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 February 28, 2005
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of April 8, 2005, there were 48,764,439* common shares, without par
value, outstanding. (* Excluding 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
February 28, 2005 and May 31, 2004 .................... 2
Unaudited Consolidated Statements of Operations for
each of the Three and Nine Months Ended
February 28, 2005 and February 29, 2004............ 3
Unaudited Consolidated Statements of Comprehensive Loss
for each of the Three and Nine Months Ended
February 28, 2005 and February 29, 2004 ........... 4
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended February 28, 2005
and February 29, 2004 ............................. 5
Notes to Unaudited Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................31
Item 3. Quantitative and Qualitative Disclosures About Market Risk .42
Item 4. Controls and Procedures.....................................43
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds ....................................43
Item 6. Exhibits ...................................................45
Signatures ...................................................................45
1
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
WORKSTREAM INC.
CONSOLIDATED BALANCE SHEETS
(United States dollars)
FEBRUARY 28, 2005 MAY 31, 2004
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,579,048 $ 4,338,466
Restricted cash 3,104,174 2,760,259
Short-term investments 323,832 301,194
Accounts receivable, net of allowance for doubtful 3,256,852 1,379,610
accounts of $82,395 (May 31, 2004 - $21,509)
Prepaid expenses 741,979 606,370
Other assets 138,149 147,009
-------------- --------------
22,144,034 9,532,908
CAPITAL ASSETS 1,433,855 1,429,143
OTHER ASSETS 169,909 79,073
ACQUIRED INTANGIBLE ASSETS 15,007,935 9,242,617
GOODWILL 41,973,581 28,598,706
-------------- --------------
$ 80,729,314 $ 48,882,447
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,541,543 $ 1,332,036
Accrued liabilities 1,348,633 2,969,248
Line of credit 2,304,693 1,972,218
Accrued compensation 1,141,076 1,241,441
Current portion of capital lease obligations 35,107 54,003
Current portion of leasehold inducements 52,314 49,533
Current portion of long-tem obligations 1,664,425 29,335
Current portion of related party obligations 24,672 170,369
Deferred revenue 3,453,749 2,065,604
-------------- --------------
12,566,212 9,883,787
DEFERRED INCOME TAX LIABILITY -- 839,265
CAPITAL LEASE OBLIGATIONS -- 31,530
LEASEHOLD INDUCEMENTS 155,931 185,200
LONG-TERM OBLIGATIONS 93,329 56,226
RELATED PARTY OBLIGATIONS -- 147,257
-------------- --------------
12,815,472 11,143,265
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding, no par value - 48,201,106
common shares (May 31, 2004 - 33,574,883) 106,774,314 72,705,603
Additional paid-in capital 8,459,725 3,605,224
Accumulated other comprehensive loss (908,801) (1,072,302)
Accumulated deficit (46,411,396) (37,499,343)
-------------- --------------
67,913,842 37,739,182
-------------- --------------
$ 80,729,314 $ 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 Nine Months Nine Months
Ended Ended Ended Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUE $ 6,874,735 $ 4,169,074 $ 19,741,688 $ 12,609,359
COST OF REVENUES (exclusive of
depreciation, shown below) 1,912,351 356,490 5,178,676 1,189,247
------------ ------------ ------------ ------------
GROSS PROFIT 4,962,384 3,812,584 14,563,012 11,420,112
------------ ------------ ------------ ------------
EXPENSES
Selling and marketing 1,684,349 978,803 5,177,541 3,150,690
General and administrative 4,193,310 2,357,744 11,851,544 7,074,416
Research and development 488,300 116,798 1,168,144 387,777
Amortization and depreciation 2,292,066 1,366,337 6,056,961 4,174,633
------------ ------------ ------------ ------------
8,658,025 4,819,682 24,254,190 14,787,516
------------ ------------ ------------ ------------
OPERATING LOSS (3,695,641) (1,007,098) (9,691,178) (3,367,404)
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 97,094 4,797 126,171 6,793
Interest and other expense (48,534) (1,248,366) (176,572) (2,600,355)
------------ ------------ ------------ ------------
48,560 (1,243,569) (50,401) (2,593,562)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX (3,647,081) (2,250,667) (9,741,579) (5,960,966)
Recovery of deferred income taxes 83,017 439,513 847,920 1,318,538
Other income tax (expense) recovery 9,713 14,837 (18,394) 13,675
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (3,554,351) $ (1,796,317) $ (8,912,053) $ (4,628,753)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 46,498,415 26,912,938 41,653,575 23,692,099
============ ============ ============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.08) $ (0.07) $ (0.21) $ (0.20)
============ ============ ============ ============
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 Nine Months Nine Months
Ended Ended Ended Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss for the period $ (3,554,351) $ (1,796,317) $ (8,912,053) $ (4,628,753)
Other comprehensive loss:
Cumulative translation
adjustment (net of tax of $0) (19,642) (111,508) 163,501 (125,190)
------------ ------------ ------------ ------------
Comprehensive loss for the period $ (3,573,993) $ (1,907,825) $ (8,748,552) $ (4,753,943)
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
4
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States dollars)
Nine Months Nine Months
Ended Ended
February 28, February 29,
2005 2004
------------ ------------
CASH FROM/(USED IN) OPERATING ACTIVITIES
Net loss for the period $ (8,912,053) $ (4,628,753)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 6,024,117 4,157,541
Non-cash interest on convertible notes and notes payable 53,746 2,407,326
Recovery of deferred income taxes (847,920) (1,318,538)
Gain on sale of capital asset -- (460)
Net change in operating components of working capital (1,282,786) (839,691)
------------ ------------
(4,964,896) (222,575)
------------ ------------
CASH (USED IN)/ FROM INVESTING ACTIVITIES
Proceeds from sale of capital asset 5,700 6,310
Acquisition of capital assets (279,729) (116,304)
Cash paid for business acquisitions (8,838,592) (522,019)
Increase in restricted cash (188,651) (1,516,884)
Sale / (purchase) of short term investments 92,589 (476,858)
------------ ------------
(9,208,683) (2,625,755)
------------ ------------
CASH FROM/(USED IN) FINANCING ACTIVITIES
Proceeds from exercise of options and warrants 1,075,637 33,333
Costs related to the registration and issuance of common stock (887,680) (604,917)
Proceeds from issuance of common stock 24,993,989 7,550,000
Shareholder loan repayment (442,497) (1,479,239)
Repayment of bank debt and capital leases (187,607) (72,085)
Line of credit, net activity 123,806 1,221,782
Repayment related to lease settlement -- (120,000)
Repayment of bridge loan (335,863) --
------------ ------------
24,339,785 6,528,874
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES 74,376 (129,432)
------------ ------------
INCREASE IN CASH AND
CASH EQUIVALENTS FOR THE PERIOD 10,240,582 3,551,112
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 4,338,466 255,173
------------ ------------
CASH AND CASH EQUIVALENTS, END OF
THE PERIOD $ 14,579,048 $ 3,806,285
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 107,270 $ 292,046
Increase in goodwill due to release of contingent
consideration common stock $ 2,302,111 --
Non-cash payments to consultants $ 250,000 $ 604,320
Conversion of notes to common shares -- $ 2,700,000
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 February 28, 2005, 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.
