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, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 001-15503
WORKSTREAM INC.
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(Exact name of Registrant as specified in its charter)
Canada N/A
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
495 March Road, Suite 300, Ottawa, Ontario K2K 3G1
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(613) 270-0619
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of January 10, 2005, there were 47,379,722* common shares, without par
value, outstanding.
* Excluding 1,057,594 common shares held in escrow under acquisition agreements.
WORKSTREAM INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of
November 30, 2004 and May 31, 2004 .................................2
Unaudited Consolidated Statements of Operations for
each of the Three and Six Months Ended
November 30, 2004 and 2003......................................3
Unaudited Consolidated Statements of Comprehensive Loss
for each of the Three and Six Months Ended
November 30, 2004 and 2003......................................4
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended November 30, 2004 and 2003..................5
Notes to Unaudited Consolidated Financial Statements.....................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................27
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............38
Item 4. Controls and Procedures..................................................39
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds .................................................39
Item 6. Exhibits ............................................................... 41
Signatures.....................................................................................41
1
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
WORKSTREAM INC.
CONSOLIDATED BALANCE SHEETS
(United States dollars)
NOVEMBER 30, 2004 MAY 31, 2004
----------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,998,413 $ 4,338,466
Restricted cash 3,290,174 2,760,259
Short-term investments 154,080 301,194
Accounts receivable, net of allowance for doubtful 3,092,849 1,379,610
accounts of $131,832 (May 31, 2004 - $21,509)
Prepaid expenses 496,380 606,370
Other assets 147,638 147,009
------------ ------------
14,179,534 9,532,908
CAPITAL ASSETS 1,297,116 1,429,143
OTHER ASSETS 113,536 79,073
ACQUIRED INTANGIBLE ASSETS 10,286,744 9,242,617
GOODWILL 36,807,640 28,598,706
------------ ------------
$ 62,684,570 $ 48,882,447
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,571,192 $ 1,332,036
Accrued liabilities 1,947,862 2,969,248
Line of credit 2,476,523 1,972,218
Accrued compensation 880,639 1,241,441
Current portion of capital lease obligations 77,878 54,003
Current portion of leasehold inducements 53,483 49,533
Current portion of long-tem obligations 135,723 29,335
Current portion of related party obligations 56,807 170,369
Deferred revenue 2,908,904 2,065,604
------------ ------------
11,109,011 9,883,787
DEFERRED INCOME TAX LIABILITY 83,930 839,265
CAPITAL LEASE OBLIGATIONS -- 31,530
LEASEHOLD INDUCEMENTS 172,615 185,200
LONG-TERM OBLIGATIONS 128,775 56,226
RELATED PARTY OBLIGATIONS -- 147,257
------------ ------------
11,494,331 11,143,265
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding, no par value - 41,411,089
common shares (May 31, 2004 - 33,574,883) 91,373,754 72,705,603
Additional paid-in capital 3,562,688 3,605,224
Accumulated other comprehensive loss (889,159) (1,072,302)
Accumulated deficit (42,857,044) (37,499,343)
------------ ------------
51,190,239 37,739,182
------------ ------------
$ 62,684,570 $ 48,882,447
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
2
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(United States dollars)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUE $ 7,147,824 $ 4,261,771 $ 12,866,953 $ 8,440,285
COST OF REVENUES (exclusive of
depreciation, shown below) 2,194,498 389,407 3,266,325 832,757
------------ ------------ ------------ ------------
GROSS PROFIT 4,953,326 3,872,364 9,600,628 7,607,528
------------ ------------ ------------ ------------
EXPENSES
Selling and marketing 1,766,087 1,104,556 3,493,192 2,171,887
General and administrative 4,170,219 2,292,240 7,658,234 4,716,672
Research and development 275,151 159,951 679,844 270,979
Amortization and depreciation 1,901,291 1,403,860 3,764,895 2,808,296
------------ ------------ ------------ ------------
8,112,748 4,960,607 15,596,165 9,967,834
------------ ------------ ------------ ------------
OPERATING LOSS (3,159,422) (1,088,243) (5,995,537) (2,360,306)
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 20,482 299 29,077 1,996
Interest and other expense (36,512) (432,324) (128,038) (1,351,989)
------------ ------------ ------------ ------------
(16,030) (432,025) (98,961) (1,349,993)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX (3,175,452) (1,520,268) (6,094,498) (3,710,299)
Recovery of deferred income taxes 346,618 435,270 764,903 879,025
Other income tax (expense) recovery (20,542) 2,121 (28,107) (1,162)
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (2,849,376) $ (1,082,877) $ (5,357,702) $ (2,832,436)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 41,385,822 22,407,020 39,270,867 22,090,479
============ ============ ============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.07) $ (0.05) $ (0.14) $ (0.13)
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
3
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(United States dollars)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss for the period $(2,849,376) $(1,082,877) $(5,357,702) $(2,832,436)
Other comprehensive loss:
Cumulative translation
adjustment (net of tax of $0) 102,417 (12,601) 183,143 (13,682)
----------- ----------- ----------- -----------
Comprehensive loss for the period $(2,746,959) $(1,095,478) $(5,174,559) $(2,846,118)
=========== =========== =========== ===========
The accompanying notes are an integral part of these unaudited financial
statements.
4
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States dollars)
Six Months Ended November 30,
2004 2003
------------ -------------
CASH FROM/(USED IN) OPERATING ACTIVITIES
Net loss for the period $(5,357,702) $(2,832,436)
Adjustments to reconcile net loss to net cash from/(used in)
operating activities:
Amortization and depreciation 3,745,163 2,797,833
Non-cash interest on convertible notes and notes payable 52,549 1,181,769
Recovery of deferred income taxes (764,903) (879,025)
Net change in operating components of working capital (959,570) (65,811)
----------- -----------
(3,284,463) 202,330
----------- -----------
CASH (USED IN)/ FROM INVESTING ACTIVITIES
Acquisition of capital assets (145,209) (5,213)
Cash paid for business acquisitions (3,338,592) (522,020)
Decrease/(increase) in restricted cash (269,260) 9,701
(Purchase)/sale of short term investments 269,260 (3,523)
----------- -----------
(3,483,801) (521,055)
----------- -----------
CASH FROM/(USED IN) FINANCING ACTIVITIES
Proceeds from exercise of options and warrants 121,029 33,333
Costs related to the registration and issuance of common stock (111,683) (22,919)
Proceeds from issuance of common stock 9,999,988 950,000
Shareholder loan repayment (409,165) (138,838)
Repayment of bank debt and capital leases (111,135) (194,156)
Line of credit, net activity 200,867 141,497
Repayment of bridge loan (335,863) --
Repayment related to lease settlement -- (120,000)
Long-term debt repayments -- (14,753)
----------- -----------
9,354,038 634,164
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES 74,173 (26,448)
----------- -----------
INCREASE IN CASH AND
CASH EQUIVALENTS FOR THE PERIOD 2,659,947 288,991
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 4,338,466 255,173
----------- -----------
CASH AND CASH EQUIVALENTS, END OF
THE PERIOD $ 6,998,413 $ 544,164
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 75,489 $ 217,898
Increase in goodwill due to accrual of contingent
consideration relating to legal settlement $ 234,405 --
Non-cash payments to consultants $ 250,000 $ 330,180
The accompanying notes are an integral part of these unaudited financial
statements.
5
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Workstream Inc. ("Workstream" or the "Company"), formerly E-Cruiter.com,
is a provider of services and Web-based software for Human Capital Management
("HCM"). HCM is the process by which companies recruit, train, evaluate,
motivate and retain their employees. Workstream offers software and services
that address the needs of companies to more effectively manage their human
capital management function. Workstream's software provides a range of solutions
for their needs, including creating and managing job requisitions, advertising
job opportunities, tracking candidates, screening applicants, searching resumes,
operating customized career web-sites, processing hiring information, creating
internal and external reports to evaluate the staffing process, evaluating and
managing employee's job performance, managing corporate compliance and offering
rewards and benefits that promote employee retention. Workstream also 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. In addition,
Workstream offers recruitment research, resume management and outplacement
services.
NOTE 2: BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
by Workstream in accordance with accounting principles generally accepted in the
United States of America. All amounts presented in these consolidated financials
statements are presented in United States dollars unless otherwise noted. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. The earnings of the subsidiaries are included from
the date of acquisition. At November 30, 2004, the Company's subsidiaries are:
Workstream USA, Inc., Paula Allen Holdings, Inc., OMNIpartners, Inc., RezLogic,
Inc., 6FigureJobs.com, Inc., Icarian Inc., Xylo, Inc., Kadiri, Inc. and
Bravanta, Inc. In management's opinion, all adjustments necessary for fair
presentation are reflected in the financial statements. All adjustments made are
normal and recurring in nature.
These unaudited financial statements should be read in conjunction with
the Company's most recent annual financial statements for the year ended May 31,
2004. These interim unaudited financial statements are prepared following
accounting policies consistent with the Company's financial statements for the
year ended May 31, 2004.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these
estimates.
Significant estimates are included in the methodology used to assess
goodwill impairment. These estimates include future cash flows as well as future
short-term and long-term growth rates. It is reasonably possible that those
estimates may change in the near-term, significantly affecting future
assessments of goodwill impairment.
Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments are stated at cost plus
accrued interest, which approximates fair value. Cash equivalents are defined as
highly liquid investments with terms to maturity at acquisition of three months
or less. Short-term investments are defined as highly liquid investments with
terms to maturity of one year or less. All cash equivalents and short-term
investments are classified as available for sale.
6
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Investment Tax Credits
Investment tax credits, which are earned as a result of qualifying
research and development expenditures, are recognized when the expenditures are
made and their realization is reasonably assured and are applied to reduce the
related research and development capital costs and expenses in the year.
Capital Assets
Capital assets are recorded at cost. Depreciation is based on the
estimated useful life of the asset and is recorded as follows:
Furniture and fixtures............... 5 years straight line
Office equipment..................... 5 years straight line
Computers and software............... 3 years straight line
Leasehold improvements............... Shorter of lease term or useful life
Capital assets are tested for impairment when evidence of a decline in
value exists and are adjusted to estimated fair value if the asset is impaired.
The carrying values are reviewed for impairment whenever events or changes in
events indicate that the carrying amounts of such assets may not be recoverable.
The determination of any impairment includes a comparison of estimated
undiscounted future cash flows anticipated to be generated during the remaining
life of the asset to the net carrying value of the asset. The amount of any
impairment recognized is the difference between the carrying value and the fair
value.
Lease Inducements
Lease inducements are amortized over the term of the lease as a reduction
of rent expense.
Income Taxes
The Company accounts for income taxes under the asset and liability method
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and tax basis of assets and liabilities. The Company provides a
valuation allowance on net deferred tax assets when it is more likely than not
that such assets will not be realized.
Capital Stock
Capital stock is recorded as the net proceeds received on issuance after
deducting all share issue costs.
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met:
persuasive evidence of an agreement exists, the services have been provided, the
price is fixed and determinable and collection is reasonably assured.
Consequently, revenue is generally recognized as services are performed, which
is in accordance with SAB 104.
The Company's Enterprise Workforce Services revenue consists of
Recruitment Systems Services, Recruitment Services, Applicant Sourcing and
Exchange Services, Performance Management Services, Employee Portal Services,
Rewards Services and Resume Management software services.
