used in) financing activities:
               
Proceeds from exercise of options and warrants
    -       39,200  
Repayment of long-term obligations
    (232,748 )     (305,229 )
Payment of guaranteed financing costs
    -       (550,000 )
Proceeds from warrant financing
    -       18,658,172  
Net repayments on line of credit
    -       (4,498,619 )
Net cash (used in) provided by financing activities
    (232,748 )     13,343,524  
                 
Effect of exchange rate changes on cash and cash equivalents
    69,410       (124,943 )
                 
Net increase/(decrease) in cash and cash equivalents
    (2,551,776 )     5,141,942  
Cash and cash equivalents, beginning of period
    3,435,337       2,752,601  
                 
Cash and cash equivalents, end of period
  $ 883,561     $ 7,894,543  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
  $ 15,009     $ 21,774  
Supplemental schedule of non-cash investing and financing activities:
               
Conversion of warrant liability to notes payable
  $ 19,000,000     $ -  
Non-cash issuance of common stock in connection with the settlement of class action lawsuits
  $ 600,000     $ -  

See accompanying notes to these consolidated financial statements.
 
 
5

 

WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

NOTE  1.      THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of November 30, 2008, the consolidated statements of operations for the three and six months ended November 30, 2008 and 2007, and the consolidated statements of cash flows for the six months ended November 30, 2008 and 2007 are unaudited but include all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position at such dates and our results of operations and cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States (“GAAP”).  The consolidated balance sheet as of May 31, 2008 has been derived from the audited consolidated financial statements at that date but, in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”), does not include all of the information and notes required by GAAP for complete financial statements.  Operating results for the six months ended November 30, 2008 are not necessarily indicative of results that may be expected for the entire fiscal year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the fiscal year ended May 31, 2008 included in the Company’s amended Form 10-K/A filed with the SEC on November 17, 2008.

Description of the Company

Workstream Inc. (“Workstream” or the “Company”), is a provider of services and software for Human Capital Management (“HCM”).  HCM is the process by which companies recruit, train, evaluate, motivate and retain their employees.  Workstream offers software and services that address the needs of companies to more effectively manage their human capital management function.  Workstream has two distinct reportable segments: Enterprise Workforce Services and Career Networks.  The Enterprise Workforce Services segment offers a suite of HCM software solutions, which includes performance management, compensation management, development, recruitment, benefits administration and enrollment, succession planning, and employee awards and discounts programs.  The Career Networks segment offers recruitment research, resume management and career transition services.  In addition, Career Networks provides services through a web-site where job-seeking senior executives can search job databases and post their resumes, and companies and recruiters can post position openings and search for qualified senior executive candidates.  Workstream conducts its business primarily in the United States and Canada.

On August 4, 2008, the Board of Directors of Workstream engaged an investment bank to sell 6FigureJobs.com which was previously reported under the Career Networks segment of the business.

Management Assessment of Liquidity

The opinion of our independent registered public accountants on the audited financial statements as of and for the year ended May 31, 2008 contained an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.

 
6

 

WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

We have had operating losses since our inception, and during fiscal 2009, we have an operating loss of approximately $3,247,000 and cash used in operating activities of approximately $2,396,000.  Cash and cash equivalents, restricted cash and short-term investments on hand as of November 30, 2008 totaled approximately $1,265,000.  These trends raise concerns about the sufficiency of the Company’s liquidity levels to be able to support its operations in the near term.  Due to significant reductions in operating expenses in the fourth quarter of fiscal 2008, October 2008 and again in January 2009, management believes the current liquidity will be sufficient to meet its anticipated working capital and capital expenditure requirements.  The current operating loss was the result of current economic conditions and is a reflection of the overall health of the economy as a whole.  As it relates to the Career Networks segment of the business, management believes that the career transition services will gain strength in this type of economy as it has in the past .   Based on an analysis of our current contracts, forecasted new business, our current backlog and current expense level, management believes the Company will meet its cash flow needs for the remainder of fiscal 2009.  If these measures fall short, management will consider additional cost savings measures, including cutting back product development initiatives and further reducing general and administrative expenses and reducing sales and marketing expenditures.  We recognize that there are no assurances that the Company will be successful in meeting its cash flow requirements, however, management is confident that, if necessary, there are other alternatives available to fund operations and meet cash requirements during fiscal 2009.

While management believes that the anticipated improvement in operating cash flows together with our current cash reserves will be sufficient to meet our working capital and capital expenditure requirements through at least May 31, 2009, we are exploring other alternatives to assist in the funding of our business.  Workstream has actively engaged an investment bank to value and divest 6Figuresjobs.com.  The move is designed to infuse the Company with cash, as well as to reduce the senior secured notes payable.  Pursuant to the terms of our aggregate $19 million notes, Workstream is to receive 25% of any proceeds from the sale of any assets and the senior secured note holders are to receive 75% of any proceeds.  Workstream is continuing to consider other opportunities to raise capital and align the Company’s business operations with its strategic focus.

Our common stock currently trades on the NASDAQ Capital Market and the Boston Stock Exchange. On November 20, 2007, the Company received a letter from The NASDAQ Stock Market (“NASDAQ”) notifying the Company that for 30 consecutive trading days prior to the date of the letter, the minimum bid price per share of the Company's listed securities had been below the minimum bid price per share of $1.00 as required for continued inclusion on the NASDAQ Capital Market. On May 20, 2008, we received a notice from NASDAQ that provided the Company an additional 180 calendar day compliance period, or until November 17, 2008, to regain compliance. However, on October 16, 2008, the NASDAQ announced that, effective immediately, it was suspending the enforcement of the rules requiring a minimum $1.00 closing bid price. The suspension remains in effect and, as a result, we will now have until at least February 18, 2009 to regain compliance with the $1.00 minimum bud price requirements. At January 20, 2009, our shares were trading at $.04 per share.
 
If our common shares are delisted from the NASDAQ Capital Market, there may be a limited market for our shares, trading our stock may become more difficult and our share price could decrease even further.  If our common shares are not listed on a national securities exchange or the NASDAQ Capital Market, potential investors may be prohibited from or be less likely to purchase our common shares, limiting the trading market for our stock even further.  In addition, the delisting of our common shares will be an event of default under our secured promissory notes requiring a waiver from our holders. There can be no assurance such waiver will be granted.  See further details under Part II, Item 1A. Risk Factors.
 
Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and the accompanying notes.  Changes in these estimates and assumptions may have a material impact on the financial statements and accompanying notes.
 
 
7

 

WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Significant estimates and assumptions made by management include the assessment of goodwill impairment.  When assessing goodwill for possible impairment, significant estimates include future cash flow projections, future revenue growth rates, the appropriate discount rate reflecting the risk inherent in future cash flows, the interpretation of current economic indicators and market valuations and our strategic plans with regard to our operations.  It is reasonably possible that those estimates may change in the near-term and may materially affect future assessments of goodwill impairment.  Other significant estimates include the determination of the provision for doubtful accounts, valuing and estimating useful lives of intangible assets, valuing assets and liabilities acquired through business acquisitions, and estimating future taxable income and the probability that net operating loss carryforwards will be utilized.

Principles of Consolidation

The consolidated financial statements include the accounts of Workstream Inc. and its wholly-owned subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.

Goodwill and Other Identified Intangible Asset Impairment

We test goodwill for impairment on an annual basis or as needed if circumstances arise that reduce the value of our reporting units below the carrying value.  We compare the fair value of each reporting unit to its carrying amount (including goodwill) for our impairment evaluation.  Our business segments are considered reporting units for goodwill impairment testing.  Goodwill is considered to be impaired if the carrying value of a reporting unit exceeds its fair value.  If goodwill is considered to be impaired, the loss that is recognized is equal to the amount that the carrying value exceeds the fair value of that goodwill.

There are judgments and estimates built into our fair value analysis, including future cash flow projections, the discount rate representing innate risk in future cash flows, market valuation, strategic operation plans and our interpretation of current economic indicators.  Changes in any of the underlying assumptions will cause a change in the results, which could lead to the fair value of one or more of the reporting units to be worth less than the current carrying amounts.  In addition to a change in market and economic conditions or our strategic plans, the possibility exists that our conclusions could change which would result in a material negative effect on both our financial position and results of operations.
 
