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, 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
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(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 Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of January 4, 2006, there were 49,234,178 common shares, no par value,
outstanding, excluding 108,304 common shares held in escrow.
WORKSTREAM INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of
November 30, 2005 and May 31, 2005.............................................2
Unaudited Consolidated Statements of Operations for
the Three and Six Months ended November 30, 2005 and 2004 .....................3
Unaudited Consolidated Statements of Cash Flows
for the Six Months ended November 30, 2005 and 2004............................4
Notes to Unaudited Consolidated Financial Statements.............................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................28
Item 4. Controls and Procedures..........................................................29
Part II. Other Information
Item 1. Legal Proceedings ..............................................................29
Item 4. Submission of Matters to a Vote of Security Holders ............................30
Item 6. Exhibits .......................................................................30
Signatures
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
PART I. - FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
WORKSTREAM INC.
CONSOLIDATED BALANCE SHEETS
November 30, 2005 May 31, 2005
----------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,378,132 $ 11,811,611
Restricted cash 2,836,778 3,063,368
Short-term investments 263,895 312,322
Accounts receivable, net 4,396,545 3,388,501
Prepaid expenses and other assets 471,332 669,692
------------- -------------
Total current assets 15,346,682 19,245,494
Property and equipment, net 1,336,512 1,224,332
Other assets 89,673 89,570
Acquired intangible assets, net 9,737,297 12,814,525
Goodwill 42,284,766 42,283,442
------------- -------------
TOTAL ASSETS $ 68,794,930 $ 75,657,363
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,634,110 $ 2,520,038
Accrued liabilities 2,119,319 1,568,306
Line of credit 2,341,295 2,326,612
Accrued compensation 1,276,293 1,005,950
Current portion of long-term obligations 228,032 1,738,966
Deferred revenue 4,208,040 3,366,120
------------- -------------
Total current liabilities 12,807,089 12,525,992
Long-term obligations 134,448 192,258
------------- -------------
Total liabilities 12,941,537 12,718,250
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Common stock, no par value: 49,194,178 and 49,182,772
shares issued and outstanding, respectively 109,030,194 109,019,358
Additional paid-in capital 7,506,376 7,506,376
Accumulated other comprehensive loss (883,767) (928,303)
Accumulated deficit (59,799,410) (52,658,318)
------------- -------------
Total stockholders' equity 55,853,393 62,939,113
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,794,930 $ 75,657,363
============= =============
See accompanying notes to these consolidated financial statements.
2
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months ended Six Months ended
November 30, November 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Enterprise Workforce Services $ 5,299,207 $ 4,932,652 $ 9,830,190 $ 8,048,239
Career Networks 1,900,602 2,215,172 3,711,745 4,818,714
------------ ------------ ------------ ------------
Revenues, net 7,199,809 7,147,824 13,541,935 12,866,953
Cost of revenues (exclusive of
depreciation expense as shown below) 2,243,623 2,194,498 4,300,905 3,266,325
------------ ------------ ------------ ------------
Gross profit 4,956,186 4,953,326 9,241,030 9,600,628
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 1,613,000 1,766,087 2,925,392 3,493,192
General and administrative 4,153,038 4,170,219 7,963,851 7,658,234
Research and development 908,402 275,151 2,043,781 679,844
Amortization and depreciation 1,569,633 1,901,291 3,460,958 3,764,895
------------ ------------ ------------ ------------
Total operating expenses 8,244,073 8,112,748 16,393,982 15,596,165
------------ ------------ ------------ ------------
(3,287,887) (3,159,422) (7,152,952) (5,995,537)
------------ ------------ ------------ ------------
Interest and other income 54,362 20,482 127,501 29,077
Interest and other expense (35,986) (36,512) (67,011) (128,038)
------------ ------------ ------------ ------------
Other income (expense), net 18,376 (16,030) 60,490 (98,961)
------------ ------------ ------------ ------------
Loss before income tax (3,269,511) (3,175,452) (7,092,462) (6,094,498)
Recovery of deferred income taxes -- 346,618 -- 764,903
Current income tax expense (33,430) (20,542) (48,630) (28,107)
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (3,302,941) $ (2,849,376) $ (7,141,092) $ (5,357,702)
============ ============ ============ ============
Weighted average number of common shares
outstanding 49,194,178 41,385,822 49,193,742 39,270,867
============ ============ ============ ============
Basic and diluted net loss per share $ (0.07) $ (0.07) $ (0.15) $ (0.14)
============ ============ ============ ============
See accompanying notes to these consolidated financial statements.
3
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended November 30,
2005 2004
------------ ------------
Cash provided by (used in) operating activities:
Net loss for the period $ (7,141,092) $ (5,357,702)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 3,434,393 3,745,163
Non-cash interest on convertible notes and notes payable -- 52,549
Provision for bad debt 292,420 118,544
Recovery of deferred income taxes -- (764,903)
Non-cash compensation 70,497 --
Non-cash payment to consultants 41,530 --
Net change in operating components of working capital:
Accounts receivable (1,282,622) (832,935)
Prepaid expenses and other assets 55,959 536,627
Accounts payable and accrued expenses 862,384 (1,277,088)
Deferred revenue 829,021 495,282
------------ ------------
Net cash used in operating activities (2,837,510) (3,284,463)
------------ ------------
Cash provided by (used in) investing activities:
Purchase of property and equipment (439,052) (145,209)
Cash paid for business combinations -- (3,338,592)
Decrease/(increase) in restricted cash 416,052 (269,260)
Sale of short-term investments 72,543 269,260
------------ ------------
Net cash provided by (used in) investing activities 49,543 (3,483,801)
------------ ------------
Cash provided by (used in) financing activities:
Proceeds from exercise of options and warrants 10,836 121,029
Proceeds from share and warrants issuance -- 9,999,988
Cost related to the registration and issuance of common stock -- (111,683)
Repayment of long-term obligations (1,553,681) (856,163)
Line of credit, net activity (147,513) 200,867
------------ ------------
Net cash (used in) provided by financing activities (1,690,358) 9,354,038
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 44,846 74,173
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,433,479) 2,659,947
Cash and cash equivalents, beginning of period 11,811,611 4,338,466
------------ ------------
Cash and cash equivalents, end of period $ 7,378,132 $ 6,998,413
============ ============
See accompanying notes to these consolidated financial statements.
4
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Workstream Inc. ("Workstream" or the "Company"), 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 has
two distinct reporting units: Enterprise Workforce Services and Career Networks.
The Enterprise Workforce Services segment offers a complete suite of HCM
software solutions, which includes recruitment, benefits administration and
enrollment, performance management, succession planning, compensation management
and employee awards and discount programs. The Career Networks segment offers
recruitment research, resume management and outplacement services. In addition,
Career Networks provides services through a web-site where job-seeking senior
executives can search job databases and post their resumes, and companies and
recruiters can post position openings and search for qualified senior executive
candidates. Workstream conducts its business in the United States and Canada.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of November 30, 2005, the
consolidated statements of operations for the three and six months ended
November 30, 2005 and 2004, and the consolidated statements of cash flows for
the six months ended November 30, 2005 and 2004 are unaudited but include all
adjustments (consisting of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of our financial
position at such dates and our results of operations and cash flows for the
periods then ended, in conformity with accounting principles generally accepted
in the United States ("GAAP"). The consolidated balance sheet as of May 31, 2005
has been derived from the audited consolidated financial statements at that date
but, in accordance with the rules and regulations of the United States
Securities and Exchange Commission ("SEC"), does not include all of the
information and notes required by GAAP for complete financial statements.
