UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 001-15503
WORKSTREAM INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Canada N/A
- ------------------------------- -------------------------------
(State or Other Jurisdiction of (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
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes / / No /X/
As of January 6, 2003, there were 27,183,955* common shares, without
par value, outstanding.
* Excluding 654,204 common shares held in escrow under acquisition agreements.
WORKSTREAM INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Unaudited Financial Statements
Unaudited Consolidated Balance Sheets as of
November 30, 2003 and May 31, 2003...............................2
Unaudited Consolidated Statements of Operations for
each of the Three and Six Months Ended
November 30, 2003 and 2002.......................................3
Unaudited Consolidated Statements of Comprehensive Loss
for each of the Three and Six Months Ended
November 30, 2003 and 2002.......................................4
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended November 30, 2003 and 2002..............5
Notes to Unaudited Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........26
Item 4. Controls and Procedures.............................................26
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds.......................27
Item 4. Submission of Matters to a Vote of Security Holders.............27
Item 6. Exhibits and Reports on Form 8-K ...............................28
Signatures .............................................................................28
1
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
WORKSTREAM, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(UNITED STATES DOLLARS)
NOVEMBER 30, 2003 MAY 31, 2003
----------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 544,164 $ 255,173
Restricted cash 1,340,110 1,307,439
Short-term investments 49,505 38,419
Accounts receivable, net of allowance for doubtful 1,164,589 933,889
accounts of $125,022 (May 31, 2003 - $55,828)
Prepaid expenses 243,732 133,551
Other assets 143,317 201,877
------------ ------------
3,485,417 2,870,348
CAPITAL ASSETS 1,003,503 1,138,276
OTHER ASSETS 118,019 143,500
ACQUIRED INTANGIBLE ASSETS 7,316,176 9,082,926
GOODWILL 17,472,946 17,383,437
------------ ------------
$ 29,396,061 $ 30,618,487
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,160,617 $ 1,909,896
Accrued liabilities 964,279 1,093,133
Accrued exit costs -- 117,702
Line of credit 622,166 593,452
Accrued compensation 430,802 443,144
Current portion of convertible notes 904,272 449,071
Current portion of long-term obligations 30,787 31,662
Current portion of related party obligation 157,057 178,623
Current portion of capital lease obligations 59,072 97,882
Deferred revenue 1,352,906 1,367,362
------------ ------------
6,681,958 6,281,927
DEFERRED INCOME TAX LIABILITY 1,728,956 2,607,981
CAPITAL LEASE OBLIGATIONS 47,065 73,316
LEASEHOLD INDUCEMENTS 140,206 142,274
LONG-TERM OBLIGATIONS 76,969 85,243
RELATED PARTY OBLIGATIONS 2,407,140 2,403,407
------------ ------------
11,082,294 11,594,148
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding, no par value - 22,446,455
common shares (May 31, 2003 - 19,951,570) 48,798,714 47,158,583
Additional paid-in capital 5,216,931 4,721,516
Accumulated other comprehensive loss (906,998) (893,316)
Accumulated deficit (34,794,880) (31,962,444)
------------ ------------
18,313,767 19,024,339
------------ ------------
$ 29,396,061 $ 30,618,487
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
2
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNITED STATES DOLLARS)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUE $ 4,261,771 $ 4,975,429 $ 8,440,285 $ 9,621,143
COST OF REVENUES (exclusive of
depreciation, shown below) 389,407 1,018,725 832,757 1,897,722
------------ ------------ ------------ ------------
GROSS PROFIT 3,872,364 3,956,704 7,607,528 7,723,421
------------ ------------ ------------ ------------
EXPENSES
Selling and marketing 1,104,556 1,651,329 2,171,887 3,702,478
General and administrative 2,292,240 2,510,700 4,716,672 5,064,644
Research and development 159,951 412,339 270,979 720,579
Amortization and depreciation 1,403,860 1,742,119 2,808,296 2,998,485
------------ ------------ ------------ ------------
4,960,607 6,316,487 9,967,834 12,486,186
------------ ------------ ------------ ------------
OPERATING LOSS (1,088,243) (2,359,783) (2,360,306) (4,762,765)
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 299 23,595 1,996 36,527
Interest and other expense (432,324) (183,634) (1,351,989) (342,242)
------------ ------------ ------------ ------------
(432,025) (160,039) (1,349,993) (305,715)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX (1,520,268) (2,519,822) (3,710,299) (5,068,480)
Recovery of deferred income taxes 439,512 463,763 879,025 795,632
Other income taxes (2,121) -- (1,162) --
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (1,082,877) $ (2,056,059) $ (2,832,436) $ (4,272,848)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 22,407,020 18,582,012 22,090,479 17,783,387
============ ============ ============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.05) $ (0.11) $ (0.13) $ (0.24)
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
3
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNITED STATES DOLLARS)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss for the period $(1,082,877) $(2,056,059) $(2,832,436) $(4,272,848)
Other comprehensive loss:
Cumulative translation
adjustment (net of tax of $nil) (12,601) (4,143) (13,682) (5,791)
----------- ----------- ----------- -----------
Comprehensive loss for the period $(1,095,478) $(2,060,202) $(2,846,118) $(4,278,639)
=========== =========== =========== ===========
The accompanying notes are an integral part of these unaudited financial
statements.
4
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNITED STATES DOLLARS)
Six Months Ended November 30,
2003 2002
----------- -----------
CASH FROM/(USED IN) OPERATING ACTIVITIES
Net loss for the year $(2,832,436) $(4,272,848)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 2,797,833 2,987,448
Non-cash interest on convertible notes and notes payable 1,181,769 139,664
Recovery of deferred income taxes (879,025) (795,632)
Net change in operating components of working capital (65,811) (643,836)
----------- -----------
202,330 (2,585,204)
----------- -----------
CASH (USED IN)/ FROM INVESTING ACTIVITIES
Acquisition of capital assets (5,213) (18,839)
Cash (paid)/acquired in for business acquisitions (522,020) 1,921,028
Decrease/(increase) in restricted cash 9,701 (322,160)
(Purchase)/sale of short term investments (3,523) 296,181
----------- -----------
(521,055) 1,876,210
----------- -----------
CASH FROM/(USED IN) FINANCING ACTIVITIES
Proceeds from exercise of options 33,333 53,838
Costs related to issuance of convertible debt -- (82,197)
Costs related to the registration of common stock (22,919) --
Proceeds from share and warrants issuance 950,000 --
Capital lease payments (55,343) (230,036)
Shareholder loan repayment (138,838) (256,000)
Repayment of bank debt (138,813) (168,962)
Proceeds from bank financing 141,497 306,485
Repayment related to lease settlement (120,000) --
Long-term debt repayments (14,753) --
----------- -----------
634,164 (376,872)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES (26,448) (49,227)
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS FOR THE PERIOD 288,991 (1,135,093)
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 255,173 1,297,656
----------- -----------
CASH AND CASH EQUIVALENTS, END OF
THE PERIOD $ 544,164 $ 162,563
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 217,898 $ 223,485
Non-cash payments to consultants $ 330,180 --
The accompanying notes are an integral part of these unaudited financial
statements.
5
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: NATURE OF OPERATIONS
Workstream Inc. ("Workstream" or the "Company"), formerly known as
E-Cruiter.com Inc., is a provider of Web-enabled tools and professional services
for human capital management ("HCM"). The Company offers a diversified suite of
high-tech and high-touch services aimed at addressing the full life cycle of the
employer-employee relationship. Workstream's HCM technology backbone enables
companies to streamline the management of enterprise human processes, including
recruitment, assessment, retention, deployment and career transitions.
