UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-Q
 
 ý
              QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended December 31, 2008o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 Commission
file number 000-30734
 
 ACCOUNTABILITIES, INC.
 (Exact
name of Registrant as specified in its charter)
 
 Delaware
              
              11-3255619(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)195
      Route 9 South, Suite 109
                Manalapan,
      New Jersey 07726(Address
      of principal executive offices)(732)
      333-3622(Registrant’s
      telephone number, including area code)Securities registered under Section 12(b) of the Exchange
      Act:Not
      ApplicableSecurities
      registered under Section 12(g) of the Exchange Act:Common
      Stock, $.0001 par value(Title
      of class)
 
 Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 ý  No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.  See definition of
“accelerated filer” and large accelerated filer in Rule 12b-2 of the Exchange
Act.  (Check One)
 
 Large Accelerated Filer  o
              Accelerated Filer  o
              Non - Accelerated Filer  o
              Smaller Reporting Company  x
 
 Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
 The
number of shares of Common Stock, $.0001 par value, outstanding as
of February 9, 2009 was 23,764,791.
 
  
  
 ACCOUNTABILITIES,
INC.
 INDEX
 
 PART
I – FINANCIAL INFORMATION
 
 
 Page
      No.Item
      1.
              Financial
      Statements (Unaudited)Balance
      Sheets as of December 31, 2008 and September 30, 2008
              1Statements
      of Operations for the Three Months Ended December 31, 2008 and
      2007
              2Statement
      of Stockholders’ Equity for the Three Months Ended December 31,
      2008
              3Statements
      of Cash Flows for the Three Months Ended December 31, 2008 and
      2007
              4Notes
      to Financial Statements
              5Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              12Item
      3.
              Quantitative
      and Qualitative Disclosure about Market Risks
              19Item
      4.
              Controls
      and Procedures
              20PART
      II – OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              20Item
      1A.
              Risk
      Factors
              20Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              20Item
      3.
              Defaults
      upon Senior Securities
              20Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              20Item
      5.
              Other
      Information
              21Item
      6.
              Exhibits
              21Signatures
              22
 
  
  ACCOUNTABILITIES,
INC.
  BALANCE
SHEETS
 
  December
      31
                
                
                September
      302008
                
                
                2008(Unaudited)ASSETSCurrent
      assets:Cash
                
                $
                80,000
                
                
                $
                69,000Accounts
      receivable – less allowance for doubtful accounts of $426,000 and
      $445,000, respectively
                
                
                -
                
                
                
                1,362,000Due
      from financial institution
                
                
                235,000
                
                
                
                202,000Unbilled
      receivables
                
                
                439,000
                
                
                
                671,000Prepaid
      expenses
                
                
                372,000
                
                
                
                326,000Due
      from related party
                
                
                51,000
                
                
                
                51,000Total
      current assets
                
                
                1,177,000
                
                
                
                2,681,000Property
      and equipment, net
                
                
                316,000
                
                
                
                340,000Other
      assets
                
                
                10,000
                
                
                
                10,000Intangible
      assets,  net
                
                
                1,263,000
                
                
                
                1,426,000Goodwill
                
                
                3,332,000
                
                
                
                3,332,000Total
      assets
                
                $
                6,098,000
                
                
                $
                7,789,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
                
                $
                1,415,000
                
                
                $
                1,431,000Accrued
      wages and related obligations
                
                
                545,000
                
                
                
                2,019,000Current
      portion of long-term debt
                
                
                402,000
                
                
                
                420,000Current
      portion of related party long-term debt
                
                
                941,000
                
                
                
                946,000Acquisition related contingent liability
                
                
                109,000
                
                
                
                193,000Due
      to related party
                
                
                41,000
                
                
                
                61,000Total
      current liabilities
                
                
                3,453,000
                
                
                
                5,070,000Long
      term debt, net of current portion
                
                
                277,000
                
                
                
                307,000Related
      party long-term debt, net of current portion
                
                
                1,041,000
                
                
                
                1,144,000Total
      liabilities
                
                
                4,771,000
                
                
                
                6,521,000Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $0.0001 par value, 5,000,000 shares authorized; zero shares issued
      and outstanding
                
                
                -
                
                
                
                -Common
      stock, $0.0001 par value, 95,000,000 shares authorized; 23,791,000 and
      23,792,000 shares issued and outstanding as of December 31, 2008 and
      September 30, 2008, respectively
                
                
                2,000
                
                
                
                2,000Additional
      paid-in capital
                
                
                3,277,000
                
                
                
                3,236,000Accumulated
      deficit
                
                
                (1,952,000
                )
                
                
                (1,970,000
                )Total
      stockholders’ equity
                
                
                1,327,000
                
                
                
                1,268,000Total
      liabilities and stockholders’ equity
                
                $
                6,098,000
                
                
                $
                7,789,000
 The accompanying notes are an integral part of these financial
statements.
 
 
  1
  ACCOUNTABILITIES,
INC.
 
 STATEMENTS
OF OPERATIONS
 (unaudited)
 
 Three
      MonthsEndedDecember
      31,
                2008
              
              
              December
      31,
                2007Revenue
              
              $
              17,351,000
              
              
              $
              18,148,000Direct
      cost of services
              
              
              14,658,000
              
              
              
              15,087,000Gross
      profit
              
              
              2,693,000
              
              
              
              3,061,000Selling,
      general and administrative expenses *
              
              
              2,420,000
              
              
              
              2,599,000Depreciation
      and amortization
              
              
              112,000
              
              
              
              107,000Income
      from operations
              
              
              161,000
              
              
              
              355,000Interest
      expense
              
              
              143,000
              
              
              
              314,000Net
      income
              
              $
              18,000
              
              
              $
              41,000Net
      income per share:Basic
              
              $
              0.00
              
              
              $
              0.00Diluted
              
              $
              0.00
              
              
              $
              0.00Weighted
      average shares outstanding:Basic
              
              
              22,169,000
              
              
              
              16,884,000Diluted
              
              
              22,247,000
              
              
              
              17,142,000
 
 *
Includes $41,000 and $11,000 for the three months ended December 31, 2008 and
2007, respectively in non-cash charges for stock based
compensation.
 
 The
accompanying notes are an integral part of these financial
statements.
 
    2
  
 
 
 ACCOUNTABILITIES,
INC.
 
 Statement
of Stockholders’ Equity
 (unaudited)
 
 Three
      Months EndedDecember
      31, 2008Common
      Stock – Shares:Balance
      at beginning of period
              
              
              23,792,000Forfeitures
      of restricted stock awards
              
              
              (1,000
              )Balance
      at end of period
              
              
              23,791,000Common
      Stock – Par Value:Balance
      at beginning of period
              
              $
              2,000-Balance
      at end of period
              
              $
              2,000Additional
      Paid-In Capital:Balance
      at beginning of period
              
              $
              3,236,000Stock-based
      compensation relating to restricted common stock
              
              
              41,000Balance
      at end of period
              
              $
              3,277,000Accumulated
      Deficit:Balance
      at beginning of period
              
              $
              (1,970,000
              )Net
      income
              
              
              18,000Balance
      at end of period
              
              $
              (1,952,000
              )
 
 The
accompanying notes are an integral part of these financial
statements.
 
 
  3
  
 ACCOUNTABILITIES,
INC.
 
 STATEMENTS
OF CASH FLOWS
 (unaudited)
 
 
 Three
      Months EndedDecember
      31,
              
              
              December
      31,2008
              
              
              2007Cash
      flows from operating activities:Net
      income
              
              $
              18,000
              
              
              $
              41,000Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
              
              
              112,000
              
              
              
              107,000Stock-based
      compensation
              
              
              41,000
              
              
              
              11,000Amortization
      of discount on long-term debt
              
              
              -
              
              
              
              12,000Bad
      debt expense
              
              
              11,000
              
              
              
              -Changes
      in operating assets and liabilities:Trade
      accounts receivable
              
              
              1,583,000
              
              
              
              631,000Due
      from financial institution
              
              
              (33,000
              )
              
              
              (42,000
              )Prepaid
      expenses
              
              
              (46,000
              )
              
              
              (113,000
              )Due
      to related party
              
              
              (20,000
              )
              
              
              -Other
      assets
              
              
              -
              
              
              
              (24,000
              )Accounts
      payable and accrued liabilities
              
              
              (1,490,000
              )
              
              
              (172,000
              )Net
      cash provided by operating activities
              
              
              176,000
              
              
              
              451,000Cash
      flows from investing activities:Purchase
      of property and equipment
              
              
              (9,000
              )
              
              
              (30,000
              )Net
      cash used in investing activities
              
              
              (9,000
              )
              
              
              (30,000
              )Cash
      flows from financing activities:Principal
      payments on long-term debt
              
              
              (48,000
              )
              
              
              (77,000
              )Proceeds
      from issuance of long-term debt – related parties
              
              
              -
              
              
              
              27,000Principal
      payments on long-term debt – related parties
              
              
              (108,000
              )
              
              
              (219,000
              )Payments
      on contingent acquisition related liability
              
              
              -
              
              
              
              (31,000
              )Net
      cash used in financing activities
              
              
              (156,000
              )
              
              
              (300,000
              )Change
      in cash
              
              
              11,000
              
              
              
              121,000Cash
      at beginning of period
              
              
              69,000
              
              
              
              137,000Cash
      at end of period
              
              $
              80,000
              
              
              $
              258,000
 The accompanying notes are an integral part of these financial
statements.
 