Operating results for the three and six months ended November 30, 2005 are not
necessarily indicative of results that may be expected for the entire fiscal
year. The financial statements should be read in conjunction with the financial
statements and notes for the fiscal year ended May 31, 2005 included in the
Company's Form 10-K filed with the Securities and Exchange Commission on August
15, 2005.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Workstream and its
wholly-owned subsidiaries. The earnings of the subsidiaries are included from
the date of acquisition. All intercompany accounts and transactions have been
eliminated in consolidation.
5
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions affecting the amounts reported in the consolidated
financial statements and the accompanying notes. Changes in these estimates and
assumptions may have a material impact on the financial statements and
accompanying notes.
Significant estimates and assumptions made by management include the assessment
of goodwill impairment. When assessing goodwill for possible impairment,
significant estimates include future cash flow projections, future revenue
growth rates and the appropriate discount rate. It is reasonably possible that
those estimates may change in the near-term, significantly affecting future
assessments of goodwill impairment. Other significant estimates include the
determination of the provision for doubtful accounts receivable, valuing and
estimating useful lives of intangible assets, valuing assets and liabilities
acquired through business acquisitions, determining the percentage of completion
of implementation services for certain revenue contracts and estimating tax
valuation allowances.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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.
RESTRICTED CASH
Restricted cash consists of short-term investment balances used to collateralize
the outstanding line of credit and term loan balances as well as certain lease
agreements. The line of credit, term loan, and facility leases form part of
current operations, and, accordingly, the restricted cash is classified as a
current asset.
PROPERTY AND EQUIPMENT
Property and equipment 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
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 whether any impairment exists 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.
LEASEHOLD INDUCEMENTS
Leasehold inducements are amortized over the term of the leases as a reduction
in rent expense.
6
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's two reporting units are consistent with its segments (Enterprise
Workforce Services and Career Networks). The Company estimates the fair value of
each reporting unit by preparing a discounted cash flow model. An impairment
charge is recorded if the implied fair value of goodwill of a reporting unit is
less than the book value of goodwill for that unit.
Intangible assets with a finite useful life recorded as a result of acquisition
transactions are amortized over their estimated useful lives as follows:
Acquired technologies...................... 3 years straight line
Customer base.............................. 3 years straight line
Intellectual property...................... 5 years straight line
The Company evaluates its intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. To determine recoverability, the Company compares the carrying
value of the assets to the estimated future undiscounted cash flows. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on temporary
differences between the financial statement and tax basis of assets and
liabilities and net operating loss and credit carry-forwards using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
INVESTMENT TAX CREDITS
Investment tax credits, which are earned as a result of qualifying Canadian
research and development expenditures, are recognized when the expenditures are
made and their realization is reasonably assured.
REVENUE RECOGNITION
The Company derives revenue from various sources including the following:
subscription and hosting fees; licensing of software; software maintenance fees;
professional services related to software implementation, customization and
training; sale of products and tickets through the Company's employee discount
and rewards software module; career transition services; recruitment research
services; and, applicant sourcing and exchange services.
In general, the Company recognizes revenue when all of the revenue recognition
criteria are met, which is typically when:
o Evidence of an arrangement exists
o Services have been provided or goods have been delivered
o The price is fixed or determinable
o Collection is reasonably assured.
7
The Company sells various HCM software applications. Software revenue is
generated through a variety of contractual arrangements.
Subscription and hosting fees and software maintenance fees are billed in
advance on a monthly, quarterly or annual basis. Quarterly and annual payments
are deferred and recognized monthly over the service period on a straight-line
basis. One-time set up fees are deferred and recognized monthly on a
straight-line basis over the contractual lives, which approximates the expected
lives of the customer relationships.
License revenues consist of fees earned from the granting of licenses to use the
software products. The Company recognizes revenue from the sale of software
licenses in accordance with American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 97-2, Software Revenue Recognition,
and SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions, when all of the following conditions are met: a
signed contract exists; the software has been shipped or electronically
delivered; the license fee is fixed or determinable; and the Company believes
that the collection of the fees is reasonably assured. License revenue is
recorded upon delivery with an appropriate deferral for maintenance services, if
applicable, provided all of the other relevant conditions have been met. The
total fee from the arrangement is allocated based on Vendor Specific Objective
Evidence ("VSOE") of fair value of each of the undelivered elements. Maintenance
agreements are typically priced based on a percentage of the product license fee
and 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.
Professional services revenue is generated from implementation and customization
of software, technical support not included in the maintenance, training and
consulting. The majority of professional services revenue is billed based on an
hourly rate and recognized on a monthly basis as services are provided. For
certain contracts which involve significant implementation or other services
which are essential to the functionality of the software and which are
reasonably estimable, the license and implementation services revenue is
recognized using contract accounting, as prescribed by SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. Revenue
is recognized over the period of each implementation using the
percentage-of-completion method. Labor hours incurred 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.
One of the software applications offered by the Company allows customer
companies to offer rewards and benefits (discounted goods and tickets) in an
effort to promote employee retention. The Company generates subscription
revenues from the customer company. In addition, the Company generates revenue
from the sale of products and tickets to the customers' employees through a
website. The Company recognizes revenue when all of the revenue recognition
criteria are met, which is typically when the goods are shipped and title has
transferred.
For outplacement services, the Company bills the client 50% when the assignment
starts and the remaining 50% when the assignment is completed. The Company
recognizes revenue when all of the revenue recognition criteria are met, which
is typically when services have been completed.
For resume management services and recruitment services, the Company bills its
clients for job postings and matching of resumes per descriptions that the
client provides and for quantity-based job posting packages. The Company
recognizes revenue when all of the revenue recognition criteria are met, which
is typically when the services have been completed.
8
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company grants stock options and restricted stock units to employees,
directors and consultants under the 2002 Amended and Restated Stock Option Plan
(the "Plan"), which was most recently amended in October 2004. Under the Plan,
as amended, the Company is authorized to issue up to 4,000,000 shares of common
stock upon the exercise of stock options and an additional 1,000,000 shares of
common stock for issuance of restricted stock unit grants.
In November 2005, the Company finalized restricted stock unit agreements for
certain executives and the members of the Board of Directors. Each restricted
stock unit represents one share of common stock and vests over three years,
after which time the Company will issue the common stock underlying the vested
restricted stock units. During the vesting period, the restricted stock units
cannot be transferred, and the grantee has no voting or dividend rights. The
cost of the awards, determined to be the fair market value of the shares at the
date of the grant, is expensed ratably over the vesting period. A total of
310,000 restricted stock units were issued through November 30, 2005. The
compensation expense associated with the restricted stock units is included in
general and administrative expenses on the statement of operations and in
accrued compensation on the balance sheet.