The Company performed interim goodwill impairment testing at November 30, 2008 because of the operating losses in the career services division. The estimated fair values of the reporting units with triggering events and goodwill were calculated based on observable market price-to-revenue multiples and tangible book value muiltiples of revelant, comparable peer companies. Commencing in the second quarter of 2008, management corroborated the estimated fair value of the reporting units based on multiple analysis with discounted cash flow analyses that indicated estimated reporting unit fair values consistent with the estimated reporting unit fair values developed using price-to-revenue and tangible book value multiples. Management determined that no goodwill impairment charge was required.

While management has a plan to return the Company’s business fundamentals to levels that support the book value per common share, there is no assurance that the plan will be successful, or that the market price of the common stock will increase to such levels in the foreseeable future and the Company may have to recognize an impairment of all, or some portion of, its goodwill and other intangible assets. There is no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase or (3) the earnings, book values or projected earnings and cash flows of the Company’s individual reporting segments will not decline. Accordingly, an impairment charge to goodwill and other intangible assets may be required in the foreseeable future.
 
Fair Value Measurements

The Company adopted the provisions of SFAS No. 157 and FSP FAS 157-2 on June 1, 2008. The adoption of these pronouncements did not have a material effect on the Company’s consolidated financial position or results of operations. SFAS No. 157 defines fail value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and emphasizes that fair value is a market-based measurement, not an entity-specific measurement.

It establishes a fair value hierarchy and expands disclosures about fair value measurements in both interim and annual periods. SFAS No. 157 enables the reader of the financial statements to assess the inputs used to develop fair value measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. FSP FAS 157-2 defers the effective date for FAS No. 157 until June 1, 2009 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis. SFAS No. 157 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

As of the November 30, 2008, there are no financial assets and financial liabilities that are measured at fair value.
 
 
8

 
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Recent Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141, Business Combinations-Revised (“SFAS No. 141(R)”).  SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination:  recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any  non-controlling interests in the acquiree;  recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase price;  and, determines what information to disclose to enable users of the consolidated financial statements to evaluate the nature and financial effects of the business combination.  Statement 141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The application of Statement 141 (R) will cause management to evaluate future transaction returns under different conditions, particularly the near term and long term economic impact of expensing transaction costs up front.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The Company is currently assessing the impact that SFAS 161 may have on its consolidated financial statements.

Reclassifications

Certain reclassifications have been made in the accompanying financial statements to conform to the current year presentation.  These reclassifications have no impact on previously reported results of operations.

NOTE 2.   ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following presents the details of the change in the allowance for doubtful accounts:

   
Six Months Ended
   
Year Ended
 
   
November 30, 2008
   
May 31, 2008
 
             
Balance at beginning of the period
  $ 509,802     $ 711,087  
Charged to bad debt expense
    466,126       485,087  
Write-offs and effect of exchange rate changes
    (551,132 )     (686,372 )
Balance at end of the period
  $ 424,796     $ 509,802  

The Company uses historical experience and knowledge of and experience with specific customers in order to assess the adequacy of the allowance for doubtful accounts.  Any adjustments to this account are reflected in the statement of operations as a general and administrative expense.

NOTE 3.  INCOME TAXES

The Company uses the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.  Income tax expense is the tax payable for the period and the change in deferred tax assets and liabilities during the period.  In determining the amount of any valuation allowance required to offset deferred tax assets, an assessment is made that includes anticipating future income and determining the likelihood of realizing deferred tax assets.  Management has determined that there is sufficient uncertainty regarding the ultimate realization of deferred tax assets relating to the United States operations and therefore, has provided a valuation allowance for the entire balance of the deferred tax assets.

 
9

 

WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.   CONTINGENCIES
 
On or about August 10, 2005, a class action lawsuit was filed against the Company, its former Chief Executive Officer and its former Chief Financial Officer in the United States District Court for the Southern District of New York. The action, instituted on behalf of a purported class of purchasers of the Company’s common shares during the period from January 14, 2005 to and including April 14, 2005 (the class period), alleged, among other things, that management provided the market misleading guidance as to anticipated revenues for the quarter ended February 28, 2005, and failed to correct this guidance on a timely basis. The action claimed violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act, and sought compensatory damages in an unspecified amount as well as the award of reasonable costs and expenses, including counsel and expert fees and costs. The Court certified the case as a class action.
 
The parties agreed to settle the claims in consideration of the payment of $3 million by the Company’s insurance carrier and issuance by the Company of $600,000 in common shares (or 3,636,363 common shares, which were issued on September 24, 2008).  The Court held a hearing on June 24, 2008 to consider the fairness of the settlement after notice of the settlement and the hearing had been given to the class.  No opposition to approval of the settlement was presented at the hearing.  On August 13, 2008, the court entered a final judgment in the case, which became final on September 12, 2008.
 
The Company maintained directors and officers’ liability insurance, which covered the liability of the individual defendants in the amount of $10 million. The Company reached an agreement with its primary insurance carrier limiting the Company’s exposure to $600,000.   The $600,000 was accrued for in fiscal year 2007 and 3,636,363 shares were issued on September 24, 2008.
 
On September 27, 2006, Sunrise Equity Partners, L.P. (“Sunrise”) filed a complaint against the Company and its former Chief Executive Officer in the United States District Court for the Southern District of New York alleging a violation of Section 10b-5 of the Securities Exchange Act of 1934 and a claim under New York common law for fraudulent and negligent misrepresentations in connection with Sunrise’s purchase of common shares and warrants in a private placement.
 
On April 11, 2007, Nathan A. Low (“Low”) and Sunrise Foundation Trust (“Trust”) filed an amended  complaint with Sunrise against the Company and its former Chief Executive Officer in the United States District Court for the Southern District of New York alleging a violation of Section 10b-5 of the Securities Exchange Act of 1934 and a claim under New York common law for fraudulent and negligent misrepresentations in connection with Low’s and the Trust’s purchase of common shares and warrants in a private placement. The three plaintiffs invested an aggregate of $4 million in the Company in the private placement. The case was settled for $1.2 million.  The settlement of the claims against defendants was funded by proceeds from the Company’s insurance policies.

 
10

 

WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On June 24, 2008, the Company filed a lawsuit in the Superior Court of the State of Delaware in and for New Castle County (the “State Court Lawsuit”) against Empagio Acquisition, LLC (“Empagio”) and SMB Capital Corporation (“SMB”) to obtain the $5 million termination fee required to be paid by Empagio and SMB pursuant to Section 7.02 of the Agreement and Plan of Merger dated as of February 12, 2008 among the Company, Workstream Merger Sub Inc., Empagio and SMB, which agreement was terminated by the Company on June 13, 2008.  On June 25, 2008, Empagio and SMB filed a lawsuit against the Company in the United States District Court for the District of Delaware (the “Federal Lawsuit”) alleging entitlement to a $3 million termination fee pursuant to the Agreement and Plan of Merger.  On July 29, 2008, Empagio and SMB filed a notice of voluntary dismissal of their Federal Lawsuit based on an understanding that Empagio and SMB would make their claim as part of the Company’s State Court Lawsuit.  Workstream intends to vigorously pursue the lawsuit.

The Company is subject to other legal proceedings and claims which arise in the ordinary course of business.  The Company does not believe that the resolution of such actions will materially affect the Company’s business, results of operations, financial condition or cash flows.

NOTE 5.   STOCK-BASED COMPENSATION PLAN
 
The Company has granted stock options to employees, directors and consultants under the 2002 Amended and Restated Stock Option Plan (the “Plan”), which was most recently amended in November 2007 at the annual shareholders’ meeting.  The shareholders approved an amendment to increase the number of shares of common stock reserved for issuance under the Plan by 6,000,000 shares.  Under the Plan, as amended, the Company may now issue up to 11,000,000 shares of common stock upon the exercise of stock options or restricted stock units.  The Audit Committee of the Board of Directors administers the Plan.  Under the terms of the Plan, the exercise price of any stock options granted shall not be lower than the fair market value of the common stock on the date of the grant.   Options to purchase shares of common stock generally vest ratably over a period of three years and expire five years from the date of grant.