  4
  ACCOUNTABILITIES,
INC.
 
 NOTES
TO FINANCIAL STATEMENTS
 (unaudited)
 
 1.           Description
of the Company and its Business
 
 Nature
of Operations
 
 Accountabilities,
Inc. (the “Company”) is a national provider of temporary commercial staffing in
areas such as light industrial and clerical services, and professional niche
consulting and staffing services in areas such as accounting, pharmaceutical and
information technology.  The Company conducts all of its business in
the United States through the operation of 13 staffing and recruiting offices,
and through sales and marketing agreements with ten public accounting
firms.  The agreements with the public accounting firms generally
provide for the public accounting firm to market and sell accounting and finance
staffing and placement services to customers in a defined market in exchange for
a defined share of profits generated from those sales.
 
 2.           Summary
of Significant Accounting Policies
 
 Interim
Financial Information
 
 The
financial information as of and for the three months ended December 31, 2008 and
2007 is unaudited, but includes all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair statement
of its financial position at such dates and the operating results and cash flows
for those periods.  The year-end balance sheet data was derived from
audited financial statements, and certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to SEC rules or regulations; however, the Company believes the disclosures made
are adequate to make the information presented not misleading.
 
 The
results of operations for the interim periods presented are not necessarily
indicative of the results of operations to be expected for the fiscal
year.  These condensed interim financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended September 30, 2008, which are included in the Company’s Form 10-K as filed
with the Securities and Exchange Commission.  Certain reclassifications
have been made to the accompanying balance sheets to conform to the current
period's presentation.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.  Although management believes these estimates and assumptions
are adequate, actual results could differ from the estimates and assumptions
used.
 
 3.           Net Income per
Share
 
 The
Company presents both basic and diluted earnings per share amounts (“EPS”) in
accordance with SFAS No. 128, “Earnings Per Share.”  This
pronouncement establishes standards for the computation, presentation and
disclosure requirements for EPS for entities with publicly held common shares
and potential common shares.  Basic EPS is calculated by dividing net
income by the weighted average number of common shares outstanding during the
period.  Diluted EPS is based upon the weighted average number of
common shares and common stock equivalent shares outstanding during the period,
calculated using the treasury-stock method for stock-based compensation subject
to vesting.  Under the treasury-stock method, exercise proceeds
include the amount of compensation costs for future services that the Company
has not yet recognized.  Common stock equivalent shares are excluded
from the computation in periods in which they have an anti-dilutive
effect.  Warrants for which the exercise or conversion price exceeds
the average market price over the period are anti-dilutive and are excluded from
the calculation.
 
  5
  The
following table summarizes the calculation of net income per share for the three
months ended December 31, 2008 and 2007:
 
 Three
      Months Ended
              
              
              Three
      Months EndedDecember
      31, 2008
              
              
              December
      31, 2007Net
      income
              
              $
              18,000
              
              
              $
              41,000Basic:Weighted average shares
              
              
              22,169,000
              
              
              
              16,884,000Diluted:Weighted average shares
              
              
              22,169,000
              
              
              
              16,884,000Potentially
      dilutive shares
              
              
              78,000
              
              
              
              258,000Total
      dilutive shares
              
              
              22,247,000
              
              
              
              17,142,000Net
      income per share:Basic
              
              $
              0.00
              
              
              $
              0.00Diluted
              
              $
              0.00
              
              
              $
              0.00
 
 The
potentially dilutive shares presented above do not include the anti-dilutive
effect of approximately 688,000 and 1,121,000 potential common shares,
representing warrants and convertible debt, for the three months ended December
31, 2008 and 2007, respectively.
 
 4.           Acquisitions
 
 ReStaff
Services, Inc. Offices Acquisition
 
 On
February 26, 2007, the Company acquired the operations, including three offices
of ReStaff Services, Inc. (“ReStaff”), for a total adjusted purchase price of
$3,312,000.  All results of operations of ReStaff have been included
in the accompanying Statements of Operations since the date of
acquisition.
 
 US
Temp Services, Inc. Offices Acquisition
 
 On March
31, 2006 the Company acquired the operations of five offices from US Temp
Services, Inc. (“US Temp Acquisition”) for a total purchase price of
$1,723,000.  All results of operations of the acquired offices have
been included in the accompanying Statements of Operations since the date of
acquisition.
 
 Stratus
Services Group, Inc. Offices Acquisition
 
 On
November 28, 2005 the Company acquired the operations of three offices from
Stratus Services Group, Inc. (“Stratus Acquisition”) in exchange for an earnout
consisting of a) 2% of revenue for the first twelve months, b) 1% of
revenue for the second twelve months, and c) 1% of revenue for the third twelve
months (“Stratus Earnout”). All results of operations of the acquired offices
have been included in the accompanying Statements of Operations since the date
of acquisition. Because the purchase price includes only the Stratus Earnout
which was based upon future revenues, the total fair value of the acquired
assets was greater than the purchase price as of the day of the acquisition,
which was zero as the Stratus Earnout had yet to be
earned.  Consequently, the total fair value of the acquired assets of
$678,000 was recorded as a liability (“Acquisition related contingent
liability”) as of the day of the acquisition in accordance with SFAS
141.  Through November 28, 2008, $485,000 had been paid relating to
the Stratus Earnout.
 
 The
Company has received an assessment from the California Employment Development
Department (“EDD”) as disclosed in Note 10.  Due to indemnification
clauses in the Asset Purchase Agreement entered into for the Stratus
Acquisition, the ultimate timing and resolution of the “Acquisition related
contingent liability” is dependent on the resolution of the assessment from the
EDD.  The Company has calculated the amount owed for the earnout as of
the end of the earnout period, November 28, 2008, to be $109,000.  As
of November 28, 2008, the estimated liability of $193,000 exceeded the amount of
contingent consideration, and the $84,000 reduction of the liability has been
recorded as a reduction in the value of the acquired intangible assets on the
accompanying balance sheets in accordance with SFAS 141.   This
liability has been reclassified as a current liability together with the
corresponding amount from September 30, 2008 for comparative
purposes.
  6
  5.           Intangible
Assets and Goodwill
 
 The
following table presents detail of the Company’s intangible assets, estimated
lives, related accumulated amortization and goodwill :
 
 As
      of December 31, 2008
              
              
              As
      of September 30, 2008Accumulated
              
              
              
              
              
              
              
              
              AccumulatedGross
              
              
              Amortization
              
              
              Net
              
              
              Gross
              
              
              Amortization
              
              
              NetCustomer
      lists and relationships (7 years)
              
              $
              1,923,000
              
              
              $
              (694,000
              )
              
              $
              1,229,000
              
              
              $
              2,007,000
              
              
              $
              (625,000
              )
              
              $
              1,382,000Non-competition
      agreements
                (3
      years)
              
              
              111,000
              
              
              
              (77,000
              )
              
              
              34,000
              
              
              
              111,000
              
              
              
              (67,000
              )
              
              
              44,000Total
              
              $
              2,034,000
              
              
              $
              (771,000
              )
              
              $
              1,263,000
              
              
              $
              2,118,000
              
              
              $
              (692,000
              )
              
              $
              1,426,000Goodwill
      (indefinite life)
              
              $
              3,332,000
              
              
              
              
              
              
              $
              3,332,000
              
              
              $
              3,332,000
              
              
              
              
              
              
              $
              3,332,000
 
 As
described in Note 4, the Company recorded an adjustment to the value assigned to
the customer lists and relationships acquired in the Stratus Acquisition at the
end of the earnout period for $84,000.  Amortization is being reflected
prospectively as a change in estimate as of the end of the earnout period,
November 28, 2008.
  The
Company recorded amortization expense for the three months ended December 31,
2008 and 2007 of $79,000 and $90,000, respectively.  Estimated
intangible asset amortization expense (based on existing intangible assets) for
the remaining nine months of fiscal 2009 is $217,000 and for the fiscal years
ending September 30, 2010, 2011, 2012, 2013 and 2014 is $270,000, $259,000,
$259,000, $189,000 and $69,000, respectively.
 