The Company accounts for compensation expense for its stock-based employee
compensation plan using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25") and complies with the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based. Under APB 25,
compensation expense is measured at the grant date based on the intrinsic value
of the award and is recognized on a straight-line basis over the service period,
which is usually the option-vesting period.
Pro forma information regarding the results of operations is determined as if
the Company had accounted for its employee stock options using the fair-value
method. The fair value of options granted was estimated at the date of grant
using the Black Scholes option-pricing model with the following assumptions:
Three Months ended Six Months ended
November 30, November 30,
------------------ ----------------
2005 2004 2005 2004
------------------ ----------------
Weighted-average risk free interest rates 4.4% 3.4% 4.3% 3.6%
Expected dividend yield 0% 0% 0% 0%
Weighted-average expected volatility 83% 66% 83% 68%
Expected life (in years) 3.5 3.5 3.5 3.5
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
The following reflects the impact on results of operations if the Company had
recorded additional compensation expense relating to the stock-based
compensation:
Three Months ended Six Months ended
November 30, November 30,
------------ ------------ ------------ ------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss, as reported $ (3,302,941) $ (2,849,376) $ (7,141,092) $ (5,357,702)
Add: stock-based compensation expense 70,497 -- 70,497 --
included in reported net income
Deduct: total stock-based compensation (293,120) (229,917) (514,290) (456,559)
expense determined under fair value
based method for all awards
------------ ------------ ------------ ------------
Net loss, pro forma $ (3,525,564) $ (3,079,293) $ (7,584,885) $ (5,814,261)
============ ============ ============ ============
Weighted average common shares
outstanding during the period 49,194,178 41,385,822 49,193,742 39,270,867
============ ============ ============ ============
Basic and diluted loss per share:
As reported $ (0.07) $ (0.07) $ (0.15) $ (0.14)
============ ============ ============ ============
Pro forma $ (0.07) $ (0.07) $ (0.15) $ (0.15)
============ ============ ============ ============
RESEARCH AND DEVELOPMENT COSTS
Research and development costs associated with computer software products to be
sold, leased, or otherwise marketed are expensed as incurred until technological
feasibility has been established. Technological feasibility is established upon
completion of a working model; thereafter, all software production costs are
capitalized and subsequently reported at the lower of unamortized cost or net
realizable value. Capitalized costs would be amortized based on current and
future revenue for each product, with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of the
product. To date, the time period between the establishment of technological
feasibility and completion of software development has been short, and as a
result, no significant development costs have been incurred during that period.
Accordingly, the Company has not capitalized any research and development costs
to date associated with computer software products to be sold, leased, or
otherwise marketed.
Research and development costs primarily include salaries and related costs,
costs associated with using outside vendors and miscellaneous administrative
expenses.
10
FOREIGN CURRENCY TRANSLATION
The parent company is located in Canada, and the functional currency of the
parent company is the Canadian dollar. The Company's subsidiaries use their
local currency, which is the U.S. dollar, as their functional currency.
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are recorded as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
in net loss for the period and have not been material during the six months
ended November 30, 2005 and fiscal 2005. All assets and liabilities denominated
in a foreign currency are translated into U.S. dollars at the exchange rate on
the balance sheet date. Revenues and expenses are translated at the average
exchange rate during the period. Equity transactions are translated using
historical exchange rates.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, restricted cash, short-term
investments and accounts receivable. At times, the Company's deposits may exceed
federally insured limits. Management believes that the use of credit quality
financial institutions minimizes the risk of loss associated with these
deposits. Collateral is not required for accounts receivable.
INTEREST RATE RISK
The Company's restricted cash short-term investments earn interest at fixed
rates. The Company's line of credit and term loan accrue interest at a variable
rate based on the bank's prime rate. Fluctuations in the prime rate could impact
the Company's financial results. Management believes that the exposure to
interest rate fluctuations is limited as the line of credit and the term loan
are fully collateralized with restricted cash and can be liquidated if faced
with rising interest rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, short-term investments, restricted cash, accounts receivable,
accounts payable, and accrued expenses, approximate their fair values due to
their short maturities. Based on borrowing rates currently available to the
Company for similar terms, the carrying value of the line of credit and
long-term obligations approximate fair value.
BUSINESS COMBINATIONS AND VALUATION OF INTANGIBLE ASSETS
The Company accounts for business combinations in accordance with SFAS No. 141,
Business Combinations ("SFAS 141"). SFAS 141 requires business combinations to
be accounted for using the purchase method of accounting and includes specific
criteria for recording intangible assets separate from goodwill. Results of
operations of acquired businesses are included in the financial statements of
the Company from the date of acquisition. Net assets of the acquired company are
recorded at their fair value at the date of acquisition. As required by SFAS No.
142, Goodwill and Other Intangible Assets ("SFAS 142"), the Company does not
amortize goodwill but instead tests goodwill for impairment periodically and if
necessary, would record any impairment in accordance with SFAS 142. Identifiable
intangibles, such as the acquired customer base, are amortized over their
expected economic lives.
11
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 states that its effective date
is for interim periods beginning after June 15, 2005, but the SEC has deferred
the effective date to annual periods beginning after June 15, 2005. Accordingly,
the Company will adopt the new requirements beginning in fiscal 2007. 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,
Share-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Company is currently assessing the impact of
adoption.
NOTE 2. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following presents the details of the change in the allowance for doubtful
accounts:
Six Months ended Year ended
November 30, 2005 May 31, 2005
----------------- ------------
Balance at beginning of the period $ 495,402 $ 21,509
Charged to costs and expenses 292,420 577,362
Write-offs and effect of exchange rate changes (1,587) (103,469)
--------- ---------
Balance at end of the period $ 786,235 $ 495,402
========= =========
The Company assesses the adequacy of the allowance for doubtful accounts balance
based on historical experience. Any adjustments to this account are reflected in
the statement of operations as a general and administrative expense.
12
NOTE 3. ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets consist of the following:
November 30, 2005 May 31, 2005
---------------------------- ----------------------------
Cost Accumulated Cost Accumulated
Amortization Amortization
------------ ------------ ------------ ------------
Customer base $ 7,570,970 $ 5,080,042 $ 7,561,712 $ 4,360,465
Acquired technologies 21,603,222 15,049,799 21,592,299 12,804,243
Intellectual property 1,322,760 629,814 1,322,760 497,538
------------ ------------ ------------ ------------
30,496,952 $ 20,759,655 30,476,771 $ 17,662,246
============ ============
Less accumulated amortization (20,759,655) (17,662,246)
------------ ------------
Net acquired intangible assets $ 9,737,297 $ 12,814,525
============ ============
Amortization expense for acquired intangible assets was $1,388,484 and
$1,642,331 for the three months ended November 30, 2005 and 2004, respectively.
Amortization expense for acquired intangible assets was $3,097,409 and
$3,271,761 for the six months ended November 30, 2005 and 2004, respectively.