Note 2: BASIS OF PRESENTATION
The consolidated interim unaudited financial statements included
herein have been prepared by management, without audit, in accordance with
United States generally accepted accounting principles. All amounts presented in
these financial 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. As of November 30, 2003, the
Company's subsidiaries are Workstream USA, Inc., 3451615 Canada Inc., Paula
Allen Holdings, Inc. ("Paula Allen Holdings"), OMNIpartners, Inc.
("OMNIpartners"), RezLogic, Inc. ("Rezlogic"), 6FigureJobs.com, Inc.
("6FigureJobs.com"), Icarian, Inc. ("Icarian") and Xylo, Inc ("Xylo").
These unaudited financial statements should be read in conjunction
with the Company's most recent annual financial statements for the year ended
May 31, 2003. These interim unaudited financial statements are prepared
following accounting policies consistent with the Company's financial statements
for the year ended May 31, 2003. In management's opinion, all adjustments
necessary for a fair presentation are reflected in the interim periods
presented. All adjustments are of a normal, recurring nature.
Note 3: ACQUISITION TRANSACTIONS
Acquisition of Perform, Inc.
On September 11, 2003, the Company acquired certain assets of
Perform, Inc. ("Perform"), a Delaware corporation, in connection with Perform,
Inc.'s voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code. As consideration for the sale, the Company issued Perform
189,873 of its common shares valued at $300,000 and cash in an amount equal to
$450,000. In addition, the Company advanced $72,000 to Perform to fund its
operations prior to the finalization of the asset purchase agreement with
Perform. Perform designs, develops and markets Human Resource Information
Systems and Performance Management Information Systems for mid-size and Global
2000 companies.
The consolidated financial statements presented herein include the
results of operations of Perform from September 12, 2003.
Management prepared a valuation of the net tangible and intangible
assets acquired.
The purchase price has been allocated as follows:
Share consideration $300,000
Cash consideration 522,000
Acquisition costs 72,373
--------
894,373
--------
Current assets 2,500
Tangible long-term assets 232,362
Intangible assets:
Acquired technology 659,511
--------
Total net identifiable assets 894,373
--------
Goodwill $ 0
========
6
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Contingent consideration relating to prior acquisitions
As of November 30, 2003, a total of 654,204 common shares were held
in escrow relating to prior acquisitions as further described below. This total
consists of 323,625 common shares relating to the Company's acquisition of
6FigureJobs.com as well as 330,579 common shares relating to the Company's
acquisition of Xylo. Management believes that those issues related to the
6FigureJobs.com and Xylo acquisitions will not be released from escrow. In
addition to the escrowed shares, an estimated number of 316,456 common shares
are contingently issuable related to the PureCarbon acquisition, which
management believes will not be issued.
Pursuant to the purchase agreement with 6FiguresJobs.com, 323,625
common shares were to be released from escrow and issued 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. However, the
representative of the former shareholders of 6FigureJobs.com requested an audit
to review the Company's calculations used in determining that the revenue and
profit targets were not achieved. Management continues to believe that the
targets were not met and that the shares currently held in escrow will be
cancelled. The Company has been named as defendants in a lawsuit with regard to
the escrow shares filed by Christopher Miller, the representative of the former
shareholders of 6FigureJobs.com.
Pursuant to the purchase agreement with PureCarbon, the Company
would issue additional shares equal to $500,000 divided by the closing price of
the Company's common shares on or prior to August 15, 2003 should certain
revenue targets for the twelve month period ending June 30, 2003 be realized. As
required under the purchase agreement, an audit confirming whether the revenue
targets were met was required. The audit was completed in August 2003 and
confirmed that the targets were not met. Management therefore believes that
those common shares will not be issued. In October 2003, PureCarbon filed an
action with the Supreme Court of the State of New York seeking to compel
arbitration under the purchase agreement to determine whether the targets were
achieved. The Company filed a motion to dismiss the action. As of November 30,
2003, based on the market price on August 15, 2003 of $1.58, 316,456 common
shares would be contingently issuable. Subsequent to the quarter ended November
30, 2003, the Supreme Court of the State of New York dismissed PureCarbon's
action to compel arbitration.
Pursuant to the purchase agreement with Xylo, 330,579 common shares
were to be released from escrow subject to achievement of certain revenue
targets for the twelve months ended August 31, 2003. Management has determined
that the revenue targets were not met and believes that those common shares will
be cancelled. Management has notified the escrow agent and shareholder
representative that the revenue targets were not met, and pursuant to the
agreement, is allowing a response time to expire in order to cancel the shares.
7
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 4: ALLOWANCE FOR DOUBTFUL ACCOUNTS
November 30, 2003 May 31, 2003
----------------- ------------
Balance at beginning of year $ 55,828 $ 98,188
Charged to costs and expenses 72,633 186,581
Write-offs (3,439) (228,941)
--------- ---------
Balance at end of year $ 125,022 $ 55,828
========= =========
Note 5: CAPITAL ASSETS
November 30, 2003 May 31, 2003
----------------- ------------
Furniture, equipment and leaseholds $ 1,432,050 $ 1,388,873
Office equipment 250,128 241,659
Computers and software 3,821,435 3,461,678
----------- -----------
5,503,613 5,092,210
Less accumulated amortization (4,500,110) (3,953,934)
----------- -----------
Net capital assets $ 1,003,503 $ 1,138,276
=========== ===========
Note 6: ACQUIRED INTANGIBLE ASSETS
November 30, 2003 May 31, 2003
----------------- ------------
Customer contracts $ 3,533,182 $ 3,559,543
Acquired technologies 10,941,143 10,281,632
Trademarks, domain names and intellectual property 457,760 457,760
------------ ------------
Total cost 14,932,085 14,298,935
------------ ------------
Accumulated amortization:
Customer contracts (2,341,648) (1,760,860)
Acquired technologies (5,065,551) (3,292,215)
Trademarks, domain names and intellectual property (208,710) (162,934)
------------ ------------
Total accumulated amortization (7,615,909) (5,216,009)
------------ ------------
Net acquired intangible assets $ 7,316,176 $ 9,082,926
============ ============
8
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 7: GOODWILL
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
Goodwill at May 31, 2001 $ -- $ -- $ --
Acquisitions during the year 6,984,835 8,563,337 15,548,172
Impairment during the year (1,310,000) (1,500,000) (2,810,000)
------------ ------------ ------------
Goodwill at May 31, 2002 5,674,835 7,063,337 12,738,172
------------ ------------ ------------
Acquisitions during the year 6,028,507 -- 6,028,507
Issuance of contingent consideration -- 750,000 750,000
Impairment during the year (2,133,242) -- (2,133,242)
------------ ------------ ------------
Goodwill at May 31, 2003 9,570,100 7,813,337 17,383,437
------------ ------------ ------------
Purchase price allocation adjustments
made within one year of
acquisition date -- 89,509 89,509
------------ ------------ ------------
Goodwill at November 30, 2003 $ 9,570,100 $ 7,902,846 $ 17,472,946
============ ============ ============
Note 8: LINES OF CREDIT AND RESTRICTED CASH
At November 30, 2003, the Company had an aggregate of $622,166
outstanding on a line of credit from the Bank of Montreal.
November 30, 2003 May 31, 2003
----------------- ------------
Line of credit - Bank of Montreal $622,166 $593,452
======== ========
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) $1,000,000 against this facility based on compensating balances on
deposit with the bank. The Company has drawn CDN $812,707 as of November 30,
2003. The Company has provided collateral of CDN $830,000, leaving CDN $17,293
available to be drawn on this line.