The Company recognized $24,009 and $90,262 of stock-based compensation expense resulting from stock options in the consolidated statements of operations for the three and six months ended November 30, 2008.  Compensation expense is determined using the fair-value method.  The fair value of options granted was estimated at the date of grant using the Black Scholes option-pricing model with the following assumptions:

   
Six Months
   
Six Months
 
   
Ended
   
Ended
 
   
November 30, 2008
   
November 30, 2007
 
Expected volatility
    137 %     108 %
Expected dividend yield
    0 %     0 %
Expected term (in years)
    3.5       3.5  
Risk-free interest rate
    2.9 %     4.04 %

 
11

 

WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Stock option activity and related information is summarized as follows:

         
Weighted
               
         
Average
 
Weighted
       
Aggregate
 
   
Number
   
Exercise
 
Average
 
Options
   
Intrinsic
 
   
of Options
   
Price
 
Fair Value
 
Exercisable
   
Value
 
                                   
Balance outstanding - May 31, 2008
    2,356,548     $ 1.23         1,228,341       -  
     Granted
    68,600       0.16                    
     Exercised
    -                            
     Forfeited
    (423,317 )     1.20                    
Balance outstanding - November 30, 2008
                                 
      2,001,831     $ 1.21         1,435,838     $ -  

The aggregate intrinsic value in the table above represents total intrinsic value (of options in the money), which is the difference between the Company’s closing stock price on November 30, 2008, the last trading day of the reporting period and the exercise price times the number of shares, that would have been received by the option holders had the option holders exercised their options on November 30, 2008.

Information about options outstanding at November 30, 2008 is as follows:

         
Options Outstanding
   
Exercisable
 
          
Weighted
                   
          
Average
   
Weighted
         
Weighted
 
          
Remaining
   
Average
   
Number
   
Average
 
Exercise
 
Number
   
Contractual
   
Exercise
   
Vested and
   
Exercise
 
Price
 
Outstanding
   
Life (Years)
   
Price
   
Outstanding
   
Price
 
                                
 Less than $.99
    879,400       3.98     $ 0.74       566,196     $ 0.76  
 $1.00-$1.99
    925,100       2.53     $ 1.35       676,145     $ 1.37  
 $2.00-$2.99
    150,800       0.76     $ 2.45       146,966     $ 2.45  
 $3.00 and over
    46,531       1.07     $ 3.24       46,531     $ 3.24  
 Total
    2,001,831                       1,435,838          

As of November 30, 2008, $167,354 of total unrecognized compensation costs related to non-vested stock options is expected to be recognized over the weighted average period of 3.00 years.  The realized tax benefit from stock options and other share based payments was $0 for the three and six month periods ended November 30, 2008 due to the uncertainty of  realizability.

 
12

 

WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company grants restricted stock units to certain management and members of the Board of Directors.  Each restricted stock unit represents one share of common stock and vests ratably over three years.  The Company will then issue common stock for the vested restricted stock units upon exercise by the grantee.  During the vesting period, the restricted stock units cannot be transferred, and the grantee has no voting or dividend rights.  The cost of the awards, determined to be the fair market value of the shares at the date of the grant, is expensed ratably over the vesting period.  The compensation expense associated with the restricted stock units totaling $15,007 and $42,440 for the three and six months ended November 30, 2008, is included in general and administrative expenses on the consolidated statements of operations and in additional paid-in capital on the consolidated balance sheets.  During the three months ended November 30, 2008, the Company did not grant any restricted stock units and none were forfeited. There were 486,670 restricted stock units outstanding including 377,776 that were fully vested, as of November 30, 2008.

         
Weighted
 
   
Number
Restricted
Shares
   
Average
Grant Date
Fair Value
 
Balance non-vested - May 31, 2008
    486,670        
               
     Granted
    -        
     Vested
    (377,776 )     1.10  
     Forfeited
    -          
                 
Balance non-vested - November 30, 2008
    108,894          

NOTE 6.  SEGMENT AND GEOGRAPHIC INFORMATION

The Company has two reportable segments: Enterprise Workforce Services and Career Networks.  Enterprise Workforce Services consists of revenue generated from HCM software and related professional services.  In addition, Enterprise Workforce Services generates revenue from the sale of various products through the rewards and discount modules of the HCM software.  Career Networks primarily consists of revenue from career transition, applicant sourcing and recruitment research services.

The Company evaluates the performance in each segment based on profit or loss from operations.  There are no inter-segment sales.  Corporate operating expenses are allocated to the segments primarily based on revenue.

The Company’s segments are distinct business units that offer different products and services.  Each is managed separately and each has a different client base that requires a different approach to the sales and marketing process.  In addition, Career Networks is an established business unit whereas Enterprise Workforce Services is a developing business unit.

 
13

 
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Business Segments

The following table summarizes the distribution of revenue by business segment:

   
Three Months Ended
   
Six Months Ended
 
   
November 30, 2008
   
November 30, 2008
 
   
Enterprise
               
Enterprise
             
   
Workforce
   
Career
         
Workforce
   
Career
       
   
Services
   
Networks
   
Total
   
Services
   
Networks
   
Total
 
Software
  $ 1,836,478     $ -     $ 1,836,478     $ 3,627,935     $ -     $ 3,627,935  
Professional services
    509,169       -       509,169       1,231,140       -       1,231,140  
Rewards and discount products
    1,435,089       -       1,435,089       2,954,004       -       2,954,004  
Career services
    -       805,488       805,488       -       1,708,579       1,708,579  
Revenue, net
    3,780,736       805,488       4,586,224       7,813,079       1,708,579       9,521,658  
Cost of revenues, rewards and discount products
    1,169,228       -       1,169,228       2,343,240       -       2,343,240  
Cost of revenues, other
    257,609       68,357       325,966       578,684       174,484       753,168  
Gross profit
    2,353,899       737,131       3,091,030       4,891,155       1,534,095       6,425,250  
Expenses
    3,386,434       396,739       3,783,173       7,921,555       824,991       8,746,546  
Amortization and depreciation
    428,093       17,234       445,326       890,867       34,467       925,334  
Business segment loss
  $ (1,460,628 )   $ 323,159       (1,137,469 )   $ (3,921,267 )   $ 674,637       (3,399,133 )
Other income/expense and impact of income taxes
                    (354,521 )                     (298,776 )
Net loss from continuing operations
                  $ (1,491,990 )                   $ (3,246,630 )

 
14

 

WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the distribution of revenue by business segment:

   
Three Months Ended
   
Six Months Ended
 
   
11/30/2007 (1)
   
11/30/2007 (1)
 
   
Enterprise
               
Enterprise
             
   
Workforce
   
Career
         
Workforce
   
Career
       
   
Services
   
Networks
   
Total
   
Services
   
Networks
   
Total
 
Software
  $ 2,210,799     $ -     $ 2,210,799     $ 4,757,258     $ -     $ 4,757,258  
Professional services
    845,605       -       845,605       1,820,737       -       1,820,737  
Rewards and discount products
    1,587,061       -       1,587,061       2,957,341       -       2,957,341  
Career services
    -       1,512,317       1,512,317       -       3,155,096       3,155,096  
Revenue, net
    4,643,465       1,512,317       6,155,782       9,535,336       3,155,096       12,690,432  
Cost of revenues, rewards and discount products
    1,160,706       -       1,160,706       2,176,083       -       2,176,083  
Cost of revenues, other
    538,800       165,878       704,678       1,126,313       296,770       1,423,083  
Gross profit
    2,943,959       1,346,439       4,290,398       6,232,940       2,858,326       9,091,266  
Expenses
    6,415,129       1,720,527       8,135,656       12,981,899       4,983,002       17,964,901  
Amortization and depreciation
    1,088,847       18,091       1,106,938       2,371,697       34,904       2,406,601  
Business segment loss
  $ (4,560,017 )   $ (392,179 )     (4,952,196 )   $ (9,120,656 )   $ (2,159,580 )     (11,280,236 )
Other income/expense and impact of income taxes
                    5,310,889                       6,025,602  
Net income (loss) from continuing operations
                  $ 358,693                     $ (5,254,634 )

(1)
Reclassified to conform to the current period’s presentation.

The following table summarizes the distribution of assets by business segment:

   
As of November 30, 2008
   
As of May 31, 2008 (1)
 
   
Enterprise
               
Enterprise
             
   
Workforce
   
Career
         
Workforce
   
Career
       
   
Services
   
Networks
   
Total
   
Services
   
Networks
   
Total
 
                                     
Business segment assets
  $ 4,706,925     $ 393,669     $ 5,100,594     $ 5,564,763     $ 382,117     $ 5,946,880  
Intangible assets
    171,867       -       171,867       449,975       -       449,975  
Goodwill
    11,381,660       2,943,074       14,324,734       11,381,660       2,943,074       14,324,734  
Asset held for sale
            3,707,195       3,707,195               3,890,865       3,890,865  
    $ 16,260,452     $ 7,043,938       23,304,390     $ 17,396,398     $ 7,216,056       24,612,454  
Assets not allocated to business segments
                    1,289,618                       3,774,728  
                                                 
Total assets
                  $ 24,594,008                     $ 28,387,182  

(1)
Reclassified to conform to the current period’s presentation.
Identifiable assets at November 30, 2007 exclude assets of discontinued operations held-for-sale.