 6.           Long-Term
Debt
 
 Long-term
debt at December 31, 2008 and September 30, 2008 is summarized as
follows:
 
 December
      31,
              
              
              September
      30,2008
              
              
              2008Long-term
      debt16.25%
      subordinated note (i)
              
              $
              102,000
              
              
              $
              102,0003%
      convertible subordinated note (ii)
              
              
              407,000
              
              
              
              436,00018%
      unsecured note (iii)
              
              
              80,000
              
              
              
              80,000Long
      term capitalized consulting obligations (v)
              
              
              23,000
              
              
              
              38,000Long
      term capitalized lease obligation (xii)
              
              
              17,000
              
              
              
              21,000Other
      debt
              
              
              50,000
              
              
              
              50,000Total
              
              
              679,000
              
              
              
              727,000Less
      current maturities
              
              
              402,000
              
              
              
              420,000Non-current
      portion
              
              
              277,000
              
              
              
              307,000Related
      party long-term debt13%
      unsecured demand note (iv)
              
              
              104,000
              
              
              
              104,000Long
      term capitalized consulting obligations (vi)
              
              
              9,000
              
              
              
              17,00018%
      unsecured convertible note (vii)
              
              
              100,000
              
              
              
              100,000Demand
      loans (viii)
              
              
              55,000
              
              
              
              65,0006%
      unsecured note (ix)
              
              
              100,000
              
              
              
              100,0006%
      unsecured note (x)
              
              
              1,577,000
              
              
              
              1,631,0009%
      unsecured note (xi)
              
              
              37,000
              
              
              
              73,000Total
              
              
              1,982,000
              
              
              
              2,090,000Less
      current maturities
              
              
              941,000
              
              
              
              946,000Non-current
      portion
              
              
              1,041,000
              
              
              
              1,144,000Total
      long-term debt
              
              
              2,661,000
              
              
              
              2,817,000Less
      current maturities
              
              
              1,343,000
              
              
              
              1,366,000Total
      non-current portion
              
              $
              1,318,000
              
              
              $
              1,451,000
 
  7
  US
Temp Services, Inc. Acquisition Notes and Long Term Consulting
Obligations
 
 As
partial consideration associated with the US Temp Acquisition four notes were
issued.
 
 (i)           A
$175,000 subordinated note was issued March 31, 2006, and was due January 30,
2007.  The note had an annual interest rate of 8% with principal and
interest payable in equal monthly installments of $18,150.  The note
is secured by office equipment and other fixed assets.  Due to the
failure to make timely payments under the terms of the note, the holder elected
the option of declaring the note in technical default and began assessing
interest, beginning April 1, 2007, at the rate of 11.25% per annum, and impose a
5% late charge on the overdue balance outstanding.  On October 31,
2007, the Company entered into a forbearance agreement with the holder of the
note wherein the holder agreed to waive defaults and refrain from exercising its
rights and remedies against the Company until October 31, 2008 in exchange for
an increase in the interest rate to 16.25%.  On October 31, 2008, the
Company entered into another forbearance agreement with the holder of the note
effectively extending the terms of the original forbearance agreement until
October 31, 2009.
 
 (ii)           A
$675,000 convertible subordinated note was issued March 31, 2006 and is due
March 31, 2012.  The note bears interest at an annual rate of 3%, and
is convertible in part or in whole into common shares at any time at the option
of the holder at the specified price of $1.50 per share.  The note is
secured by office equipment and other fixed assets.
 
 (iii)           An
$80,000 unsecured non-interest bearing note was issued March 31, 2006, and was
due June 29, 2006.  Due to the failure to make timely payments under
the terms of the note, on April 1, 2007, the holder elected the option of
declaring the note in technical default and began charging interest at a rate of
18% per annum.  On October 31, 2007, the Company entered into a
forbearance agreement with the holder of the note wherein the holder agreed to
waive defaults and refrain from exercising its rights and remedies against the
Company until October 31, 2008 in exchange for an increase in the interest rate
to 18% per annum.  On October 31, 2008, the Company entered into
another forbearance agreement with the holder of the note effectively extending
the terms of the original forbearance agreement until October 31,
2009.
 
 (iv)           A
$150,000 unsecured demand note was issued March 31, 2006 to a principal
shareholder of the Company as a finders fee in consideration for sourcing and
completing the US Temp Acquisition.  The note bore an annual interest
rate of 8%.  On October 31, 2007, the Company entered into a
forbearance agreement with the holder of the note wherein the holder agreed to
waive defaults and refrain from exercising its rights and remedies against the
Company until October 31, 2008 in exchange for an increase in the interest rate
to 13% per annum.  On October 31, 2008, the Company entered into
another forbearance agreement with the holder of the note effectively
extending the terms of the original forbearance agreement until October 31,
2009.
 
 On March
31, 2006, in connection with the US Temp Acquisition, the Company entered into
three long term consulting obligations which require the Company to pay fixed
recurring amounts but which do not require the other party to provide any
minimum level of services.  Consequently, the agreements have been
treated as debt obligations in the accompanying financial statements and
capitalized, net of interest imputed at a rate of 8.75% per year.  The
imputed interest was determined by reference to terms associated with credit
available to the Company at that time.  All three agreements expire on
March 31, 2009.
 
 (v)           Two
of the agreements were entered into with the principals of US Temps and each
require annual payments of $60,000 in the first two years and $30,000 in the
final year, payable in fixed weekly amounts.  These two agreements in
total were initially recognized at a fair value of $292,000 using a discount
rate of 8.75%.
 
 (vi)           The
third agreement was entered into with a major shareholder of the Company and
requires annual payments of $30,000 in each of three years, payable in fixed
weekly amounts.  The agreement was initially recorded at a fair value
of $84,000 using an interest rate of 5%.
 
 18%
Unsecured Convertible Note
 
 (vii)           A
$100,000 unsecured convertible note and 600,000 shares of restricted common
stock were issued on January 31, 2008 to a shareholder and director of the
Company in exchange for another note that had an outstanding principal balance
of $200,000.  This $100,000 unsecured convertible note was due October
31, 2008 and bore interest at an annual rate of 12%.  It is
convertible at any time at the option of the holder at a specified price of
$0.40 per share.  Due to the failure to pay the note at maturity, the
interest rate on the note has increased to 18% per annum.  The Company
is currently negotiating terms of a forbearance agreement with the
noteholder.
 
  8
  Demand
Loans
 
 (viii)           In
fiscal 2008 and 2006, a major shareholder advanced the Company $18,000 and
$30,000, respectively, to fund its operations.  As of December 31,
2008, $7,000 remains outstanding to another shareholder.  The amounts
are not subject to interest, are classified as short-term loans and are due and
payable upon demand by the shareholders.
 
 ReStaff
Inc., Acquisition Notes
 
 As
partial consideration associated with the ReStaff Acquisition the following
notes and loan remain outstanding.  The notes described in (ix) and
(x) below were issued to the then sole shareholder of ReStaff who was also
issued 600,000 shares of common stock as partial consideration and who also
became an employee of the Company.  The note described in (x) below is
subject to proportionate reduction in principal in the event the acquired
operations generate less than $1,000,000 in net income (as defined in the asset
purchase agreement) in any year during the term of the note.  The debt
described in (xi) and (xii) below was issued to two separate major shareholders
of the Company.
 
 (ix)           In February 2008 a
$100,000 unsecured note was issued.  The note is due March 5, 2009,
and bears an annual interest rate of 6%.
 
 (x)           In February 2008, a
$1,700,000 unsecured note was issued.  The note bears an annual
interest rate of 6% with principal and interest payable in equal monthly
installments of $39,925 over four years beginning May 1, 2008.  As
mentioned above, the note is subject to proportionate reduction in principal in
the event the acquired operations generate less than $1,000,000 in net income
(as defined in the asset purchase agreement) in any year during the term of the
note.
 
 (xi)           In
February 2007, a $275,000 unsecured note was issued as partial finder’s fee
consideration, bearing annual interest of 9%, with principal and interest
payable in equal monthly installments of $2,885 over 104 months.
 
 Other
Long-Term Debt
 
 (xii)           In
November, 2007, the Company entered into a capital lease agreement to purchase
computer equipment.  The original principal of $33,000 is payable over
a lease term of 24 months in equal monthly installments of $1,843.
 