At November 30, 2003, and May 31, 2003, a total of $1,340,110 and
$1,307,439, respectively, of cash and short-term deposits were pledged to the
institutions below as collateral for the line of credit, a term loan and a
letter of credit for a facility lease and therefore were restricted from the
Company's use:
November 30, 2003 May 31, 2003
----------------- ------------
Bank of America - credit card reserve $ 399,786 $ 399,786
Bank of Montreal - Term loan, line of credit and
letter of credit for facility lease 940,324 907,653
---------- ----------
$1,340,110 $1,307,439
========== ==========
9
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 9: CONVERTIBLE NOTES
November 30, 2003 May 31, 2003
----------------- ------------
Convertible notes, face value at issue date $ 2,900,000 $ 2,900,000
Less: Amount allocated to detachable warrants (1,038,380) (1,038,380)
Amount allocated to beneficial
conversion feature (1,763,387) (1,763,387)
----------- -----------
Discounted value of convertible notes 98,233 98,233
Note conversion (800,000) (200,000)
Amortization of discount 1,606,039 550,838
----------- -----------
Convertible notes $ 904,272 $ 449,071
=========== ===========
During fiscal 2002, the Company issued 8% Senior Subordinated
Convertible Notes (the "Convertible Notes") with detachable warrants as further
described below. The total gross proceeds received upon issuance of the
convertible notes totaling $2,900,000 was allocated between the convertible debt
and warrants based on their relative fair values. The fair value of the
detachable warrants was calculated using the Black Scholes pricing model.
Additionally, the Convertible Notes have a non-detachable conversion feature
where the fair value of the underlying equity securities exceeds the conversion
price of the debt ("beneficial conversion feature"). The value of the beneficial
conversion feature is measured as the excess of the fair value of the underlying
shares over the conversion price up to, but not exceeding, the net proceeds
received upon issuance of the Convertible Notes. The value ascribed to the
beneficial conversion feature is recorded as paid-in capital. The total discount
on the Convertible Notes is recognized as interest expense using the effective
yield method over the two year term to maturity of the Convertible Notes.
At the original date of issuance, the detachable warrants entitled
the Warrant holders to purchase 658,000 common shares at an exercise price of
$3.70 per share, subject to adjustment upon the occurrence of certain dilution
events. As a result of our sales of securities, as of November 30, 2003 the
Warrant holders are entitled to warrants to purchase 733,619 common shares at an
exercise price of $3.32 per share. The warrants have a five year term.
The Convertible Notes are convertible into a class of preferred
shares designated Class A Series A Preferred Shares, no par value per share (the
"Series A Shares"). The conversion price of the Convertible Notes into Series A
Shares is $100 per share, subject to adjustment upon the occurrence of certain
events. The Series A Shares are convertible into a number of common shares
determined by dividing $100 by a floating conversion price based on the market
price of our common shares, provided that the conversion price cannot exceed the
lesser of $0.75 or 80% of the market price of our common shares for the five day
period immediately preceding conversion. The conversion price for the Series A
Shares into common shares is subject to further adjustment upon the occurrence
of certain events. At the election of the holder, the Convertible Notes may be
converted directly into our common shares at a conversion price equal to 80% of
the average closing price of our common shares for the five day period before
such conversion.
During May 2003, the Company raised additional capital by issuing an
individual 266,666 common shares at $0.75 per share and warrants to purchase
133,333 common shares at an exercise price of $1.50 per share, subject to
adjustment upon the occurrence of certain events. In May 2003 and June 2003, the
Company also entered into agreements with an individual and two institutional
investors whereby the Company agreed to sell and they agreed to purchase an
aggregate of 1,266,668 common shares at $0.75 per share and warrants to purchase
an aggregate of 500,001 common shares at an exercise price of $1.50 per share,
subject to adjustment upon the occurrence of certain events. The closing on the
sale of these additional common shares and warrants occurred in June and July
2003. As a result of these sales, any future conversion of Series A Shares will
be made at a price per share not to exceed the lesser of $0.75 or 80% of the
market price of our common shares for the five day period immediately preceding
conversion.
10
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During fiscal year 2003, certain holders of the Company's
Convertible Notes exercised their option to convert a portion of the Convertible
Notes. This resulted in a conversion of $200,000 of the Convertible Notes into
Series A Shares, which were immediately converted into common shares. As a
result of the foregoing conversions, 210,525 common shares were issued at a
conversion price equal to 80% of the average market price of the Company's
common shares for the five days prior to conversion, resulting in a conversion
price of $0.95 per share.
In June 2003, certain holders of the Company's Convertible Notes
exercised their option to convert a portion of the Convertible Notes. This
resulted in a conversion of $600,000 of the Convertible Notes into Series A
Shares, which were immediately converted into common shares. As a result of the
foregoing conversions, 800,000 common shares were issued at a conversion price
of $0.75 per share.
In December 2003, certain holders of the Company's Convertible Notes
exercised their option to convert a portion of the Convertible Notes. This
resulted in a conversion of $337,500 of the Convertible Notes into Series A
Shares, which were immediately converted into common shares. As a result of the
foregoing conversions, 450,000 common shares were issued at a conversion price
equal to $0.75 per share.
In January 2004, the Company entered into an agreement with
Crestview Capital Fund L.P., Sands Brothers Venture Capital III LLC and their
respective affiliates to amend the Convertible Notes and the warrants to
purchase common shares that were issued in connection with the sale of the
Convertible Notes in April and May 2002 to Crestview Capital Fund L.P., Sands
Brothers Venture Capital III LLC and their respective affiliates. Under the
agreement, the holders of the Convertible Notes agreed that on January 12, 2004
the remaining outstanding balance of $1,762,500 of the Convertible Notes would
be automatically converted into a total of 1,174,999 common shares at a
conversion price of $1.50 per common share. In consideration for the noteholders
agreement to convert the Convertible Notes into common shares, the Company
agreed to reduce the exercise price on the warrants to purchase common shares
from $3.3186 per common share to an exercise price of $2.00 per common share.
Due to the conversion of the Convertible Notes subsequent to the end
of the quarter, the remaining unamortized discount as of November 30, 2003
related to the Convertible Notes will be charged as non-cash interest expense in
the third quarter.
NOTE 10: LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
November 30, 2003 May 31, 2003
----------------- ------------
Term loan $107,756 $116,905
Less: current portion 30,787 31,662
-------- --------
$ 76,969 $ 85,243
======== ========
Long-term obligations represents a five year term loan maturing in
May 2007 with monthly principal payments of CND $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 8.
11
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As at November 30, 2003 the maturities for long-term obligations are
as follows:
Last six months of fiscal year 2004 $ 15,395
Fiscal year 2005 30,787
Fiscal year 2006 30,787
Fiscal year 2007 30,787
--------
$107,756
========
Note 11: RELATED PARTY OBLIGATIONS
November 30, 2003 May 31, 2003
----------------- ------------
Note payable $ -- $ 33,838
Deferred compensation 883,334 797,880
Shareholder loans 1,680,863 1,750,312
---------- ----------
2,564,197 2,582,030
Less: current portion 157,057 178,623
---------- ----------
$2,407,140 $2,403,407
========== ==========
As of November 30, 2003, the note payable to a related party has
been paid in full. The note payable was non-interest bearing and repayable in
monthly installments of $10,200 beginning in October 2001 and ending in April
2003. As of May 31, 2003, the last three payments had not been made due to a
disagreement with the related party. This was subsequently resolved and the
final payments were made during the second quarter of fiscal 2004.