The estimated amortization expense related to acquired intangible assets in
existence as of November 30, 2005 is as follows:
Remainder of Fiscal 2006: $2,691,785
Fiscal 2007: 5,081,614
Fiscal 2008: 1,769,398
Fiscal 2009: 173,000
Fiscal 2010: 21,500
----------
$9,737,297
==========
NOTE 4. GOODWILL
The following represents the detail of the changes in the goodwill account for
the year ended May 31, 2005 and the six months ended November 30, 2005:
Enterprise Workforce Career Total
Services Networks
----------- ----------- -----------
Goodwill at May 31, 2004 $16,375,409 $12,223,297 $28,598,706
Acquisitions during the year 10,617,019 -- 10,617,019
Contingent consideration 2,532,111 234,305 2,766,416
Purchase price allocation adjustments made
within one year of acquisition date 301,301 -- 301,301
----------- ----------- -----------
Goodwill at May 31, 2005 29,825,840 12,457,602 42,283,442
Purchase price allocation adjustments made
within one year of acquisition date 1,324 -- 1,324
----------- ----------- -----------
Goodwill at November 30, 2005 $29,827,164 $12,457,602 $42,284,766
=========== =========== ===========
13
NOTE 5. CONTINGENCIES
In July 2005, a direct competitor filed a complaint against the Company in U.S.
District Court in the District of Massachusetts. The plaintiff asserted that
Workstream interfered with the contractual relationship between it and a former
member of its executive management team. This issue was resolved during the
second quarter of fiscal 2006 for approximately $60,000.
On or about August 10, 2005, a class action lawsuit was filed against the
Company, its Chief Executive Officer and its former Chief Financial Officer in
the United States District Court for the Southern District of New York. The
action, brought on behalf of a purported class of purchasers of the Company's
common shares during the period from January 14, 2005 to and including April 14,
2005, alleges, among other things, that management provided the market
misleading guidance as to anticipated revenues for the quarter ended February
28, 2005, and failed to correct this guidance on a timely basis. The action
claims violations of Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder, as well as Section 20(a)
of the Exchange Act, and seeks compensatory damages in an unspecified amount as
well as the award of reasonable costs and expenses, including counsel and expert
fees and costs. In December 2005, the plaintiffs filed an amended complaint
which added an additional plaintiff and sought to elaborate on the allegations
contained in the complaint. The Company's counsel has advised the court and
opposing counsel of its intention to file a motion to dismiss. The court has
scheduled dates by which the motion and briefs are to be filed and has scheduled
April 21, 2006 as the date on which it will hear argument on the motion. The
case is in its earliest stage, and the Company intends to defend the action
vigorously. Management is of the view that the possible effect of the suit
cannot be reasonably estimated at this time.
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 6. COMPREHENSIVE LOSS
Components of comprehensive loss were as follows:
Three Months ended Six Months ended
November 30, November 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss for the period $(3,302,941) $(2,849,376) $(7,141,092) $(5,357,702)
Other comprehensive income:
Cumulative translation adjustment
(net of tax of $0) 7,260 102,417 44,536 183,143
----------- ----------- ----------- -----------
Comprehensive loss for the period $(3,295,681) $(2,746,959) $(7,096,556) $(5,174,559)
=========== =========== =========== ===========
NOTE 7. SEGMENTED AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: Enterprise Workforce Services and
Career Networks. Enterprise Workforce Services consists of revenue generated
from HCM software and related professional services. In addition, Enterprise
Workforce Services generates revenue from the sale of various products through
the rewards module of the HCM software. Career Networks primarily consists of
revenue from outplacement services, recruitment services and resume management
services.
14
The Company evaluates performance in each segment based on profit or loss from
operations. There are no inter-segment sales. Corporate operating expenses are
allocated to the segments primarily based on revenue.
The Company's segments are distinct business units that offer different products
and services. Each is managed separately and each has a different client base
that requires a different approach to the sales and marketing process. In
addition, Career Networks is an established business unit whereas Enterprise
Workforce Services is a developing business unit, which requires significantly
more investment in time and resources.
During the fourth quarter of fiscal 2005, the Company changed its reportable
segments. Prior to the change, outplacement services were considered a separate
reportable segment (Career Transition Services), and recruitment services and
resume management services were included in the Enterprise Workforce Services
segment. The change was made to more accurately reflect how management evaluates
the business. The fiscal 2004 segment information has been reclassified to
conform to the current year presentation.
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, 2005
and 2004:
BUSINESS SEGMENTS
Enterprise
Workforce Career
Services Networks Total
----------- ----------- -----------
Three Months ended November 30, 2005
Software and professional services $ 3,512,535 $ -- $ 3,512,535
Awards and tickets 1,786,672 -- 1,786,672
Career Networks revenue -- 1,900,602 1,900,602
----------- ----------- -----------
Revenue, net 5,299,207 1,900,602 7,199,809
Cost of revenues, awards and tickets 1,365,297 -- 1,365,297
Cost of revenues, other 676,404 201,922 878,326
----------- ----------- -----------
Gross profit 3,257,506 1,698,680 4,956,186
Expenses 4,875,054 1,799,386 6,674,440
Amortization and depreciation 1,532,064 37,569 1,569,633
----------- ----------- -----------
Business segment loss $(3,149,612) $ (138,275) (3,287,887)
=========== ===========
Other expenses and impact of
income taxes (15,054)
-----------
Net loss $(3,302,941)
===========
15
Enterprise
Workforce Career
Services Networks Total
------------ ------------ ------------
Six Months ended November 30, 2005
Software and professional services $ 6,529,625 $ -- $ 6,529,625
Awards and tickets 3,300,565 -- 3,300,565
Career Networks revenue -- 3,711,745 3,711,745
------------ ------------ ------------
Revenue, net 9,830,190 3,711,745 13,541,935
Cost of revenues, awards and tickets 2,491,757 -- 2,491,757
Cost of revenues, other 1,434,049 375,099 1,809,148
------------ ------------ ------------
Gross profit 5,904,384 3,336,646 9,241,030
Expenses 9,293,944 3,639,080 12,933,024
Amortization and depreciation 3,385,868 75,090 3,460,958
------------ ------------ ------------
Business segment loss $ (6,775,428) $ (377,524) (7,152,952)
============ ============
Other income and impact of
income taxes 11,860
------------
Net loss $ (7,141,092)
============
Enterprise
Workforce Career
Services Networks Total
------------ ------------ ------------
As at November 30, 2005
Business segment assets $ 5,606,995 $ 687,067 $ 6,294,062
Intangible assets 9,682,995 54,302 9,737,297
Goodwill 29,827,164 12,457,602 42,284,766
------------ ------------ ------------
$ 45,117,154 $ 13,198,971 58,316,125
============ ============
Assets not allocated to business segments 10,478,805
------------
Total assets $68,794,930
============
16
Enterprise
Workforce Career
Services Networks Total
------------ ------------ ------------
Three Months ended November 30, 2004
Software and professional services $ 2,897,918 $ -- $ 2,897,918
Awards and tickets 2,034,734 -- 2,034,734
Career Networks revenue -- 2,215,172 2,215,172
------------ ------------ ------------
Revenue, net 4,932,652 2,215,172 7,147,824
Cost of revenues, awards and tickets 1,480,569 -- 1,480,569
Cost of revenues, other 467,823 246,106 713,929