7
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company makes sales to Recruitment Systems Services and Performance
Management Systems Services' clients based on contracts typically for a one-year
term with automatic renewal. Clients are charged a monthly subscription fee for
concurrent user access licenses, career site hosting, on-line reporting and
other services. Revenue is recognized ratably over the contract period. The
Company recognizes revenue from the sale of software licenses in accordance with
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") No. 97-2 "Software Revenue Recognition", and SOP No. 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" when all of the following conditions are met: a signed contract or
purchase order; the software has been shipped or electronically delivered; the
license fee is fixed or determinable; and the Company believes that the
collection of these fees is reasonably assured. For contracts, which involve
significant implementation or other services which are essential to the
functionality of the software and which are reasonably estimable, the license
and services revenue is recognized 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, primarily using the percentage-of-completion method. Labor hours
incurred are 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. In cases where a sale of a license
does not include significant implementation services, license revenue is
recorded upon delivery with an appropriate deferral for maintenance services, if
applicable, provided all of the other relevant conditions have been met. The
total fee from the arrangement is allocated based on Vendor Specific Objective
Evidence ("VSOE") of fair value of each of the undelivered elements. Maintenance
agreements are typically priced based on a percentage of the product license fee
and have a one-year term, renewable annually. VSOE of fair value for maintenance
is established based on the stated renewal rates. Services provided to customers
under maintenance agreements include technical product support and unspecified
product upgrades. VSOE of fair value for the professional service element is
based on the standard hourly rates the Company charges for services when such
services are sold separately. Deferred revenues from advanced payments for
maintenance agreements are recognized ratably over the term of the agreement,
which is typically one year. For Recruitment Services, the Company bills its
clients based on a per-hour fee and recognizes the revenue once the project is
completed. For Applicant Sourcing and Exchange Services and Employee Portal
Services, the Company bills based on a subscription basis and recognizes the
revenue ratably over the term of the subscription. The Company also bills its
clients for product sales through some of its websites. The Company recognizes
the related revenue when the product has been shipped. For the Rewards Services,
the Company bills its clients for consulting and technology services related to
the sale of enterprise incentive and recognition programs and for product sales
used as awards by the client for its employees. The service and technology
revenue is recognized ratably over the expected life of the underlying customer
contract. The award product revenue is recognized as the related award is sold
and shipped, title has transferred to the customer and collection is reasonably
assumed. For the Resume Management Services, the Company bills its clients for
job postings and matching of resumes per descriptions that the client provides,
or for quantity-based job posting packages. The revenue is recognized when the
service is provided.
For Career Transition Services, the Company bills the client 50% when the
assignment starts and the remaining 50% when the assignment is completed. The
Company recognizes this revenue when services have been completed.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, defines a fair value method of accounting for issuance
of stock options and other equity investments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Pursuant to SFAS No. 123, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but if they do so they are required to disclose in a note to the
financial statements pro forma net income amounts as if the Company had applied
the fair value method of accounting. The Company accounts for employee
stock-based compensation under APB No. 25 and has complied with the disclosure
requirements of SFAS No. 123.
8
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The fair value of options granted was estimated at the date of grant using
the Black Scholes option pricing model with the following assumptions:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2004 2003 2004 2003
---------------- ------------------ ---------------- -----------------
Weighted average
Risk free interest rates 3.36% 3.32% 3.61% 2.50%
Expected dividend yield 0% 0% 0% 0%
Weighted average
expected volatility 66% 105% 68% 115%
Expected lives (in years) 3.5 3.5 3.5 3.5
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense ratably over the option's vesting period.
Because the determination of the fair value of all options is based on the
assumptions described in the preceding paragraph, and because additional option
grants are expected to be made in future periods, this pro forma information is
not likely to be representative of the pro forma effects on reported net income
or loss for future periods.
The following reflects the impact on results of operations if the Company
had recorded additional compensation expense relating to the employee stock
options:
For the Three Months Ended For the Six Months Ended
November 30, November 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss, as reported $ (2,849,376) $ (1,082,877) $ (5,357,702) $ (2,832,436)
Estimated incremental share based
compensation expense (229,917) (108,741) (456,559) (282,643)
------------ ------------ ------------ ------------
Pro forma net loss $ (3,079,293) $ (1,191,618) $ (5,814,261) $ (3,115,079)
============ ============ ============ ============
Weighted average common shares
outstanding during the period 41,385,822 22,407,020 39,270,867 22,090,479
============ ============ ============ ============
Basic and diluted loss per share, as
Reported $ (0.07) $ (0.05) $ (0.14) $ (0.13)
============ ============ ============ ============
Pro forma basic and diluted loss
per share $ (0.07) $ (0.05) $ (0.15) $ (0.14)
============ ============ ============ ============
9
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Research and Development Costs
The Company expenses all research and development costs as incurred.
Software development costs are expensed in the year incurred unless a
development project meets the criteria under generally accepted accounting
principles for deferral and amortization. No amounts have been capitalized to
date. Research and development expenses consist mainly of payroll related costs.
Goodwill and Acquired Intangible Assets
Management assesses goodwill related to reporting units for impairment at
least annually and writes down the carrying amount of goodwill as required. The
Company estimates the fair value of each reporting unit by preparing a
discounted cash flow model. An impairment charge is recorded if the implied fair
value of goodwill of a reporting unit is less than the book value of goodwill
for that unit.
Intangible assets with a finite useful life recorded as a result of
acquisition transactions are amortized over their estimated useful lives as
follows:
Acquired technologies.......... 3 years straight line
Customer base.................. 3 years straight line
Intellectual property.......... 5 years straight line
The Company evaluates its intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying value of such assets may
not be recoverable. To determine recoverability, the Company compares the
carrying value of the assets to the estimated future undiscounted cash flows. If
the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Foreign Currency Translation and Foreign Transactions
The financial statements of the parent company have been translated into
United States dollars in accordance with SFAS No. 52, Foreign Currency
Translation. The Company's subsidiaries use their local currency, which is the
United States dollar, as their functional currency. The functional currency of
the parent company is the Canadian dollar, and all balance sheet amounts of the
parent company with the exception of Shareholders' Equity have been translated
using the exchange rates in effect at the end of the period. Shareholder's
Equity accounts are translated using the exchange rate in effect at the time of
each equity transaction. Statement of operation amounts have been translated
using the average exchange rate for the period. The gains and losses resulting
from the translation of foreign currency into the United States dollar are
reported in comprehensive income for the period and accumulated other
comprehensive income.
Gains or losses on foreign currency transactions are recognized in income
when incurred.
NOTE 4: ACQUISITION TRANSACTIONS
Acquisition of Peoplebonus.com LLC.
On June 21, 2004, the Company acquired certain assets of Peoplebonus.com
LLC ("Peoplebonus"), a Delaware limited liability company. As consideration for
the sale, the Company issued 180,506 common shares (72,202 common shares valued
at $200,000 and 108,304 common shares held in escrow) , made a cash payment of
$25,000 held in escrow and assumed a promissory note for $100,000. In addition,
the Company made a cash payment of $105,000 to Peoplebonus. The primary reason
for the Peoplebonus acquisition is the expansion and enhancement of our HCM
solutions that the Peoplebonus' products and services enables us to achieve.
Peoplebonus' products and services are designed to streamline the way a company
processes and handles resumes. Peoplebonus' artificial intelligence data mining
software can search for key words and phrases from within a resume and score the
resume based on learned search criteria.
10
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The consolidated financial statements presented herein include the results
of operations of Peoplebonus from June 22, 2004.
Management prepared a valuation of the net tangible and intangible assets
acquired.
The preliminary purchase price has been allocated as follows:
Share consideration $ 200,000
Cash consideration 105,000
Note payable (discounted) 95,798
Escrow funds 25,000
Acquisition costs 23,775
---------
Total purchase costs $ 449,573
=========
$ 8,450
Tangible long term assets 9,080
Current liabilities (644)
Acquired technology 432,687
---------
Total net identifiable assets $ 449,573
=========
Acquisition of Bravanta, Inc.
On July 27, 2004, the Company acquired Bravanta, Inc., a Delaware
corporation. As consideration for the sale, the Company issued Bravanta
2,427,125 common shares. In January 2005, 244,939 additional common shares were
issued to the former management of Bravanta upon receipt by the Company of
completed and satisfactory accredited investor questionnaires and other related
documentation from them. The total aggregate value of the shares is $7,107,693.
400,000 of the issued shares are being held in escrow to cover indemnity
obligations covering breaches of representations and warranties. These shares
are not considered contingent and therefore have been included in the purchase
price at the time of acquisition. In addition, the Company made cash payments in
an amount equal to $2,051,120 to meet some of Bravanta's obligations prior to
the finalization of the asset purchase agreement with Bravanta. Bravanta is a
provider of enterprise incentive and recognition programs. The primary reason
for the Bravanta acquisition is that it enables the Company to expand its
customer base, expand rewards and incentives products and services, and increase
recurring revenues.
The consolidated financial statements presented herein include the results
of operations of Bravanta from July 28, 2004.
11
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Management obtained an independent valuation of intangible assets acquired
and prepared a valuation of net tangible assets acquired. The excess of the
purchase price over the value of the net tangible and identifiable intangible
assets acquired has been allocated to goodwill.
The preliminary purchase price has been allocated as follows:
Share consideration $ 7,107,693
Cash consideration 2,051,120
Closing costs 155,000
-----------
Total purchase costs $ 9,313,813
===========
Current assets $ 661,866
Tangible long-term assets 86,310
Other assets 35,005
Deferred tax asset 861,000
Current liabilities (895,863)
Intangible assets:
Trademarks 645,000
Customer relationship 837,000
Acquired technology 670,000
Future tax liabilities (861,000)
Other liabilities (61,624)
Goodwill 7,336,119
-----------
Total net identifiable assets $ 9,313,813
===========
12
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Acquisition of HRSoft, LLC
On October 6, 2004, the Company acquired certain assets of HRSoft, LLC
("HRSoft"), a Delaware limited liability company. As consideration for the sale,
the Company assumed $766,913 in bank debts and vendor obligations. In addition,
the Company made cash payments of $100,000 to meet some of HRSoft's obligations
prior to the finalization of the asset purchase agreement. The Company also
agreed to reimburse the owners of HRSoft for the estimated individual tax
liabilities arising from the transaction. This amount totaled $110,000. Finally,
the Company issued a promissory note for $325,000 to the owners of HRSoft, under
which the portion to be repaid to the Company is contingent on future revenues.
HRSoft develops and markets strategic talent management software solutions for
succession planning and leadership development, performance management,
competency management, career and development planning, organizational charting,
modeling and hierarchy management. The primary reason for the HRSoft acquisition
was to enable the Company to expand its customer base, expand its products and
services, and increase recurring revenues.
The consolidated financial statements presented herein include the results
of operations of HRSoft from October 7, 2004.
Management prepared a valuation of the net tangible and intangible assets
acquired and liabilities assumed.