During fiscal 2003, Michael Mullarkey, the Company's Chief Executive
Officer, agreed to defer until after June 1, 2004, a total of $797,880 in
compensation earned as of May 31, 2003, as well as any additional compensation
earned thereafter, with interest accruing on the balance at a rate of 8.0% per
annum. The repayment date under the agreement is automatically extended each
month after June 1, 2004 for an additional month, which results in the amounts
continuing to remain due and outstanding for greater than 365 days. After June
1, 2004, Mr. Mullarkey and the Company will mutually agree on the repayment
terms of his deferred compensation. As of November 30, 2003, Mr. Mullarkey's
total deferred compensation was $883,334.
During fiscal years 2003 and 2002, the Company received $500,000 and
$750,000 respectively, in working capital loans from Mr. Mullarkey. These loans
accrued interest at 4.75%. In January 2003, the Company consolidated the loans
made by Mr. Mullarkey to the Company along with the interest accrued thereon
into a five year term loan. The consolidated term loan is collateralized by
certain inventory, equipment, accounts receivable and other assets. The
consolidated term loan balance at November 30, 2003 was $1,287,901 and bears
interest at 8% per annum. The Company is required to make monthly interest only
payments during the first 24 months and monthly interest and principal payments
beginning in January 2005. In December 2003 and January 2004, the loan and
accrued interest was paid in full (see Note 17: Subsequent Events). In addition,
Mr. Mullarkey has agreed to provide the Company with a $1,200,000 credit
facility bearing interest at 8% per annum. With respect to each draw against the
credit facility, the Company is required to make monthly interest only payments
during the first 24 months from the draw date and thereafter monthly interest
and principal payments over a three year period. The Company is allowed to draw
against this credit facility as needed.
12
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The balance of the shareholder loans consists of a term loan assumed
as part of the acquisition of Paula Allen Holdings which is non-interest bearing
and is 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 is charged to expense over the term to maturity.
Note 12: CAPITAL LEASE OBLIGATIONS
November 30, 2003 May 31, 2003
----------------- ------------
Capital leases $106,137 $171,198
Less: current portion 59,072 97,882
-------- --------
$ 47,065 $ 73,316
======== ========
Capital lease obligations relate to office equipment, computers and
software, and bear interest at rates that range from 7.5% to 32.2% per annum.
These leases mature at various times through October 2005.
Note 13: COMMON SHARES AND WARRANTS
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
Class A Series A Preferred Shares, no par value per share (the "Series A
Shares"). The Company has 22,446,455 shares that are outstanding as of November
30, 2003 (May 31, 2003 - 19,951,570). As of November 30, 2003, an additional
654,204 common shares were being held in escrow as a result of the terms of
acquisitions and an estimated 316,456 are contingently issuable related to the
PureCarbon acquisition (see note 3). As at November 30, 2003 there were no Class
A Preferred Shares or Series A Shares outstanding.
In June 2003, certain holders of the Company's 8% senior
Subordinated Convertible Notes exercised their option to convert a portion of
the Convertible Notes. This resulted in a conversion of $600,000 of the
Convertible Notes into Series A Convertible Preferred Shares, which were
immediately converted into common shares. As a result of the foregoing
conversions, 800,000 common shares were issued at a conversion price equal to
$0.75 per share.
In June 2003 and July 2003, the Company received $950,000 from an
individual and two institutional investors in exchange for the issuance of an
aggregate of 1,266,668 common shares at a purchase price equal to $0.75 per
share and warrants to purchase an aggregate of 500,001 common shares at an
exercise price of $1.50 per share, subject to adjustment upon the occurrence of
certain events. The proceeds from these funds will be used for potential
acquisitions and for working capital needs.
In June 2003, the Company entered into a consulting agreement with
Stern & Co. whereby the Company agreed to issue 125,000 common shares to Stern &
Co. in consideration of Stern & Co. providing consulting services to the
Company. Stern & Co. directed that the 125,000 common shares be issued in the
name of Shai Stern.
In June 2003, we entered into an agreement with The Research Works,
Inc. whereby the Company agreed to issue an aggregate of 107,000 common shares
to The Research Works, Inc. and certain individuals designated by The Research
Works, Inc. in consideration of The Research Works, Inc. providing certain
research services to the Company.
13
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In August 2003, a shareholder surrendered and the Company
subsequently cancelled 26,989 common shares as a reimbursement for legal fees
owed to the Company.
In September 2003, the Company acquired certain assets of Perform,
Inc., a Delaware corporation, in connection with Perform, Inc.'s voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. As
consideration for the sale, the Company issued Perform, Inc. 189,873 of its
common shares valued at $300,000 and cash in an amount equal to $450,000. In
addition, the Company advanced $72,000 to Perform, Inc. to fund its operations
prior to the finalization of the asset purchase agreement with Perform, Inc.
In October 2003, the Company issued 33,333 common shares to an
individual as a result of the individual's exercise of an option to purchase
33,333 common shares.
Note 14: SEGMENTED AND GEOGRAPHIC INFORMATION
The following is a summary of the Company's operations by business
segment and by geographic region for the three and six month periods ended
November 30, 2003 and November 30, 2002.
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
BUSINESS SEGMENT
THREE MONTHS ENDED
NOVEMBER 30, 2003
Revenue $ 2,638,160 $ 1,623,611 $ 4,261,771
Expenses 3,131,180 1,802,194 4,933,374
----------- ----------- -----------
Business segment loss $ (493,020) $ (178,583) (671,603)
=========== ===========
Corporate overhead, other revenues
And expenses (411,274)
-----------
Net loss $(1,082,877)
===========
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
SIX MONTHS ENDED
NOVEMBER 30, 2003
Revenue $ 5,310,973 $ 3,129,312 $ 8,440,285
Expenses 6,377,468 3,590,693 9,968,161
----------- ----------- -----------
Business segment loss $(1,066,495) $ (461,381) (1,527,876)
=========== ===========
Corporate overhead, other revenues
And expenses (1,304,560)
-----------
Net loss $(2,832,436)
===========
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
AS AT NOVEMBER 30, 2003
Business segment assets $ 3,401,617 $ 83,861 $ 3,485,478
Intangible assets 6,981,425 334,751 7,316,176
Goodwill 9,659,608 7,813,338 17,472,946
----------- ----------- -----------
$20,042,650 $ 8,231,950 28,274,600
=========== ===========
Assets not allocated to business
Segments 1,121,461
-----------
Total assets $29,396,061
===========
14
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
THREE MONTHS ENDED
NOVEMBER 30, 2002
Revenue $ 3,195,813 $ 1,779,616 $ 4,975,429
Expenses 4,095,516 2,094,185 6,189,701
----------- ----------- -----------
Business segment loss $ (899,703) $ (314,569) (1,214,272)
=========== ===========
Corporate overhead, other revenues
And expenses (841,787)
-----------
Net loss $(2,056,059)
===========
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
SIX MONTHS ENDED
NOVEMBER 30, 2002
Revenue $ 5,499,574 $ 4,121,569 $ 9,621,143
Expenses 7,694,406 4,596,981 12,291,387
------------ ------------ ------------
Business segment loss $ (2,194,832) $ (475,412) (2,670,244)
============ ============
Corporate overhead, other revenues
And expenses (1,602,604)
------------
Net loss $ (4,272,848)
============
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
AS AT NOVEMBER 30, 2002
Business segment assets $ 6,550,352 $ 439,356 $ 6,989,708
Intangible assets 10,946,660 650,490 11,597,150
Goodwill 11,783,375 7,073,084 18,856,459