6
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments are stated at cost plus
accrued interest, which approximates fair value. Cash equivalents are defined as
highly liquid investments with terms to maturity at acquisition of three months
or less. Short-term investments are defined as highly liquid investments with
terms to maturity of one year or less. All cash equivalents and short-term
investments are classified as available for sale.
Investment Tax Credits
Investment tax credits, which are earned as a result of qualifying
research and development expenditures, are recognized when the expenditures are
made and their realization is reasonably assured and are applied to reduce the
related research and development capital costs and expenses in the year.
Capital Assets
Capital assets are recorded at cost. 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.
7
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met:
persuasive evidence of an agreement exists, the services have been provided, the
price is fixed and determinable and collection is reasonably assured.
Consequently, revenue is generally recognized as services are performed, which
is in accordance with SAB 104.
The Company's Enterprise Workforce Services revenue consists of
Recruitment Systems Services, Recruitment Services, Applicant Sourcing and
Exchange Services, Performance Management Services, Employee Portal Services,
Rewards Services and Resume Management software services.
The Company makes sales to Recruitment Systems Services and Performance
Management Systems Services' clients based on contracts typically for a one-year
term with automatic renewal. Clients are charged a monthly subscription fee for
concurrent user access licenses, career site hosting, on-line reporting and
other services. Revenue is recognized ratably over the contract period. The
Company recognizes revenue from the sale of software licenses in accordance with
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") No. 97-2 "Software Revenue Recognition", and SOP No. 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" when all of the following conditions are met: a signed contract or
purchase order exists; 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 gross revenue is recognized as the related award is
sold and shipped, title has transferred to the customer and collection is
reasonably assumed. For the Resume Management Services, the Company bills its
clients for job postings and matching of resumes per descriptions that the
client provides, or for quantity-based job posting packages. The revenue is
recognized when the service is provided.
8
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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 Nine Months Nine Months
Ended Ended Ended Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------------- ------------------ ---------------- -----------------
Weighted average
Risk free interest rates 3.74% 3.06% 3.62% 2.60%
Expected dividend yield 0% 0% 0% 0%
Weighted average
expected volatility 77% 81% 70% 105%
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.
9
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following reflects the impact on results of operations if the Company
had recorded additional compensation expense relating to the employee stock
options:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss, as reported $ (3,554,351) $ (1,796,317) $ (8,912,053) $ (4,628,753)
Estimated incremental share based
compensation expense (211,005) (99,177) (663,045) (381,820)
------------ ------------ ------------ ------------
Pro forma net loss $ (3,765,356) $ (1,895,494) $ (9,575,098) $ (5,010,573)
============ ============ ============ ============
Weighted average common shares
outstanding during the period 46,498,415 26,912,938 41,653,575 23,692,099
============ ============ ============ ============
Basic and diluted loss per share
As reported $ (0.08) $ (0.07) $ (0.21) $ (0.20)
============ ============ ============ ============
Proforma $ (0.08) $ (0.07) $ (0.23) $ (0.21)
============ ============ ============ ============
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
10
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Accounting
for Share-Based Payments ("SFAS 123R"). SFAS 123R requires that the compensation
cost relating to share-based payment transactions be recognized in financial
statements, with the cost measured based on the estimated fair value of the
equity or liability instruments issued. SFAS 123R is effective for interim and
annual periods beginning after June 15, 2005 and, accordingly, the Company will
adopt the new requirements beginning with our first quarter of fiscal 2006. SFAS
123R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123R replaces SFAS
123, Shares-Based Compensation, and supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees. The Company is currently assessing the impact of
adoption.
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.
The consolidated financial statements presented herein include the results
of operations of Peoplebonus from June 22, 2004.
11
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
============
Current assets $ 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.
In addition, the Company made cash payments in an amount equal to $2,051,120 to
meet some of Bravanta's obligations prior to the finalization of the asset
purchase agreement with Bravanta. Bravanta is a provider of enterprise incentive
and recognition programs. The primary reason for the Bravanta acquisition is
that it enables the Company to expand its customer base, expand rewards and
incentives products and services, and increase recurring revenues.
The consolidated financial statements presented herein include the results
of operations of Bravanta from July 28, 2004.
Management obtained an independent valuation of intangible assets acquired
and prepared a valuation of net tangible assets acquired. The excess of the
purchase price over the value of the net tangible and identifiable intangible
assets acquired has been allocated to goodwill.
12
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
============
13
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
============
14
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Acquisition of ProAct Technologies Corporation
On December 30, 2004, the Company 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 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. In addition, the Company issued
913,551 shares of common stock valued at $2,700,000, of which 253,764 shares are
being held in escrow as the exclusive source against which the Company may
assert most potential indemnification claims. The actual number of common shares
issued at closing was determined based on the average of the closing price of
the Company's common shares for the 20 business days prior to the closing date.
Under accounting principles generally accepted in the United States, the common
shares were valued at $2,822,873. ProAct is a provider of software and hosted
web-based tools for employee benefits management. The primary reason for the
ProAct acquisition is that it enables the Company to expand its customer base,
expand employee benefits management products and services, and increase
recurring revenue.
The consolidated financial statements presented herein include the results
of operations of ProAct from December 31, 2004.
Management obtained an independent valuation of the identifiable
intangible assets acquired. Management estimated the fair value of all other
assets. 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 $ 2,822,873
Cash consideration 5,500,000
Promissory note 1,530,000
Closing costs 128,800
------------
Total purchase costs $ 9,981,673
============
Current assets $ 1,442,695
Tangible long-term assets 298,858
Other assets 56,686
Current liabilities (1,457,896)
Intangible assets:
Customer relationship 1,717,000
Acquired technology 5,034,000
Goodwill 2,890,330
------------
Total net identifiable assets $ 9,981,673
============
Contingent consideration
As of February 28, 2005, a total of 358,304 common shares were held in
escrow relating to acquisitions as further described below. Of this total,
250,000 common shares relating to the Company's acquisition of Kadiri are
considered issuable as of February 28, 2005. The remaining 108,304 common shares
relate to the Company's acquisition of Peoplebonus.
15
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 was not required to issue the 323,625 common
shares held in escrow to the former shareholders of 6FigureJobs.com. Because the
escrowed shares were considered contingent 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 and December 2004,
350,000 shares valued at $864,500 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. In December 2004, 100,000 shares
valued at $281,000 that were held in escrow were released to former shareholders
of Kadiri. In January 2005, an additional 250,000 shares valued at $812,500 were
released after certain revenue and cash generation targets were achieved. As of
February 28, 2005, the remaining 250,000 shares are considered issuable as it
was determined that the revenue and cash generation targets for the quarter
ended February 28, 2005 were achieved. These shares will be released in April
2005.