 
15

 



WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Geographic

The following table summarizes the distribution of revenue by geographic region:

   
Three Months Ended
   
Six Months Ended
 
   
November 30, 2008
   
November 30, 2008
 
         
United
               
United
       
   
Canada
   
States
   
Total
   
Canada
   
States
   
Total
 
Revenue
  $ 307,065     $ 4,279,159     $ 4,586,224     $ 613,712     $ 8,907,946     $ 9,521,658  
Expenses
    989,425       5,081,714       6,071,139       2,233,240       10,816,070       13,049,310  
Geographical loss
  $ (682,360 )   $ (802,555 )     (1,484,915 )   $ (1,619,528 )   $ (1,908,124 )     (3,527,652 )
Other income/expenses and impact of income taxes
                    (7,075 )                     (17,754 )
Net loss from continuing operations
                  $ (1,491,990 )                   $ (3,545,406 )

The following table summarizes the distribution of revenue by geographic region:

   
Three Months Ended
   
Six Months Ended
 
   
11/30/2007 (1)
   
11/30/2007 (1)
 
         
United
               
United
       
   
Canada
   
States
   
Total
   
Canada
   
States
   
Total
 
Revenue
  $ 353,532     $ 5,802,250     $ 6,155,782     $ 702,565     $ 11,987,867     $ 12,690,432  
Expenses
    1,310,449       9,797,529       11,107,978       2,661,719       20,104,480       22,766,199  
Geographical loss
  $ (956,917 )   $ (3,995,279 )     (4,952,196 )   $ (1,959,154 )   $ (8,116,613 )     (10,075,767 )
Other income/expenses and impact of income taxes
                    5,310,889                       4,821,133  
Net income (loss) from continuing operations
                  $ 358,693                     $ (5,254,634 )

The following table summarizes the distribution of assets by geographic region:

   
As of November 30, 2008
   
As of May 31, 2008 (1)
 
         
United
               
United
       
   
Canada
   
States
   
Total
   
Canada
   
States
   
Total
 
Long-lived assets
  $ 1,058,172     $ 14,077,282     $ 15,135,454     $ 1,463,762     $ 15,342,571     $ 16,806,333  
Assets held for sale
    -       3,707,195       3,707,195       -       3,890,865     $ 3,890,865  
Current assets
                    5,751,359                       7,689,984  
Total assets
                  $ 24,594,008                     $ 28,387,182  

(1)
Reclassified to conform to the current period’s presentation.
Identifiable assets at November 30, 2007 exclude assets of discontinued operations held-for-sale

 
16

 


WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.                      Discontinued Operations and Assets Held For Sale

On August 4, 2008 the Board of Directors of Workstream engaged an investment bank to sell 6Figuresjobs.com (6FJ). The carrying value of the assets of 6FJ at November 30, 2008 is $3,707,195 consisting mainly of $3,404,714 of goodwill and $293,882 of accounts receivable.  The carrying value of the liabilities is $728,416 consisting mainly of $405,635 of deferred revenue and $318,547 of accounts payable and accrued liabilities. The sale of 6FJ is designed to provide the Company with cash to enhance the Company’s working capital position as well as to reduce the senior secured notes payable. Pursuant to the terms of our senior secured notes issued to our Special Warrant Holders (SWH), Workstream is to receive 25% of any proceeds from the sale of any assets and the SWH are to receive 75% of any proceeds. 6Figuresjobs.com is considered an industry leader in the job board market and is a part of the Career Networks division. Based on the current valuation of the business, we do not anticipate any impairment or loss from the sale.

   
November 30,
   
May 31,
 
   
2008
   
2008
 
Assets
           
Accounts receivable net
  $ 293,882     $ 478,319  
Prepaid & other assets
    2,633       333  
Equipment, net
    3,416       4,949  
Goodwill
    3,404,714       3,404,714  
Other assets
    2,550       2,550  
Total assets
  $ 3,707,195     $ 3,890,865  
                 
Liabilities
               
Accounts payable
  $ 99,621     $ 61,285  
Accrued liabilities
    115,399       108,073  
Accrued compensation
    59,727       52,390  
Long-term obligation, current
    2,329       2,029  
Deferred revenue
    405,635       595,907  
Long-term obligation
    1,905       3,687  
Total liabilities
  $ 684,616     $ 823,371  
 
   
Three months
   
Six months
 
   
ended
   
ended
 
   
November 30,
   
November 30,
 
   
2008
   
2008
 
Total revenues, net of interest expense
  $ 5,131,323     $ 10,684,210  
Income from discountinued operations
    142,370       144,204  
Provision for (benefit from) for income taxes
    -       -  
Income from discountinued operations, net
  $ 142,370     $ 144,204  

 
17

 
 
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.                      Senior Secured Notes Payable

On August 3, 2007, the Company consummated a private placement of securities pursuant to which the Company raised $20,000,000 through the sale of two series of warrants.  The first series of warrants (the “Special Warrants”) were convertible into 16,000,000 common shares at a conversion price of $1.25 per share.  The Special Warrants had a five year life; however, after the fourth year the holder had the right to require the Company to purchase the unconverted portion at a price equal to fair value, which would be determined by an independent party selected by the Company and approved by the holder.  The second series of warrants (the “Additional Warrants”) were convertible into 4,000,000 common shares at an exercise price of $1.40 per share over a five year life.  On November 28, 2007, the Company was informed that it would not be receiving $1,000,000 of the $20,000,000 proceeds, from one of the investors, therefore reducing the amount raised to $19,000,000.  This also reduced the number of Special Warrants sold to from 16,000,000 to 15,200,000 and reduced the number of Additional Warrants from 4,000,000 to 3,800,000.

Pursuant to FASB Statement No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”), the Special Warrants were originally accounted for as a liability due to their redeemable feature, while the Additional Warrants have been accounted for as additional paid- in capital.  Using the Black-Scholes valuation model, the Company determined the fair value of the Special Warrants to be $12,681,900 as of the closing of the private placement.  Pursuant to Emerging Issue Task Force Issue 00-19 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock” the value of the Additional Warrants originally amounted to $5,976,272 which was calculated as the net proceeds received less the value of the Special Warrants.

On April 14, 2008, Workstream and the holders of its Special Warrants entered into a Forbearance Agreement pursuant to which the holders of the Special Warrants agreed to forbear, for a period of one year and one day, any rights they have to require the redemption of the Special Warrants as a result of the occurrence of triggering events under the Special Warrants and to any fees owing to the Special Warrant holders under the Registration Rights Agreement Workstream entered into with them.  Due to the triggering events described above, as of February 29, 2008, we no longer believed the Black-Scholes valuation model was indicative of the fair value of the Special Warrants.  As a result, we evaluated the possible outcomes and determined the weighted-average value of the warrant liability to be $19 million as of February 29, 2008.  This adjustment resulted in $13,051,901 of interest expense in the third quarter of fiscal 2008.
 
On August 29, 2008, we entered into a separate Exchange Agreement with each of the holders of our Special Warrants pursuant to which, among other things, each Investor exchanged its Special Warrant for a senior secured Note, in the original principal amount equal to the original purchase price of its Special Warrant (totaling, in the aggregate, approximately $19,000,000).  Each Note is secured by a lien on all of our assets and our subsidiaries pursuant to the terms of a Security Agreement with each Investor.  Interest on each Note accrues at an annual rate of 7%.  The interest rate will increase to 12% per year if we have not repaid at least 50% of the sum of the original principal amount of the Note plus all accrued but unpaid interest and late charges, if any, upon the one-year anniversary of the issuance of the Note.  Interest is payable at maturity of each Note, which is August 29, 2010.  Upon the occurrence of an event of default, as defined in the Notes, an Investor may require us to redeem all or a portion of such Investor’s Note at a price equal to 110% of the sum of the principal amount of the Note, accrued and unpaid interest and late fees, if any, to be redeemed.  Upon a Disposition (as defined in the Notes) of assets, we have agreed to use 75% of the gross proceeds from such Disposition to redeem the Notes (on a pro rata basis among the Investors) and 25% (such amount not to exceed $2,500,000) of the gross proceeds may be retained by us.  In addition, in the event that we receive cash, cash equivalents or publicly-traded securities in an amount exceeding $2,000,000 in connection with the settlement of certain litigation involving us, we agree to use 75% of the amount received in excess of $2,000,000 to redeem the Notes (on a pro rata basis among the Investors).  Each Note contains customary covenants with which we must comply.  Each of our subsidiaries delivered a Guaranty pursuant to which it agreed to guarantee our obligations under each Note.
 