 Reliance
on Related Parties
 
 The
Company has historically relied on funding from related parties in order to meet
its liquidity needs, such as the debt described in (iv), (vi), (vii), (viii),
(ix), (x), and (xi) above.  Management believes that the terms
associated with these instruments would not differ materially from those that
might have been negotiated with independent parties.  However,
management believes that the advantages the Company derived from obtaining
funding from related parties include a shortened length of time to identify and
obtain funding sources due to the often pre-existing knowledge of the Company’s
business and prospects possessed by the related party, and the lack of agent or
broker compensation often deducted from gross proceeds available to the
Company.  Management anticipates the Company will continue to have
significant working capital requirements in order to fund its growth and
operations, and to the extent the Company does not generate sufficient cash flow
from operations to meet these working capital requirements it will continue to
seek other sources of funding including the issuance of related party
debt.
 
 7.           Stock-Based
Compensation
 
 In
September, 2007, the Board adopted the Accountabilities, Inc. Equity Incentive
Plan (“the Plan”).  The Plan provides for the grant of stock options,
stock appreciation rights and restricted stock awards to employees, directors
and other persons in a position to contribute to the growth and success of the
Company.  A total of 2,000,000 shares of common stock have been
reserved for issuance under the Plan, and as of December 31, 2008 grants with
respect to 1,403,000 shares had been made.
 
 During
April 2007, 585,000 shares of restricted common stock were granted to certain
employees prior to the adoption of the Plan as restricted stock
awards.  Restricted stock award vesting is determined on an individual
grant basis.  Of the shares granted, 500,000 vest over five years and
85,000 vest over three years.
 
  9
  A summary
of the status of the Company’s nonvested shares as of December 31, 2008 and the
changes during the three months ended December 31, 2008 is presented
below:
 
 Nonvested
      Shares
              
              Shares
              
              
              Weighted-Average
                Grant-Date
      Fair ValueNonvested
      at October 1, 2008
              
              
              1,624,000
              
              
              $
              0.31Forfeited
              
              
              (1,000
              )
              
              $
              0.30Nonvested
      at December 31, 2008
              
              
              1,623,000
              
              
              $
              0.31
 
 Compensation
expense is measured using the grant-date fair value of the shares granted and is
recognized on a straight-line basis over the required vesting
period.  Fair value is determined as a discount from the current
market price quote to reflect a) lack of liquidity resulting from the restricted
status and low trading volume and, b) recent private placement
valuations.  For the three months ended December 31, 2008 and 2007,
compensation expense relating to restricted stock awards under the Plan was
$41,000 and $11,000, respectively.  As of December 31, 2008, there was
$334,000 of total unrecognized compensation cost.  That cost is
expected to be recognized as an expense over a weighted-average period of 2.4
years.
 
 8.           Stockholders’
Equity
 
 As of the
Date of Inception (June 9, 2005), a stockholders’ deficit of $1,765,000 existed
relating to remaining liabilities associated with the discontinued businesses of
certain wholly owned subsidiaries (the “Humana Businesses”), and was recognized
in Additional paid-in capital with a corresponding amount in Accounts payable
and accrued liabilities.  From the Date of Inception through September
30, 2007 approximately 6,536,000 shares of common stock of the Company were
issued in satisfaction of these liabilities.  During the first quarter
of fiscal 2009 and during fiscal 2008, no additional shares were issued relating
to the Humana Businesses.  As stock issuances to settle these
liabilities were completed, both the stockholders’ deficit and Accounts payable
and accrued liabilities were reduced.  As of December 31, 2008 and
September 30, 2008 the total remaining amount of these liabilities outstanding
was $700,000 relating to unremitted payroll tax withholdings of the subsidiary
conducting the discontinued employee leasing and benefit processing
business.
 
 9.           Supplemental
Disclosure of Cash Flow Information
 
 Three
      Months Ended
              
              
              Three
      Months EndedDecember
      31,
              
              
              December
      31,2008
              
              
              2007Cash
      paid for interest
              
              $
              134,000
              
              
              $
              243,000Non-cash
      investing and financing activities:Stock-based
      compensation
              
              
              41,000
              
              
              
              11,000
 
 10.           Commitments
and contingencies
 
 Unremitted
Payroll Taxes Related to Humana Businesses
 
 The
subsidiary conducting employee leasing and benefits processing services which
was part of the discontinued Humana Businesses has received assessments for
unremitted payroll taxes for calendar year 2004 from the IRS and certain state
taxing authorities totaling approximately $700,000.  This amount is
included in Accounts Payable and accrued expenses in the accompanying financial
statements and represents the amount management believes will ultimately be
payable for this liability based upon its knowledge of events and
circumstances.  However, there can be no assurance that future events
and circumstances will not result in an ultimate liability, including penalties
and interest, in excess of management’s current estimate.
 