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.
16
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information gives effect to
the significant acquisitions (Kadiri, Bravanta and ProAct) made subsequent to
May 31, 2003 by Workstream as if the transactions occurred as of June 1, 2003.
Nine Months Nine Months
Ended Ended
February 28, February 29,
2005 2004
------------ ------------
REVENUE
COST OF REVENUES (exclusive of $ 24,955,955 $ 25,124,796
Depreciation, shown below) 8,088,583 10,703,382
------------ ------------
GROSS PROFIT 16,867,372 14,421,414
------------ ------------
EXPENSES
Selling and marketing 6,350,429 9,392,636
General and administrative 13,991,643 12,133,780
Research and development 2,765,421 4,547,176
Amortization and depreciation 7,746,387 8,365,632
------------ ------------
30,853,880 34,439,224
------------ ------------
(13,986,508) (20,017,810)
OPERATING LOSS
------------ ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 126,171 14,777
Interest and other expense (437,828) (2,844,833)
------------ ------------
(311,657) (2,830,056)
------------ ------------
LOSS BEFORE INCOME TAX (14,298,165) (22,847,866)
Recovery of deferred income taxes 847,920 1,318,538
Current income tax (expense) recovery (18,394) 13,675
------------ ------------
NET LOSS FOR THE PERIOD $(13,468,639) $(21,515,653)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 43,310,580 32,592,807
============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.31) $ (0.66)
============ ============
17
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5: RESTRICTED CASH AND SHORT-TERM INVESTMENTS
The following is a summary of the Company's restricted cash and short-term
investments:
February 28, 2005 May 31, 2004
-------------------------------------
Restricted cash $ 3,104,174 $ 2,760,259
Short-term investments $ 323,832 $ 301,194
Restricted cash is held in reserve deposits to support the current credit
card activity, the Company's line of credit and certain lease agreements. The
Company's customer credit card accounts, its line of credit and its facility
leases 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
February 28, 2005 May 31, 2004
-----------------------------------
Balance at beginning of the period $ 21,509 $ 55,828
Charged to costs and expenses 76,088 55,966
Write-offs and effect of exchange rate (15,202) (90,285)
---------------------------------
Balance at end of the period $ 82,395 $ 21,509
=================================
NOTE 7: CAPITAL ASSETS
Property and equipment consists of the following:
February 28, 2005 May 31, 2004
----------------------------- -----------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
----------------------------- -----------------------------
Furniture, equipment
and leasehold improvements $ 1,717,222 $ 927,507 $ 1,393,844 $ 695,967
Office equipment 310,572 264,100 293,814 226,992
Computers and software 4,752,949 4,155,281 4,049,582 3,385,138
----------------------------- -----------------------------
6,780,743 $ 5,346,888 5,737,240 $ 4,308,097
----------------------------- -----------------------------
Less accumulated depreciation (5,346,888) (4,308,097)
------------ ------------
Net capital assets $ 1,433,855 $ 1,429,143
============ ============
18
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8: ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets consists of the following:
February 28, 2005 May 31, 2004
----------------------------- -----------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
----------------------------- -----------------------------
Customer base $ 7,544,566 $ 3,935,276 $ 4,186,182 $ 2,930,512
Acquired technologies 21,577,446 11,070,161 14,513,943 6,950,270
Trademarks, domain names and
intellectual property 1,322,760 431,400 677,760 254,486
----------------------------- -----------------------------
30,444,772 $ 15,436,837 19,377,885 $ 10,135,268
----------------------------- -----------------------------
Less accumulated amortization (15,436,837) (10,135,268)
------------ ------------
Net acquired intangible assets $ 15,007,935 $ 9,242,617
============ ============
Amortization of intangible assets was $2,029,809 and $1,231,472 for the
quarters ended February 28, 2005 and February 29, 2004, respectively.
Amortization of intangible assets was $5,301,569 and $3,636,090 for the nine
months ended February 28, 2005 and February 29, 2004, respectively. The
estimated amortization expense related to intangible assets in existence as of
February 28, 2005 over the next fiscal periods is as follows:
Remainder of fiscal 2005: $ 2,217,336
Fiscal 2006: 5,768,091
Fiscal 2007: 5,064,994
Fiscal 2008: 1,763,014
Fiscal 2009: 173,000
Fiscal 2010: 21,500
-----------
$15,007,935
===========
19
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 10,222,818 -- 10,222,818
Contingent consideration 2,766,416 -- 2,766,416
Purchase price allocation adjustments
made within one year
of acquisition date 385,641 -- 385,641
--------------------------------------------
Goodwill at February 28, 2005 $ 34,160,244 $ 7,813,337 $ 41,973,581
============================================
NOTE 10: LINES OF CREDIT
At February 28, 2005 and May 31, 2004, the Company had an aggregate of
$2,304,693 and $1,972,218, respectively, outstanding on a line of credit from
the Bank of Montreal ("BMO").
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 $2,842,840 as of February 28,
2005. The Company has provided collateral of CDN $3,000,000, leaving CDN
$157,160 available to be drawn on this line.
As of February 28, 2005 and May 31, 2004, a total of $3,104,174 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:
February 28, 2005 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 credit card 2,826,794 2,482,879
--------------------------------
$ 3,104,174 $ 2,760,259
================================
20
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11: LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
February 28, 2005 May 31, 2004
-----------------------------------
Term loan $ 70,254 $ 85,561
Note payable 1,530,000 --
Settlement agreement payable 157,500 --
--------------------------------
1,757,754 85,561
Less: current portion 1,664,425 29,335
--------------------------------
$ 93,329 $ 56,226
================================
Term loan 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.
The note payable represents a portion of the total consideration for the
acquisition of ProAct. The note accrues interest at an annual rate of 6% with
principal and interest due on June 1, 2005 and is collateralized by the assets
acquired by the Company from ProAct.
As of February 28, 2005, the maturities for long-term obligations are as
follows:
Remainder of fiscal 2005: $ 33,606
Fiscal 2006: 1,664,425
Fiscal 2007: 59,723
-----------
$ 1,757,754
===========
NOTE 12: RELATED PARTY OBLIGATIONS
Related party obligations consist of the following:
February 28, 2005 May 31, 2004
-----------------------------------
Note payable $ 24,672 $ --
Shareholder loans -- 317,626
--------------------------------
24,672 317,626
Less: current portion 24,672 170,369
--------------------------------
$ -- $ 147,257
================================
21
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of February 28, 2005, 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
February 28, 2005, 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:
February 28, 2005 May 31, 2004
-----------------------------------
Capital leases $ 35,107 $ 85,533
Less: current portion 35,107 54,003
------------ ------------
$ -- $ 31,530
============ ============
Capital lease obligations relate to office equipment, computers and
software and bear interest at rates that range from 12.8% to 15.1% 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 was 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 was not required to issue the 323,625 common shares held in escrow
to the former shareholders of 6FigureJobs.com. 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.