----------- ----------- -----------
$29,280,387 $ 8,162,930 37,443,317
=========== ===========
Assets not allocated to business
Segments 1,297,387
-----------
Total assets $38,740,704
===========
15
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CANADA USA TOTAL
----------- ----------- -----------
GEOGRAPHY
THREE MONTHS ENDED
NOVEMBER 30, 2003
Revenue $ 496,490 $ 3,765,281 $ 4,261,771
Expenses 580,008 4,770,006 5,350,014
----------- ----------- -----------
Geographical loss $ (83,518) $(1,004,725) (1,088,243)
=========== ===========
Other revenues and expenses 5,366
-----------
Net loss $(1,082,877)
===========
CANADA USA TOTAL
----------- ----------- -----------
SIX MONTHS ENDED
NOVEMBER 30, 2003
Revenue $ 940,860 $ 7,499,425 $ 8,440,285
Expenses 1,159,450 9,641,140 10,800,590
------------ ------------ ------------
Geographical loss $ (218,590) $ (2,141,715) (2,360,305)
============ ============
Other revenues and expenses (472,131)
------------
Net loss $ (2,832,436)
============
CANADA USA TOTAL
----------- ----------- -----------
AS AT NOVEMBER 30, 2003
Geographic segment assets $ 1,781,309 $27,614,752 $29,396,061
=========== =========== ===========
16
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CANADA USA TOTAL
----------- ----------- -----------
THREE MONTHS ENDED
NOVEMBER 30, 2002
Revenue $ 636,431 $ 4,338,998 $ 4,975,429
Expenses 1,069,901 6,265,310 7,335,211
----------- ----------- -----------
Geographical loss $ (433,470) $(1,926,312) (2,359,782)
=========== ===========
Other revenues and expenses 303,723
-----------
Net loss $(2,056,059)
===========
CANADA USA TOTAL
----------- ----------- -----------
SIX MONTHS ENDED
NOVEMBER 30, 2002
Revenue $ 1,394,848 $ 8,226,295 $ 9,621,143
Expenses 2,153,826 12,230,083 14,383,909
------------ ------------ ------------
Geographical loss $ (758,978) $ (4,003,788) (4,762,766)
============ ============
Other revenues and expenses 489,918
------------
Net loss $ (4,272,848)
============
CANADA USA TOTAL
----------- ----------- -----------
AS AT NOVEMBER 30, 2002
Geographic segment assets $ 3,892,493 $34,848,211 $38,740,704
=========== =========== ===========
Note 15: EARNINGS PER SHARE
For all the periods presented, diluted net loss per share equals
basic net loss per share due to the antidilutive effect of employee stock
options, warrants and escrowed shares. The following outstanding instruments
could potentially dilute basic earnings per share in the future:
NOVEMBER 30, 2003
-----------------
Stock options 1,538,265
Escrowed shares 654,204
Convertible notes 2,800,000
PureCarbon contingent shares 316,456
Warrants issued to investors 633,334
Warrants issued with convertible notes 733,619
Underwriter warrants 440,000
---------
Potential increase in number of shares from
dilutive instruments 7,115,878
=========
The weighted average price of the options exercisable at November 30, 2003 was
$2.21 per common share.
17
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 16: STOCK BASED COMPENSATION PLANS
Pro forma information regarding compensation expense related to
employee stock options is required by SFAS No. 123 and SFAS No. 148, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of those statements. The fair value of options
granted was estimated at the date of grant using the Black Scholes option
pricing model with the following assumptions:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2003 2002 2003 2002
------------- ------------ ------------ -------------
Weighted average
Risk free interest rates 3.32% 3.07% 2.50% 3.08%
Expected dividend yield 0% 0% 0% 0%
Weighted average
expected volatility 105% 110% 115% 115%
Expected lives (in years) 3.5 3.5 3.5 3.5
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense ratably over the option's vesting period.
Because the determination of the fair value of all options is based on the
assumptions described in the preceding paragraph, and because additional option
grants are expected to be made in future periods, this pro forma information is
not likely to be representative of the pro forma effects on reported net income
or loss for future years.
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 Six Months Six Months
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss, as reported $ (1,082,877) $ (2,056,059) $ (2,832,436) $ (4,272,848)
Estimated incremental share based
compensation expense (net
of tax of $nil) (108,741) (149,441) (282,643) (399,133)
------------ ------------ ------------ ------------
Pro forma net loss $ (1,191,618) $ (2,205,500) $ (3,115,079) $ (4,671,981)
============ ============ ============ ============
Weighted average common shares
outstanding during the period 22,407,020 18,582,012 22,090,479 17,783,387
============ ============ ============ ============
Basic and diluted loss per share, as
Reported $ (0.05) $ (0.11) $ (0.13) $ (0.24)
============ ============ ============ ============
Pro forma basic and diluted loss
Per share $ (0.05) $ (0.12) $ (0.14) $ (0.26)
============ ============ ============ ============
18
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 17: SUBSEQUENT EVENTS
In December 2003, the Company issued an aggregate of 4,125,000
common shares at $1.60 per common share to institutional and other accredited
investors in a private placement offering resulting in aggregate proceeds of
approximately $6.6 million. The proceeds from the sale will be used to repay or
otherwise cause the satisfaction in full of the amounts outstanding under the
Company's Convertible Notes, to pay the expenses incurred in connection with the
issuance and for general working capital requirements. In connection with the
issuance of the 4,125,000 common shares, the Company paid commissions to
placement agents in an aggregate amount equal to $540,000, of which $100,000 was
paid in 62,500 common shares in lieu of cash. The Company also issued the
placement agents or their designee's warrants to purchase an aggregate of
412,500 common shares at an exercise price of $1.60 per share.
In December 2003, the Company issued to Legend Merchant Group a
warrant to purchase 50,000 common shares at an exercise price of $1.50 per
share, and a warrant to purchase an additional 50,000 common shares at an
exercise price of $1.75 per share. The warrants have a two year term. This
issuance of the warrants was made in exchange for business advisory services to
be provided over a period of 12 months by Legend Merchant Group to the Company.
In December 2003, certain holders of the Company's 8% Senior
Subordinated Convertible Notes exercised their option to convert a portion of
the Convertible Notes. This resulted in a conversion of $337,500 of the
Convertible Notes into Series A Convertible Preferred Shares which were
immediately converted into common shares. As a result of the foregoing
conversions, 450,000 common shares were issued at a conversion price equal to
$0.75 per share.
In December 2003, the Company issued 100,000 shares to Nathan Lowe
for consulting services provided to the Company.
In December 2003 and January 2004, the Company paid in full the
$1,287,901 note payable and accrued interest that was due to Michael Mullarkey,
the Company's Chief Executive Officer. Mr. Mullarkey has no obligation under
this term loan to advance the Company any additional funds.
In January 2004, the Company entered into an agreement with
Crestview Capital Fund L.P., Sands Brothers Venture Capital III LLC and their
respective affiliates to amend the Convertible Notes and the warrants to
purchase common shares that were issued in connection with the sale of the
Convertible Notes in April and May 2002 to Crestview Capital Fund L.P., Sands
Brothers Venture Capital III LLC and their respective affiliates. Under the
agreement, the holders of the Convertible Notes agreed that on January 12, 2004
the remaining outstanding balance of $1,762,500 of the Convertible Notes would
be automatically converted into a total of 1,174,999 common shares at a
conversion price of $1.50 per common share. In consideration for the noteholders
agreement to convert the Convertible Notes into common shares, the Company
agreed to reduce the exercise price on the warrants to purchase common shares
from $3.3186 per common share to an exercise price of $2.00 per common share.