18

 
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to the terms of the Exchange Agreement, each Investor also exchanged the additional warrant held by it for a new warrant exercisable for the same number of common shares at an exercise price of $.25 per share.  All other material terms of the new warrants are substantially the same as those contained in the warrants being exchanged, including the existence of anti-dilution provisions that provide for a full adjustment of the exercise price and the number of common shares to be issued in the event we, in certain circumstances, issue securities at a price below the exercise price of the New Warrants.  Each New Warrant must be exercised on or prior to August 3, 2012 or it will expire by its terms.

The note payable contains covenants that, among other things, limit our ability and the ability of our subsidiaries to:
 
·
Incur additional indebtedness;
 
·
create liens;
 
·
pay dividends or repurchase capital stock;
 
·
restricts payments;
 
·
restriction on transfer of assets.

Upon the occurrence of an event of default, as defined in the Notes, an Investor may require the Company to redeem all or a portion of such Investor’s Note at a price equal to 110% of the sum of the principal amount of the Note, accrued and unpaid interest and late fees, if any, to be redeemed.  While management does not believe that the Company is in an event of default at the present time, there can be no assurance that the Company will not be in default during fiscal 2009 and beyond.  In the event of default without a waiver from the note holders the Company may not be able to comply with the requirements of an event of default.
 
19

 
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.                      Other Comprehensive Loss

Components of comprehensive loss were as follows:
 

   
3 Months Ended November 30,
   
6 Months Ended November 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Net loss for the year
  $ (1,349,620 )   $ 782,411     $ (3,401,202 )   $ (4,718,624 )
Other comprehensive loss:
                               
Foreign currency translation adjustments (net of tax of $0)
    180,639       65,117       184,551       64,373  
                                 
Comprehensive loss for the year
  $ (1,168,981 )   $ 847,528     $ (3,216,651 )   $ (4,654,251 )
                                 


 
20

 
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward Looking Statements

Certain statements discussed in Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), and Item 3 (Quantitative and Qualitative Disclosures About Market Risk) and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements concerning management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements discussed or implied by such forward-looking statements.  Such risks, uncertainties and other important factors are described in Items 1A (Risk Factors) and 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of the Company’s Form 10-K/A for the fiscal year ended May 31, 2008 and in Item 1A of Part II hereunder.  The words “estimate,” “project,” “intend,” “believe,” “plan” and similar expressions are intended to identify forward-looking statements.  Forward-looking statements speak only as of the date of the document in which they are made.  The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which the forward-looking statement is based.
 
The following discussion and analysis should be read in conjunction with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.  All figures are in United States dollars, except as otherwise noted.

Overview

We are a provider of services and web-based Software-as-a-Service (SaaS) products for organizations requiring talent management solutions for their Human Capital Management (HCM) processes. Talent Management is the process by which companies recruit, train, evaluate, motivate, develop and retain their employees.  We have two distinct operating segments, which are Enterprise Workforce Services and Career Network Services.  The Enterprise Workforce Services segment primarily consists of HCM software, professional services and additional products sold as part of reward and discount programs.  Specifically, our Enterprise Workforce segment offers a complete suite of on-demand HCM software solutions, which address performance, compensation, development, recruitment, benefits and rewards.  The Career Networks segment consists of career transition, applicant sourcing and recruitment research services.
 
Workstream provides on-demand compensation, performance and talent management solutions and services that help companies manage the entire employee lifecycle - from recruitment to retirement.  We offer software and services that focus on talent management and address the needs of companies to more effectively manage their human capital management function.  We believe that our integrated end-to-end talent management suite, which brings together our entire modular stand-alone applications on a common platform, is a more efficient and effective than traditional methods of human resource management. Workstream's TalentCenter Solution Suite provides a unified view of Workstream products and services. Access to our TalentCenter Solution Suite is offered on a monthly subscription basis under a SaaS based on-demand software delivery model designed to help companies build high performing workforces, while controlling costs.
 
21

 
Key Performance Indicators

The following table summarizes the key performance indicators that we consider to be material in managing our business, in thousands (except percentages):

   
For the three months ended
   
For the six months ended
 
   
November 30
   
November 30
   
November 30
   
November 30
 
   
2008
   
2007
   
2008
   
2007
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
                         
Total Revenue
  $ 4,586     $ 6,156     $ 9,522     $ 12,690  
Hosting revenue
    29 %     22 %     27 %     21 %
License revenue
    11 %     14 %     11 %     16 %
Subscription revenue
    0 %     1 %     0 %     0 %
Total Software revenue
    40 %     37 %     38 %     37 %
Professional services
    11 %     13 %     13 %     14 %
Rewards and tickets
    31 %     26 %     31 %     23 %
Career Networks
    18 %     25 %     18 %     25 %
Operating loss
  $ (1,290 )   $ (4,952 )   $ (3,399 )   $ (10,076 )
Net cash used in operating activities
  $ (480 )   $ (1,301 )   $ (2,396 )   $ (7,829 )

The following table summarizes the operating segments as a percentage of deferred revenue, in thousands (except percentages):

   
As of
   
As of
 
   
November 30, 2008
   
May 31, 2007
 
   
(unaudited)
       
Total deferred revenue
  $ 2,872     $ 2,509  
                 
Enterprise Workforce Services
    85 %     67 %
Career Networks
    15 %     33 %
 
22

 
Results of Operations

The following table sets forth certain condensed consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated.  Period-to period comparisons of our financial results are not necessarily meaningful and you should not rely on them as an indication of future performance.

   
Three Months ended
   
Six Months ended
 
   
November 30,
   
November 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Revenues:
                       
Software
    40 %     36 %     38 %     37 %
Professional services
    11 %     13 %     13 %     15 %
Rewards and discount products
    31 %     26 %     31 %     23 %
Career networks
    18 %     25 %     18 %     25 %
Revenues, net
    100 %     100 %     100 %     100 %
Cost of revenues:
                               
Rewards and discount products
    25 %     19 %     25 %     17 %
Other
    7 %     11 %     8 %     11 %
Cost of revenues (exclusive of amortization
                               
and depreciation expense noted below)
    33 %     30 %     33 %     28 %
                                 
Gross profit
    67 %     70 %     67 %     72 %
                                 
Operating expenses:
                               
Selling and marketing
    20 %     44 %     20 %     40 %
General and administrative
    45 %     65 %     49 %     69 %
Research and development
    21 %     23 %     25 %     23 %
Amortization and depreciation
    10 %     18 %     10 %     19 %
Total operating expenses
    96 %     150 %     103 %     151 %
                                 
Operating loss
    -31 %     -80 %     -36 %     -79 %
                                 
Interest and other income
    0 %     88 %     1 %     55 %
Interest and other expense
    -4 %     -2 %     -3 %     -17 %
Other income (expense), net
    -4 %     86 %     -1 %     38 %
                                 
Income (loss) before income tax expense
    -32 %     5 %     -37 %     -41 %
Current income tax (expense) benefit
    0 %     1 %     3 %     0 %
Net income (loss) from continuing operations
    -33 %     6 %     -37 %     -41 %
                                 
Income from discontinued operations net of taxes
    3 %     7 %     2 %     4 %
                                 
NET (LOSS) INCOME
    -29 %     13 %     -36 %     -37 %
 
23

 
REVENUES

Consolidated revenues were $4,586,000 for the quarter ended November 30, 2008 compared to $6,156,000 for the same period in fiscal year 2008, a decrease of $1,570,000 or 26%.

Software revenues for the second quarter 2009 were $1,836,000 compared to $2,211,000 for the second quarter 2008, a decrease of $375,000 or 17%.  Software revenue, which is comprised of subscription, hosting and maintenance fees, was down based on code deals that were not present in fiscal year 2009 and were present in fiscal year 2008.

Professional services revenues for the second quarter 2009 were $509,000 compared to $846,000 for the second quarter 2008, a decrease of $337,000 or 40%.  The decrease in professional services was primarily due to a reduction in new customer implementations and upgrades.

Rewards and discount products revenues for the second quarter 2009 were $1,435,000 compared to $1,587,000 for the second quarter 2008, a decrease of $152,000 or 10%.  Rewards and discount products revenues declined year over year as a result of a reduction in company holiday redemptions due to a slow economy.