------------ ------------ ------------
Gross profit 2,984,260 1,969,066 4,953,326
Expenses 3,977,232 2,234,225 6,211,457
Amortization and depreciation 1,806,332 94,959 1,901,291
------------ ------------ ------------
Business segment loss $ (2,799,304) $ (360,118) (3,159,422)
============ ============
Other income and impact of
income taxes 310,046
-----------
Net loss $ (2,849,376)
============
Enterprise
Workforce Career
Services Networks Total
------------ ------------ ------------
Six Months ended November 30, 2004
Software and professional services $ 5,212,006 $ -- $ 5,212,006
Awards and tickets 2,836,233 -- 2,836,233
Career Networks revenue -- 4,818,714 4,818,714
------------ ------------ ------------
Revenue, net 8,048,239 4,818,714 12,866,953
Cost of revenues, awards and tickets 2,121,299 -- 2,121,299
Cost of revenues, other 628,685 516,341 1,145,026
------------ ------------ ------------
Gross profit 5,298,255 4,302,373 9,600,628
Expenses 7,192,496 4,638,774 11,831,270
Amortization and depreciation 3,434,921 329,974 3,764,895
------------ ------------ ------------
Business segment loss $ (5,329,162) $ (666,375) (5,995,537)
============ ============
Other income and impact of
income taxes 637,835
------------
Net loss $ (5,357,702)
============
17
Enterprise
Workforce Career
Services Networks Total
------------ ------------ ------------
As at May 31, 2005
Business segment assets $ 4,714,196 $ 737,873 $ 5,452,069
Intangible assets 12,721,282 93,243 12,814,525
Goodwill 29,825,840 12,457,602 42,283,442
------------ ------------ ------------
$ 47,261,318 $ 13,288,718 60,550,036
============ ============
Assets not allocated to business segments 15,107,327
------------
Total assets $ 75,657,363
============
GEOGRAPHIC
Canada United States Total
------------ ------------- ------------
Three Months ended November 30, 2005
Revenue $ 582,808 $ 6,617,001 $ 7,199,809
Expenses 1,102,421 9,385,275 10,487,696
------------ ------------ ------------
Geographical loss $ (519,613) $ (2,768,274) (3,287,887)
============ ============
Other expenses and impact of
income taxes (15,054)
------------
Net loss $ (3,302,941)
============
Canada United States Total
------------ ------------- ------------
Six Months ended November 30, 2005
Revenue $ 1,150,502 $ 12,391,433 $ 13,541,935
Expenses 2,245,610 18,449,277 20,694,887
------------ ------------ ------------
Geographical loss $ (1,095,108) $ (6,057,844) (7,152,952)
============ ============
Other expenses and impact of
income taxes 11,860
------------
Net loss $ (7,141,092)
============
Canada United States Total
------------ ------------- ------------
As at November 30, 2005
Long-lived assets $ 823,642 $ 52,624,606 $ 53,448,248
============ ============
Other assets 15,346,682
------------
Total assets $ 68,794,930
============
18
Canada United States Total
------------ ------------- ------------
Three Months ended November 30, 2004
Revenue $ 551,281 $ 6,596,543 $ 7,147,824
Expenses 712,324 9,594,922 10,307,246
------------ ------------ ------------
Geographical loss $ (161,043) $ (2,998,379) (3,159,422)
============ ============
Other income and impact of
income taxes 310,046
------------
Net loss $ (2,849,376)
============
Canada United States Total
------------ ------------- ------------
Six Months ended November 30, 2004
Revenue $ 1,086,071 $ 11,780,882 $ 12,866,953
Expenses 1,217,120 17,645,370 18,862,490
------------ ------------ ------------
Geographical loss $ (131,049) $ (5,864,488) (5,995,537)
============ ============
Other income and impact of
income taxes 637,835
------------
Net loss $ (5,357,702)
============
Canada United States Total
------------ ------------- ------------
As at May 31, 2005
Long-lived assets $ 641,040 $ 55,770,829 $ 56,411,869
============ ============
Other assets 19,245,494
------------
Total assets $ 75,657,363
============
19
NOTE 8. NET INCOME (LOSS) PER SHARE
Because the Company reported a net loss during the three and six month periods
ended November 30, 2005 and 2004, the Company excluded the impact of its common
stock equivalents in the computation of dilutive earnings per share for these
periods, as their effect would be anti-dilutive. The following outstanding
instruments could potentially dilute basic earnings per share in the future:
November 30, 2005
-----------------
Stock options 2,390,887
Restricted stock units 310,000
Escrowed shares 108,304
Warrants 3,570,834
---------
Potential increase in number of shares from dilutive instruments 6,380,025
=========
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements discussed in Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations), and Item 3
(Quantitative and Qualitative Disclosures About Market Risk) and elsewhere in
this Form 10-Q constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements concerning management's expectations, strategic objectives, business
prospects, anticipated economic performance and financial condition and other
similar matters involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or
achievements of results to differ materially from any future results,
performance or achievements discussed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors are described
in 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, 2005. 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
three-month and six-month periods ended November 30, 2005. All figures are in
United States dollars, except as otherwise noted.
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 Networks segments. The Enterprise Workforce
Services segment primarily consists of HCM software, professional services and
the sale of products and tickets through the Company's employee discount and
rewards software module. Our Enterprise Workforce Services segment offers a
complete suite of HCM software solutions, which address recruitment, benefits,
performance, compensation and rewards. The Career Networks segment consists of
career transition services, recruitment research and applicant sourcing and
exchange.
During the fourth quarter of fiscal 2005, the Company changed its
reportable segments. Prior to the change, outplacement services were considered
a separate reportable segment (Career Transition Services), and recruitment
services and resume management services were included in the Enterprise
Workforce Services segment. The change was made to more accurately reflect how
management evaluates the business. The fiscal 2004 segment information contained
in the notes to the financial statements has been reclassified to conform to the
current year presentation.
21
During fiscal 2002, 2003 and 2004, we made a total of 12 business
acquisitions. During fiscal 2005, we completed the following business
acquisitions: Peoplebonus on June 21, 2004; Bravanta on July 27, 2004; HRSoft on
October 6, 2004; and ProAct on December 30, 2004. All of these acquisitions have
enabled us to expand and enhance our HCM software, increase our service
offerings and increase our revenue streams. Subsequent to the acquisitions, we
have concentrated on integrating the acquired entities, expanding the reach of
the existing business and identifying other potential acquisition targets. When
we complete an acquisition, we combine the business of the acquired entity into
the Company's existing operations. We expect that this will significantly reduce
the administrative and other expenses associated with the business prior to the
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. Rather, it is included in one of our two distinct
business segments and is evaluated as part of the entire segment. Furthermore,
we do not assess the impact of individual acquisitions on earning trends.
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 acquired entities are integrated and
our business evolves, we continue to seek methods to more efficiently monitor
and manage our business performance. We review key operating metrics such as
revenue per average number of employee, liquidity ratio(1), and debt to equity
ratio(2).
(1) 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.