Due to the conversion of the Convertible Notes subsequent to the end
of the quarter, the remaining unamortized discount as of November 30, 2003
related to the Convertible Notes will be charged as non-cash interest expense in
the third quarter.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The forward-looking statements contained in this report involve risks
and uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements. Forward-looking statements include,
without limitation, statements containing the words "anticipates," "believes,"
"expects," "intends," "future," and words and terms of similar substance and
express management's belief, expectations or intentions regarding future
performance. Our actual results could differ materially from our historical
operating results and from those anticipated in these forward-looking statements
as a result of certain factors, including without limitation, those set forth in
our Annual Report on Form 10-K and other factors and uncertainties contained in
our other filings with the Securities and Exchange Commission. You are cautioned
not to place undue reliance on such forward-looking statements, which speak only
as of the date they were made. We disclaim any obligation or undertaking to
provide any updates or revisions to any forward-looking statement to reflect any
change in our 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 three and six month periods ended November 30, 2003. All figures are in
United States dollars, except as otherwise noted.
OVERVIEW
We are a leading provider of human capital management (HCM)
services. We offer a combination of high-tech and high-touch services, giving
customers the ability to manage their complete recruiting and outplacement needs
on a single Workstream platform.
We have two distinct operating segments, which are the Enterprise
Recruiting Services and Career Transition Services segments. The Enterprise
Recruiting Services segment consists of automated talent acquisition systems,
recruiting research, online exchange, and employee management and retention
system services. The Career Transition Services segment consists of outplacement
services.
Fiscal year 2003 and fiscal year 2002 resulted in significant
changes in our business. We completed three and six acquisitions during fiscal
year 2003 and fiscal year 2002, respectively In addition, another acquisition
was completed during fiscal year 2004 (see Note 3). Subsequent to the
acquisitions, we concentrated on integrating the acquired entities and expanding
the reach of the existing business. These acquisitions have enabled us to
increase our service offerings. 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. Certain
actions taken to reduce costs have also caused reductions in revenue.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies relate to the assessment of
goodwill impairment and impairments in intangible assets. Management applies
judgment to value these assets. Changes in assumptions used would impact our
financial results.
Goodwill is assessed for impairment on 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 business
unit. Assumptions are made with regard to the economy direction, revenue growth,
gross profit margins and operating expense estimates. 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.
20
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. The valuation of acquired technology is based on the cost
incurred to develop the software that is then licensed to our clients.
Consideration is also given to the useful life and the technology's continued
demand in the marketplace. Changes in circumstances impacting other assumptions
used to value intangible assets could also lead to future impairments.
REVENUES
Consolidated revenues were $4,261,771 for the three months ended
November 30, 2003 ("second quarter 2004") compared to $4,975,429 for the three
months ended November 30, 2002 ("second quarter 2003"), a decrease of $713,658
or 14%. The Perform acquisition completed in the second quarter 2004 contributed
$237,356 of the total revenue for the second quarter 2004. The overall decrease
in revenues is mainly due to lower Enterprise Recruitment Service sales (17%
lower than second quarter 2003) which management believes is caused by a
transitioning of sales into the Ecruiter software solution, which is more
economical for the client but more profitable for Workstream, as well as by the
continued weak job market resulting in fewer companies hiring additional staff,
and lower Career Transition Service revenues (9% lower than second quarter 2003)
caused by the closure of seven office locations during the first six months of
fiscal 2003 as well as lower sales as a result of a change in marketing
strategy.
Career Transition Service revenues for second quarter 2004 were
$1,623,611 compared to $1,779,616 in second quarter 2003. The main reason for
the decline in Career Transition Service revenue was due to the closure of seven
office locations during the first six months of fiscal 2003 as well as lower
sales as a result of a change in marketing strategy in order to generate more
profitable business. The office closures are a result of our plan to consolidate
sales locations and develop larger centers in fewer locations in order to
leverage management costs and improve internal controls.
Enterprise Recruiting Service revenues for second quarter 2004 were
$2,638,160 compared to $3,195,813 for second quarter 2003. The decrease in
revenues was primarily due to a decrease in recruitment research and software
sales which we believe is due to the continued weak job market causing fewer
companies hiring additional staff. This was partially offset by revenue of
$237,356 generated by the Perform acquisition completed during second quarter
2004.
Consolidated revenues were $8,440,285 for the six months ended
November 30, 2003 compared to $9,621,143 for the six months ended November 30,
2002, a decrease of $1,180,858 or 12%. The overall decrease in revenues is
mainly due to lower Career Transition Service revenues (24% lower than the six
months ended November 30, 2003) caused by our closure of seven office locations
in the first six months of fiscal 2003 as well as lower sales as a result of a
change in marketing strategy.
COST OF REVENUES
Cost of revenues for second quarter 2004 were $389,407 compared to
$1,018,725 for second quarter 2003, a decrease of $629,318 or 62%. The Perform
acquisition completed in second quarter 2004 did not incur any cost of revenues.
Career Transition Service cost of revenues accounted for $190,757 and Enterprise
Recruiting Service cost of revenues accounted for $198,650 of the total cost of
revenues for second quarter 2004. Cost of revenues for the Career Transition
Services segment decreased $142,193 as a result of lower revenues and cost of
revenues for the Enterprise Recruiting Service decreased $487,125 as a result of
a decrease in costs in the recruitment software area. Management has made a
concentrated effort to reduce costs by eliminating redundant operations.
21
Cost of revenues for the six months ended November 30, 2003 were
$832,757 compared to $1,897,722 for the six months ended November 30, 2002, a
decrease of $1,064,965 or 56%. Career Transition Service cost of revenues
accounted for $363,348 and Enterprise Recruiting Service cost of revenues
accounted for $469,409 of the total cost of revenues for the six months ended
November 30, 2003. Cost of revenues for the Career Transition Services segment
decreased $345,978 as a result of lower revenues and cost of revenues for the
Enterprise Recruiting Service decreased $718,987 as a result of lower costs in
recruitment software due to management's effort to eliminate redundant
operations.
GROSS PROFITS
Consolidated gross profits were $3,872,364 for second quarter 2004
or 91% of revenues compared to $3,956,704 or 80% of revenues for the second
quarter 2003. The Perform acquisition completed during the second quarter 2004
contributed $237,356 of the total gross profit for that quarter. Career
Transition Services gross profit was $1,432,855 or 88% of Career Transition
Services revenues and Enterprise Recruiting Services gross profit represented
$2,439,509 or 92% of Enterprise Recruiting Services revenues for second quarter
2004. The improvement in gross profit as a percent of revenues is due to the
efforts to eliminate redundant operations and costs and to pursue more
profitable business by shifting towards more profitable products and changing
marketing strategies resulting in sales with higher gross margin.
Consolidated gross profits were $7,607,528 or 90% of revenues for
the six months ended November 30, 2003 compared to $7,723,421 or 80% of revenues
for the six months ended November 30, 2002. Career Transition Services gross
profit was $2,765,963 or 88% of Career Transition Services revenues and
Enterprise Recruiting Services gross profit represented $4,841,565 or 91% of
Enterprise Recruiting Services revenues for the six months ended November 30,
2003.
OPERATING EXPENSES
Total operating expenses were $4,960,607 for second quarter 2004,
compared to $6,316,487 for second quarter 2003, a decrease of $1,355,880 or 21%.
Total operating expenses for the Perform acquisition completed in second quarter
2004 was $196,650. The primary reason for the overall decline in operating
expenses is the consolidation of operating functions, which includes lower
selling and marketing expenses, lower research and development costs and reduced
general and administrative expenses such as rent, bad debt expense and credit
card fees.