The preliminary purchase price has been allocated as follows:
Payoff of bank loans $ 550,000
Cash consideration 100,000
Note receivable advance 325,000
Payoff of vendor payable 216,913
Acquisition costs 150,000
-----------
Total purchase costs $ 1,341,913
===========
Current assets $ 326,561
Tangible long-term assets 49,548
Other assets 57,103
Current liabilities (644,942)
Intangible assets:
Customer relationship 804,404
Acquired technology 949,239
Other liabilities (200,000)
-----------
Total net identifiable assets $ 1,341,913
===========
CONTINGENT CONSIDERATION
As of November 30, 2004, a total of 1,046,549 common shares were held in
escrow relating to acquisitions as further described below. This total consists
of 323,625 common shares relating to the Company's acquisition of
6FigureJobs.com, 614,620 common shares relating to the Company's acquisition of
Kadiri, and 108,304 common shares relating to the Company's acquisition of
Peoplebonus.
13
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pursuant to the purchase agreement with 6FiguresJobs.com, 323,625 common
shares were to be released from escrow to the former shareholders of
6FigureJobs.com provided that certain revenue and profit targets for the twelve
month period ending September 30, 2002 were achieved. The Company determined
that the revenue and profit targets were not achieved, but the representative of
the former 6FigureJobs.com shareholders disputed that determination and filed a
lawsuit against the Company with regard to the escrowed shares. The dispute was
heard by an arbitrator in October 2004. On January 3, 2005, the Company received
the arbitrator's decision. According to the decision, damages and other fees
totaling $376,523 were assessed against the Company. The damages were computed
as 20% of the fair market value of the escrowed shares as of the date of the
decision, or $234,405. The Company is not required to issue the 323,625 common
shares held in escrow to the former shareholders of 6FigureJobs.com. 25% of the
shares (80,906) are to remain in escrow until the Company pays the damages and
other fees assessed, at which time such shares will be released to the Company.
Because the escrowed shares were considered contingency consideration at the
time of the 6FigureJobs.com acquisition, the cash damages of $234,405, which are
based on the value of the shares, increased the goodwill relating to the
acquisition. The fees totaling $142,118 were expensed.
As of May 31, 2004, there were 950,000 common shares held in escrow
pursuant to the purchase agreement with Kadiri. In July 2004, 335,380 shares
valued at $828,389 that were held in escrow were released as a result of the
resolution of a dispute between Kadiri and one of its clients, Bank of America
Technology and Operations, Inc., reducing the common shares held in escrow to
614,620 as of November 30, 2004. These shares are to be released from escrow if
certain revenue and cash generation targets are achieved during each fiscal
quarter through November 30, 2005 or if there is no indemnification claims for
breaches of representation and warranties.
Pursuant to the purchase agreement with Peoplebonus, 108,304 additional
common shares are being held in escrow and will be released if certain revenue
and cash generation targets of the acquired business are met or if there are no
indemnification claims for breaches of representations and warranties.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the significant acquisitions (Kadiri and Bravanta) made subsequent to May 31,
2003 by Workstream as if the transactions occurred as of June 1, 2003.
For the six months ended November 30,
2004 2003
------------ ------------
REVENUE $ 14,053,301 $ 13,263,354
COST OF REVENUES (exclusive of
Depreciation, shown below)
4,092,266 3,938,773
------------ ------------
GROSS PROFIT
9,961,035 9,324,581
------------ ------------
EXPENSES
Selling and marketing
3,494,460 4,917,863
General and administrative
8,516,254 7,710,987
Research and development
679,844 2,378,995
Amortization and depreciation
3,896,221 3,916,540
------------ ------------
16,586,779 18,924,385
------------ ------------
(6,625,744) (9,599,804)
OPERATING LOSS
------------ ------------
14
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
OTHER INCOME AND (EXPENSES)
Interest and other income
29,077 11,986
Interest and other expense (389,344) (1,426,931)
------------ ------------
(360,267) (1,414,945)
------------ ------------
LOSS BEFORE INCOME TAX (6,986,011) (11,014,749)
Recovery of deferred income taxes
764,903 879,025
Current income tax (expense) recovery (28,107) (1,162)
------------ ------------
NET LOSS FOR THE PERIOD $ (6,249,215) $(10,136,886)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 40,103,149 29,713,016
============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.16) $ (0.34)
============ ============
NOTE 5: RESTRICTED CASH AND SHORT-TERM INVESTMENTS
The following is a summary of the Company's restricted cash and short-term
investments:
November 30, 2004 May 31, 2004
------------------------------------
Restricted cash $3,290,174 $2,760,259
Short-term investments $ 154,080 $ 301,194
Restricted cash is held in reserve deposits to support the current credit
card activity and the Company's line of credit. The Company's customer credit
card accounts and its line of credit form part of its current operations and
accordingly, the restricted cash has been classified as a current asset.
Excess funds are used to purchase units of an investment trust established
by a Canadian chartered bank, as well as bonds issued by Canadian corporations.
The investment trust holds various short-term, low-risk instruments that accrue
interest daily, and monies held in trust can be withdrawn without penalty at any
time.
NOTE 6: ALLOWANCE FOR DOUBTFUL ACCOUNTS
November 30, 2004 May 31, 2004
----------------------------------
Balance at beginning of the period $ 21,509 $ 55,828
Charged to costs and expenses 118,544 55,966
Write-offs and effect of exchange rate (8,221) (90,285)
--------- ---------
Balance at end of the period $ 131,832 $ 21,509
========= =========
15
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7: CAPITAL ASSETS
Property and equipment consists of the following:
November 30, 2004 May 31, 2004
-------------------------- ---------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
----------- ------------ ----------- ------------
Furniture, equipment
and leaseholds $ 1,533,079 $ 883,994 $ 1,393,844 $ 695,967
Office equipment 317,616 264,373 293,814 226,992
Computers and software 4,654,199 4,059,411 4,049,582 3,385,138
----------- ----------- ----------- -----------
6,504,894 $ 5,207,778 5,737,240 $ 4,308,097
----------- ----------- ----------- -----------
Less accumulated depreciation (5,207,778) (4,308,097)
----------- -----------
Net capital assets $ 1,297,116 $ 1,429,143
=========== ===========
NOTE 8: ACQUIRED INTANGIBLE ASSETS
Depreciable intangible assets consists of the following:
November 30, 2004 May 31, 2004
----------------------------------
Customer base $ 5,827,566 $ 4,186,182
Acquired technologies 16,543,447 14,513,943
Trademarks, domain names and intellectual property 1,322,760 677,760
------------ ------------
Total cost 23,693,773 19,377,885
------------ ------------
Accumulated amortization:
Customer base (3,561,590) (2,930,512)
Acquired technologies (9,480,177) (6,950,270)
Trademarks, domain names and intellectual property (365,262) (254,486)
------------ ------------
Total accumulated amortization (13,407,029) (10,135,268)
------------ ------------
Net acquired intangible assets $ 10,286,744 $ 9,242,617
============ ============
16
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Amortization of intangible assets was $3,271,761 and $2,404,618 for the
six months ended November 30, 2004 and 2003, respectively. The estimated
amortization expense related to intangible assets in existence as of November
30, 2004 over the next fiscal periods is as follows:
Remainder of fiscal 2005: $3,309,506
Fiscal 2006: 3,517,758
Fiscal 2007: 2,814,661
Fiscal 2008: 450,319
Fiscal 2009: 173,000
Fiscal 2010: 21,500
--------------
$10,286,744
==============
NOTE 9: GOODWILL
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
Goodwill at May 31, 2003 $ 9,570,100 $ 7,813,337 $17,383,437
----------- ----------- -----------
Acquisitions during the year 11,125,760 -- 11,125,760
Purchase price allocation
Adjustments made within
one year of acquisition date 89,509 -- 89,509
----------- ----------- -----------
Goodwill at May 31, 2004 20,785,369 7,813,337 28,598,706
----------- ----------- -----------
Acquisitions during the period 7,336,119 -- 7,336,119
Contingency consideration 234,405 -- 234,405
Purchase price allocation adjustments
made within one year
of acquisition date 638,410 -- 638,410
----------- ----------- -----------
Goodwill at November 30, 2004 $28,994,303 $ 7,813,337 $36,807,640
----------- ----------- -----------
NOTE 10: LINES OF CREDIT
At November 30, 2004 and May 31, 2004, the Company had an aggregate of
$2,476,523 and $1,972,218, respectively, outstanding on a line of credit from
the Bank of Montreal ("BMO").
17
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The line of credit with the Bank of Montreal bears interest at the bank's
prime rate plus 1%. The Company is permitted to draw up to CDN (Canadian
dollars) $3,000,000 against this facility based on compensating balances on
deposit with the bank. The Company has drawn CDN $2,937,157 as of November 30,
2004. The Company has provided collateral of CDN $3,000,000, leaving CDN $62,843
available to be drawn on this line.
As of November 30, 2004 and May 31, 2004, a total of $3,290,174 and
$2,760,259, respectively, of short-term deposits were pledged to the
institutions below as collateral for the line of credit, credit card reserve,
term loan, letters of credit for facility leases, as well as for Workstream's
credit card with the Bank of Montreal and therefore were restricted from the
Company's use:
November 30, 2004 May 31, 2004
--------------------------------
Bank of America - credit card reserve $ 199,786 $ 199,786
Silicon Valley Bank - letter of credit for facility lease 77,594 77,594
Bank of Montreal - term loan, line of credit and letters
of credit for facility leases, and BMO credit card 3,012,794 2,482,879
---------- ----------
$3,290,174 $2,760,259
========== ==========
NOTE 11: LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
November 30, 2004 May 31, 2004
--------------------------------
Term loan $ 81,498 $ 85,561
Settlement agreement payable 183,000 0
-------- --------
264,498 85,561
Less: current portion 135,723 29,335
-------- --------
$128,775 $ 56,226
======== ========
Long-term obligations represents a five year term loan maturing in May
2007 with monthly principal payments of CDN $3,333 with the Bank of Montreal
that bears interest at the Bank's prime rate plus 2.0%. Collateral has been
provided as described in note 10.
The settlement agreement payable represents a settlement reached by HRSoft
with one of its vendors relating to services provided prior to the asset
acquisition of HRSoft by the Company. The Company assumed the liability as part
of the acquisition agreement. The settlement agreement provides for monthly
payments of $8,500 through August 2006 with a final payment of $4,500 in
September 2006.
18
As of November 30, 2004, the maturities for long-term obligations are as
follows:
Remainder of fiscal 2005: $ 67,862
Fiscal 2006: 135,723
Fiscal 2007: 60,913
--------
$264,498
========
NOTE 12: RELATED PARTY OBLIGATIONS
Related party obligations consist of the following:
November 30, 2004 May 31, 2004
---------------------------------
Note payable $ 56,807 --
Shareholder loans -- $317,626
-------- --------
56,807 317,626
Less: current portion 56,807 170,369
-------- --------
-- $147,257
======== ========
As of November 30, 2004, the note payable consists of a note payable
assumed as part of the acquisition of Peoplebonus which is non-interest bearing
and is repayable in monthly installments of $8,333 through May 31, 2005. The
Company recorded the present value of the note payable at the time of the
acquisition utilizing an 8% discount rate. Imputed interest is charged to
expense over the term to maturity.