(2) 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 the assessment of goodwill
impairment, the valuation of acquired intangible assets, the assessment of
intangible asset impairment and the valuation of deferred tax assets and related
allowances. Management makes estimates and assumptions that affect the value of
assets and the reported amounts of revenues. Changes in assumptions used would
impact our financial position and results.
Goodwill is assessed for impairment on an annual basis or more frequently
if circumstances warrant. The most recent assessment was performed as of May 31,
2005, and no impairment indicators were identified during the first six months
of fiscal 2006. 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 business 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. For the calculation done
at the end of fiscal 2005, we estimated that individual reporting unit revenue
growth rates would range from 2% to 25%, that gross profit would increase
slightly, and that operating expenses would increase but would decrease as a
percentage of revenues. 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 acquired intangible assets, which include acquired technologies,
customer base and intellectual property, based on the estimated fair value of
the assets at the time of the acquisition. The estimated fair value is primarily
based on projected cash flows associated with the assets and the customer
attrition rates. Different assumptions were used in estimating the intangible
assets acquired in each business acquisition. If the future cash flows or the
customer attrition rates differ significantly from our estimates, 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.
22
We apply significant judgment in recording deferred tax assets, which
primarily are the result of loss carry forwards of companies that we acquired
and loss carry forwards internally generated. In addition, we make certain
assumptions about if and when these deferred tax assets will be utilized. These
determinations require estimates of future profits to be forecasted. Actual
results may differ from amounts estimated.
REVENUES
Consolidated revenues were $7,199,809 for second quarter 2006 compared to
$7,147,824 for second quarter 2005, an increase of $51,985 or 1%.
Enterprise Workforce Solutions revenues for second quarter 2006 were
$5,299,207 compared to $4,932,652 for second quarter 2005, an increase of
$366,555 or 7%. The net increase in revenue is due to: a $327,420 increase in
software revenue and a $287,197 increase in professional services revenue offset
by a $248,062 decrease in reward product revenue. The increases in software
revenue and professional services revenue are due to a combination of revenue
attributable to the acquired entities, primarily ProAct, and to new revenue
generated from existing products and professional services. The decrease in
reward product revenue is due to the loss of a large customer towards the end of
second quarter 2005.
Career Networks revenues for second quarter 2006 were $1,900,602 compared
to $2,215,172 for second quarter 2005, a decrease of $314,570 or 14%. The
decrease was the result of a decline in career transition services revenue of
$376,960. As unemployment decreases, career transition revenue can be adversely
affected as individuals believe that they need less outside assistance to find
employment. In addition, it can impair our ability to hire and retain qualified
sales consultants. The remaining decrease in Career Networks is due to a
decrease in recruitment research of $21,914 offset by an increase in executive
search revenue of $84,304.
Consolidated revenues were $13,541,935 for the six months ended November
30, 2005 compared to $12,866,953 for the six months ended November 30, 2004, an
increase of $674,982 or 5%.
Enterprise Workforce Solutions revenues for the six months ended November
30, 2005 were $9,830,190 compared to $8,048,239 for the six months ended
November 30, 2004, an increase of $1,781,951 or 22%. The increase in revenue is
due to: a $835,181 increase in software revenue, a $464,332 increase in reward
product revenue and a $482,438 increase in professional services revenue. The
increases in software revenue and professional services revenue are due to a
combination of revenue attributable to the acquired entities (Peoplebonus,
HRSoft, and ProAct) and to new revenue generated from existing products and
professional services. The increase in reward product revenue is due to the fact
that we acquired Bravanta in late July 2004 so the six months ended November 30,
2004 only includes four months of Bravanta-related reward product revenue.
Career Networks revenues for the six months ended November 30, 2005 were
$3,711,745 compared to $4,818,714 for the six months ended November 30, 2004, a
decrease of $1,106,969 or 23%. The decrease was the result of a decline in
career transition services revenue of $1,093,435. As discussed previously, as
unemployment decreases, career transition revenue can be adversely affected. The
remaining decrease in Career Networks is due to a decrease in recruitment
research of $270,962 offset by an increase in executive search revenue of
$257,428.
During second quarter 2006, the total revenue per average number of
employees increased to $37,017 compared to $31,698 for second quarter 2005. The
increase is due to the acquisitions within the Enterprise Workforce Services
segment, which generate higher revenue per employee rates. In addition, the
increase is consistent with management's attempts to refocus Career Networks in
an effort to generate more revenue per sales consultant as opposed to gross
revenue.
23
COST OF REVENUES AND GROSS PROFIT
Cost of revenues for second quarter 2006 was $2,243,623 compared to
$2,194,498 for second quarter 2005, an increase of $49,125 or 2%. Gross profits
were $4,956,186 for second quarter 2006 or 69% of revenues compared to
$4,953,326 or 69% of revenues for second quarter 2005.
Enterprise Workforce Services cost of revenues accounted for $2,041,701 of
the total cost of revenues for second quarter 2006 and $1,948,392 for second
quarter 2005, an increase of $93,309. Enterprise Workforce Services gross profit
was $3,257,506 or 61% for second quarter 2006 compared to $2,984,260 or 61% for
second quarter 2005. Gross profit remained flat as the increase in software
revenue, which has margins of approximately 95%, was offset by a decrease in
rewards revenue, which has margins of approximately 25%.
Career Networks cost of revenues accounted for $201,922 of the total cost
of revenues for second quarter 2006 and $246,106 for second quarter 2005, a
decrease of $44,184 or 18%. Career Networks gross profit was $1,698,680 or 89%
of revenues for second quarter 2006 compared to $1,969,066 or 89% of revenue for
second quarter 2005. The decrease in Career Networks gross profit in dollars is
consistent with the decrease in revenues.
Cost of revenues for the six months ended November 30, 2005 was $4,300,905
compared to $3,266,325 for the six months ended 2005, an increase of $1,034,580
or 32%. Gross profits were $9,241,030 for the six months ended November 30, 2005
or 68% of revenues compared to $9,600,628 or 75% of revenues for the six months
ended November 30, 2004.
Enterprise Workforce Services cost of revenues accounted for $3,925,806 of
the total cost of revenues for the six months ended November 30, 2005 and
$2,749,984 for the six months ended November 30, 2004, an increase of
$1,175,822. Enterprise Workforce Services gross profit was $5,904,384 or 60% for
the six months ended November 30, 2005 compared to $5,298,255 or 66% for the six
months ended November 30, 2004. The decrease in the Enterprise Workforce
Services gross profit as a percent of revenues is due to the change in product
and service mix within the Enterprise Workforce Services segment subsequent to
the various acquisitions. The decrease in the gross profit margin corresponds to
the increase in professional services revenue and rewards product revenue as a
percentage of total segment revenue.
Career Networks cost of revenues accounted for $375,099 of the total cost
of revenues for the six months ended November 30, 2005 and $516,341 for the six
months ended November 30, 2004, a decrease of $141,242 or 27%. Career Networks
gross profit was $3,336,646 or 90% of revenues for the six months ended November
30, 2005 compared to $4,302,373 or 89% of revenue for the six months ended
November 30, 2004. The decrease in Career Networks gross profit in dollars is
consistent with the decrease in revenues.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses were $1,613,000 for second quarter 2006
compared to $1,766,087 for second quarter 2005, a decrease of $153,087 or 9%.