Total operating expenses were $9,967,834 for the six months ended
November 30, 2003, compared to $12,486,186 for the six months ended November 30,
2002, a decrease of $2,518,352 or 20%. The primary reason for the overall
decline in operating expenses is the consolidation of operating functions,
partially offset by additional operating expense of $891,861 due to the
acquisitions completed at different times during the six months ended November
30, 2002 and additional operating expenses of $196,650 related to the Perform
acquisition completed in second quarter 2004.
SELLING AND MARKETING
Selling and marketing expenses were $1,104,556 for second quarter
2004 compared to $1,651,329 for second quarter 2003, a decrease of $546,773 or
33%. Selling and marketing expense related to the Perform acquisition completed
in second quarter 2004 was $40,047. The overall decrease in selling and
marketing expense is mainly attributed to a reduction of $211,485 in advertising
expense, a reduction of $266,918 in employee costs, and a decrease of $65,962 in
travel and entertainment expense. Advertising was reduced mainly in the Career
Transition Services segment (a decrease of $206,335 from second quarter 2003) by
shifting advertising from newspapers and print media to the Internet.
22
Selling and marketing expenses were $2,171,887 for the six months
ended November 30, 2003 compared to $3,702,478 for the six months ended November
30, 2002, a decrease of $1,530,591 or 41%. The overall decrease in selling and
marketing expense is mainly attributed to a reduction of $821,906 in advertising
expense, a reduction of $662,995 in employee costs, and a decrease of $87,997 in
travel and entertainment expense. Advertising was reduced by $662,880 in the
Career Transition Services segment by shifting advertising from newspapers and
print media to the Internet. In addition, advertising expense was reduced in the
Enterprise Recruitment Services segment by $159,026 by implementing a more
direct sales approach compared to an indirect approach used by prior management
of the acquired companies and initially continued after the acquisitions.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,292,240 for second
quarter 2004, compared to $2,510,700 for second quarter 2003, a decrease of
$218,460 or 9%. General and administrative expenses related to the Perform
acquisition completed in second quarter 2004 were $48,915. The overall decrease
in general and administrative expenses was due mainly to a decrease of $260,550
in rent expense, a reduction of $52,888 in bad debt expense, a decrease of
$29,617 in travel and entertainment expenses , and a reduction of $33,694 of
public company expense, as well as the recovery and settlement of claims of
$150,238 related to Icarian prior to the acquisition, partially offset by an
increase of $239,611 in employee costs, and an increase of $95,977 in
professional fees.
General and administrative expenses were $4,716,672 for the six
months ended November 30, 2003, compared to $5,064,644 for the six months ended
November 30, 2002, a decrease of $347,972 or 7%. The overall decrease in
expenses was due mainly to reductions of $452,991 in rent expense, $79,555 in
communications expense, $55,327 in postage expense, $54,535 in computing
expense, and $56,460 in bad debt expense, as well as the recovery and settlement
of claims of $150,238 related to Icarian prior to the acquisition, partially
offset by an increase of $541,070 in employee costs. Acquisitions partially
offset the decrease in general and administrative by $348,695 for additional
general and administrative expenses due to the acquisitions completed at
different times during the six months ended November 30, 2002 and additional
general and administrative expenses of $48,915 related to the Perform
acquisition completed in second quarter 2004.
RESEARCH AND DEVELOPMENT
Research and development costs were $159,951 for second quarter 2004
compared to $412,339 for second quarter 2003, a decrease of $252,388 or 61%.
Research and development costs were $270,979 for the six months ended November
30, 2003 compared to $720,579 for the six months ended November 30, 2002, a
decrease of $449,600 or 62%. Research and development costs related to the
Perform acquisition completed in second quarter 2004 were $107,688. The overall
decline in research and development costs is primarily due to our strategy to
acquire technology through acquisitions. We believe that we can acquire new
technology at a lower cost and more efficiently than developing new software
platforms with internal resources. Since fiscal 2002, most of our research and
development efforts have been incurred in the Enterprise Recruiting Services
segment.
DEPRECIATION/AMORTIZATION EXPENSE
Depreciation and amortization expenses were $1,403,860 for second
quarter 2004, compared to $1,742,119 for second quarter 2003, a decrease of
$338,259 or 19%. Depreciation and amortization expenses were $2,808,295 for the
six months ended November 30, 2003, compared to $2,998,485 for the six months
ended November 30, 2002, a decrease of $190,190 or 6%. . The depreciation and
amortization expenses related to the Perform acquisition completed in second
quarter 2004 were $74,323. This overall decrease was mainly due to lower
depreciation expense due to the disposal of certain assets in connection with
the termination of a lease of certain real property formerly leased to Icarian
and certain other assets becoming fully amortized, partially offset by increased
amortization of intangibles and depreciation expense of $450,116 due to the
acquisitions completed at different times during the six months ended November
30, 2002.
23
INTEREST INCOME/EXPENSE
Interest income was $299 for second quarter 2004 compared to $23,595
for second quarter 2003, a decrease of $23,296 or 99%. Interest expense was
$432,324 for second quarter 2004, compared to $183,634 for second quarter 2003,
and increase of $248,690 or 135%. The increased interest expense was mainly due
to interest expense incurred as a result of a non-cash charge of $284,814 for
the accretion of the 8% Senior Subordinated Convertible Notes to their current
face value.
Interest income was $1,996 for the six months ended November 30,
2003 compared to $36,527 for the six months ended November 30, 2002, a decrease
of $34,531 or 95%. Interest expense was $1,351,989 for the six months ended
November 30, 2003, compared to $342,242 for the six months ended November 30,
2002, an increase of $1,009,747 or 295%. The increased interest expense was
mainly due to interest expense incurred as a result of a non-cash charge of
$1,055,202 for amortization of the discount related to the conversion of
$600,000 of 8% Senior Subordinated Convertible Notes and the accretion of the
Notes to their face value as of November 30, 2003 compared to November 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2003, we had $1,933,779 in cash, cash
equivalents, restricted cash and short-term investments. As of November 30,
2003, $1,340,110 of these cash and short- term investment balances were
restricted from use because they were collateral for debt, leases and a letter
of guarantee. These restricted cash balances could be reduced in the future by
lease payments, any repayments on lines of credit and improvement in the return
rate on credit card charges accepted by us for our services.
For the six months ended November 30, 2003, cash provided by
operations totaled $202,330, consisting primarily of the net loss for the period
of $2,832,436, offset by non-cash expenses such as depreciation, amortization,
and non-cash interest. Our working capital deficiency decreased to $3,196,541 as
of November 30, 2003, a decrease of $215,038 from May 31, 2003 as a result of
cash received from investors, higher prepaid balances as a result of payments to
consultants, higher receivables, and lower accrued liabilities.
Net cash used in investing activities during six months ended
November 30, 2003 was $521,055 due mainly to payments related to the acquisition
of Perform.
Net cash generated by financing activities was $634,164 for the six
months ended November 30, 2003. We received $950,000 in cash from an individual
and two institutional investors upon the issuance of common shares. We received
proceeds of $141,497 from our line of credit, and $33,333 from the exercise of
common stock options. Financing outflows consisted primarily of the payments of
$120,000 related to a lease settlement, repayment of bank debt of $138,813,
repayment of shareholder loans of $138,838, and payments for capital leases of
$55,343.
We have had operating losses since our inception, however we had
positive cash flow from operations for the six months ended November 30, 2003.