Career Networks revenues for the second quarter 2009 were $805,000 compared to $1,512,000 for the second quarter 2008, a decrease of $707,000 or 47%.  The decrease in revenues was primarily due to the slow economy and the slow down of the financing availablity for our outplacement services.

Consolidated revenues were $9,522,000 for the six months ended November 30, 2008 compared to $12,690,000 for the six months ended November 30, 2007, a decrease of $3,168,000 or 25%.

Software revenues for the six months ended November 30, 2008 were $3,628,000 compared to $4,757,000 for the six months ended November 30, 2007, a decrease of $1,129,000 or 24%. Software revenue, which is comprised of subscription, hosting and maintenance fees, were primarily due to code deals that were not present in fiscal year 2009 and were present in fiscal year 2008.

Professional services revenues for the six months ended November 30, 2008 were $1,231,000 compared to $1,821,000 for the six months ended November 30, 2007, a decrease of $590,000 or 32%. The decrease in professional services was primarily due to a reduction in new customer implementations and upgrades.

Rewards and discount products revenues for the six months ended November 30, 2008 were $2,954,000 compared to $2,957,000 for the six months ended November 30, 2007, a decrease of $3,000 or 0%.  Rewards and discount products revenues remained consistent year over year as a result of additional business from existing customers in the first quarter 2009.  These gains were offset by a reduction in company holiday redemptions.

Career Networks revenues for the six months ended November 30, 2008 were $1,709,000 compared to $3,155,000 for the six months ended November 30, 2007, a decrease of $1,446,000 or 54%.  The decrease in revenues was primarily due to the availability of financing and a slow economy for the customers in our outplacement services which contributed to the decreased sales.
 
COST OF REVENUES AND GROSS PROFIT

Cost of revenues for the second quarter 2009 was $1,495,000 compared to $1,865,000 for the second quarter 2008 a decrease of $370,000 or 20%.  Gross profits were $3,091,000 for the second quarter 2009 compared to $4,290,000 for the second quarter 2008, a decrease of $1,199,000 or 28%.

Rewards and discount product cost of revenues accounted for $1,169,000 of the total cost of revenues for second quarter 2009 compared to $1,161,000 for second quarter 2008, an increase of $8,000 or 0%.  Rewards and discount products gross profit was $266,000 or 19% for second quarter 2009 compared to $426,000 or 27% for second quarter 2008, a decrease of $160,000 or 38%.  The decrease in gross profit is driven by the redemption mix of our products.
 
24

 
Cost of revenues for the six months ended November 30, 2008 was $3,096,000 compared to $3,599,000 for the six months ended November 30, 2007, a decrease of $503,000 or 14%.  Gross profits were $6,425,000 for six months ended November 30, 2008 compared to $9,091,000 for the six months ended November 30, 2007, a decrease of $2,666,000 or 29%.
 
Rewards and discount product cost of revenues accounted for $2,343,000 of the total cost of revenues for the six months ended November 30, 2008 compared to $2,176,000 for the six months ended November 30, 2007, an increase of $167,000 or 8%.  Rewards and discount products gross profit was $611,000 or 21% for the six months ended November 30, 2008 compared to $781,000 or 26% for the six months ended November 30, 2007, a decrease of $170,000 or 22%.  The decrease in gross profit is driven by the redemption mix of our products.
 
SELLING AND MARKETING EXPENSE
 
Selling and marketing expenses were $908,000 for second quarter 2009 compared to $2,688,000 for second quarter 2008, a decrease of $1,780,000 or 66%.  The decrease is primarily due to employee costs, including commissions, as there was a significant decrease in headcount.  There was also a decrease in trade show activity compared to prior year related to the release of our new product interface.
 
Selling and marketing expenses were $1,901,000 for the six months ended November 30, 2008 compared to $5,101,000 for the six months ended November 30, 2007, a decrease of $3,200,000 or 63%.  The decrease was primarily due to the decrease in sales headcount and marketing programs in the current period.
 
GENERAL AND ADMINISTRATIVE EXPENSE
 
General and administrative expenses were $1,890,000 for second quarter 2009 compared to $4,010,000 for second quarter 2008, an decrease of $2,120,000 or 53%.  This decrease was primarily a result of lower professional service fees in connection with the release of certain SEC documents that required consents from the two accounting firms representing the Company during the past fiscal year and other professional fees due to recruiting costs associated with new hires.
 
General and administrative expenses were $4,558,000 for the six months ended November 30, 2008 compared to $8,737,000 for the six months ended November 30, 2007, a decrease of $4,179,000 or 48%.  This decrease was primarily the result of lower professional services fees and substantially lower recruiting costs during the current period.
 
RESEARCH AND DEVELOPMENT EXPENSE
 
Research and development expenses were $985,000 for second quarter 2009 compared to $1,438,000 for second quarter 2008, a decrease of $453,000 or 32%.  The Company has slowed the continuing updates to acquired technology to standardize for customer satisfaction and requests.
 
Research and development costs were $2,287,000 for the six months ended November 30, 2008 compared to $2,922,000 for the six months ended November 30, 2007, a decrease of $635,000 or 22%.  The primary reason for the decrease was due to the release of the integrated version of our product suite in the prior year.
 
AMORTIZATION AND DEPRECIATION EXPENSE
 
Amortization and depreciation expense was $445,000 for second quarter 2009 compared to $1,107,000 for second quarter 2008, a decrease of $662,000 or 60%.   The decrease reflects certain acquired intangible assets becoming fully amortized.  Without additional business acquisitions, amortization expense will fully amortize during fiscal 2009.
 
25

 
Amortization and depreciation expense was $925,000 for the six months ended November 30, 2008 compared to $2,407,000 for the six months ended November 30, 2007, a decrease of $1,482,000 or 62%.   The decrease reflects certain acquired intangible assets becoming fully amortized.  Without additional business acquisitions, amortization expense will fully amortize during fiscal 2009.
 
INTEREST AND OTHER INCOME
 
Interest and other income was $2,000 for second quarter 2009 compared to $5,435,000 for the second quarter 2008, a decrease of $5,433,000 or 99%.  Interest income from prior year reflects approximately $6,734,000 of warrant liability interest income.

Interest and other income was $142,000 for the six months ended November 30, 2009 compared to $6,977,000 for the six months ended November 30, 2008, a decrease of $6,835,000 or 98%.

INTEREST AND OTHER EXPENSE
 
Interest and other expense was $349,000 for second quarter 2009 compared to $157,000 for second quarter 2008, an increase of $192,000 or 123%.  Interest expense for the current year quarter primarily includes interest on the senior secured notes payable which was closed in August 2008 in connection with the renogation of the equity financing from August 2007.
 
Interest and other expense was $423,000 for the six months ended November 30, 2008 compared to $2,138,000 for the six months ended November 30, 2007, a decrease of $1,715,000 or 80%.  The increase was primarily due to accelerated interest and other expense related to a term loan that was paid off in August 2008.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of November 30, 2008, we maintained $1,265,000 in cash, cash equivalents and short-term investments.  Working capital, which represents current assets less current liabilities, was negative $1,123,000, a decrease of $1,733,000 compared to May 31, 2008.

As of November 30, 2008, $322,000 was restricted from use in order to collateralize various lease arrangements.  The restricted cash guaranteeing the leases will periodically decrease according to the terms of the lease agreements.

For the six months ended November 30, 2008, cash used in operations totaled $2,396,000, consisting primarily of the net loss for the period of $3,401,000, offset by non-cash expenses, including amortization and depreciation of $927,000.

Net cash used in investing activities during the six months ended November 30, 2008 was $7,000 primarily attributable to changes in currency valuation of the Canadian dollar compared to the US dollar.

Net cash used in financing activities during the six months ended November 30, 2008 was $233,000.  Primarily consisted of accrued interest for the senior secured note payable.

We have had operating losses since our inception, and during the six months ended November 30, 2008, we had an operating loss of $3,247,000.

26


In order to avoid immediate concerns about cash constraints, the Company considered various fund-raising alternatives, including both equity and debt options.  We believe our existing cash and cash equivalents and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months   Our future capital requirements will depend on many factors, including meeting our budget as outlined below, the timing and extent of spending to support product development efforts, the timing of introductions of new applications and enhancements to existing applications, and the continuing market acceptance of our applications. To the extent that existing cash and cash equivalents, and cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, applications or technologies in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

The Company’s fiscal year 2009 budget assumes reduced levels of investment in product and research and a significant increase in the levels of sales and marketing spending, as well as increased revenue from both operating segments.   If these measures fall short, management will consider additional cost savings measures, including reductions in new product development initiatives and further reducing general and administrative and sales and marketing expenses.