The net decrease in selling and marketing expense is due to decreases in
employee costs and in advertising in Career Networks, partially offset by
Enterprise Workforce Services expenses. The decrease in employee costs is
primarily due to a decrease in the number of sales consultants within the career
transition services group of the Career Networks segment. This decrease is due
to a change in business strategy whereby the focus is on increasing revenue per
sales consultants while using a smaller, more effective salesforce. The decrease
in advertising costs is due to a decrease in the cost of sales leads within the
career transition services group of the Career Networks segment as we further
leveraged our internal lead generation resources.
24
Selling and marketing expenses were $2,925,392 for the six months ended
November 30, 2005 compared to $3,493,192 for the six months ended November 30,
2004, a decrease of $567,800 or 16%. The decrease in selling and marketing
expense is due to decreases in employee costs and in advertising in Career
Networks, partially offset by Enterprise Workforce Services expenses. This
decrease is attributable to a reduction in the number of sales and marketing
employees in both the Enterprise Workforce Services and Career Networks
segments. The decrease in employees in the Enterprise Workforce Services segment
is the result of the elimination of redundant positions subsequent to several
acquisitions. The decrease in employees in the career transition services group
in the Career Networks segment is due to a change in business strategy whereby
the focus is on increasing revenue per salesperson while using a smaller, more
effective salesforce. The decrease in advertising costs is due to a decrease in
the cost of sales leads within the career transition services group of the
Career Networks segment as we further leveraged our internal lead generation
resources.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses were $4,153,038 for second quarter
2006 compared to $4,170,219 for second quarter 2005, a decrease of $17,181 or
..4%. The slight net decrease in general and administrative expenses includes an
increase in bad debt expense of approximately $148,000 and an increase in
professional fees of $124,000 offset by a decrease in legal expenses of $130,000
and a decrease in communication expenses of $130,000. The increase in bad debt
expense reflects the addition to the allowance for doubtful accounts as a result
of higher accounts receivable balances. The increase in professional fees is due
to our using various consultants for departmental projects as well as the
estimated expense associated with a SAS 70 audit. The primary decrease in legal
expense reflects the fact that during second quarter 2005, the Company was
involved in an on-going dispute with the ex-shareholders of 6FigureJobs.com.
This dispute was settled in third quarter 2005. Finally, the decrease in
communication expense represents efficiencies gained after the various
acquisitions and the reduction in the number of employees using communication
services.
General and administrative expenses were $7,963,851 for the six months
ended November 30, 2005 compared to $7,658,234 for the six months ended November
30, 2004, an increase of $305,617 or 4%. The increase in general and
administrative expenses includes an increase in employee costs of approximately
$250,000, an increase in professional fees of $243,000 and an increase in bad
debt expense of $152,000 offset by a decrease in communication expense of
$196,000. The increase in employee costs primarily reflects the accrual of
contractual compensation expenses, including the restricted stock units granted
during the first six months of fiscal 2006. The increase in professional fees is
due to our using various consultants for departmental projects as well as the
estimated expense associated with a SAS 70 audit. The increase in bad debt
expense reflects the addition to the allowance for doubtful accounts as a result
of higher accounts receivable balances. Finally, the decrease in communication
expense represents efficiencies gained after the various acquisitions and the
reduction in the number of employees using communication services.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs were $908,402 for second quarter 2006
compared to $275,151 for second quarter 2005, an increase of $633,251 or 230%.
Subsequent to the various acquisitions, we continue to incur costs necessary to
update the acquired software, to standardize the software applications now owned
by the Company, and to build out the platform. The increase in research and
development costs reflects the increase in employee costs of approximately
$284,000 and the increase in professional fees of $343,000 as the Company use
both internal and external resources.
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Research and development costs were $2,043,781 for the six months ended
November 30, 2005 compared to $679,844 for the six months ended November 30,
2004, an increase of $1,363,937 or 201%. Subsequent to the various acquisitions,
we continue to incur costs necessary to update the acquired software, to
standardize the software applications now owned by the Company, and to build out
the platform. The increase in research and development costs reflects the
increase in employee costs of approximately $430,000 and the increase in
professional fees of $918,000 as the Company used both internal and external
resources, including overseas vendors.
AMORTIZATION AND DEPRECIATION EXPENSE
Amortization and depreciation expense was $1,569,633 for second quarter
2006 compared to $1,901,291 for second quarter 2005, a decrease of $331,658 or
17%. Amortization and depreciation expense for the Enterprise Workforce Services
segment was $1,532,064 for second quarter 2006 compared to $1,806,332 for second
quarter 2005, a decrease $274,268 or 15%. The decrease is the net result of
certain acquired intangible assets becoming fully amortized offset by the
amortization expense associated with intangible assets acquired through recent
acquisitions, specifically HRSoft and ProAct. In second quarter 2006, the Career
Networks segment amortization and depreciation expense was $37,569 compared to
$94,959 in second quarter 2005, a decrease of $57,390 or 60%. The decrease is
due to certain intangible assets with a three-year life (customer base and
acquired technology) included in the Career Networks segment becoming fully
amortized during fiscal 2005.
Amortization and depreciation expense was $3,460,958 for the six months
ended November 30, 2005 compared to $3,764,895 for the six months ended November
30, 2004, a decrease of $303,937 or 8%. Amortization and depreciation expense
for the Enterprise Workforce Services segment was $3,385,868 for the six months
ended November 30, 2005 compared to $3,434,921 for the six months ended November
30, 2004, an increase $49,053 or 1%. The decrease is the net result of certain
acquired intangible assets becoming fully amortized offset by the amortization
expense associated with intangible assets acquired through recent acquisitions,
specifically HRSoft and ProAct. During the six months ended November 30, 2005,
the Career Networks segment amortization and depreciation expense was $75,090
compared to $329,974 in the six months ended November 30, 2004, a decrease of
$254,884 or 77%. The decrease is due to certain intangible assets with a
three-year life (customer base and acquired technology) included in the Career
Networks segment becoming fully amortized during fiscal 2005.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $54,362 for second quarter 2006 compared to
$20,482 for second quarter 2005, an increase of $33,880 or 165%. The increase in
interest and other income during second quarter 2006 was due to higher
interest-earning cash, short-term investment and restricted cash balances
compared to second quarter 2005. The increase in the interest-earning deposits
is primarily due to the funds raised during the equity financing in fiscal 2005.
Interest and other income was $127,501 for the six months ended November
30, 2005 compared to $29,077 for the six months ended November 30, 2004, an
increase of $98,424 or 338%. The increase in interest and other income during
the six months ended November 30, 2005 was due to higher interest-earning cash,
short-term investment and restricted cash balances compared to the six months
ended November 30, 2004. The increase in the interest-earning deposits is
primarily due to the funds raised during the equity financing in fiscal 2005.
INTEREST AND OTHER EXPENSE
Interest and other expense was $35,986 for second quarter 2006 compared to
$36,512 for second quarter 2005, a decrease of $526 or 1%.