22
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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.
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 48,201,106 common shares outstanding as of February 28,2005
(May 31, 2004 - 33,574,883). As of February 28, 2005, an additional 358,304
shares were being held in escrow for contingent considerations as a result of
the terms of acquisitions (see note 4). These shares are to be released from
escrow if certain revenue, profit, and/or cash generation targets are achieved.
The periods covered by the escrow agreements extend until November 30, 2005. As
of February 28, 2005, 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 partial 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 July and December 2004, 350,000 shares valued at $864,500 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.
23
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 partial consideration for the
sale, the Company issued 2,672,064 common shares with an aggregate value of
$7,107,693. In January 2005, the Company released 400,000 of the issued shares
that were being held in escrow to cover indemnity obligations covering breaches
of representations and warranties contained in the merger agreement.
In July 2004, 92,891 common shares valued at $230,000 were issued to the
former shareholders of Trimbus, Inc., a company acquired by Kadiri prior to the
Company's acquisition of Kadiri. The shares were issued as fulfillment for
Kadiri's commitment to Trimbus per their original acquisition agreement.
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.
In December 2004, the Company issued an aggregate of 4,996,667 common
shares at $3.00 per common share and warrants to purchase 2,498,333 common
shares at an exercise price of $3.50 per share to institutional and other
accredited investors in a private placement resulting in aggregate proceeds of
$14,994,001. The fair value of the warrants was estimated using the
Black-Scholes pricing model and was determined to be $4,262,052. The assumptions
used were as follows: risk free interest rate of 3.36%, expected dividend yield
of 0%, expected volatility of 85%, and expected life of 4 years. In connection
with the issuance of the common shares, the Company paid commissions to a
placement agent in the amount of $700,000. The proceeds from the sale will be
used for working capital and future acquisitions.
In December 2004, the Company acquired certain assets of ProAct
Technologies Corporation, a provider of software and hosted web-based tools for
employee benefits management. As consideration for the sale, the Company issued
913,551 shares of common stock valued at $2,700,000, of which 253,764 shares are
being held in escrow as the exclusive source against which the Company may
assert most potential indemnification claims.
In December 2004, the Company released 100,000 shares of common stock
valued at $281,000, from escrow to the former shareholders of Kadiri after the
indemnification period expired.
In January 2005, 250,000 common shares valued at $812,500 were released
from escrow to the former shareholders of Kadiri as certain revenue and cash
generation targets were achieved.
As of February 28, 2005, 250,000 common shares held in escrow valued at
$1,172,500 were considered issuable to the former shareholders of Kadiri as
certain revenue and cash generation targets were achieved. These shares will be
released in April 2005.
24
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 nine month periods ended February 28,
2005 and February 29, 2004.
BUSINESS SEGMENT
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
------------------------------------------------------
THREE MONTHS ENDED
FEBRUARY 28, 2005
Revenue $ 5,988,048 $ 886,687 $ 6,874,735
Expenses 9,377,048 1,181,828 10,558,876
------------------------------------------------------
Business segment loss $ (3,389,000) $ (295,141) (3,684,141)
=================================
Corporate overhead, other revenues
And expenses 129,790
------------
Net loss $ (3,554,351)
============
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
------------------------------------------------------
NINE MONTHS ENDED
FEBRUARY 28, 2005
Revenue $ 16,039,140 $ 3,702,548 $ 19,741,688
Expenses 24,938,769 4,483,175 29,421,944
------------------------------------------------------
Business segment loss $ (8,899,629) $ (780,627) (9,680,256)
=================================
Corporate overhead, other revenues
And expenses 768,203
------------
Net loss $ (8,912,053)
============
25
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
------------------------------------------------------
AS AT FEBRUARY 28, 2005
Business segment assets $ 8,536,921 $ 327,833 $ 8,864,754
Intangible assets 14,922,935 85,000 15,007,935
Goodwill 34,160,243 7,813,338 41,973,581
------------------------------------------------------
$ 57,620,099 $ 8,226,171 65,846,270
=================================
Assets not allocated to business segments 14,883,044
------------
Total assets $ 80,729,314
============
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
------------------------------------------------------
THREE MONTHS ENDED
FEBRUARY 29, 2004
Revenue $ 2,638,645 $ 1,530,429 $ 4,169,074
Expenses 3,392,615 1,783,361 5,175,976
------------------------------------------------------
Business segment loss $ (753,970) $ (252,932) (1,006,902)
=================================
Corporate overhead, other revenues
And expenses (789,415)
------------
Net loss $ (1,796,317)
============
26
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
------------------------------------------------------
NINE MONTHS ENDED
FEBRUARY 29, 2004
Revenue $ 7,949,618 $ 4,659,741 $ 12,609,359
Expenses 10,575,770 5,400,456 15,976,226
------------------------------------------------------
Business segment loss $ (2,626,152) $ (740,715) (3,366,867)
=================================
Corporate overhead, other revenues
And expenses (1,261,886)
------------
Net loss $ (4,628,753)
============
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
============
27
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
GEOGRAPHY
CANADA USA TOTAL
------------------------------------------------------
THREE MONTHS ENDED
FEBRUARY 28, 2005
Revenue $ 558,608 $ 6,316,127 $ 6,874,735
Expenses 634,691 9,935,685 10,570,376
------------ ------------ ------------
Geographical loss $ (76,083) $ (3,619,558) (3,695,641)
============ ============
Other revenues and expenses 141,290
------------
Net loss $ (3,554,351)
============
CANADA USA TOTAL
------------------------------------------------------
NINE MONTHS ENDED
FEBRUARY 28, 2005
Revenue $ 1,644,678 $ 18,097,010 $ 19,741,688
Expenses 1,855,651 27,577,215 29,432,866
------------ ------------ ------------
Geographical loss $ (210,973) $ (9,480,205) (9,691,178)
============ ============
Other revenues and expenses 779,125
------------
Net loss $ (8,912,053)
============
CANADA USA TOTAL
------------------------------------------------------
AS AT FEBRUARY 28, 2005
Geographic segment assets $ 4,247,746 $ 76,481,568 $ 80,729,314
============ ============ ============
28
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CANADA USA TOTAL
------------------------------------------------------
THREE MONTHS ENDED
FEBRUARY 29, 2004
Revenue $ 588,866 $ 3,580,208 $ 4,169,074
Expenses 508,538 4,667,634 5,176,172
------------ ------------ ------------
Geographical loss $ 80,328 $ (1,087,426) (1,007,098)
============ ============
Other revenues and expenses (789,219)
------------
Net loss $ (1,796,317)
============
CANADA USA TOTAL
------------------------------------------------------
NINE MONTHS ENDED
FEBRUARY 29, 2004
Revenue $ 1,529,726 $ 11,079,633 $ 12,609,359
Expenses 1,667,988 14,308,774 15,976,762
------------ ------------ ------------
Geographical loss $ (138,262) $ (3,229,141) (3,367,403)
============ ============
Other revenues and expenses (1,261,350)
------------
Net loss $ (4,628,753)
============
CANADA USA TOTAL
------------------------------------------------------
AS AT MAY 31, 2004
Geographic segment assets $ 5,310,040 $ 43,572,407 $ 48,882,447
============ ============ ============
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:
February 28, 2005
-----------------
Stock options 2,619,234
Escrowed shares 358,304
Warrants issued to investors 2,631,667
Warrants issued with convertible notes 400,000
Warrants issued to private placement agents 312,500
Warrants issued to consultant 80,000
Warrants issued through acquisition 50,000
Warrants issued to underwriters 440,000
-----------------
Potential increase in number of shares
from dilutive instruments 6,891,705
=================
29
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 19: SUBSEQUENT EVENTS
On April 4, 2005, the Company announced the resignation of the Chief
Financial Officer effective April 15, 2005. On April 4, 2005, the Company
entered into an employment agreement with the new Chief Financial Officer/Chief
Operating Officer.