 Legal
Proceedings
 
 In 2005,
the Company acquired the outstanding receivables of Nucon Engineering
Associates, Inc. (“Nucon”).  During the third quarter of fiscal 2008,
the Company was notified by the State of Connecticut that the Company may be
considered the successor employer associated with the accounts receivable
formerly owned by Nucon for State Unemployment Insurance (“SUI”) rate
purposes.  Nucon’s SUI rate was higher than the Company’s at the time
of the acquisition.  The State of Connecticut is claiming additional
SUI expense based on this higher rate and has assessed a higher experience rate
on wages for all periods subsequent to the acquisition date, which may be
reduced upon audit.  Management believes that it has properly
calculated its unemployment insurance tax and is in compliance with all
applicable laws and regulations.  The Company has appealed the ruling
and is awaiting a determination, but intends to vigorously defend its position
that the Company is not a successor employer.  Management estimates the
range of possible loss to be between $0 and $103,000.
  10
  In
December 2008, the Company received an assessment from the California Employment
Development Department (“EDD”) stating that it had determined the Company to be
a successor to Stratus Services Group, Inc. (“Stratus”) as a result of having
purchased the offices in the Stratus Acquisition described in Note
4.  The total amount of the assessment is $566,000, which consists
solely of penalties of $220,000 and interest of $346,000 and represents the
entire amount of the liability owed by Stratus.  Other entities who
also acquired offices from Stratus received a like assessment also for the total
amount of the liability owed by Stratus.  The Company has timely filed
a Petition for Reassessment stating its position that it does not believe it is
a successor to Stratus, and is working with outside counsel to resolve the
matter.  A confirmation of a hearing date from the EDD is
awaited.  Management is currently unable to estimate a range of
possible loss but intends to vigorously defend its position.
  11. Subsequent
Event
  On
February 11, 2009, the Company's Board of Directors determined that the Company
will exit all components of its business related to accounting and finance
services.  These components constitute all of the Company's CPA Partner on
Premise Program and the accounting service offerings within Direct Professional
Services.  The Board has not yet determined whether these components will
be sold or otherwise discontinued, and consequently management cannot currently
estimate the costs to exit these components or any anticipated gain or loss on
sale of the disposed components should a sale occur.  During the three
month periods ended December 31, 2008 and 2007, these finance and accounting
services components generated revenue of approximately $695,000 and $1,436,000,
respectively, and losses from operations of approximately ($186,000) and
($151,000), respectively.  During the fiscal year ended September 30, 2008,
these finance and accounting services components generated revenue of
approximately $4,056,000 and losses from operations of approximately
($539,000).  The Board reached its conclusion after reviewing the
historical operating performance and future prospects of these services and the
likely need for continued capital to support ongoing
losses.
  11
  Item
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
  The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion and analysis contains “forward-looking
statements,” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements relate to expectations concerning matters that are not
historical facts. Such forward-looking statements may be identified by words
such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,”
“expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or
“will” or the negative of these terms or other comparable terminology. These
statements, and all phases of our operations, are subject to known and unknown
risks, uncertainties and other factors as identified in our report on Form 10-K
for the fiscal year ended September 30, 2008 . Readers are cautioned not to
place undue reliance on these forward-looking statements. Our actual results,
levels of activity, performance or achievements and those of our industry may be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. We
undertake no obligation to update the forward-looking statements in this filing.
References in this filing to “Accountabilities,” the “Company,” “we,” “us,” and
“our” refer to Accountabilities, Inc. and its subsidiaries.
  Overview
  Description
of the Company
  We
currently provide both general staffing services and niche professional
services to the business community through our three primary service
offerings which include Staffing Abilities, CPA Partner on Premise and Direct
Professional Services.  Our Staffing Abilities offering provides general
staffing services to a variety of clientele in the areas of clerical and light
industrial services.  Our CPA Partner on Premise and Direct Professional
Service offerings provide niche professional services including project
management, interim contract, consulting and executive search, in the areas of
accounting, information technology, engineering, biotechnology and
biopharmaceutical.  As of December 31, 2008, we provide these services
in key markets across the United States, through the operation of 13 offices in
11 states and through cooperative sales and marketing arrangements with ten
different regional public accounting firms through our Partner on Premise
Program.
  The
contribution of each service offering to net income is primarily dependent on
the respective gross margin provided by each offering.  The Staffing
Abilities service offerings, although producing lower margins, have comprised
the largest component of our revenue at approximately 80% and consequently the
largest component of our gross profit.  Additionally, these service
offerings are more mature and we are not currently incurring significant amounts
of upfront expenses or captial expenditure towards future growth as we are to
develop our other service offerings.  In our CPA Partner on Premise and
Direct Professional Services offerings, which together currently comprise
approximately 20% of our revenue, we have incurred, and would expect to continue
to incur, upfront expenditures in senior management, consultants and other
client service associates, development of processes and procedures, and
marketing expenditures in order to build the necessary infrastructure and brand
awareness in anticipataion of future revenue growth for these service
offerings.
  Consequently, on February
11, 2009, our Board of Directors determined that the Company will exit all
components of its business related to accounting and finance services. 
These components constitute all of our CPA Partner on Premise Program and the
accounting and finance service offerings within Direct Professional Services, as
explained further below.  Our Board has not yet determined whether these
components will be sold or otherwise discontinued and consequently management
cannot currently estimate the costs to exit these components or any anticipated
gain or loss on sale of the disposed components should a sale occur. 
During the three month periods ended December 31, 2008 and 2007, these finance
and accounting services components generated revenue of approximately $651,000
and $1,436,000, respectively, and losses from operations of approximately
($189,000) and ($151,000), respectively.  During the fiscal year ended
September 30, 2008, these finance and accounting services components generated
revenue of approximately $4,056,000 and losses from operations of approximately
($539,000).  Our Board reached its conclusion after reviewing the
historical operating performance and future prospects of these services and the
likely need for continued capital to support ongoing losses.
  A more
detailed description of our current service offerings, including those expected
to be discontinued, as mentioned above, is as follows:
  ▪
              Staffing
      Abilities
  We provide general
temporary staffing in the areas of light industrial services and administrative
support to a diverse range of clients ranging from sole proprietorships to
Fortunue 500 companies.  Light industrial includes assignments for
warehouse work, manufacturing work, general factory and distribution. 
Administrative support services include placements satisfying a range of general
business needs including data entry processors, customer service
representatives, receptionists and general office personnel.  The Staffing
Abilities business has grown largely through the acquisition of established
offices from general staffing companies, such as those from Stratus Services
Group, Inc., US Temp Services, Inc. and ReStaff Services, Inc. as explained in
more detail elsewhere in this document.  Through December 31, 2008, the
Staffing Abilities service offering has historically constituted approximately
80% of our revenues.  The Staffing Abilities service offerings have
provided us with a predictable source of revenues to aid in supporting the
growth of our CPA Partner on Premise Program and Direct Professional Service
offerings, and functions as a potential client base from which to cross-sell
higher margin professional services.
  ▪
              CPA
      Partner on Premise Program
  Although
currently operating, as mentioned above, our Board of Directors has determined
that we will exit our CPA Partner on Premise Program business as part of the
Board's decision to exit all business components related to accounting and
finance service offerings.
  Currently,
our Partner on Premise Program has agreements with leading regional
public accounting firms to function as our sales and marketing presence in
pre-defined markets.  These public accounting firms offer to provide
our non-attest related finance and accounting services to their current client
base as well as any other client in the pre-defined market area.  This
relationship provides us with the ability to provide our professional accounting
and finance services immediately to an established client base in that market,
and to co-brand, utilizing the recognized name of the public accounting firm as
well as ours in the solicitation of new clients, while the public accounting
firm derives both an additional source of revenue as well as the ability to
provide these additional services to their clients.  As of December
31, 2008 we have agreements with ten different regional public accounting firms,
which to date through December 31, 2008 have historically generated less than
10% of our total revenues.  While the CPA Firm acts as a marketing and
sales arm for us and provides access to their client base, we retain control of
the clients, employees, systems and processes.  We provide, among
other things, industry expertise, business plans, market analysis, management
and technical services, back office support, including enterprise-wide
financial, accounting and human resources systems, personnel and assistance in
training to our CPA Partners.  As compensation, the CPA firm receives
a commission equal to the profits calculated by us, less 10% of the revenues
which is retained by us.
  12
 ▪Direct
Professional Services
  Although
the accounting and finance services component within Direct Professional
Services is currently operating, as mentioned above, our Board of Directors has
determined that we will exit all business components related to accounting and
finance service offerings.
  Currently,
our Direct Professional Services include Staff Augmentation and Consulting
Services.  Staff Augmentation services include executive search,
interim contract and project management in the areas of Accounting and Finance,
IT/Technology, Engineering, Biotechnology and
Biopharmaceutical.  Consulting services include accounting and finance
consulting services in the areas of Sarbanes-Oxley compliance, mergers and
acquisitions, corporate reorganizations, information systems and tax related
matters.  We provide these services directly through the operations of
our two wholly owned offices and national network of consultants. Through
December 31, 2008, Direct Professional Services have historically constituted
less than 20% of our revenues.
 The
following are additional material trends that are creating opportunities and
risks to our business, and a discussion of how management is
responding.
  ▪
              Our
      future profitability and rate of growth, if any, will be directly affected
      by our ability to continue to expand our service offerings at acceptable
      gross margins, and to achieve economies of scale, through the continued
      introduction of differentiated marketing and sales channels, and through
      the successful completion and integration of acquisitions.  During
      the first quarter of fiscal 2009, there have been growing concerns about
      the U.S. macro-economic environment including the significant
      turmoil in the credit and financial markets, declining GDP growth, an
      increase in the unemployment rate for individuals with college degrees,
      and increasing jobless claims; as well as several significant sudden
      business failures.  The economic uncertainties in which we
      currently operate make it challenging to predict the near-term future and
      could have a significant adverse impact on our clients and our
      business.  Our ability to sustain profitability will also be affected
      by the extent to which we must incur additional expenses to expand
      our sales, marketing, and general and administrative capabilities to
      expand our business.  The largest component of our operating expenses
      is personnel costs.  Personnel costs consist of salaries, benefits
      and incentive compensation, includin bonuses and stock-based compensation
      for our employees.  Management expects our operating expenses will
      continue to grow in absolute dollars, assuming our revenues continue to
      grow.
  ▪
              A
      significant component of our growth to date has come through
      acquisitions.  Management continues to invest resources in
      activities to seek, complete and integrate acquisitions that enhance
      current service offerings, and effectively assimilate into
      our operations, marketing and sales
      strategies.  Additionally, management seeks acquisitions in
      desired geographical markets and which have minimal costs and risks
      associated with integration.  Management believes that
      effectively acquiring businesses with these attributes will be critical
      to our growth.
  ▪
              Our
      success depends on our ability to provide our clients with highly
      qualified and experienced personnel who possess the skills and experience
      necessary to satisfy their needs.  Such individuals are in great
      demand, particularly in certain geographic areas, and are likely to remain
      a limited resource for the foreseeable future.  Management is
      responding to this demand through proactive recruiting efforts and
      targeted marketing.
  ▪
              We
      have financed our growth largely through the issuance of debt and have
      incurred negative working capital.  As of December 31, 2008 we
      had negative working capital of ($2,276,000), for which the component
      constituting the current portion of long-term debt was
      $1,343,000.  Total outstanding debt as of December 31, 2008 was
      $2,661,000, $591,000 of which is past due or due upon demand, whereas
      $1,577,000 of which is subject to proportionate reduction in the event the
      associated acquired businesses for which the debt was issued do not
      produce agreed upon levels of profitability.  In order to
      service our debt, maintain our current level of operations, as well as
      fund the increased costs of becoming a reporting company and our growth
      initiatives, we must be able to generate sufficient amounts of cash flow
      and working capital.  Management is engaged in several
      activities, as explained further in the Working Capital section below, to
      effectively accomplish these objectives; however, continued or increased
      volatility and disruption in the global capital and credit markets could
      negatively impact our business operations and therefore our liquidity and
      ability to meet working capital
needs.
  ▪
              As
      a result of becoming a fully reporting public company, we will experience
      increases in certain general and administrative expenses to comply with
      the laws and regulations applicable to public companies. These laws and
      regulations include the provisions of the Sarbanes-Oxley Act of 2002 and
      the rules of the Securities and Exchange Commission and the Nasdaq Stock
      Market.  To comply with the corporate governance and operating
      requirements of being a public company, we will incur increases in such
      items as personnel costs, professional services fees, and fees for
      independent directors.
   13
  Mergers
and Acquisitions
 
 One of
our key strategies is to focus on mergers and acquisitions of companies that
either complement our existing service offerings, expand our geographic presence
and/or further expand and strengthen our existing infrastructure.
 