As of May 31, 2004, the shareholder loans consisted of a term loan assumed
as part of the acquisition of Paula Allen Holdings which was non-interest
bearing and was repayable in quarterly installments of $52,500 beginning in
April 2001 and ending in January 2006. The Company recorded the present value of
these shareholder notes at the time of the acquisition utilizing a 15% discount
rate. Imputed interest was charged to expense over the term to maturity. As of
November 30, 2004, the Company has paid the loans in full and expensed the
remaining unamortized interest during the first three months of fiscal 2005.
NOTE 13: CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following:
November 30, 2004 May 31, 2004
-------------------------------
Capital leases $77,878 $85,533
Less: current portion 77,878 54,003
------- -------
0 $31,530
======= =======
19
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Capital lease obligations relate to office equipment, computers and
software and bear interest at rates that range from 7.5% to 32.2% per annum.
These leases mature at various times through October 2005.
NOTE 14: CONTINGENCIES
OMNIpartners filed a lawsuit against U.S. Vehicle and its principals
alleging a breach of its sublease agreement with OMNIpartners. This action was
filed on April 18, 2002 in the Clark County District Court in Nevada. In this
action, OMNIpartners seeks approximately $115,000 for unpaid rents, maintenance
charges and other charges as well as an undetermined amount for attorneys' fees.
The Company has been involved in a dispute with the former shareholders of
6FigureJobs.com, Inc., a company acquired in October 2001. Under the terms of
the original purchase agreement pursuant to which the Company acquired
6FigureJobs.com, 323,625 common shares were held in escrow to be issued to the
former shareholders of 6FigureJobs.com provided that certain revenue and profit
targets were achieved. The Company determined that the revenue and profit
targets were not achieved, but the representative of the former 6FigureJobs.com
shareholders disputed that determination and filed a lawsuit against the Company
with regard to the escrowed shares. The dispute was heard by an arbitrator in
October 2004. On January 3, 2005, the Company received the arbitrator's
decision. According to the decision, damages and other fees totaling $376,523
were assessed against the Company. The damages were computed as 20% of the fair
market value of the escrowed shares as of the date of the decision, or $234,405.
The Company is not required to issue the 323,625 common shares held in escrow to
the former shareholders of 6FigureJobs.com. 25% of the shares (80,906) are to
remain in escrow until the Company pays the damages and other fees assessed, at
which time such shares will be released to the Company. Because the escrowed
shares were considered contingency consideration at the time of the
6FigureJobs.com acquisition, the cash damages of $234,405, which are based on
the value of the shares, increased the goodwill relating to the acquisition. The
fees totaling $142,118 were expensed.
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 or financial condition.
NOTE 15: FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including accounts
receivable, accounts payable, restricted cash and other accrued charges, the
carrying amounts approximate the fair value. Cash equivalents, short-term
investments, bank line of credit, capital lease obligations and long-term
obligations are carried at cost which management believes approximates their
fair value due to their short-term to maturity and the relative stability of
fixed interest rates. The terms of the Company's related party obligations are
set out in note 12.
Interest rate and Foreign Exchange Risk
The Company has short-term investments and deposits that earn interest at
fixed rates ranging from 1.75% to 2.25%.
As explained in note 10, the Company has a line of credit with the Bank of
Montreal that bears interest based on the bank's prime rate plus 1%.
Fluctuations in the Bank's prime rate or exchange rates would result in an
impact on financial results. The Company also has letters of credit with a
Canadian bank based on a fixed rate of 1.2% and fluctuations in exchange rates
would have a financial impact.
20
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Concentrations of Credit Risk
Concentrations of credit risk consist primarily of cash, short-term
investments and accounts receivable. Management believes the use of credit
quality financial institutions minimizes the risk of loss associated with cash
and short-term investments. Accounts receivable primarily represent amounts due
under the Company's contracts with its customers. The Company generally does not
require collateral from its customers.
NOTE 16: SHARE CAPITAL
The authorized share capital consists of an unlimited number of no par
value common shares, an unlimited number of Class A Preferred Shares, no par
value per share (the "Class A Preferred Shares"), and an unlimited number of
Series A Convertible Preferred Shares, no par value per share (the "Series A
Shares"). There were 41,411,089 common shares outstanding as of November 30,
2004 (May 31, 2004 - 33,574,883). As of November 30, 2004, an additional
1,046,549 shares were being held in escrow for contingent considerations as a
result of the terms of acquisitions. (See note 6) These shares are to be
released from escrow if certain revenue, profit, and/or cash generation targets
are achieved or if there are not any indemnification claims for breaches of
representation and warranties. The periods covered by the escrow agreements
extend until November 30, 2005. As of November 30, 2004, there were no Class A
Preferred Shares or Series A Shares outstanding.
In June 2004, the Company released from escrow 50,000 common shares held
in escrow pursuant to the purchase agreement entered into in connection with the
Company's acquisition of Peopleview, Inc. These shares were valued at $139,500.
In June 2004, the Company acquired certain assets of Peoplebonus.com LLC,
a resume management services provider. As consideration for the sale, the
Company issued 72,202 common shares valued at $200,000. An additional 108,304
shares are held in escrow. In addition, the Company made a cash payments of
$25,000 to be held in escrow and assumed a promissory note for $100,000. In
addition, the Company made a cash payment of $105,000.
In July 2004, 335,380 shares valued at $828,389 that were held in escrow
were released as a result of the resolution of a pre-acquisition liability
between Kadiri and one of its clients, Bank of America Technology and
Operations, Inc.
In July 2004, the Company issued an aggregate of 4,444,439 common shares
at $2.25 per common share to William Blair & Company and entities for which it
serves as investment advisor and Crestview Capital Fund L.P. in a private
placement resulting in aggregate proceeds of $9,999,988. The proceeds from the
sale will be used for working capital and future acquisitions. The private
placement was exempt from registration under Rule 506 of the Securities Act of
1933.
In July 2004, the Company acquired Bravanta, Inc., a provider of
enterprise incentive and recognition programs. As consideration for the sale,
the Company issued 2,427,125 common shares and 244,939 common shares will be
issued to the former management of Bravanta upon receipt by the Company of
completed and satisfactory accredited investor questionnaires and other related
documentation from them. The common shares had an aggregate value of $7,107,693.
400,000 of the issued shares are held in escrow to cover indemnity obligations
covering breaches of representations and warranties contained in the merger
agreement. In addition, the Company made cash payments in the amount of
$2,051,120 to meet some of Bravanta's obligations prior to the finalization of
the purchase agreement.
21
In July 2004, 92,891 common shares valued at $230,000 were issued to the
former shareholders of Trimbus, Inc., a company acquired by Kadiri prior to the
Company's acquisition of Kadiri. The shares were issued as fulfillment for
Kadiri's commitment to Trimbus per their original acquisition agreement.
In July 2004, 100,000 common shares valued at $250,000 were issued as a
retainer under the terms of a one-year business advisory agreement.
NOTE 17: SEGMENTED AND GEOGRAPHIC INFORMATION
The following is a summary of the Company's operations by business segment
and by geographic region for the three and six month periods ended November 30,
2004 and November 30, 2003.
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
THREE MONTHS ENDED
NOVEMBER 30, 2004
Revenue $ 5,870,377 $ 1,277,447 $ 7,147,824
Expenses 8,419,609 1,554,576 9,974,185
----------- ----------- -----------
Business segment loss $(2,549,232) $ (277,129) (2,826,361)
=========== ===========
Corporate overhead, other revenues
And expenses (23,015)
-----------
Net loss $(2,849,376)
===========
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
SIX MONTHS ENDED
NOVEMBER 30, 2004
Revenue $ 10,051,092 $ 2,815,861 $ 12,866,953
Expenses 14,852,067 3,324,318 18,176,385
------------ ------------ ------------
Business segment loss $ (4,800,975) $ (508,457) (5,309,432)
============ ============
Corporate overhead, other revenues
And expenses (48,270)
------------
Net loss $ (5,357,702)
============
22
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
AS AT NOVEMBER 30, 2004
Business segment assets $ 8,526,833 $ 268,767 $ 8,795,600
Intangible assets 10,186,744 100,000 10,286,744
Goodwill 28,994,302 7,813,338 36,807,640
----------- ----------- -----------
$47,707,879 $ 8,182,105 55,889,984
=========== ===========
Assets not allocated to business
Segments 6,794,586
-----------
Total assets $62,684,570
===========
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
BUSINESS SEGMENT
THREE MONTHS ENDED
NOVEMBER 30, 2003
Revenue $ 2,638,160 $ 1,623,611 $ 4,261,771
Expenses 3,131,180 1,802,194 4,933,374
----------- ----------- -----------
Business segment loss $ (493,020) $ (178,583) (671,603)
=========== ===========
Corporate overhead, other revenues
And expenses (411,274)
-----------
Net loss $(1,082,877)
===========
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
SIX MONTHS ENDED
NOVEMBER 30, 2003
Revenue $ 5,310,973 $ 3,129,312 $ 8,440,285
Expenses 6,377,468 3,590,693 9,968,161
----------- ----------- -----------
Business segment loss $(1,066,495) $ (461,381) (1,527,876)
=========== ===========
Corporate overhead, other revenues
And expenses (1,304,560)
-----------
Net loss $(2,832,436)
===========
23
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
AS AT MAY 31, 2004
Business segment assets $ 7,883,911 $ 322,278 $ 8,206,189
Intangible assets 9,069,568 173,049 9,242,617
Goodwill 20,785,368 7,813,338 28,598,706
----------- ----------- -----------
$37,738,847 $ 8,308,665 46,047,512
=========== ===========
Assets not allocated to business
Segments 2,834,935
-----------
Total assets $48,882,447
===========
CANADA USA TOTAL
------------ ------------ ------------
GEOGRAPHY
THREE MONTHS ENDED
NOVEMBER 30, 2004
Revenue $ 551,280 $ 6,596,544 $ 7,147,824
Expenses 716,164 9,591,082 10,307,246
------------ ------------ ------------
Geographical loss $ (164,884) $ (2,994,538) (3,159,422)
============ ============
Other revenues and expenses 310,046
------------
Net loss $ (2,849,376)
============
CANADA USA TOTAL
------------ ------------ ------------
SIX MONTHS ENDED
NOVEMBER 30, 2004
Revenue $ 1,086,071 $ 11,780,882 $ 12,866,953
Expenses 1,220,960 17,641,530 18,862,490
------------ ------------ ------------
Geographical loss $ (134,889) $ (5,860,648) (5,995,537)
============ ============
Other revenues and expenses 637,835
------------
Net loss $ (5,357,702)
============
CANADA USA TOTAL
----------- ----------- -----------
AS AT NOVEMBER 30, 2004
Geographic segment assets $ 4,604,119 $58,080,451 $62,684,570
=========== =========== ===========
24
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CANADA USA TOTAL
----------- ----------- -----------
GEOGRAPHY
THREE MONTHS ENDED
NOVEMBER 30, 2003
Revenue $ 496,490 $ 3,765,281 $ 4,261,771
Expenses 580,008 4,770,006 5,350,014
----------- ----------- -----------
Geographical loss $ (83,518) $(1,004,725) (1,088,243)
=========== ===========
Other revenues and expenses 5,366
-----------
Net loss $(1,082,877)
===========
CANADA USA TOTAL
------------ ------------ ------------
SIX MONTHS ENDED
NOVEMBER 30, 2003
Revenue $ 940,860 $ 7,499,425 $ 8,440,285
Expenses 1,159,450 9,641,141 10,800,591
------------ ------------ ------------
Geographical loss $ (218,590) $ (2,141,714) (2,360,306)
============ ============
Other revenues and expenses (472,130)
------------
Net loss $ (2,832,436)
============
CANADA USA TOTAL
----------- ----------- -----------
AS AT MAY 31, 2004
Geographic segment assets $ 5,310,040 $43,572,407 $48,882,447
=========== =========== ===========
25
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 18: EARNINGS PER SHARE
For all the periods presented, diluted net loss per share equals basic net
loss per share due to the antidilutive effect of employee stock options,
warrants and escrowed shares. The following outstanding instruments could
potentially dilute basic earnings per share in the future:
November 30, 2004
-----------------
Stock options 2,499,417
Escrowed shares 1,046,549
Warrants issued to investors 133,333
Warrants issued with convertible notes 712,179
Warrants issued to private placement agents 412,500
Warrants issued to consultant 100,000
Warrants issued through acquisition 50,000
Warrants issued to underwriters 440,000
------------
Potential increase in number of shares from dilutive instruments 5,393,978
============
NOTE 19: SUBSEQUENT EVENTS
On December 15, 2004, the Company entered into a Securities Purchase
Agreement pursuant to which it raised $14 million through the sale of an
aggregate of 4,666,667 shares of the Company's common stock at a purchase price
of $3.00 per share and warrants to purchase 2,333,333 shares of the Company's
common stock at an exercise price of $3.50 per share. The private placement
closed on December 17, 2004 and December 20, 2004.