30
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
nine month period ended February 28, 2005. 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 significant 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, benefits administration,
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 nine months of
fiscal 2005, we completed the acquisitions of Peoplebonus, Bravanta, HRSoft and
ProAct. 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 do not assess the impact of individual acquisitions on
earning trends.
31
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 nine months ended February 28, 2005 and for
the nine months ended February 29, 2004. These pro forma results assume that the
significant acquisitions (Kadiri, Bravanta and ProAct) 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.
32
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.
33
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The table below sets forth pro forma results and the percentage difference
between the nine months ended February 28, 2005 and the nine months ended
February 29, 2004, assuming that the Kadiri, Bravanta and ProAct acquisitions
were acquired as of June 1, 2003.
%
2005 2004 Variance change
------------ ------------ ------------ ------
REVENUE $ 24,955,955 $ 25,124,796 $ (168,841) -1%
COST OF REVENUES (exclusive of
depreciation, shown below) 8,088,583 10,703,382 (2,614,799) -24%
------------ ------------ ------------
GROSS PROFIT 16,867,372 14,421,414 2,445,958 17%
------------ ------------ ------------
EXPENSES
Selling and marketing 6,350,429 9,392,636 (3,042,207) -32%
General and administrative 13,991,643 12,133,780 1,857,863 15%
Research and development 2,765,421 4,547,176 (1,781,755) -39%
Amortization and depreciation 7,746,387 8,365,632 (619,245) -7%
------------ ------------ ------------
30,853,880 34,439,224 (3,585,344) -10%
------------ ------------ ------------
OPERATING LOSS (13,986,508) (20,017,810) 6,031,302 -30%
------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 126,171 14,777 111,394 754%
Interest and other expense (437,828) (2,844,833) 2,407,005 -85%
------------ ------------ ------------
(311,657) (2,830,056) 2,518,399 -89%
------------ ------------ ------------
LOSS BEFORE INCOME TAX (14,298,165) (22,847,866) 8,549,701 -37%
Recovery of deferred income taxes 847,920 1,318,538 (470,618) -36%
Current income tax (expense) recovery (18,394) 13,675 (32,069) -235%
------------ ------------ ------------
NET LOSS FOR THE PERIOD $(13,468,639) $(21,515,653) $ (8,047,014) -37%
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 43,310,580 32,592,807
============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.31) $ (0.66)
============ ============
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 nine months ended February 28,
2005, operating expenses of non-acquired operations declined $1,167,091 or 8%
compared to the nine months ended February 29, 2004.
34
REVENUES
Consolidated revenues were $6,874,735 for the three months ended February
28, 2005 ("third quarter 2005") compared to $4,169,074 for the three months
ended February 29, 2004 ("third quarter 2004"), an increase of $2,705,661 or
65%. Revenues from Peopleview, Kadiri, Peoplebonus, Bravanta, HRSoft and ProAct
("companies acquired subsequent to third quarter 2004") represented $3,496,814
for the third quarter 2005. Revenues from all other companies ("existing
companies") declined 19% to $3,377,921 in third quarter 2005 from $4,169,074 in
third quarter 2004. This decrease was primarily due to a decrease in Career
Transition Services revenues as management focuses on improving earnings using a
smaller workforce consolidated into fewer locations.
Career Transition Service revenues for third quarter 2005 were $886,687
compared to $1,530,429 in third quarter 2004, a decrease of $643,742 or 42%. The
primary reason for the decrease is discussed in the previous paragraph.
Enterprise Workforce Solutions revenues for third quarter 2005 were
$5,988,048 compared to $2,638,645 for third quarter 2004, an increase of
$3,349,403 or 127%. $3,496,814 of revenues for third quarter 2005 were
contributed by the companies acquired subsequent to third quarter 2004.
Consolidated revenues were $19,741,688 for the nine months ended February
28, 2005 compared to $12,609,359 for the nine months ended February 29, 2004, an
increase of $7,132,329 or 57%. Revenues from companies that we acquired
subsequent to third quarter 2004 represented $8,313,691 for the nine months
ended February 28, 2005. Revenues from existing companies declined $1,181,362 or
9% to $11,427,997 in the nine months ended February 28, 2005 from $12,609,359
for the nine months ended February 29, 2004. This decrease was primarily due to
a decrease in Career Transition Services revenues due to the closure of several
offices in an effort to consolidate the workforce into fewer locations, and
management focusing on higher earnings with this smaller workforce.
Career Transition Service revenues for the nine months ended February 28,
2005 were $3,702,548 compared to $4,659,741 for the nine months ended February
29, 2004, a decrease of $957,193 or 21%. The primary reason for the decrease is
discussed in the previous paragraphs.
Enterprise Workforce Solutions revenues for the nine months ended February
28, 2005 were $16,039,140 compared to $7,949,618 for the nine months ended
February 29, 2004, an increase of $8,089,522 or 102%. $8,313,691 of revenues for
the nine months ended February 28, 2005 were contributed by the companies
acquired subsequent to third 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 nine months ended February 28, 2005 were
$24,955,955 compared to $25,124,796, a decrease of $168,841 or less than 1%.
During third quarter 2005, the amount of sales per average number of
employees increased to $30,285 compared to $23,162 for third quarter 2004. We
believe that the increase is due to improved efficiencies and the elimination of
redundant positions.
By the end of third quarter 2005, the total number of clients for our
software services, consisting of our recruitment systems, benefit
administration, performance management, resume management, reward services and
employee portal was 46% higher than at the end of third 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 2% for
the third quarter 2005 compared to the third quarter 2004. This decrease was due
to a shift in focus to clients that provide higher revenue per posting. At the
end of third quarter 2005, the total number of clients for our Career Transition
Services decreased 50% since the end of the third quarter 2004. This decrease is
consistent with the decrease in Career Transition Services revenue for third
quarter 2005 due to the closure of several offices in an effort to consolidate
the workforce into fewer locations and focus on higher earnings with this
smaller workforce.