 In fiscal
2006 we consummated the following two material acquisitions:
 
 ▪
              Stratus Services
      Group, Inc. Offices Acquisition (“Stratus
      Acquisition”).In November 2005, we acquired the
      operations of three general staffing offices from Stratus Services Group,
      Inc. in exchange for certain future earn-out
    payments.
 
 ▪
              US Temp
      Services, Inc. Offices Acquisition (“US Temp
      Acquisition”).On March 31, 2006, we acquired the
      operations, including five general staffing offices, of US Temp Services,
      Inc. in exchange for cash, notes and shares of our common
      stock.
 
 In fiscal
2007 we consummated the following material acquisition:
 
 ▪
              ReStaff
      Services, Inc. Offices Acquisition (“ReStaff
      Acquisition”).On February 26, 2007, we acquired the
      operations, including three general staffing offices, of ReStaff Services,
      Inc. in exchange for, cash, notes and shares of our common
      stock.
 
 All of
our acquisitions have been accounted for as purchases and the results of
operations of the acquired operations have been included in our results since
the dates of acquisition.
  As
mentioned above, management continues to invest resources in activities to seek,
complete and integrate acquisitions that enhance our current service
offerings.  Completing such acquisitions, however, will likely be
limited by our ability to negotiate purchase terms and/or obtain third party
financing on terms acceptable to us, given our current working capital
deficit.
  Critical
Accounting Policies
 
 The
following discussion and analysis of the financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States
and the rules of the Securities and Exchange Commission.  As a result
of the dispositions of all operations associated with the discontinued
businesses of certain wholly-owned subsidiaries (the “Humana Businesses”), and
the subsequent formation and startup of Accountabilities, Inc., the financial
statements have been prepared based upon a change in reporting entity wherein
only the accounts and related activity beginning with June 9, 2005 (the “Date of
Inception”) have been included, and all accounts and related operating activity
of the discontinued Humana Businesses have been excluded, in order to reflect
this reorganization of the Company.  The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.
 
 The
following represents a summary of the critical accounting policies, which
management believes are the most important to the portrayal of the financial
condition and results of operations and involve inherently uncertain issues that
require management’s most difficult, subjective or complex
judgments.
 
 Revenue
Recognition.  We recognize staffing and consulting revenues
when professionals deliver services.  Permanent placement revenue is
recognized when the candidate commences employment, net of an allowance for
those not expected to remain with clients through a 90-day guarantee period,
wherein we are obligated to find a suitable replacement.
   14
 Allowance for Doubtful
Accounts.  We maintain an allowance for doubtful accounts for
estimated losses resulting from our clients failing to make required payments
for services rendered.  Management estimates this allowance based upon
knowledge of the financial condition of our clients, review of historical
receivable and reserve trends and other pertinent information.  If the
financial condition of any of our clients deteriorates or there is an
unfavorable trend in aggregate receivable collections, additional allowances may
be required.
 
 Stock-Based
Compensation.We calculate stock-based compensation expense in
accordance with SFAS No. 123 Revised, “Share-Based Payment” (“SFAS
123(R)”).  This pronouncement requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and
directors including employee stock options, stock appreciation rights and
restricted stock awards to be based on estimated fair values. Fair value for
restricted stock is determined as a discount from the current market price quote
to reflect a) lack of liquidity resulting from the restricted
status and low trading volume and, b) recent private placement
valuations. Under SFAS 123(R), the value of the portion of the award that
is ultimately expected to vest is recognized as an expense over the requisite
service periods.  We recognize stock-based compensation expense on a
straight-line basis.
 
 Income
Taxes.  We account for income taxes in accordance with SFAS
109, “Accounting for Income Taxes”.  Under SFAS 109, deferred income
taxes are recognized for the estimated tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income.  If necessary, valuation allowances are established to
reduce deferred tax assets to the amount expected to be realized when, in
management’s opinion, it is more likely than not that some portion of the
deferred tax assets will not be realized.  The estimated provision for
income taxes represents current taxes that would be payable net of the change
during the period in deferred tax assets and liabilities. We evaluate the
probable resolution of tax positions based on the technical merits, that the
position will be sustained upon examination, presuming that the tax position
will be examined by the relevant taxing authority that has full knowledge of all
relevant information.
 
 Intangible
Assets.  In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” goodwill and other intangible assets with indefinite lives
are not subject to amortization but are tested for impairment annually or
whenever events or changes in circumstances indicate that the asset might be
impaired.  We performed our annual impairment analysis as of June 30,
2008 and will continue to test for impairment annually.  No impairment
was indicated as of June 30, 2008.  Other intangible assets with
finite lives are subject to amortization, and impairment reviews are performed
in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.”
  Recent
Accounting Pronouncements
 
 In June,
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position No. EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities” (“FSP EITF
03-6-1”).  FSP EITF 03-6-1 establishes that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities as defined in
Emerging Issues Task Force (“EITF”) Issue No. 03-6, “Participating Securities
and the Two-Class Method under FASB Statement No. 128”, and should be included
in the computation of earnings per share pursuant to the two-class method as
described in Statement of Financial Accounting Standards No. 128, Earnings per
Share”.  FSP EITF 03-6-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years.  All prior-period earnings per share data presented shall
be adjusted retrospectively to conform to the provisions of FSP EITF
03-6-1.  Early application is not permitted.  We do not
expect the adoption of FSP EITF 03-6-1 to have a material impact on our
consolidated financial position or results of operations.
  In June
2008 the FASB issued EITF 07-5, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock”.  EITF 07-5 provides guidance
in assessing whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity’s own stock for purposes of determining whether the
appropriate accounting treatment falls under the scope of SFAS 133, “Accounting
For Derivative Instruments and Hedging Activities” and/or EITF 00-19,
“Accounting For Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”.  EITF 07-05 is effective as of the
beginning of our 2010 fiscal year.  We do not expect the adoption of EITF
07-05 to have a material impact on our consolidated financial position or
results of operations.
   15
  In
December 2007, the FASB issued SFAS 141(revised 2007), “Business Combinations”
(“SFAS 141(R)”). This standard significantly changes the accounting and
reporting of business combinations in consolidated financial
statements.  Among other things, SFAS 141R requires the acquiring
entity in a business combination to recognize the full fair value of assets
acquired and liabilities assumed at the acquisition date and requires the
expensing of most transaction and restructuring costs.  The standard
is effective for us beginning October 1, 2009 and is applicable only to
transactions occurring after the effective date.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FAS 115”
(“SFAS 159”), which permits companies to measure certain financial assets and
financial liabilities at fair value.  Under SFAS 159, companies that
elect the fair value option will report unrealized gains and losses in earnings
at each subsequent reporting date.  The fair value option may be
elected on an instrument-by-instrument basis.  SFAS 159 establishes
presentation and disclosure requirements to clarify the effect of a company’s
election on its earnings but does not eliminate disclosure requirements of other
accounting standards.  Assets and liabilities that are measured at
fair value must be displayed on the face of the balance sheet.  SFAS
159 was effective as of the beginning of our 2009 fiscal year. The Company has
not elected to measure any financial assets and financial liabilities at fair
value that were not previously required to be measured at fair
value.  Therefore, the adoption of this standard had no impact on the
Company’s financial position, results of operations and cash
flows.
  In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (“SFAS 157”). This new standard provides guidance
for using fair value to measure assets and liabilities and information about the
extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value
measurements on earnings. This framework is intended to provide increased
consistency in how fair value determinations are made under various existing
accounting standards which permit, or in some cases require, estimates of fair
market value. SFAS 157 also expands financial statement disclosure requirements
about a company’s use of fair value measurements, including the effect of such
measures on earnings. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. However, the
FASB staff has approved a one year deferral for the implementation of SFAS 157
for non-financial assets and liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis.
Non-financial assets and liabilities for which we have not applied the
provisions of SFAS 157 include those measured at fair value in goodwill
impairment testing and asset impairments under SFAS 144. We have adopted this
statement for financial assets and liabilities effective October 1, 2008 and the
adoption had no impact on the Company’s financial position, results of
operations and cash flows.  The Company will adopt this statement for
non-financial assets and liabilities effective October 1, 2009, although we do
not expect there will be a material impact from adoption of this standard on our
consolidated financial statements, although we may need to include additional
disclosures in the financial statement footnotes.
 
 Results
of Operations
 
 Three
months ended December 31, 2008 compared to three months ended December 31,
2007
 
 Revenue
 
 For the
three months ended December 31, 2008, revenue decreased $797,000, or 4%, to
$17,351,000, as compared to $18,148,000 in the same period of the prior
year.  This decrease in revenue is primarily attributable to a
decrease in revenue of $1,340,000 from the business acquired in the US Temps
Acquisition, a decrease in revenue of $686,000 from the CPA Partner on Premise
Program and a decrease in revenue of $121,000 from the business acquired in the
Stratus Acquisition.  These declines were due to a combination of the
loss of accounts and lower billings for several larger customers that were not
fully offset by the acquisition of new accounts or existing account
increases.   The revenue decreases were partially offset by
increased revenue of $739,000 provided by the business acquired in the ReStaff
Acquisition and revenue of $672,000 from new commercial offices in California
and Virginia.
 