On December 30, 2004, the Company, through a wholly-owned subsidiary,
acquired certain assets of ProAct Technologies Corporation ("ProAct"), a
Delaware corporation. As consideration for the sale, the Company made a cash
payment of $5,500,000 and issued 913,551 shares of common stock valued at
$2,700,000, of which 253,764 shares are being held in escrow. In addition, the
Company issued a promissory note for $1,530,000, which accrues interest at an
annual rate of 6% with principal and interest due on June 1, 2005. ProAct is a
provider of software and hosted web-based tools for employee benefits
management.
On January 3, 2005 in conjunction with the private placement discussed
above, the Company entered into a Securities Purchase Agreement pursuant to
which it raised an additional $990,000 through the sale of 330,000 shares of the
Company's common stock at a purchase price of $3.00 per share and warrants to
purchase 165,000 shares of the Company's common stock at an exercise price of
$3.50 per share.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements discussed in Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations), and Item 3
(Quantitative and Qualitative Disclosures About Market Risk) and elsewhere in
this Form 10-Q constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements concerning Management's expectations, strategic objectives, business
prospects, anticipated economic performance and financial condition and other
similar matters involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or
achievements of results to differ materially from any future results,
performance or achievements discussed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors are described
in Item 7 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) of the Company's Form 10-K for the fiscal year ended May
31, 2004. The words "estimate," "project," "intend," "believe," "plan" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements speak only as of the date of the document in which
they are made. The Company disclaims any obligation or undertaking to provide
any updates or revisions to any forward-looking statement to reflect any change
in the Company's expectations or any change in events, conditions or
circumstances on which the forward-looking statement is based.
The following discussion and analysis should be read in conjunction with
our unaudited consolidated financial statements and accompanying notes for the
six month period ended November 30, 2004. All figures are in United States
dollars, except as otherwise noted.
Management has prepared unaudited pro forma financial information which
can be found in note 4 of the unaudited financial statements. Management's
discussion and analysis refers to this information. All pro forma financial
information gives effect to the acquisitions made by us as if the transactions
had occurred as of June 1, 2003.
OVERVIEW
We are a provider of services and Web-based software for Human Capital
Management ("HCM"). HCM is the process by which companies recruit, train,
evaluate, motivate and retain their employees. We offer software and services
that address the needs of companies to more effectively manage their human
capital management function. We believe that our "one-stop-shopping" approach
for our clients' HCM needs is more efficient and effective than traditional
methods of human resource management.
We have two distinct operating segments, which are the Enterprise
Workforce Services and Career Transition Services segments. The Enterprise
Workforce Services segment consists of recruiting systems, recruitment services,
applicant sourcing and exchange, employee portal, rewards systems, resume
management systems, performance management systems services and compensation
management systems services. The Career Transition Services segment consists of
outplacement services.
Our business changed significantly beginning in fiscal 2002. During fiscal
2002, we completed the acquisition of Paula Allen Holdings, OMNIpartners,
6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. During fiscal 2003, we
completed the acquisition of Icarian, PureCarbon and Xylo. During fiscal 2004,
we completed the acquisitions of Perform, Peopleview and Kadiri. During the
first six months of fiscal 2005, we completed the acquisitions of Peoplebonus,
Bravanta and HRSoft. Subsequent to the acquisitions, we have concentrated on
integrating the acquired entities and expanding the reach of the existing
business as well as on other potential acquisitions. These acquisitions have
enabled us to increase our service offerings and revenue streams. When we
complete an acquisition, we combine the business of the acquired entity into the
Company's existing operations and thus expect that it will significantly reduce
the administrative and other expenses associated with the business prior to its
acquisition . The acquired business is not maintained as a standalone business
operation. Therefore, we do not separately account for the acquired business,
including its profitability, unless it constitutes a distinct segment requiring
separate reporting. Futhermore, we no not assess the impact of individual
acquisitions on earning trends.
27
Due to the substantive change these acquisitions have made to our
business, this management's discussion and analysis includes comparisons of pro
forma results of operations for the six months ended November 30, 2004 and for
the six months ended November 30, 2003. These pro forma results assume that the
significant acquisitions (Kadiri and Bravanta) had been completed as of June 1,
2003 and, therefore, compare revenues and expenses for both periods.
To monitor our results of operations and financial condition, we review
key financial information, including net revenues, gross profit, earnings per
share, and cash flow from operations. As our businesses are integrated, we
continue to seek ways to more efficiently manage and monitor our business
performance. We review other key operating metrics such as sales per employee,
days of sales outstanding1, liquidity ratio2, and debt to equity ratio3. In
addition, we review the number of clients and revenue per client in both the
Enterprise Workforce Services and Career Transition Services segments and the
number of listings in our applicant sourcing and exchange business. As our
business is impacted by the job market, we also review economic indicators such
as the unemployment rate.
- ----------
1 Days of sales outstanding represents both the age, in terms of days, of a
company's accounts receivable and the average time it takes to turn the
receivables into cash. It is calculated by dividing accounts receivables by
daily revenue. Daily revenue is calculated by dividing revenue for a month by
the number of days in that month.
2 Liquidity ratio represents the number of times that current assets can cover
current liabilities and it is calculated by dividing current assets by current
liabilities.
3 Debt to equity ratio represents the level of debt in relation to shareholders'
equity measuring a company's financial leverage. The ratio is calculated by
dividing total liabilities by shareholders' equity.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies relate to revenue recognition for
software, the assessment of goodwill impairment, impairments in intangible
assets and the valuation of deferred tax assets. Management applies judgment to
value these assets. Changes in assumptions used would impact our financial
results.
The Company recognizes revenue from the sale of 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 or purchase order; the software has been shipped or electronically
delivered; the license fee is fixed or determinable; and the Company believes
that the collection of these fees is reasonably assured. For contracts which
involve significant implementation or other services that are essential to the
functionality of the software and are reasonably estimable, the license and
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, primarily using the percentage-of-completion method. Labor hours
incurred are used as the measure of progress towards completion, and management
believes its estimates to completion are reasonable dependable. A provision for
estimated losses on engagements is made in the period in which the losses become
probable and can be reasonably estimated. In cases where a sale of a license
does not include significant implementation services, license revenue is
recorded upon delivery with an appropriate deferral for maintenance services, if
applicable, provided all of the other relevant conditions have been met. The
total fee from the arrangement is allocated based on Vendor Specific Objective
Evidence ("VSOE") of fair value of each of the undelivered elements. Maintenance
agreements are typically priced based on a percentage of the product license fee
and have a one-year term, renewable annually. VSOE of fair value for maintenance
is established based on the stated renewal rates. Services provided to customers
under maintenance agreements include technical product support and unspecified
product upgrades. VSOE of fair value for the professional service element is
based on the standard hourly rates we charge for services when such services are
sold separately. Deferred revenues from advanced payments for maintenance
agreements are recognized ratably over the term of the agreement, which is
typically one year.
28
Goodwill is assessed for impairment on at least an annual basis or more
frequently if circumstances warrant. We assess goodwill related to reporting
units for impairment and write down the carrying amount of goodwill as required.
We estimate the fair value of each reporting unit by preparing a discounted cash
flow model using a 15% discount rate. The model is prepared by projecting
results for five years making different assumptions for each reporting unit. At
the end of fiscal 2004, we assumed that the economy would continue to improve in
fiscal 2005, that individual reporting unit revenue growth rates would range
from 10% to 146%, that gross profit would generally be higher than current
trends, and that operating expense would be reduced. An impairment charge is
recorded if the implied fair value of goodwill of a reporting unit is less than
the book value of goodwill for that unit. Changes in the discount rate used, or
in other assumptions in the model, would result in wide fluctuations in the
value of goodwill that is supported. Any such changes may result in additional
impairment write-downs.
We value intangible assets, such as a customer base acquired in an
acquisition, based on estimated future income applying historical customer
retention rates. If the customer base acquired discontinues using our service
earlier than historical experience, we may be required to record an impairment
of intangible assets. Changes in circumstances impacting other assumptions used
to value intangible assets could also lead to future impairments.
We apply significant judgment in recording net deferred tax assets, which
result from the loss carry forwards of companies that we acquire and that we
generate internally. The recording of deferred tax assets requires estimates of
future profitability. Actual results may differ from estimated amounts.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The table below sets forth pro forma results and the percentage difference
between the sixs months ended November 30, 2004 and 2003, assuming that the
Kadiri and Bravanta acquisitions were acquired as of June 1, 2003.
2004 2003 Variance % change
------------ ------------ ---------------------------
REVENUE $ 14,053,301 $ 13,263,354 $ 789,947 6%
COST OF REVENUES (exclusive of
depreciation, shown below) 4,092,266 3,938,773 153,493 4%
------------ ------------ ------------
GROSS PROFIT 9,961,035 9,324,581 636,454 7%
------------ ------------ ------------
EXPENSES
Selling and marketing 3,494,460 4,917,863 (1,423,403) -29%
General and administrative 8,516,254 7,710,987 805,267 10%
Research and development 679,844 2,378,995 (1,699,151) -71%
Amortization and depreciation 3,896,221 3,916,540 (20,319) -1%
------------ ------------ ------------
16,586,779 18,924,385 (2,337,606) -12%
------------ ------------ ------------
OPERATING LOSS (6,625,744) (9,599,804) 2,974,060 -31%
------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 29,077 11,986 17,091 143%
Interest and other expense (389,344) (1,426,931) 1,037,587 -73%
------------ ------------ ------------
(360,267) (1,414,945) 1,054,678 -75%
------------ ------------ ------------
LOSS BEFORE INCOME TAX (6,986,011) (11,014,749) 4,028,738 -37%
Recovery of deferred income taxes 764,903 879,025 (114,122) -13%
Current income tax (expense) recovery (28,107) (1,162) (26,945) 2,319%
------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (6,249,215) $(10,136,886) $ 3,887,671 -38%
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 40,103,149 29,713,016
============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.16) $ (0.34)
============ ============
29
Following completion of our acquisitions, we focused on integrating the
acquired entities and expanding the reach of the existing businesses. We have
also made efforts to reduce costs by consolidating operations, resulting in
staff reductions of redundant positions and related overhead and reducing
research and development expenditures. In the six months ended November 30,
2004, operating expenses of non-acquired operations declined $283,813 or 3%
compared to the six months ended November 30, 2003.