35
By the end of third quarter 2005, our revenue per average number of
clients for our software services increased 88% since the end of third quarter
2004 mainly due to the high revenue clients associated with some of the
companies acquired subsequent to third quarter 2004, primarily Kadiri, Bravanta
and ProAct. Our revenue per client for our Career Transition Services increased
1% during third quarter 2005 compared to third 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.
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 February 28, 2005 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 third quarter 2005 were $1,912,351 compared to
$356,490 for third quarter 2005, an increase of $1,555,861 or 436%. Career
Transition Service cost of revenues accounted for $134,149 and Enterprise
Workforce Services cost of revenues accounted for $1,778,202 of the total cost
of revenues for third quarter 2005. Career Transition Service cost of revenues
accounted for $192,659 and Enterprise Workforce Services cost of revenues
accounted for $163,831 of the total cost of revenues for third quarter 2004.
Cost of revenues in the Enterprise Workforce Services segment during third
quarter 2005 increased $1,614,372 from third quarter 2004 as a result of
additional costs of revenues of $1,632,278 incurred in connection with the
companies we acquired subsequent to third quarter 2004. Cost of revenues for the
Career Transition Services segment during third quarter 2005 decreased $58,509
from third quarter 2004 as a result of lower revenues.
Cost of revenues for the nine months ended February 28, 2005 were
$5,178,676 compared to $1,189,247 for the nine months ended February 29, 2004,
an increase of $3,989,429 or 336%. Career Transition Service cost of revenues
accounted for $438,834 and Enterprise Workforce Services cost of revenues
accounted for $4,739,842 of the total cost of revenues for the nine months ended
February 28, 2005. Career Transition Service cost of revenues accounted for
$556,008 and Enterprise Workforce Services cost of revenues accounted for
$633,239 of the total cost of revenues for the nine months ended February 28,
2005. Cost of revenues for the Career Transition Services segment decreased
$117,174 as a result of lower revenues. Cost of revenues for the Enterprise
Workforce Services increased $4,106,603 as a result of additional costs of
revenues of $4,237,813 incurred in connection with the companies acquired
subsequent to third quarter 2004.
Pro forma cost of revenues for the nine months ended February 28, 2005
were $8,088,583 compared to $10,703,382 for the nine months ended February 29,
2004, a decrease of $2,614,799 or 24%. The decrease is due to efforts to
eliminate redundant operations and costs and to pursue more profitable business
and changing marketing strategies.
36
GROSS PROFITS
Consolidated gross profits were $4,962,384 for third quarter 2005 or 72%
of revenues compared to $3,812,584 or 91% of revenues for second quarter 2004.
Career Transition Services gross profit was $752,538 or 85% of Career
Transition Service revenues for third quarter 2005 compared to $1,337,770 or 87%
of Career Transition Service revenues for third quarter 2004. Enterprise
Workforce Services gross profit was $4,209,846 or 70% of Enterprise Workforce
Services revenues for third quarter 2005 compared to $2,474,814 or 94% of
Enterprise Workforce Services revenue for third quarter 2004. The decrease in
the Enterprise Workforce Services gross profit as a percent of revenues is due
to the lower gross profit margins (53% of revenue) generated by the companies
that the Company acquired subsequent to third quarter 2004. Gross profit margins
for existing companies was 92% of revenues for third quarter 2005 compared to
91% for third quarter 2004.
Consolidated gross profits were $14,563,012 or 74% of revenues for the
nine months ended February 28, 2005 compared to $11,420,112 or 91% of revenues
for the nine months ended February 29, 2004. Career Transition Services gross
profit was $3,263,714 or 88% of Career Transition Services revenues and
Enterprise Workforce Services gross profit represented $11,299,298 or 70% of
Enterprise Workforce Services revenues for the nine months ended February 28,
2005. Career Transition Services gross profit was $4,103,734 or 88% of Career
Transition Services revenues and Enterprise Workforce Services gross profit
represented $7,316,378 or 92% of Enterprise Workforce Services revenues for the
nine months ended February 29, 2004. The decrease in the Enterprise Workforce
Services gross profit as a percent of revenues is due to the lower gross profit
margins (49% of revenue) generated by the companies that the Company acquired
subsequent to third quarter 2004. Gross profit margins for existing companies
was 92% of revenues for the nine months ended February 28, 2005 compared to 91%
for the nine months ended February 29, 2004. The improvement in gross profit for
existing companies was due to efforts to eliminate redundant operations and
costs and to pursue more profitable business by shifting to more profitable
products.
Pro forma gross profits for the nine months ended February 28, 2005 were
$16,867,372 or 68% of revenues, compared to $14,421,414 or 57% of revenues for
the nine months ended February 29, 2004. The improvement in the gross profit
percentage is due to the improvement in gross profit of existing companies as
explained above.
OPERATING EXPENSES
Total operating expenses were $8,658,025 for third quarter 2005, compared
to $4,819,682 for third quarter 2004, an increase of $3,838,343 or 80%.
Companies that we acquired subsequent to third quarter 2004 accounted for
$4,717,880 in total operating expenses. Operating expenses for existing
companies were $3,940,145 for third quarter 2005, representing an approximate
18% decline compared to third quarter 2004. The decline in operating expenses
for existing companies is primarily due to the lower amortization expense as
intangibles become fully amortized as well as the decrease in general and
administrative expenses as more corporate expenses are allocated to the acquired
entitites. In general, we believe that operating expenses 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 $24,254,190 for the nine months ended
February 28, 2005, compared to $14,787,516 for the nine months ended February
29, 2004, an increase of $9,466,674 or 64%. Companies that we acquired
subsequent to third quarter 2004 accounted for $10,633,766 in total operating
expenses. Operating expenses for existing companies were $13,620,424 for the
nine months ended February 28, 2005, representing an approximate 8% decrease
compared to the nine months ended February 29, 2004. The decline in operating
expenses for existing companies is primarily due to the lower amortization
expense as intangibles become fully amortized as well as the decrease in general
and administrative expenses as more corporate expenses are allocated to the
acquired entities. In addition, a decrease in occupancy expense due to the
closing of certain locations was offset by an increase in professional fees due
to the 6FigureJobs.com legal dispute.
37
Pro forma operating expenses were $30,853,880 for the nine months ended
February 28, 2005 compared to $34,439,224 for the nine months ended February 29,
2004, a decrease of $3,585,344 or 10%. The decrease is primarily due to the
reduction in research and development and selling and marketing activities and
efforts to reduce costs mainly in the form of employee costs.
SELLING AND MARKETING
Selling and marketing expenses were $1,684,349 for third quarter 2005
compared to $978,803 for third quarter 2004, an increase of $705,546 or 72%.
This increase is attributable primarily to selling and marketing expenses of
$602,572 incurred by the companies we acquired subsequent to third quarter 2004.
Selling and marketing expenses for existing companies increased $103,036
compared to third quarter 2004. This increase is primarily due to a $88,718 or
11% increase in employee costs, including commissions and bonuses.