Interest and other expense was $67,011 for the six months ended November
30, 2005 compared to $128,038 for the six months ended November 30, 2004, a
decrease of $61,027 or 48%. During the six months ended November 30, 2004, the
Company paid off a non-interest term loan, which was originally assumed as part
of the Paula Allen Holdings acquisition. The interest expense relating to the
discount on the loan totaled $51,636 during first quarter 2005.
26
GOODWILL
Goodwill was $42,284,766 at November 30, 2005 compared to $42,283,442 at
May 31, 2005, a net increase of $1,324. The increase in goodwill represents
various purchase price adjustments relating to the goodwill generated from the
Bravanta acquisition made within one year of the acquisition date.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 2005, we maintained $10,478,805 in cash and cash
equivalents, restricted cash and short-term investments and working capital of
$2,539,593. The receipt of approximately $25 million from the issuance of stock
during fiscal 2005 provided capital used in the four acquisitions and, in part,
to subsidize the current operating deficit.
At November 30, 2005, $2,836,778 of short-term investments was restricted
from use in order to collateralize various borrowing and lease arrangements.
Specifically, these deposits were restricted as security for an outstanding term
loan, a line of credit and two letters of guarantee provided to landlords for
facility leases. As the outstanding term loan and line of credit balances
change, the restricted cash balance guaranteeing them will change accordingly.
In addition, when we make lease payments, the restricted cash guaranteeing the
leases will periodically decrease according to the terms of the lease
agreements.
For the six months ended November 30, 2005, cash used in operations
totaled $2,837,510, consisting primarily of the net loss for the period of
$7,141,092 offset by an increase in working capital of $464,742, and non-cash
expenses such as amortization and depreciation of $3,434,393, non-cash
compensation and payments to consultants of $112,027 and provision for bad debts
of $292,420.
Net cash provided by investing activities during the six months ended
November 30, 2005 were $49,543. Investing outflows consisted mainly of $439,052
in capital expenditures offset by the release of restrictions on cash and cash
equivalents of $416,052 and the sale of short-term investments of $72,543.
Net cash used in financing activities was $1,690,358 for the six months
ended November 30, 2005. Outflows consisted primarily of repayment of long-term
obligations of $1,553,681. This includes a principal payment of $1,434,408 on
the note payable entered into as part of the ProAct acquisition. In additions,
outflows consisted of the net activity of the bank line of credit totaling
$147,513.
We have had operating losses since our inception. During the six months
ended November 30, 2005, we have continued to incur operating losses as a result
of non-cash charges such as amortization and depreciation and an overall net
increase in operating expenses subsequent to our acquisitions. However,
management believes that operating cash flow will continue to increase in the
future as a result of increased revenue from the sales of the now complete suite
of HCM software applications, a rationalizing of operating expenses after the
elimination of redundant costs in the businesses we have acquired, and a general
increase in efficiencies.
27
We believe that our financial wellbeing remains strong as of November 30,
2005. We believe that our liquidity ratio of 1.2 and our debt to equity ratio of
..23 reflect this.
Management believes that the anticipated improvement in operating cash
flows together with our current cash reserves will be sufficient to meet our
working capital and capital expenditure requirements through at least November
30, 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 we believe will not have a material impact on
our financial position.
We have established a CDN $3,000,000 line of credit with a Canadian bank
which bears interest at the bank's prime rate plus 1%. We have drawn CDN
$2,903,232 on this facility as of November 30, 2005. We can draw an additional
CDN $96,768 before additional collateral would be required. We also have a term
loan with the bank in the amount of CDN $56,661 as of November 30, 2005. The
term loan bears interest at the bank's prime rate plus 2%. Additionally, we have
two letters of credit used as collateral on leased facilities in the amounts of
$95,568 and CDN $400,000.
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 adverse change in
interest rates for the six- month period ended November 30, 2005 would have been
less than $25,000.
FOREIGN CURRENCY RISK
We have monetary assets and liabilities 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 and net income or
loss. A 10% change in foreign exchange rates would result in a change in our
reported net asset position of approximately $70,000, and a change in the
reported net loss for the period ended November 30, 2005 of approximately
$115,000.
We are primarily exposed to market risks associated with fluctuations in
interest rates and foreign currency exchange rates.
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ITEM 4. CONTROLS AND PROCEDURES
As of November 30, 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 November 30, 2005 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 10, 2005, a class action lawsuit was filed against the
Company, its Chief Executive Officer and its former Chief Financial Officer in
the United States District Court for the Southern District of New York. The
action, brought on behalf of a purported class of purchasers of the Company's
common shares during the period from January 14, 2005 to and including April 14,
2005, alleges, among other things, that management provided the market
misleading guidance as to anticipated revenues for the quarter ended February
28, 2005, and failed to correct this guidance on a timely basis. The action
claims violations of Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder, as well as Section 20(a)
of the Exchange Act, and seeks compensatory damages in an unspecified amount as
well as the award of reasonable costs and expenses, including counsel and expert
fees and costs. In December 2005, the plaintiffs filed an amended complaint
which added an additional plaintiff and sought to elaborate on the allegations
contained in the complaint. The Company's counsel has advised the court and
opposing counsel of its intention to file a motion to dismiss. The court has
scheduled dates by which the motion and briefs are to be filed and has scheduled
April 21, 2006 as the date on which it will hear argument on the motion. The
case is in its earliest stage, and the Company intends to defend the action
vigorously. Management is of the view that the possible effect of the suit
cannot be reasonably estimated at this time.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual and special meeting of shareholders on October 20,
2005, the shareholders of the Company voted on the following matters:
1. Election of the nominees for directors of the Company as a group;
2. Appointment of PricewaterhouseCoopers LLP as auditors of the Company;
and
3. A resolution authorizing the directors to fix the remuneration of the
auditors of the Company.
The shareholders elected all of the nominated directors as follows:
Nominee Votes Received Votes Withheld
Michael Mullarkey 32,207,312 739,930
Thomas Danis 32,207,312 739,930
Matthew Ebbs 32,207,312 739,930
Arthur Halloran 32,207,312 739,930
Cholo Manso 32,207,312 739,930
Michael Gerrior 32,207,312 739,930
Steve Singh 32,207,312 739,930
The shareholders approved the appointment of PricewaterhouseCoopers LLP as
auditors of the Company. The results of the voting were: For - 32,894,476;
Against - 25,090; Abstentions - 22,576; 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:
For - 32,898,563; Against - 34,803; Abstentions - 8,776; and no broker
non-votes.
ITEM 6. EXHIBITS
Exhibit No. Description
31.1 Certification of Michael Mullarkey pursuant to Rule 13a-14(a).
31.2 Certification of Stephen Lerch pursuant to Rule 13a-14(a).
32.1 Certification of Michael Mullarkey pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Stephen Lerch pursuant to 18 U.S.C. Section
1350.
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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 9, 2006 By: /s/ Michael Mullarkey
-------------------------------------
Michael Mullarkey,
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
DATE: January 9, 2006 By: /s/ Stephen Lerch
-------------------------------------
Stephen Lerch,
Executive Vice President
Chief Financial Officer /
Chief Operating Officer
(Principal Financial Officer)
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