Critical Accounting Policies

We believe that the following critical accounting policies affect our more significant estimates and judgments used in preparation of our consolidated financial statements.  Management makes estimates and assumptions that affect the value of assets and the reported revenues. Changes in assumptions used would impact our financial position and results.

Revenue Recognition

The Company derives revenue from various sources including the following: subscription and hosting fees; licensing of software and related maintenance fees; professional services related to software implementation, customization and training; sale of products and tickets through the Company’s employee discount and rewards software module; career transition services; recruitment research services; and, applicant sourcing.

In general, the Company recognizes revenue when all of the revenue recognition criteria are met, which is typically when:
 
·
evidence of an arrangement exists;
 
·
services have been provided or goods have been delivered;
 
·
the price is fixed or determinable; and
 
·
collection is reasonably assured.

The Company primarily provides various HCM software applications as an on-demand application service and also enters into the sale of license agreements.  Revenue is generated through a variety of contractual arrangements.

Subscription and hosting fees and software maintenance fees are billed in advance on a monthly, quarterly or annual basis.  Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.  Quarterly and annual payments are deferred and recognized monthly over the service period on a straight-line basis.   Set up fees are deferred and recognized monthly on a straight-line basis over the contractual lives of the customer.

Subscription revenues and hosting fees consist of fees from customers accessing our on-demand application service.  The Company follows the provisions of SEC Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.  For revenue arrangements with multiple deliverables, the Company allocates the total customer arrangement to the separate units of accounting based on their relative fair values, as determined by the price of the undelivered items when sold separately.  Professional services included in an application services arrangement with multiple deliverables are accounted for separately when these services have value to the customer on a standalone basis, and there is objective and reliable evidence of fair value of each undeliverable item of the arrangement. When accounted for separately, revenues are recognized as the services are rendered.

 
27

 

License revenues consist of fees earned from the granting of both perpetual and term licenses to use the software products.  The Company recognizes revenue from the sale of software licenses in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, and SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions, when all of the following conditions are met: a signed contract exists; the software has been shipped or electronically delivered; the license fee is fixed or determinable; and the Company believes that the collection of the fees is reasonably assured.  License revenue is recorded upon delivery with an appropriate deferral for maintenance services, if applicable, provided all of the other relevant conditions have been met. The total fee from the arrangement is allocated based on Vendor Specific Objective Evidence ("VSOE") of fair value of each of the undelivered elements. Maintenance agreements are typically priced based on a percentage of the product license fee and are either multi-year or have a one-year term, renewable annually. VSOE of fair value for maintenance is established based on the stated renewal rates. Services provided to customers under maintenance agreements include technical product support and unspecified product upgrades. VSOE of fair value for the professional service element is based on the standard hourly rates the Company charges for services when such services are sold separately.

Source code revenue is generated by sales in small markets that we do not typically target.  The sales are for old versions of specific applications or products that we no longer support or sell.  As such, future earnings are not affected by these sales.  The Company recognizes revenue when all of the revenue recognition criteria are met, which is typically when the services have been completed.

Professional services revenue is generated from implementation of software applications and from customer training, customization and general consulting.  In addition, revenue is generated from technical support not included in the software maintenance.  The majority of professional services revenue is billed based on an hourly rate and recognized on a monthly basis as services are provided.  For certain contracts which involve significant implementation or other services which are essential to the functionality of the software and which are reasonably estimable, the license and implementation services revenue is recognized using contract accounting, as prescribed by SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.  Revenue is recognized over the period of each implementation using the percentage-of-completion method.  Labor hours incurred is used as the measure of progress towards completion, and management believes its estimates to completion are reasonably dependable. A provision for estimated losses on engagements is made in the period in which the losses become probable and can be reasonably estimated.

One of the software applications offered by the Company allows customers to offer rewards, employee recognition and benefits (discounted goods and tickets) in an effort to promote their employee retention.  The Company generates subscription revenues from the customer.  In addition, the Company generates revenue from the sale of products and tickets to the customers’ employees through a website.  The Company recognizes revenue when all of the revenue recognition criteria are met, which is typically when the goods are shipped and title has transferred.

For career transition services, the Company bills the client 50% when the assignment starts and the remaining 50% when the assignment is completed.  The Company recognizes revenue when all of the revenue recognition criteria are met, which is typically when services have been completed.

For applicant sourcing services, the Company bills its clients in advance on a monthly, quarterly and annual basis.  The Company recognizes revenue when all of the revenue recognition criteria are met, which is typically on a straight-line basis as services have been completed.  Unrecognized revenue is included in deferred revenue.

For resume management services and recruitment services, the Company bills its clients for job postings and matching of resumes per descriptions that the client provides and for quantity-based job posting packages.  The Company recognizes revenue when all of the revenue recognition criteria are met, which is typically when the services have been completed.

 
28

 

As described above, the Company defers certain revenues received and recognizes them ratably over the applicable term of service.  If the revenue is expected to be recognized within the following twelve months, it is classified as a current liability on the accompanying consolidated balance sheets.  If the revenue is expected to be recognized over a period longer than 12 months then the portion of revenue

Goodwill and Other Identified Intangible Asset Impairment

We test goodwill for impairment on an annual basis or as needed if circumstances arise that reduce the value of our reporting units below the carrying value.  We compare the fair value of each reporting unit to its carrying amount (including goodwill) for our impairment evaluation.  Our business segments are considered reporting units for goodwill impairment testing.  Goodwill is considered to be impaired if the carrying value of a reporting unit exceeds its fair value.  If goodwill is considered to be impaired, the loss that is recognized is equal to the amount that the carrying value exceeds the fair value of that goodwill.

There are judgments and estimates built into our fair value analysis, including future cash flow projections, the discount rate representing innate risk in future cash flows, market valuation, strategic operation plans and our interpretation of current economic indicators.  Changes in any of the underlying assumptions will cause a change in the results, which could lead to the fair value of one or more of the reporting units to be worth less than the current carrying amounts.  In addition to a change in market and economic conditions or our strategic plans, the possibility exists that our conclusions could change which would result in a material negative effect on both our financial position and results of operations.

While management has a plan to return the Company’s business fundamentals to levels that support the book value per common share, there is no assurance that the plan will be successful, or that the market price of the common stock will increase to such levels in the foreseeable future and the Company may have to recognize an impairment of all, or some portion of, its goodwill and other intangible assets. There is no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase or (3) the earnings, book values or projected earnings and cash flows of the Company’s individual reporting segments will not decline. Accordingly, an impairment charge to goodwill and other intangible assets may be required in the foreseeable future if the book equity value exceeds the estimated fair value of the enterprise or of an individual segment.

Deferred Tax Assets

We apply significant judgment in recording deferred tax assets, which primarily are the result of loss carry forwards of companies that we acquired and loss carry forwards internally generated.  In addition, we make certain assumptions about if and when these deferred tax assets will be utilized.  These determinations require estimates of future profits to be forecasted.  Actual results may differ from amounts estimated.

ITEM 4T.    CONTROLS AND PROCEDURES

As of November 30, 2008 under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report, or the evaluation date. Based upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of the evaluation date. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 
29

 

In connection with this evaluation, our management identified no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are involved in claims, which arise in the ordinary course of business. In the opinion of management, we have made adequate provision for potential liabilities, if any, arising from any such matters. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings (whether civil or criminal), settlements, judgments and investigations, claims and changes in any such matters, and developments or assertions by or against us relating to intellectual property rights and intellectual property licenses, could have a material adverse effect on our business, financial condition and operating results. See Note 4- Contingencies for further discussion of litigation that may be material to our business.

ITEM 1A.    RISK FACTORS

In addition to the information set forth under Item 1A of Part I to our Annual Report on Form 10-K for the year ended May 31, 2008 , you should carefully consider the following factors, which could have a material adverse effect on our results of operations, financial condition, cash flows, business or the market for our common shares.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and future results of operations.
 
We have limited operating funds, and our ability to continue as a going concern is dependent upon our ability to obtain additional capital to operate the business.

We have experienced net losses which have caused an accumulated deficit of approximately $135,511,000 as of  November 30, 2008. In addition, we have consumed net cash used in operating activities of approximately $2,441,000 for the six months ended November 30, 2008. We will require additional funds to sustain and expand our current business, and to continue implementing our business plan. These factors raise substantial doubt about our ability to continue as a going concern.
 