REVENUES
Consolidated revenues were $7,147,824 for the three months ended November
30, 2004 ("second quarter 2005") compared to $4,261,771 for the three months
ended November 30, 2003 ("second quarter 2004"), an increase of $2,886,053 or
68%. Revenues from Peopleview, Kadiri, Peoplebonus, Bravanta and HRSoft
("companies acquired subsequent to second quarter 2004") represented $3,395,631
for the second quarter 2005. Revenues from all other companies ("existing
companies") declined 12% to $3,752,193 in second quarter 2005 from $4,261,771 in
second quarter 2004. This decrease was primarily due to a decrease in Career
Transition Services revenues caused by the closure of several offices in an
effort to consolidate the workforce into fewer locations. This caused what we
believe will be a temporary decline in revenues.
Career Transition Service revenues for second quarter 2005 were $1,277,447
compared to $1,623,611 in second quarter 2004, a decrease of $346,164 or 21%.
The primary reason for the decrease is discussed in the previous paragraph.
Enterprise Workforce Solutions revenues for second quarter 2005 were
$5,870,377 compared to $2,638,160 for second quarter 2004, an increase of
$3,232,217 or 123%. $3,395,631 of revenues for second quarter 2005 were
contributed by the companies acquired subsequent to second quarter 2004. This
increase as a result of acquisitions was partially offset by a decline in sales
in recruiting systems which we believe is due in part to the weak job market and
to the transition of Icarian clients from our Icarian software to our E-cruiter
software, which is less expensive for the client but results in a greater profit
as a percentage of sales for the Company.
30
Consolidated revenues were $12,866,953 for the six months ended November
30, 2004 compared to $8,440,285 for the six months ended November 30, 2003, an
increase of $4,426,668 or 52%. Revenues from companies that we acquired
subsequent to second quarter 2004 represented $4,816,877 for the six months
ended November 30, 2004. Revenues from existing companies declined $390,208 or
5% to $8,050,076 in the six months ended November 30, 2004 from $8,440,284 for
the six months ended November 30, 2003. This decrease was primarily due to a
decrease in Career Transition Services revenues as discussed in the previous
paragraphs.
Career Transition Service revenues for the six months ended November 30,
2004 were $2,815,861 compared to $3,129,312 for the six months ended November
30, 2003, a decrease of $313,451 or 10%. The primary reason for the decrease is
discussed in the previous paragraphs.
Enterprise Workforce Solutions revenues for the six months ended November
30, 2004 were $10,051,092 compared to $5,310,973 for the six months ended
November 30, 2003, an increase of $4,740,119 or 90%. $4,816,877 of revenues for
the six months ended November 30, 2004 were contributed by the companies
acquired subsequent to second quarter 2004. The decrease in revenue from
existing companies is primarily due to the transition of Icarian clients from
our Icarian software to our E-cruiter software, which is less expensive for the
client but results in greater profit as a percentage of sales for the Company.
Pro forma revenues for the six months ended November 30, 2004 were
$14,053,301 compared to $13,263,354, an increase of $789,947 or 6%. The increase
is primarily due to higher participation by Bravanta clients in the awards
programs. Bravanta's awards program is a program under which client companies
grant their employees awards for various reasons, including achieving desired
performance goals, undertaking certain business or other activities, and
celebrating birthdays and anniversaries. These awards can be redeemed by
employees through our software/hosted website for items such as electronic
equipment, household goods, leather goods, and glassware. When an employee
redeems an award, we purchase the award from a third party vendor, send it to
the redeeming employee and bill the client for the award plus a percentage
markup. We generate revenue from the awards program through fees paid by clients
to use the Bravanta product and from payments made by clients for awards
redeemed by their employees. The Company believes that the higher participation
rate reflects more awards being granted by existing Bravanta clients to their
employees as they seek to provide additional benefits in an effort to increase
employee loyalty and retention.
During second quarter 2005, the amount of sales per average number of
employees increased to $31,698 compared to $23,162 for second quarter 2004. We
believe that the increase is due to improved efficiencies and the elimination of
redundant positions.
By the end of second quarter 2005, the total number of clients for our
software services, consisting of our recruitment systems, performance
management, resume management, reward services and employee portal was 43%
higher than at the end of second quarter 2004 mainly as a result of the new
clients acquired through the acquisitions. The average number of job postings in
our applicant sourcing and exchange business decreased 9% for the second quarter
2005 compared to the second quarter 2004. This decrease was due to a shift in
focus to clients that provide higher revenue per posting. At the end of second
quarter 2005, the total number of clients for our Career Transition Services
decreased 29% since the end of the second quarter 2004. This decrease is
consistent with the decrease in Career Transition Services revenue for second
quarter 2005 due to the closure of several offices in an effort to consolidate
the workforce into fewer locations.
By the end of second quarter 2005, our revenue per average number of
clients for our software services increased 41% since the end of second quarter
2004 mainly due the high revenue clients associated with some of the companies
acquired subsequent to second quarter 2004, primarily Kadiri and Bravanta. Our
revenue per client for our Career Transition Services increased 11% during
second quarter 2005 compared to second quarter 2004. The revenue per average
number of clients figures are calculated by dividing revenue for the quarter by
the average of the number of clients at the beginning of the quarter and the end
of the quarter.
31
We believe that our business is impacted by the job market. The
unemployment rate in the United States, as disclosed by the U.S. Bureau of Labor
Statistics, as of November 30, 2004 was 5.4%, slightly down from 5.6% as of May
31, 2004, but still significantly higher than the pre-recession rate of 3.9% for
December 2000. When businesses reduce the number of employees being hired, as
evidenced by a higher unemployment rate, we believe that the demand for our
services decreases mainly in the areas of our recruitment software and
recruitment services.
COST OF REVENUES
Cost of revenues for second quarter 2005 were $2,194,498 compared to
$389,407 for second quarter 2005, an increase of $1,805,091 or 464%. Career
Transition Service cost of revenues accounted for $158,841 and Enterprise
Workforce Services cost of revenues accounted for $2,035,657 of the total cost
of revenues for second quarter 2005. Career Transition Service cost of revenues
accounted for $190,757 and Enterprise Workforce Services cost of revenues
accounted for $198,650 of the total cost of revenues for second quarter 2004.
Cost of revenues in the Enterprise Workforce Services segment during second
quarter 2005 increased $1,837,007 from second quarter 2004 as a result of
additional costs of revenues of $1,907,534 incurred in connection with the
companies we acquired subsequent to first quarter 2004. Cost of revenues for the
Career Transition Services segment during second quarter 2005 decreased $31,916
from second quarter 2004 as a result of lower revenues.
Cost of revenues for the six months ended November 30, 2004 were
$3,266,325 compared to $832,757 for the six months ended November 30, 2003, an
increase of $2,433,568 or 292%. Career Transition Service cost of revenues
accounted for $304,685 and Enterprise Workforce Services cost of revenues
accounted for $2,961,640 of the total cost of revenues for the six months ended
November 30, 2004. Career Transition Service cost of revenues accounted for
$363,348 and Enterprise Workforce Services cost of revenues accounted for
$469,409 of the total cost of revenues for the six months ended November 30,
2003. Cost of revenues for the Career Transition Services segment decreased
$58,663 as a result of lower revenues. Cost of revenues for the Enterprise
Workforce Services increased $2,492,231 as a result of additional costs of
revenues of $2,605,535 incurred in connection with the companies acquired
subsequent to second quarter 2004.
Pro forma cost of revenues for the six months ended November 30, 2004 were
$4,092,266 compared to $3,938,773 for the six months ended November 30, 2003, an
increase of $153,493 or 4%. The increase is mainly due to the additional cost of
revenues associated with the increase in sales for the Bravanta's award
programs. This increase was partially offset by a decrease in cost in the
existing companies as a result of efforts to eliminate redundant operations and
costs and to pursue more profitable business and changing marketing strategies.
GROSS PROFITS
Consolidated gross profits were $4,953,326 for second quarter 2005 or 69%
of revenues compared to $3,872,364 or 91% of revenues for second quarter 2004.
Career Transition Services gross profit was $1,118,607 or 88% of Career
Transition Service revenues for second quarter 2005 compared to $1,432,856 or
88% of Career Transition Service revenues for second quarter 2004. Enterprise
Workforce Services gross profit was $3,834,719 or 65% of Enterprise Workforce
Services revenues for second quarter 2005 compared to $2,439,510 or 92% of
Enterprise Workforce Services revenue for second quarter 2004. The decrease in
the Enterprise Workforce Services gross profit as a percent of revenues is due
to the lower gross profit margins (44% of revenue) generated by the companies
that the Company acquired subsequent to second quarter 2004. Gross profit
margins for existing companies was 92% of revenues for second quarter 2005
compared to 91% for second quarter 2004.
Consolidated gross profits were $9,600,628 or 75% of revenues for the six
months ended November 30, 2004 compared to $7,607,528 or 90% of revenues for the
six months ended November 30, 2003. Career Transition Services gross profit was
$2,511,176 or 89% of Career Transition Services revenues and Enterprise
Workforce Services gross profit represented $7,089,452 or 71% of Enterprise
Workforce Services revenues for the six months ended November 30, 2004. Career
Transition Services gross profit was $2,765,963 or 88% of Career Transition
Services revenues and Enterprise Workforce Services gross profit represented
$4,841,565 or 91% of Enterprise Workforce Services revenues for the six months
ended November 30, 2003. The decrease in the Enterprise Workforce Services gross
profit as a percent of revenues is due to the lower gross profit margins (46% of
revenue) generated by the companies that the Company acquired subsequent to
second quarter 2004. Gross profit margins for existing companies was 92% of
revenues for the six months ended November 30, 2004 compared to 90% for the six
months ended November 30, 2004. The improvement in gross profit for existing
companies was due to efforts to eliminate redundant operations and costs and to
pursue more profitable business by shifting to more profitable products.
32
Pro forma gross profits for the six months ended November 30, 2004 were
$9,961,035 or 71% of revenues, compared to $9,324,581 or 70% of revenues for the
six months ended November 30, 2003. The improvement in the gross profit
percentage is due to the improvement in gross profit of existing companies as
explained above.
OPERATING EXPENSES
Total operating expenses were $8,112,748 for second quarter 2005, compared
to $4,960,607 for second quarter 2004, an increase of $3,152,141 or 64%.
Companies that we acquired subsequent to second quarter 2004 accounted for
$3,392,695 in total operating expenses. Operating expenses for existing
companies were $4,720,054 for second quarter 2005, representing an approximate
5% decline compared to second quarter 2004. The decline in operating expenses
for existing companies due to the lower amortization expense as intangibles
become fully amortized was partially offset by the 6FigureJobs.com legal
settlement expenses. In general, we believe that operating expenses generally
continue to increase in the first three to twelve months after we complete an
acquisition but that operating expenses will decrease after that as a result of
the consolidation of operations. Any future acquisitions will increase operating
expenses from the date of the acquisition, in which case we believe that pro
forma results would provide a more comparable analysis.