 Direct
cost of services
 
 For the
three months ended December 31, 2008, direct cost of services decreased by
$429,000 or 3% to $14,658,000, as compared to $15,087,000 in the same period of
the prior year.  The decrease is consistent with the decline in
revenue during the period.
 
 Gross
profit
 
 For the
three months ended December 31, 2008 gross profit decreased $368,000, or 12%, to
$2,693,000, as compared to $3,061,000 in the same period in the prior
year.  As a percentage of revenue, gross profit for the three months
ended December 31, 2008 decreased to 15.5% as compared to 16.9% in the same
period in the prior year, primarily as a result of changes in the client mix
resulting in lower average gross margins and increases in state unemployment
insurance rates that could not be passed along to the clients.
   16
 Selling,
general and administrative expenses
 
 For the
three months ended December 31, 2008, selling, general and administrative
expenses decreased $179,000, or 7%, to $2,420,000, as compared to $2,599,000 in
the same period of the prior year.  Selling, general and
administrative expenses include non-cash charges for stock based compensation
expense of $41,000 for the three months ended December 31, 2008 as compared with
$11,000 in the same period of the prior year.  As a percentage of
revenue, selling, general and administrative expenses were 13.9% for the three
months ended December 31, 2008 compared to 14.3% during the same period in the
prior year.  Management has been aggressively managing expenses and
has successfully reduced expenses by seeking efficiencies in operating offices
and corporate functions.
 
 Depreciation
and amortization
 
 For the
three months ended December 31, 2008, depreciation and amortization increased
$5,000, or 5%, to $112,000, as compared to $107,000 in the same period in the
prior year.  The increase is attributable to increased purchases of
property and equipment made in the preceding twelve months.
  Income
from operations
 
 As a
result of the above, income from operations was $161,000 for the three months
ended December 31, 2008 versus income from operations of $355,000 for the same
period in the prior year, representing a decrease of 55%.
 
 Interest
expense
 
 Interest
expense includes the net discounts associated with the sales of accounts
receivable, as well as interest on debt associated with acquired companies and
financing our operations. Interest expense for the three months ended December
31, 2008 was $143,000, as compared to $314,000 during the same period in the
prior year, representing a decrease of 54%.The
decrease is attributable to a reduction in the amount of debt outstanding that
occurred during fiscal 2008 through restructuring outstanding debt, conversion
of debt to restricted common stock and repayments of principal.  In
addition, the three percentage point reduction in the federal prime lending rate
from the same period of the prior year, resulted in lowered interest expense on
our sold outstanding accounts receivable.
 
 Net
income
 
 The
factors described above resulted in net income for the three months ended
December 31, 2008 of $18,000, as compared to $41,000 during the same period of
the prior year.
 
 Liquidity
and Capital Resources
 
 Cash
Flows
 
 We have
historically relied on cash flows from operations, borrowings under debt
facilities, loans from related parties and proceeds from sales of stock to
satisfy our working capital requirements as well as to fund
acquisitions.  In the future, we may need to raise additional funds
through public and/or additional private debt or equity financings to take
advantage of business opportunities, including existing business growth and
mergers and acquisitions.
 
 At
December 31, 2008, cash was $80,000, an increase of $11,000 from $69,000 as of
September 30, 2008.
 
 Net cash
provided by operating activities during the three months ended December 31, 2008
decreased ($275,000) to $176,000, from $451,000 during the same period of the
prior year.  This was primarily due to a reduction in outstanding
accounts payable and accrued liabilities of ($1,318,000), offset by a decrease
in trade accounts receivable of $952,000, as well as a variety of other normal
operating fluctuations in other operating assets and liabilities.
  17
 Net cash
used in investing activities during the three months ended December 31, 2008
decreased ($21,000) to ($9,000) from ($30,000) during the same period of the
prior year, primarily as a result of fewer purchases of computer equipment in
the current period.
 
 Net cash
used in financing activities during the three months ended December 31, 2008
decreased ($144,000) to ($156,000) from ($300,000) during the same period of the
prior year, primarily as a result of decreased principal payments on long-term
debt required after the effect of debt restructurings which took place in fiscal
2008.
 
 Working
Capital
 
 We have
financed our growth largely through the issuance of debt and have incurred
negative working capital.  As part of funding this growth, as of
December 31, 2008 we had negative working capital of ($2,276,000), for which the
component constituting the current portion of long-term debt was
$1,343,000.  Within the current portion of long-term debt $591,000 is
past due or due upon demand as explained further below.  Total
outstanding debt as of December 31, 2008 was $2,661,000.  In order to
service our debt, maintain our current level of operations, as well as fund the
increased costs of having become a reporting company and our growth initiatives,
we must be able to generate sufficient amounts of cash flow and working
capital.  Management is engaging in the following activities to
effectively accomplish these objectives:
 
 a)
              In
      October 2008, we extended the terms of three forbearance agreements with
      respect to $286,000 of the $591,000 past due or due upon demand
      debt.  These short term debt holders have agreed to waive
      defaults and refrain from exercising their rights and remedies against us
      until October 31, 2009.
 b)
              In
      December 2007 we retained an outside financial advisory and investment
      banking firm to advise and assist us in raising
  capital.
 c)
              We
      are aggressively managing cash and expenses, including the increased costs
      of being a reporting company, with activities such as seeking additional
      efficiencies in our operating offices and corporate functions including
      headcount reductions if appropriate, improving our accounts receivable
      collection efforts, obtaining more favorable vendor terms, and using our
      finance and accounting consultants when available to aid in the necessary
      obligations associated with being a reporting company.
  The
working capital deficit of ($2,276,000) as of December 31, 2008, represents a
decrease of ($113,000) as compared to a working capital deficit of ($2,389,000)
as of September 30, 2008.
 
 Because
our revenue depends primarily on billable labor hours, most of our charges are
invoiced weekly, bi-weekly or monthly depending on the associated payment of
labor costs, and are due currently, with collection times typically ranging from
30 to 60 days.  We sell our accounts receivable to a financial
institution as a means of managing our working capital.  Under the
terms of our receivable sale agreement the maximum amount of trade receivables
that can be sold is $8,000,000.  As collections reduce previously sold
receivables, we may replenish these with new receivables.  Net
discounts per the agreement are represented by an interest charge at an annual
rate of prime plus 1.5% (“Discount Rate”) applied against outstanding
uncollected receivables sold.  The risk we bear from bad debt losses
on trade receivables sold is retained by us, and receivables sold may not
include amounts over 90 days past due.  The agreement is subject to a
minimum discount computed as minimum sales per month of $3,000,000 multiplied by
the then effective Discount Rate, and a termination fee applies of 3% of the
maximum facility in year one of the agreement, 2% in year two, and 1%
thereafter.  In addition, an overadvance of $500,000 was received, is
secured by outstanding receivables, and is being repaid in weekly payments of
$7,500.  As of December 31, 2008, the amount of sold receivables
outstanding was $5,597,000, which includes $292,275 of the
overadvance.
 
  18
 Debt
 
 Long-term
debt at December 31, 2008 and September 30, 2008 is summarized as
follows:
 
 December
      31,
              
              
              September
      30,2008
              
              
              2008Long-term
      debt16.25%
      subordinated note (i)
              
              $
              102,000
              
              
              $
              102,0003%
      convertible subordinated note (ii)
              
              
              407,000
              
              
              
              436,00018%
      unsecured note (iii)
              
              
              80,000
              
              
              
              80,000Long
      term capitalized consulting obligations (v)
              
              
              23,000
              
              
              
              38,000Long
      term capitalized lease obligation (xii)
              
              
              17,000
              
              
              
              21,000Other
      debt
              
              
              50,000
              
              
              
              50,000Total
              
              
              679,000
              
              
              
              727,000Less
      current maturities
              
              
              402,000
              
              
              
              420,000Non-current
      portion
              
              
              277,000
              
              
              
              307,000Related
      party long-term debt13%
      unsecured demand note (iv)
              
              
              104,000
              
              
              
              104,000Long
      term capitalized consulting obligations (vi)
              
              
              9,000
              
              
              
              17,00018%
      unsecured convertible note (vii)
              
              
              100,000
              
              
              
              100,000Demand
      loans (viii)
              
              
              55,000
              
              
              
              65,0006%
      unsecured note (ix)
              
              
              100,000
              
              
              
              100,0006%
      unsecured note (x)
              
              
              1,577,000
              
              
              
              1,631,0009%
      unsecured note (xi)
              
              
              37,000
              
              
              
              73,000Total
              
              
              1,982,000
              
              
              
              2,090,000Less
      current maturities
              
              
              941,000
              
              
              
              946,000Non-current
      portion
              
              
              1,041,000
              
              
              
              1,144,000Total
      long-term debt
              
              
              2,661,000
              
              
              
              2,817,000Less
      current maturities
              
              
              1,343,000
              
              
              
              1,366,000Total
      non-current portion
              
              $
              1,318,000
              
              
              $
              1,451,000
 
 For
further explanations of (i) through (xii) please see Note 6 to our financial
statements beginning on page 1 of this report on Form 10-Q.
 