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

Our independent registered public accounting firm has issued its report, which includes an explanatory paragraph for a going concern uncertainty on our financial statements as of May 31, 2008. Our ability to continue as a going concern is heavily dependent upon our ability to obtain additional capital to sustain operations. Currently, we have no commitments to obtain additional capital, and there can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.

 
30

 
 
The Company has a material weakness in its internal accounting controls.

In the 2008 Annual Report on Form 10-K, the Company noted that it had identified a material weakness in its internal accounting controls because of insufficient staffing in its accounting department. Management is addressing the material weakness by adding staff and increasing the level and the training of it’s staff.  As of November 30, 2008 the problem was being addressed.  Management noted that issues of the prior quarter did not exist at November 30, 2008.  By definition, a material weakness means that there is a significant deficiency that, by itself, or in combination with other significant deficiencies, results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Additionally, the existence of a material weakness precludes management from concluding that internal control over financial reporting is effective.

Currently our common shares trade at prices below $1.00.  If this continues in the future, our common shares could be subject to delisting by NASDAQ.
 
Our common stock currently trades on the NASDAQ Capital Market and the Boston Stock Exchange. On November 20, 2007, the Company received a letter from The NASDAQ Stock Market (“NASDAQ”) notifying the Company that for 30 consecutive trading days prior to the date of the letter, the minimum bid price per share of the Company's listed securities had been below the minimum bid price per share of $1.00 as required for continued inclusion on the NASDAQ Capital Market.
 
On May 20, 2008, we received a notice from the Nasdaq Stock Market informing the Company that pursuant to NASDAQ’s previous communication of November 20, 2007, the Company had not regained compliance with Marketplace Rule 4310(c)(4) related to the minimum closing bid price of the Company’s common shares by May 19, 2008.

The notice stated that because the Company met all initial inclusion criteria for the Capital Market set forth in Marketplace Rule 4310(c) (except for the bid price) on May 19, 2008, in accordance with Marketplace Rule 4310(c)(8)(D), the Company will now be provided an additional 180 calendar day compliance period, or until November 17, 2008, to regain compliance. To regain compliance anytime before November 17, 2008, the bid price of the Company’s common shares must close at $1.00 per share or more for a minimum of ten consecutive business days.  However, on October 16, 2008, the NASDAQ announced that, effective immediately, it was suspending the enforcement of the rules requiring a minimum $1.00 closing bid price.
The suspension remains in effect and, as a result, we will now have until at least February 18, 2009 to regain compliance with the $1.00 minimum bid price requirements.

Under the NASDAQ’s requirements, a stock can be delisted and not allowed to trade on the NASDAQ Capital Market if the closing bid price of the stock over a 30 consecutive trading-day period is less than $1.00. The Boston Stock Exchange does not maintain a similar minimum price requirement. We intend to seek shareholder approval to authorize a reverse split of our common shares in order to raise our stock price and gain compliance with the minimum bid price requirement, However, there is no assurance that our shareholders will approve the reverse stock split or that such split, if approved, will be sufficient to allow us to maintain a bid price of at least $1.00.  No assurance can be given that the closing bid price of our common shares will satisfy the NASDAQ minimum bid price requirements and thus continue to trade on the NASDAQ Capital Market. Although our common shares may remain listed on the Boston Stock Exchange, if our common shares are delisted from the NASDAQ Capital Market, there may be a limited market for our shares, trading our stock may become more difficult and our share price could decrease even further. If our common shares are not listed on a national securities exchange or the NASDAQ Capital Market, potential investors may be prohibited from or be less likely to purchase our common shares, limiting the trading market for our stock even further.

 
31

 
 
We are currently not in compliance with the NASDAQ’s reporting requirements and may face delisting if it does not regain compliance.
 
We were not in compliance with the requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14) because of our failure to timely file our annual report on Form 10-K for the fiscal year ended May 31, 2008 and our quarterly report on Form 10-Q for the fiscal quarter ended August 31, 2008.  We filed an appeal of a delisting notice delivered to us by the NASDAQ with the NASDAQ Listing Qualifications Panel requesting continued listing of our common shares until the Panel’s review and determination.  A hearing before the Panel to consider the appeal occurred on October 30, 2008.  We are awaiting a determination by the Panel on our matter.  In the meantime, we filed our annual report on November 14, 2008 and this quarterly report on the date hereof, as we undertook to do during our hearing with the Panel.  The suspension of trading and delisting remains stayed pending such appeal.  Subsequent to our hearing, the NASDAQ announced that effective as of October 30, 2008, the NASDAQ is providing a company that is delinquent in its periodic filing obligations with the opportunity to submit a plan of compliance pursuant to which the staff may grant an exception for up to 180 calendar days from the due date of the filing for the company to evidence compliance.  A company that regains compliance within that time would not receive a delisting determination.  We expect that the Panel’s determination will take into consideration such pronouncement.  In addition, currently we are not in compliance with the requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(3) because of our failure to maintain a stockholders’ equity of at least $2,500,000, a market value of listed securities of at least $35,000,000 or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.  The notification we received on November 20, 2008 from the NASDAQ stated that the Panel would consider this additional deficiency in rendering a determination regarding our continued listing on The NASDAQ Capital Market.  We were asked to present our views with respect to the additional deficiency to the Panel no later than December 3, 2008.  On December 3, 2008, we submitted a plan of compliance to the Panel for its consideration.  We expect to receive a determination from the Panel regarding our listing deficiencies by December 31, 2008.
 
If the Panel determines not to accept our plan of compliance, our common shares will likely be delisted from trading on the NASDAQ Capital Market.  As described above, if our common shares are delisted from the NASDAQ Capital Market, there may be a limited market for our shares, trading our stock may become more difficult and our share price could decrease even further.  If our common shares are not listed on a national securities exchange or the NASDAQ Capital Market, potential investors may be prohibited from or be less likely to purchase our common shares, limiting the trading market for our stock even further.  In addition, the delisting of our common shares may result in a default under our secured promissory notes.

Michael Mullarkey, our Chairman, may have interests that are different than other shareholders and may influence certain actions.
 
As of November 30, 2008, Michael Mullarkey, our Executive Chairman, beneficially owned approximately 19.91% of our outstanding common shares.  Mr. Mullarkey’s interests as a major shareholder may conflict with his fiduciary duties as a director.  Mr. Mullarkey’s interests may influence how he votes on certain matters that require shareholder approval.  Mr. Mullarkey may influence the outcome of various actions that require shareholder approval including the election of our directors, delaying or preventing a transaction in which shareholders might receive a premium over the prevailing market price for their shares and preventing changes in control or management.
 
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

 
32

 

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.   OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

Exhibit
   
Number
 
Description
31.1
 
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
     
31.2
 
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
 
32.1
 
Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
33

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Workstream Inc.
(Registrant)
   
DATE:     January 21, 2009
By:
/s/ Steve Purello
 
Steve Purello,
President and Chief Executive Officer
(Principal Executive Officer)
   
DATE:     January 21, 2009
By:
/s/ Jay Markell
 
Jay Markell,
Chief Financial Officer
(Principal Financial Officer)

 
34

 
EX-31.1 2 v137376_ex31-1.htm
 
EXHIBIT 31.1
 
CERTIFICATION

I, Steve Purello, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Workstream Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

DATE:    January 21, 2009
By:
/s/ Steve Purello
 
Steve Purello,
President and Chief Executive Officer
(Principal Executive Officer)

 
 

 
EX-31.2 3 v137376_ex31-2.htm
EXHIBIT 31.2
 
CERTIFICATION

I, Jay Markell, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Workstream Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

DATE:     January 21, 2009
By:
/s/Jay Markell
 
Jay Markell,
Chief Financial Officer

 
 

 
EX-32.1 4 v137376_ex32-1.htm

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Workstream Inc. (the “Company”) on Form 10-Q for the period ended November 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Steve Purello, Chief Executive Officer of the Company, and Jay Markell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to their respective knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

DATE:     January 21, 2009
By:
/s/ Steve Purello
 
Steve Purello,
President and Chief Executive Officer
   
DATE:     January 21, 2009
By:
/s/Jay Markell
 
Jay Markell,
Chief Financial Officer

This certification is made solely for the purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

A signed original of this written statement required by Section 906 has been provided to Workstream Inc. and will be retained by Workstream Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 
 

 
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