Selling and marketing expenses were $5,177,541 for the nine months ended
February 28, 2005 compared to $3,150,690 for the nine months ended February 29,
2004, an increase of $2,026,851 or 64%. This increase is attributable primarily
to selling and marketing expenses of $1,704,505 incurred by the companies we
acquired subsequent to third quarter 2004. Selling and marketing expenses for
existing companies increased $322,346 compared to the nine months ended February
29, 2004. This increase is primarily due to an increase in employee costs of
$190,832 and an increase in trade show expenses of $57,089.
Pro forma selling and marketing expenses were $6,350,429 for the nine
months ended February 28, 2005 compared to $9,392,636 for the nine months ended
February 29, 2004, a decrease of $3,042,207 or 32%. 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 $4,193,310 for third quarter
2005, compared to $2,357,744 for third quarter 2004, an increase of $1,835,566
or 78%. The companies acquired subsequent to third quarter 2004 accounted for
$2,492,151 of general and administrative expenses during third quarter 2005,
primarily for employee costs, rent, travel and entertainment and consulting
fees. General and administrative expenses for existing companies decreased
$656,585. The decrease was due to a $823,117 decrease in the corporate general
and administrative expense allocation as more expenses are being allocated to
the acquired entities. This decrease was partially offset by a $216,305 increase
in employee costs. In general, we believe that general and administrative
expenses 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 $11,851,544 for the nine months
ended February 28, 2005, compared to $7,074,416 for the nine months ended
February 29, 2004, an increase of $4,777,128 or 68%. The companies acquired
subsequent to third quarter 2004 accounted for $5,353,037 of general and
administrative expenses during the nine months ended February 28, 2005,
primarily for employee costs, rent, travel and entertainment and consulting
fees. General and administrative expenses for existing companies decreased
$575,909. The decrease was due to a $1,663,698 decrease in the corporate general
and administrative expense allocation as more expenses are being allocated to
the acquired entities and a $464,055 decrease in occupancy expense as the
workforce is being consolidated into fewer locations. This decrease was
partially offset by a $460,860 increase in employee costs primarily as a result
of an increase in personnel at our headquarters in Ottawa, Canada, which is a
corporate support function. In addition, professional fees increased $511,742
due to the 6FigureJobs.com legal dispute and settlement.
Pro forma general and administrative expenses were $13,991,643 for the
nine months ended February 28, 2005 compared to $12,133,780 for the nine months
ended February 29, 2004, an increase of $1,857,863 or 15%. 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.
38
RESEARCH AND DEVELOPMENT
Research and development costs were $488,300 for third quarter 2005
compared to $116,798 for third quarter 2004, an increase of $371,502 or 318%.
$396,676 of the research and development costs incurred in third quarter 2005
was attributable to the companies acquired subsequent to third quarter 2004.
Research and development costs for existing companies declined $25,174. 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 $1,168,144 for the nine months ended
February 28, 2005 compared to $387,777 for the nine months ended February 29,
2004, an increase of $780,367 or 201%. $1,027,415 of the research and
development costs incurred during the nine months ended February 28, 2005 was
attributable to the companies acquired subsequent to third quarter 2004.
Research and development costs for existing companies declined $247,048. The
previous paragraph discusses our strategy with regards to research and
development.
Pro forma research and development costs were $2,765,421 for the nine
months ended February 28, 2005 compared to $4,547,176 for the nine months ended
February 29, 2004, a decrease of $1,781,755 or 39%. The decrease in pro forma
research and development costs is due mainly to a decrease in research and
development employee costs as a result of reduction in personnel in efforts to
reduce costs and consolidate operations.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense was $2,292,066 for third quarter
2005, compared to $1,366,337 for third quarter 2004, an increase of $925,729 or
68%. Companies we acquired subsequent to third quarter 2004 incurred $1,230,222
of depreciation and amortization expense. Amortization and depreciation expense
for existing companies decreased $304,492 due primarily to certain capital and
intangible assets becoming fully depreciated and amortized. Amortization and
depreciation expense for the Enterprise Workforce Services segment increased
$986,872 primarily as a result of the increase in amortization due to the
companies acquired subsequent to third quarter 2004. In third quarter 2005, the
Career Transition Services segment amortization and depreciation expense
decreased by $61,142. During third quarter 2005 through the acquisition of
ProAct, we acquired capital assets of $298,858 and identifiable intangible
assets of $6,751,000. 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 $6,056,961 for the nine months
ended February 28, 2005, compared to $4,174,633 for the nine months ended
February 29, 2004, an increase of $1,882,328 or 45%. Companies we acquired
subsequent to third quarter 2004 incurred $2,548,809 of depreciation and
amortization expense. Amortization and depreciation expense for existing
companies decreased $666,480 due primarily to certain capital and intangible
assets becoming fully depreciated and amortized. Amortization and depreciation
expense for the Enterprise Workforce Services segment increased $2,028,602
primarily as a result of the increase in amortization due to the companies
acquired subsequent to third quarter 2004. During the nine months ended February
28, 2005, the Career Transition Services segment amortization and depreciation
expense decreased $145,933. During the nine months ended February 28, 2005
through the acquisitions of Bravanta, Peoplebonus, HRSoft and ProAct, we
acquired capital assets of $443,796 and identifiable intangible assets of
$11,089,330.
39
Pro forma amortization and depreciation expense were $7,746,387 for the
nine months ended February 28, 2005 compared to $8,365,632 for the nine months
ended February 29, 2004, a decrease of $619,245 or 7%. The decrease is due to
certain capital assets and identifiable intangible assets of existing entities
becoming fully depreciated.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $97,094 for third quarter 2005 compared to
$4,797 for third quarter 2004, an increase of $92,297. Interest and other income
was $126,171 for the nine months ended February 28, 2005, compared to $6,793 for
the nine months ended February 29, 2004, an increase of $119,378. The increase
in interest and other income during third quarter 2005 and the nine months ended
February 28, 2005 was due to higher interest-earning cash, short-term investment
and restricted cash balances compared to third quarter 2004 and the nine months
ended February 29, 2004.
Pro forma interest income and other income was $126,171 for the nine
months ended February 28, 2005 compared to $14,777 for the nine months ended
February 29, 2004, an increase of $111,394 or 754%. The increase in interest and
other income was due to higher interest-earning cash, short-term investment and
restricted cash balances as discussed in the previous paragraph.
INTEREST AND OTHER EXPENSE
Interest and other expense was $48,534 for third quarter 2005, compared to
$1,248,366 for third quarter 2004, a decrease of $1,199,832 or 96%. Interest
expense was $176,572 for the nine months ended February 28, 2005 compared to
$2,600,355 for the nine months ended February 29, 2004, a decrease of $2,423,783
or 93%. The reason for the decrease in interest and other expense was due to
expense incurred during the third quarter 2004 and the nine months ended
February 28, 2005 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 $437,828 for the nine months
ended February 28, 2005 compared to $2,844,833 for the nine months ended
February 29, 2004, a decrease of $2,407,005 or 85%. The decrease in interest and
other expense is due to the expense incurred in the nine months ended February
29, 2004 for the cessation of the amortization of the discount related to the 8%
Senior Subordinated Convertible notes, partially offset by interest expense
associated with issued warrants incurred by Bravanta in the nine months ended
February 29, 2004.