Total operating expenses were $15,596,165 for the six months ended
November 30, 2004, compared to $9,967,834 for the six months ended November 30,
2003, an increase of $5,628,331 or 56%. Companies that we acquired subsequent to
second quarter 2004 accounted for $5,912,144 in total operating expenses.
Operating expenses for existing companies were $9,684,021 for the six months
ended November 30, 2004, representing an approximate 3% decline compared to the
six months ended November 30, 2003. The decline in operating expenses for
existing companies due to the lower amortization expense as intangibles become
fully amortized was partially offset by the 6FigureJobs.com legal settlement
expenses.
Pro forma operating expenses were $16,586,779 for the six months ended
November 30, 2004 compared to $18,924,385 for the six months ended November 30,
2003, a decrease of $2,337,606 or 12%. The decrease is primarily due to the
reduction in research and development activities and efforts to reduce costs
mainly in the form of employee costs.
SELLING AND MARKETING
Selling and marketing expenses were $1,766,087 for second quarter 2005
compared to $1,104,556 for second quarter 2004, an increase of $661,531 or 60%.
This increase is attributable primarily to selling and marketing expenses of
$539,362 incurred by the companies we acquired subsequent to second quarter
2004. Selling and marketing expenses for existing companies increased $122,169
compared to second quarter 2004. This increase is primarily due to higher
advertising expenses of $72,648 and higher costs for obtaining sales leads in
the Career Transition Services segment of $77,844. These increases are partially
offset by a reduction in employee costs.
33
Selling and marketing expenses were $3,493,192 for the six months ended
November 30, 2004 compared to $2,171,887 for the six months ended November 30,
2003, an increase of $1,321,305 or 61%. This increase is attributable primarily
to selling and marketing expenses of $1,101,932 incurred by the companies we
acquired subsequent to second quarter 2004. Selling and marketing expenses for
existing companies increased $219,373 compared to the six months ended November
30, 2003. This increase is primarily due to an increase in advertising expense
of $166,813 and higher costs for obtaining sales leads in the Career Transition
Services segment of $100,409. These increases are partially offset by reductions
in employee costs and in travel and entertainment expenses.
Pro forma selling and marketing expenses were $3,494,460 for the six
months ended November 30, 2004 compared to $4,917,863 for second quarter 2004, a
decrease of $1,423,403 or 29%. The decrease in pro forma selling and marketing
expenses is mainly due to a reduction in selling and marketing personnel at
Kadiri in efforts to reduce costs and consolidate operations.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $4,170,219 for second quarter
2005, compared to $2,292,240 for second quarter 2004, an increase of $1,877,978
or 82%. The companies acquired subsequent to second quarter 2004 accounted for
$1,827,809 of general and administrative expenses during second quarter 2005,
primarily for employee costs, rent, travel and entertainment and consulting
fees. General and administrative expenses for existing companies increased
$50,169. The increase was due to the $142,118 legal settlement expenses relating
to the dispute with the former shareholders of 6FigureJobs.com, a $331,794
increase in professional fees mainly for legal expenses associated with the
6FigureJobs.com litigation, and an increase in employees costs as a result of an
increase in personnel at our headquarters in Ottawa, Canada, which is a
corporate support function. These increases are partially offset by a $129,959
decrease in space occupancy as a result of negotiation of existing or new leases
at the current lower market rates, a decrease of $111,339 in equipment lease
expense due to the termination and buyout of lease equipment contracts, and a
decrease of $645,129 due to the allocation of corporate expenses to the entities
acquired subsequent to second quarter 2004. We believe that general and
administrative expenses will continue to increase in the first three to twelve
months after we complete an acquisition but that general and administrative
expenses will decrease after that as a result of our effort to eliminate
redundant costs. Any future acquisitions will increase general and
administrative expenses from the date of the acquisition, in which case we
believe that pro forma results would provide a more comparable analysis.
General and administrative expenses were $7,658,234 for the six months
ended November 30, 2004, compared to $4,716,672 for the six months ended
November 30, 2003, an increase of $2,941,562 or 62%. The companies acquired
subsequent to second quarter 2004 accounted for $2,860,887 of general and
administrative expenses during the six months ended December 31, 2004, primarily
for employee costs, rent, travel and entertainment and consulting fees. General
and administrative expenses for existing companies increased $80,673. The
increase was due to the $142,118 legal settlement expenses relating to the
dispute with the former shareholders of 6FigureJobs.com, a $452,994 increase in
professional fees mainly for legal expenses associated with 6FigureJobs.com
litigation, and an increase in employee costs as a result of an increase in
personnel at our headquarters in Ottawa, Canada, which is a corporate support
function. These increases were partially offset by a $324,161 decrease in space
occupancy as a result of negotiation of existing or new leases at the current
lower market rates, a decrease of $210,109 in equipment lease expense due to the
termination and buyout of lease equipment contracts, and a decrease of $840,480
due to the allocation of corporate expenses to the entities acquired subsequent
to second quarter 2004.
Pro forma general and administrative expenses were $8,516,254 for the six
months ended November 30, 2004 compared to $7,710,987 for the six months ended
November 30, 2003, an increase of $805,267 or 10%. The increase in pro forma
general and administrative expenses is due to the increase in the existing
companies general and administrative expenses as discussed previously.
34
RESEARCH AND DEVELOPMENT
Research and development costs were $275,151 for second quarter 2005
compared to $159,951 for second quarter 2004, an increase of $115,200 or 72%.
$248,265 of the research and development costs incurred in second quarter 2005
was attributable to the companies acquired subsequent to second quarter 2004.
Research and development costs for existing companies declined $133,065. The
decline in research and development costs for existing companies is primarily
due to our strategy to acquire new technology through acquisitions. We believe
that we can acquire new technology at a lower cost in the long-term and more
efficiently than developing new software platforms with internal resources. We
implemented this strategy in fiscal 2002. Since fiscal 2002, most of our
research and development efforts have been incurred in the Enterprise Workforce
Services segment.
Research and development costs were $679,844 for the six months ended
November 30, 2004 compared to $270,979 for the six months ended November 30,
2003, an increase of $408,865 or 151%. $630,739 of the research and development
costs incurred during the six months ended November 30, 2004 was attributable to
the companies acquired subsequent to second quarter 2004. Research and
development costs for existing companies declined $221,874. The previous
paragraph discusses our strategy with regards to research and development.
Pro forma research and development costs were $679,844 for the six months
ended November 30, 2004 compared to $2,378,995 for the six months ended November
30, 2003, a decrease of $1,699,151 or 71%. The decrease in pro forma research
and development costs is due mainly to a decrease in research and development
employee costs in Kadiri as a result of reduction in personnel in efforts to
reduce costs and consolidate operations.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense was $1,901,291 for second quarter
2005, compared to $1,403,860 for second quarter 2004, an increase of $497,431 or
35%. Companies we acquired subsequent to second quarter 2004 incurred $777,258
of depreciation and amortization expense. Amortization and depreciation expense
for existing companies decreased $279,827 due primarily to certain capital and
intangible assets becoming fully depreciated and amortized. Amortization and
depreciation expense for the Enterprise Workforce Services segment increased
$563,887 primarily as a result of the increase in amortization due to the
companies acquired subsequent to second quarter 2004. In second quarter 2005,
the Career Transition Services segment amortization and depreciation expense
decreased by $66,456. During second quarter 2005 through the acquisition of
HRSoft, we acquired capital assets of $49,548 and intangible assets of
$1,753,643. The depreciation and amortization of these assets is based on the
estimated useful lives of the assets as described in note 3 of the consolidated
financial statements.
Depreciation and amortization expenses were $3,764,895 for the six months
ended November 30, 2004, compared to $2,808,296 for the six months ended
November 30, 2003, an increase of $956,599 or 34%. Companies we acquired
subsequent to second quarter 2004 incurred $1,318,587 of depreciation and
amortization expense. Amortization and depreciation expense for existing
companies decreased $361,988 due primarily to certain capital and intangible
assets becoming fully depreciated and amortized. Amortization and depreciation
expense for the Enterprise Workforce Services segment increased $1,041,390
primarily as a result of the increase in amortization due to the companies
acquired subsequent to second quarter 2004. During the six months ended November
30, 2004, the Career Transition Services segment amortization and depreciation
expense decreased $84,791. During the six months ended November 30, 2004 through
the acquisitions of Bravanta, Peoplebonus and HRSoft, we acquired capital assets
of $144,938 and intangible assets of $4,343,701.
35
Pro forma amortization and depreciation expense were $3,896,221 for the
six months ended November 30, 2004 compared to $3,916,540 for the six months
ended November 30, 2003, a decrease of $20,319 or 1%.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $20,482 for second quarter 2005 compared to
$299 for second quarter 2004, an increase of $20,183. Interest and other income
was $29,077 for the six months ended November 30, 2004, compared to $1,996 for
the six months ended November 30, 2003, an increase of $27,081. The increase in
interest and other income during second quarter 2005 and the six months ended
November 30, 2004 was due to higher short-term investment and restricted cash
balances compared to first quarter 2004 and the six months ended November 30,
2003.
Pro forma interest income and other income was $29,077 for the six months
ended November 30, 2004 compared to $11,986 for the six months ended November
30, 2003, an increase of $17,091 or 143%. The increase in interest and other
income was due to higher short-term investment and restricted cash balances as
discussed in the previous paragraph.
INTEREST AND OTHER EXPENSE
Interest and other expense was $36,512 for second quarter 2005, compared
to $432,324 for second quarter 2004, a decrease of $395,812 or 92%. Interest
expense was $128,038 for the six months ended November 30, 2004, compared to
$1,351,989 for the six months ended November 30, 2003, a decrease of $1,223,951
or 91%. The reason for the decrease in interest and other expense was due to
expense incurred during the second quarter 2004 and the six months ended
November 30, 2003 for the cessation of the amortization of the discount related
to 8% senior subordinated convertible notes that were paid in full in fiscal
2004 and are not relevant to fiscal 2005.
Pro forma interest and other expense was $389,344 for the six months ended
November 30, 2004 compared to $1,426,931 for the six months ended November 30,
2003, a decrease of $1,037,587 or 73%. The decrease in interest and other
expense is due to the expense incurred in the six months ended November 30, 2003
for the cessation of the amortization of the discount related to the 8% Senior
Subordinated Convertible notes, partially offset by interest expense associated
with issued warrants incurred by Bravanta in the six months ended November 30,
2003.
GOODWILL
Goodwill was $36,807,640 as of November 30, 2004 compared to $28,598,706
as of May 31, 2004, an increase of $8,208,934 or 29%. $7,336,119 of the increase
relates to the Bravanta acquisition completed during first quarter 2005.