Management believes that the improvement in cash flow is the result of
elimination of redundancies in the companies acquired in fiscal 2002 and 2003,
the consolidation of ongoing operations and reduction efforts in selling and
marketing as well as in research and development previously discussed. Michael
Mullarkey, our Chief Executive Officer, provided us with $500,000 and $750,000
in short term loans during fiscal 2003 and fiscal 2002, respectively. In January
2003, those loans were consolidated into a term loan maturing in five years. The
consolidated term loan is collaterized by certain inventory, equipment, accounts
receivable and other assets and bears interest at 8% per annum. Under the
consolidated term loan, we are required to make monthly interest only payments
during the first 24 months and monthly interest and principal payments beginning
in January 2005. As of November 30, 2003, the total amount of the consolidated
term loan was $1,287,901. In December 2003 and January 2003, we paid this loan
in full. Mr. Mullarkey has no obligation under the term loan to advance us any
additional funds.
24
In January 2003, Mr. Mullarkey agreed to provide us with an
additional $1,200,000 credit facility bearing interest at 8% per annum. With
respect to each draw against the credit facility, we are required to make
monthly interest only payments during the first 24 months from the draw date and
thereafter monthly interest and principal payments over a three year period. We
have the ability to draw against this credit facility as needed. Mr. Mullarkey
also agreed to defer until after June 1, 2004, a total of $797,880 in
compensation earned as of May 31, 2003, as well as any additional compensation
earned thereafter, with interest accruing on the balance at a rate of 8% per
annum. The repayment date under the agreement is automatically extended each
month after June 1, 2004 for an additional month, which results in the amounts
continuing to remain due and outstanding for greater than 365 days. After June
1, 2004, Mr. Mullarkey and Workstream will mutually agree on the repayment terms
of his deferred compensation. As of November 30, 2003, total deferred
compensation was $883,334.
In December 2003, we sold an aggregate of 4,125,000 common shares at
$1.60 per common share to institutional and other accredited investors in a
private placement offering, resulting our receiving gross proceeds of
approximately $6.6 million. The proceeds from the sale will be used to repay or
otherwise cause the satisfaction in full of the amounts outstanding under our 8%
Senior Subordinated Convertible Notes, to pay the expenses incurred in
connection with the offering and for general working capital requirements. In
connection with the issuance of the 4,125,000 common shares, we paid commissions
to placement agents in an aggregate amount equal to $540,000, of which $100,000
was paid in 62,500 common shares in lieu of cash. We also issued the placement
agents or their designee's warrants to purchase an aggregate of 412,500 common
shares at an exercise price of $1.60 per share.
Management believes the proceeds from the offering in December 2003,
the credit facility from Michael Mullarkey and the compensation deferral
provided by Mr. Mullarkey, and the closure of offices and reduction of costs
made in fiscal 2002 and fiscal 2003, along with further consolidation of cost
centers and elimination of redundancies will result in continued improvement of
cash flows from operations which, together with current cash reserves, will be
sufficient to meet our working capital and capital expenditure requirements
through at least November 30, 2004.
As of November 30, 2003, we had 8% Senior Subordinated Convertible
Notes with an outstanding balance of $2.1 million. In December 2003, certain
holders of our Convertible Notes exercised their option to convert $337,500 of
the Convertible Notes into Class A Series A Preferred Shares, which were
immediately converted into common shares. As a result of the foregoing
conversions, 450,000 common shares were issued at a conversion price equal at
$0.75 per share.
In January 2004, we entered into an agreement with Crestview Capital
Fund L.P., Sands Brothers Venture Capital III LLC and their respective
affiliates to amend the Convertible Notes and the warrants to purchase common
shares that were issued in connection with the sale of the Convertible Notes in
April and May 2002 to Crestview Capital Fund L.P., Sands Brothers Venture
Capital III LLC and their respective affiliates. Under the agreement, the
holders of the Convertible Notes agreed that on January 12, 2004 the remaining
outstanding balance of $1,762,500 of the Convertible Notes would be
automatically converted into a total of 1,174,999 common shares at a conversion
price of $1.50 per common share. In consideration for the noteholders agreement
to convert the Convertible Notes into common shares, we agreed to reduce the
exercise price on the warrants to purchase common shares from $3.3186 per common
share to an exercise price of $2.00 per common share.
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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 $1,000,000 line of credit with the Bank of
Montreal which bears interest at the bank's prime rate plus 1%. We have drawn
CDN $812,707 on this facility as of November 30, 2003. We can draw an additional
CDN $17,293 before additional collateral would be required. We also have a term
loan with the bank in the amount of CDN $143,319 as of November 30, 2003. 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 CDN $270,000 that renews annually. We pay an annual fee of 1.2% on
this letter of credit.
We also have a credit facility from Michael Mullarkey, our Chief
Executive Officer, and Convertible Notes, both of which bear interest at 8.0%
per annum. The terms of these financing instruments are fixed and therefore do
not expose us to interest rate fluctuations.
The majority of our interest rates are fixed, and therefore we have
limited exposure to risks associated with interest rate fluctuations.
The impact on net interest income of a 100 basis point adverse
change in interest rates for the quarter ended November 30, 2003 would have been
less than $14,000.
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 our reported
net asset position of approximately $145,928.
ITEM 4. CONTROLS AND PROCEDURES
As of November 30, 2003, our management, with the participation of
our Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of our disclosure controls and procedures. Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There were no changes during the quarter
ended November 30, 2003 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
There has been no change in our internal controls over financial
reporting during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal controls over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In September, 2003, we acquired certain assets of Perform, Inc., a
Delaware corporation, in connection with Perform, Inc.'s voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. As consideration
for the sale, we issued Perform, Inc. 189,873 of our common shares valued at
$300,000 and cash in an amount equal to $450,000. The common shares were issued
to one investor in a transaction not involving a public offering. Such issuance
was made in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
At the Company's annual and special meeting of shareholders on
November 20, 2003, the shareholders of the Company voted on the following
matters:
1. Election of the nominees for directors of the Company as a group;
2. Approval to issue common shares in an aggregate amount exceeding
19.99% of the outstanding common shares pursuant to convertible notes, Class A
Series A Preferred Shares and Warrants;
3. The appointment of PricewaterhouseCoopers LLP as auditors of the
Company; and
4. In a resolution authorizing the directors to fix the remuneration
of the auditors of the Company.
The shareholders approved the election of directors as a group. The
shareholders elected Michael Mullarkey, Thomas Danis, Matthew Ebbs, Michael
Gerrior, Arthur Halloran and Cholo Manso. The results of the voting were:
15,255,546 For; 14,498 Against; no Abstentions; and no broker non-votes.
The shareholders approved the issuance of common shares in an
aggregate amount exceeding 19.99% of the outstanding common shares pursuant to
the Company's Convertible Notes, Class A Series A Preferred Shares and Warrants.
The results of the voting were: 9,517,042 For; 110,988 Against; 66 Abstentions;
and 5,584,448 broker non-votes.
The shareholders approved the appointment of PricewaterhouseCoopers
LLP as auditors of the Company. The results of the voting were: 15,268,372 For;
1,450 Against; 222 Abstentions; and no broker non-votes.
The shareholders approved a resolution authorizing the directors to
fix the remuneration of the auditors of the Company. The results of the voting
were: 15,258,024 For; 11,298 Against; 722 Abstentions; and no broker non-votes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10.1 Asset Purchase Agreeement dated as of July 14,
2003 by and between Perform, Inc. and Workstream
Inc.
31.1 Certifications pursuant to Rule
13a-14(a)/15d-14(a).
32.1 Certification pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Workstream Inc.
(Registrant)
DATE: January 14, 2004 By: /s/ Michael Mullarkey
-------------------------------------------------
Michael Mullarkey,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
DATE: January 14, 2004 By: /s/ David Polansky
-------------------------------------------------
David Polansky,
Chief Financial Officer and Secretary
(Principal Financial Officer)
28