GOODWILL
Goodwill was $41,973,581 as of February 28, 2005 compared to $28,598,706
as of May 31, 2004, an increase of $13,374,875 or 47%. $7,332,488 of the
increase relates to the Bravanta acquisition completed during first quarter
2005, and $2,890,330 of the increase relates to the ProAct acquistion completed
during third quarter 2005. $2,532,111 of the increase represents additional
consideration issued to the former shareholders of Kadiri after the
indemnification period ended and after certain revenue and cash generation
targets were achieved. $234,305 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. The remaining $385,641 of the
increase relates to Kadiri purchase price allocation adjustments.
40
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 2005, we maintained $18,007,054, in cash and cash
equivalents, restricted cash and short-term investments and a working capital of
$9,577,822. The receipt of $10 million for the issuance of stock during first
quarter 2005 and an additional $15 million during third quarter 2005 improved
working capital. At the end of fiscal 2004, we acquired Kadiri, and during the
nine months ended February 28, 2005, we acquired Bravanta, Peoplebonus, HRSoft
and ProAct. As a result of these acquisitions, we assumed current liabilities
which exceeded acquired current assets by $559,773 as of the respective dates of
acquisition. In addition, we made cash payments of $2,051,120, $130,000,
$1,191,913 and $5,500,000 related to the Bravanta, Peoplebonus, HRSoft and
ProAct acquisitions, respectively.
At February 28, 2005, $3,104,174 of short-term investment balances was
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 February 28, 2005, $199,786 was held as guarantees by such
banks. These deposits are reviewed quarterly and may be returned to us or
increased based on the activity surrounding chargebacks and credit card usage.
We expect the level of chargebacks and credit card usage to remain consistent
with levels experienced in the past. Therefore, we believe that our reserve
deposits will not change significantly and will not impact our liquidity in a
material way. Additional deposits of $2,904,388 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 nine months ended February 28, 2005, cash used for operations
totaled $4,964,896, consisting primarily of the net loss for the period of
$8,912,053, cash used for working capital of $1,282,786, and the non-cash
recovery of deferred income taxes of $847,920 offset by non-cash expenses such
as amortization and depreciation of $6,024,117 and amortization of note
discounts of $53,746. Our acquisitions made from July 2001 through February 2005
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 nine months ended
February 28, 2005 was $9,208,683. Investing outflows consisted mainly of cash
paid for business acquisitions, net of cash acquired, of $8,838,592 for the
acquisitions made during the period and $279,729 used for the acquisition of
capital assets.
Net cash provided by financing activities was $24,993,989 for the nine
months ended February 28, 2005. In July 2004, we received $9,999,988 in exchange
for 4,444,439 shares of our common stock 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 December 2004, we received $14,994,001 in
exchange for 4,996,667 shares of our common stock and 2,498,333 warrants to
purchase our common stock at $3.50 per share. In addition, we received $868,313
in cash from institutional investors as a result of their exercise of warrants
to purchase our common stock and $207,324 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 $123,806. Financing outflows consisted primarily of the repayments
of shareholder notes of $442,497, 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 $887,680, and capital lease and debt payments of
$187,607.
41
We have had operating losses since our inception, and during the nine
months ended February 28, 2005, we continued to have operating losses as a
result of non-cash charges such as amortization and depreciation, and additional
expenses incurred by the acquisitions made subsequent to the third 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 nine 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 nine months
ended February 28, 2005 as a result of the funds we raised through the sale of
$25 million of our common shares in July and December 2004. We believe that our
liquidity ratio, which improved from 1.0 as of May 31, 2004 to 1.8 as of
February 28, 2005, and our debt to equity ratio, which decreased from .30 as of
May 31, 2004 to .19 as of February 28, 2005, due to the $25 million of common
shares sold in July and December 2004, reflect our increased financial strength.
Our Days of Sales Outstanding (DSO) for the month of February 2005 was 37
compared to 29 for May 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 February
28, 2006.
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 $2,842,840 on this facility as of February 28, 2005. We can draw an
additional CDN $157,160 before additional collateral would be required. We also
have a term loan with the bank in the amount of CND $86,658 as of February 28,
2005. 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.
42
The majority of our interest rates are variable, and, therefore, we have
exposure to risks associated with interest rate fluctuations. However,
management believes that the exposure is limited as the majority of the exposure
is related to the CDN $3,000,000 line of credit, which is fully collateralized
with our restricted cash and therefore can be liquidated immediately if faced
with a rising interest rate environment.
The impact on net interest income of a 100 basis point change in interest
rates for the quarter ended February 28, 2005 would have been less than $6,000.
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 $83,000 and a change in the reported net loss
for the nine months ended February 28, 2005 of approximately $3,000.
ITEM 4. CONTROLS AND PROCEDURES
As of February 28, 2005, 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 February 28, 2005 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 and December 2004, a total of 350,000 common shares, valued at
$864,500, 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.
43
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. In January 2005, the Company
released 400,000 of such shares, which were 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.
In December 2004, the Company issued an aggregate of 4,996,667 common
shares at $3.00 per common share to institutional and other accredited investors
in a private placement resulting in aggregate proceeds of $14,994,001. The
proceeds of 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.
In December 2004, the Company acquired certain assets of ProAct
Technologies Corporation, a provider of software and hosted web-based tools for
employee benefits management. As consideration for the sale, the Company issued
913,551 shares of common stock valued at $2,700,000, of which 253,764 shares are
being held in escrow. The issuance of the shares in the private placement was
exempt from registration under Rule 506 of the Securities Act of 1933.
In December 2004, the Company released 100,000 shares of common stock
valued at $281,000, from escrow to the former shareholders of Kadiri after the
indemnification period expired. The issuance of the shares in the private
placement was exempt from registration under Rule 506 of the Securities Act of
1933.
In January 2005, 250,000 common shares valued at $812,500 were released
from escrow to the former shareholders of Kadiri as certain revenue and cash
generation targets were achieved. The issuance of the shares in the private
placement was exempt from registration under Rule 506 of the Securities Act of
1933.
44
ITEM 6. EXHIBITS
Exhibit No. Description
31.1 Certification of Michael Mullarkey pursuant to
Rule 13a-14(a).
31.2 Certification of David Polansky pursuant to
Rule 13a-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: April 14, 2005 By: /s/ Michael Mullarkey
------------------------
Michael Mullarkey,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
DATE: April 14, 2005 By: /s/ David Polansky
---------------------
David Polansky,
Chief Financial Officer and Secretary
(Principal Financial Officer)
45