$234,405 of the increase represents the additional consideration issued to the
former shareholders of 6FigureJobs.com. This additional consideration was
determined by an arbitrator who resolved a dispute between the Company and the
former shareholders of 6FigureJobs.com. The amount represents 20% of the fair
market value of the shares held in escrow since the acquisition as potential
contingent consideration. $318,187 of the increase was a result of additional
liabilities for Kadiri, such as the issuance of shares to Trimbus, and
additional payments made and severance related to periods prior to the
acquisitions and recorded as part of the purchase equation within twelve months
after the acquisition in accordance with FASB 142. $320,223 of the increase
represents an adjustment to the original amount allocated to accounts
receivable. The adjustment was made in order to reflect the fact that certain
customers were billed in advance prior to the acquisition date, and the service
period did not begin until after the acquisition date.
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LIQUIDITY AND CAPITAL RESOURCES
At November 30, 2004, we maintained $10,442,667, in cash and cash
equivalents, restricted cash and short-term investments and a working capital of
$3,446,946. The receipt of $10 million for the issuance of stock during first
quarter 2005 improved working capital. At the end of fiscal 2004, we acquired
Kadiri, and during the six months ended November 30, 2004, we acquired Bravanta,
Peoplebonus and HRSoft. As a result of these acquisitions, we assumed current
liabilities which exceeded acquired current assets by $544,572 as of the
respective dates of acquisition. In addition, we made cash payments of
$2,051,120, $130,000 and $1,191,913 related to the Bravanta, Peoplebonus and
HRSoft acquisitions, respectively.
At November 30, 2004, $3,290,174 of short-term investment balances were
restricted from use because they represent collateral for various borrowing or
leasing arrangements. Due to the high volume of credit card usage by our
clients, Merchant banks have required us to place reserve deposits on our
merchant accounts. These reserve deposits serve as guarantees to the Merchant
banks for chargebacks that may be issued to our clients that request a
cancellation of our services and that previously paid for our services with a
credit card. As of November 30, 2004, $199,786 was held as guarantees by such
banks. These deposits are reviewed quarterly and may be returned to us or
increased based on the activity surrounding chargebacks and credit card usage.
We expect the level of chargebacks and credit card usage to remain consistent
with levels experienced in the past. Therefore, we believe that our reserve
deposits will not change significantly and will not impact our liquidity in a
material way. Additional deposits of $3,090,388 are restricted by three banks as
security for an outstanding term loan, a line of credit and letters of guarantee
provided to three landlords for facility leases. Since these restricted cash
balances are held as guarantees of the borrowings and leases mentioned above, as
any of the borrowings or the leases change, the restricted cash balance
guaranteeing them will change accordingly. The line of credit will increase or
decrease according to our working capital needs, and therefore the restricted
cash guaranteeing the line of credit will change accordingly. We expect to
reduce the principal amount of the term loan on a monthly basis according to the
loan agreement, and as we do so, the restricted cash balance guaranteeing the
loan will decrease. We also expect that as we make lease payments, the
restricted cash guaranteeing the leases will decrease on an annual basis
according to the lease agreements.
For the six months ended November 30, 2004, cash used for operations
totaled $3,284,463, consisting primarily of the net loss for the period of
$5,357,702, cash used for working capital of $959,570, and the non-cash recovery
of deferred income taxes of $764,903 offset by non-cash expenses such as
amortization and depreciation of $3,745,163 and amortization of note discounts
of $52,549. Our acquisitions made from July 2001 through November 2004 have
reduced our working capital. Prior to the acquisitions, the majority of these
companies experienced losses generating working capital deficits. As we
integrate them and consolidate costs, we expect to generate operating cash flow,
therefore reducing our working capital deficit. However, any future acquisitions
that result in our acquiring working capital deficiencies will contribute to
increasing our working capital deficit.
Net cash used for investing activities during the six months ended
November 30, 2004 was $3,483,801. Investing outflows consisted mainly of cash
paid for business acquisitions, net of cash acquired, of $3,338,592 for the
acquisitions made during the period and $145,209 used for the acquisition of
capital assets.
Net cash provided by financing activities was $9,354,038 for the six
months ended November 30, 2004. During the period, we received $9,999,988 in
exchange for 4,444,439 of our common shares in a private placement sold to
William Blair & Company and entities for which it serves as investment advisor
and Crestview Capital Fund L.P. In addition, we received $51,455 in cash from
institutional investors as a result of their exercise of warrants to purchase
our common stock and $69,574 in cash from employees as a result of their
exercise of stock options. The net of our draws and repayments on the line of
credit was $200,867. Financing outflows consisted primarily of the repayments of
shareholder notes of $409,165, repayment of a loan assumed through the
acquisition of Bravanta of $335,863, costs related to the registration and
issuance of the common stock of $111,683, and capital lease and debt payments of
$111,135.
37
We have had operating losses since our inception, and during the six
months ended November 30, 2004, we continued to have operating losses as a
result of non-cash charges such as amortization and depreciation, and additional
expenses incurred by the acquisitions made subsequent to the second quarter
2004. However, management believes that our operations will generate operating
cash flow in the future as a result of the elimination of redundant costs in the
businesses we have acquired in first six months of fiscal 2005 and in the prior
fiscal years, the consolidation of ongoing operations, and improved efficiencies
in the delivery of our services.
We believe that our financial strength was improved during the six months
ended November 30, 2004 as a result of the funds we raised through the sale of
$10 million of our common shares in July 2004. We believe that our liquidity
ratio, which improved from 1.0 as of May 31, 2004 to 1.3 as of November 30,
2004, and our debt to equity ratio, which decreased from .30 as of May 31, 2004
to .22 as of November 30, 2004, due to the $10 million of common shares sold in
July 2004, reflect our increased financial strength. Our Days of Sales
Outstanding (DSO) for November 30, 2004 was 40 compared to 29 for May 31, 2004.
The increase in DSO is due to a general slow down in collections subsequent to
acquisitions as we work with new customers to change the payment process. In
addition, Kadiri, Bravanta and HRSoft have had higher DSO trends than those
experienced at Workstream. We anticipate that as we continue with the
integration of these acquisitions, we will be able to improve DSO.
Management believes the proceeds from the sale of $10 million of our
common shares in July 2004, the additional sale of $15 million of our common
shares in December 2004, and the reduction of, along with further consolidation
of cost centers and elimination of redundant costs will result in improvement of
our working capital and positive generation of cash flows from operations which,
together with current cash reserves, will be sufficient to meet our working
capital and capital expenditure requirements through at least November 30, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are primarily exposed to market risks associated with fluctuations in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
Our exposure to interest rate fluctuations relates primarily to our
short-term investment portfolio and our bank loans. We invest our surplus cash
in an investment trust established by a Canadian chartered bank and in a
certificate of deposit in a bank in the United States. The investment trust
holds various short-term, low-risk instruments, and can be withdrawn without
penalty at any time. The interest income from these investments is subject to
interest rate fluctuations which our management believes will not have a
material impact on our financial position.
We have established a CDN $3,000,000 line of credit with the Bank of
Montreal which bears interest at the bank's prime rate plus 1%. We have drawn
CDN $2,937,157 on this facility as of November 30, 2004. We can draw an
additional CDN $62,843 before additional collateral would be required. We also
have a term loan with the bank in the amount of CND $96,657 as of November 30,
2004. The term loan bears interest at the bank's prime rate plus 2%.
Additionally, we have a letter of credit issued in May 2002 as collateral on
leased facilities in the amount of CND $400,000 that will renew annually. We pay
an annual fee of 1.2% on this letter of credit.
The majority of our interest rates are variable, and, therefore, we have
exposure to risks associated with interest rate fluctuations. However,
management believes that the exposure is limited as the majority of the exposure
is related to the CDN $3,000,000 line of credit, which is fully collateralized
with our restricted cash and therefore can be liquidated immediately if faced
with a rising interest rate environment.
38
The impact on net interest income of a 100 basis point change in interest
rates for the quarter ended November 30, 2004 would have been less than $6,500.
FOREIGN CURRENCY RISK
We have monetary assets and liability balances denominated in Canadian
dollars. As a result, fluctuations in the exchange rate of the Canadian dollar
against the U.S. dollar will impact our reported net asset position. A 10%
change in foreign exchange rates would result in a change in the reported net
asset position of approximately $93,000 and a change in the reported net loss
for the six months ended November 30, 2004 of approximately $60,000.
ITEM 4. CONTROLS AND PROCEDURES
As of November 30, 2004, our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, carried out an evaluation
of the effectiveness of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There were no changes during the quarter
ended November 30, 2004 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In June 2004, 50,000 common shares, valued at $139,500, that were held in
escrow under the purchase agreement pursuant to which the Company acquired
Peopleview, Inc. were released from escrow. The issuance of these common shares
was exempt from registration under Rule 506 of the Securities Act of 1933.
In June 2004, the Company acquired certain assets of Peoplebonus.com LLC,
a resume management services provider. As consideration for the sale, the
Company issued 72,202 common shares, valued at $200,000, and an additional
108,304 shares are being held in escrow. The issuance of these common shares was
exempt from registration under Rule 506 of the Securities Act of 1933.
In July 2004, 335,380 common shares, valued at $828,389, that were held in
escrow were released as a result of the resolution of a dispute between Kadiri
and one of its clients, Bank of America Technology and Operations, Inc. The
issuance of these common shares was exempt from registration under Rule 506 of
the Securities Act of 1933.
In July 2004, the Company issued an aggregate of 4,444,439 common shares
at $2.25 per common share to William Blair & Company and entities for which it
serves as investment advisor and Crestview Capital Fund L.P. in a private
placement resulting in aggregate proceeds of $9,999,988. The proceeds from the
sale will be used for working capital and future acquisitions. The issuance of
the shares in the private placement was exempt from registration under Rule 506
of the Securities Act of 1933.
39
In July 2004, the Company acquired Bravanta, Inc., a provider of
enterprise incentive and recognition programs. As consideration for the sale,
the Company issued 2,427,125 common shares. 400,000 of such shares are held in
escrow to cover indemnity obligations covering breaches of representations and
warranties contained in the merger agreement. In January 2005, 244,939
additional common shares were issued to the former management of Bravanta upon
receipt by the Company of completed and satisfactory accredited investor
questionnaires and other related documentation. The shares had an aggregate
value of $7,107,693. The issuance of these common shares was exempt from
registration under Rule 506 of the Securities Act of 1933.
In July 2004, 92,891 common shares, valued at $230,000, were issued to the
former shareholders of Trimbus, Inc., a company acquired by Kadiri prior to the
Company's acquisition of Kadiri. The shares were issued as fulfillment for
Kadiri's commitment to Trimbus per their agreement with Kadiri. The issuance of
these common shares was exempt from registration under Section 4(2) of the
Securities Act of 1933 as a transaction not involving a public offering.
40
ITEM 6. EXHIBITS
Exhibit No. Description
10.1 Asset Purchase Agreement dated October 6, 2004 among
Workstream Inc., Workstream USA, Inc., and HRSoft, LLC.
31.1 Certification of Michael Mullarkey pursuant to
Rule 13a-14(a)/15d-14(a).
31.2 Certification of David Polansky pursuant to
Rule 13a-14(a)/15d-14(a).
32.1 Certification of Michael Mullarkey pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of David Polansky pursuant to 18 U.S.C.
Section 1350.
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 14, 2005 By: /s/ Michael Mullarkey
-------------------------------------
Michael Mullarkey,
Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)
DATE: January 14, 2005 By: /s/ David Polansky
-------------------------------------
David Polansky,
Chief Financial Officer and Secretary
(Principal Financial Officer)
41