 Sales
of Common Stock
 
 None
during the three months ended December 31, 2008.
  Item
      3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS
 
 Our
receivable sale agreement is subject to variable rate interest, which could be
adversely affected by an increase in interest rates.  As of September
30, 2008 outstanding uncollected receivables sold were
$5,106,000.  Our weighted average outstanding uncollected receivables
sold for the year ending September 30, 2008 was
$5,504,000.  Management estimates that had the average interest rate
increased by two percentage points during the year ending September 30, 2008,
interest expense would have increased by approximately $110,000.
 
 We
believe that our business operations are not exposed to market risk relating to
foreign currency exchange risk or commodity price risk.
  19
 Item
      4.
              CONTROLS
      AND PROCEDURES
 
 Under the
supervision and with the participation of management, including our Chief
Executive Officer and our Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures.  Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the 1934 Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.  Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this
report.  There were no changes in our internal controls during the
quarter ended December 31, 2008 that have materially affected, or are reasonably
likely to have materially affected our internal controls over financial
reporting.
 
 Our
management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent all error and all
fraud.  A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met.  Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected.
  Part
      II
              Other
      InformationItem
      1.
              Legal
      Proceedings
 
 We are
involved, from time to time, in routine litigation arising in the ordinary
course of business, including the matters described in our report on Form 10-K
for the fiscal year ended September 30, 2008.  There have been no
material changes in the status of such matters since the filing of that annual
report.
 
 In
December 2008, we received an assessment from the California Employment
Development Department (“EDD”) stating that it had determined the Company to be
a successor to Stratus Services Group, Inc. (“Stratus”) as a result of having
purchased the offices from Stratus in November, 2005.  The total
amount of the assessment is $566,000, which consists solely of penalties of
$220,000 and interest of $346,000 and represents the entire amount of the
liability owed by Stratus.  Other entities who also acquired offices
from Stratus received a like assessment also for the total amount of the
liability owed by Stratus.  We have timely filed a Petition for
Reassessment stating our position that we do not believe we are a successor to
Stratus, and are working with outside counsel to resolve the
matter.  A confirmation of a hearing date from the EDD is
awaited.  Management is currently unable to estimate a range of
possible loss but intends to vigorously defend its position.
  Item
      1A.
              Risk
      Factors
 
 There
have been no material changes with respect to the risk factors disclosed in our
latest report on Form 10-K for the fiscal year ended September 30, 2008 as filed
with the Securities and Exchange Commission.
 
 Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 None
during the three months ended December 31, 2008.
 
 Item
      3.
              Defaults
      Upon Senior Securities
 
 We are
currently in default under promissory notes in the principal amounts of
$175,000, $80,000, $150,000 and $100,000, respectively, as a result of our
failure to make timely payments of principal and/or interest.  The holders
of the $175,000, $80,000 and $150,000 notes have extended the terms of their
forbearance agreements with us and have agreed to refrain from exercising their
rights and remedies against us until October 31, 2009. We are currently
negotiating the terms of a forbearance agreement with the holder of the $100,000
note.  As of December 31, 2008, the aggregate amount of payments due but
not made under the notes was $386,000.
  Item
      4.
              Submission
      of Matters to a Vote of Security
Holders
 
 No
matters were submitted to a vote of stockholders during the three months ended
December 31, 2008.
  20
 
 Item
      5.
              Other
      Information
  Election
of Director
  On
February 11, 2009, the Board of Directors elected Robert Cassera to fill a
vacancy on the Board of Directors. Mr. Cassera, 46 years old, is the founder,
sole owner, president and director of Tri-State Employment Service, Inc. from
1993 to present. Tri-State Employment Service, Inc. itself and through several
wholly-owned subsidiaries (collectively, “Tri-State”), including Tri-State
Employment Service, Inc. and TS Staffing Corp, primarily offers temporary
staffing and related services to municipalities and privately-held and public
companies as well as Professional Employer Organization and ancillary services
to privately-held and public companies. It has not been determined to which, if
any, committees of the Board of Directors Mr. Cassera will be
named.
  The Board
of Directors is now composed of five persons, three of whom (including Mr.
Cassera) are employees of Tri-State. Currently, Tri-State provides such services
to the Company pursuant to an arm’s length agreement, with terms consistent with
those provided other Tri-State clients. This agreement was entered into between
the Company and Tri-State prior to the election of any Tri-State affiliates to
the Company’s Board of Directors. As of February 17, 2009, Mr. Cassera and his
affiliates, including Tri-State, own approximately 43% of the outstanding shares
of the Company’s common stock.
  The
Company leases the majority of its workers from Tri-State. The Company leases
employees in order to mitigate certain insurance risks and obtain greater
employee benefits at more advantageous rates via Tri-State’s much larger scale.
Employees are leased from Tri-State based upon agreed upon rates which are
dependent upon the individual employee’s compensation structure, as agreed to
between the Company and the employee, with the total rate paid to Tri-State
being inclusive of the employees compensation as well as all related payroll
taxes and fees to Tri-State. The total amount of these leasing costs charged by
Tri-State (inclusive of the compensation and taxes referred to in the prior
sentence) during the three months ended December 31, 2008 and 2007 were
$15,505,000 and $15,933,000, respectively, and for the fiscal years ended
September 30, 2008 and 2007 was $59,268,000 and $50,979,000,
respectively.
  In order
to finance portions of the purchase price of an acquisition, the Company entered
into a borrowing arrangement with Tri-State in 2007 pursuant to which up to
$950,000 was eligible to be borrowed without interest. As consideration for the
loan, Tri-State was granted 600,000 shares of restricted common stock. The
Company borrowed and subsequently repaid $450,000 in March 2007, and borrowed
the balance of $500,000 in June 2007 which was payable in equal monthly
installments of $10,000. In March 2008, the Company issued 1,000,000 shares of
restricted common stock to Tri-State in exchange for consideration of $200,000,
which consisted of the cancellation of the remaining outstanding balance of the
loan of $120,000, the cancellation of $26,000 of outstanding invoices payable
and $54,000 in cash.
  Costs
Associated with Exit or Disposal Activities
  On
February 11, 2009, the Company's Board of Directors determined that the Company
will exit all components of its business related to accounting and finance
services.  These components constitute all of the Company's CPA Partner on
Premise Program and the accounting service offerings within Direct Professional
Services.  The Board has not yet determined whether these components will
be sold or otherwise discontinued, and consequently management cannot currently
estimate the costs to exit these components or any anticipated gain or loss on
sale of the disposed components should a sale occur.  During the three
month periods ended December 31, 2008 and 2007, these finance and accounting
services components generated revenue of approximately $695,000 and $1,436,000,
respectively, and losses from operations of approximately ($186,000) and
($151,000), respectively.  During the fiscal year ended September 30, 2008,
these finance and accounting services components generated revenue of
approximately $4,056,000 and losses from operations of approximately
($539,000).  The Board reached its conclusion after reviewing the
historical operating performance and future prospects of these services and the
likely need for continued capital to support ongoing losses.
 Item
      6.
              Exhibits
  Number
              Description10.45
              Temporary
      Forbearance Agreement dated October 31, 2008 between Accountabilities,
      Inc. and Bernard Freedman10.46
              Temporary
      Forbearance Agreement dated October 31, 2008 between Accountabilities,
      Inc. and Bernard Freedman10.47
              Temporary
      Forbearance Agreement dated October 31, 2008 between Accountabilities,
      Inc. and Washington Capital LLC31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act
      of 200231.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act
      of 200232.1
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of Sarbanes-Oxley Act of 2002
 
  21
  
 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.
 
 ACCOUNTABILITIES,
      INC.Date: 
      February 17, 2009
                By:
                /s/ Jeffrey
      J. RaymondName: 
      Jeffrey J. RaymondTitle: 
      Chief Executive Officer
 ACCOUNTABILITIES,
      INC.Date: 
      February 17, 2009
                By:
                /s/ Stephen
      DelVecchiaName: 
      Stephen DelVecchiaTitle: 
      Chief Financial Officer
  22