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 March 31, 2009o
              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)
 
 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T  during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).  o Yes  o  No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
 
 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 April 24,
2009 was 23,677,018.
  
  
 ACCOUNTABILITIES,
INC.
 INDEX
 
 
 
 
 PART
      I – FINANCIAL INFORMATION
              PageItem
      1.
              Financial
      Statements (Unaudited)Balance
      Sheets as of March 31, 2009 and September 30, 2008
              1Statements
      of Operations for the Three and Six Months Ended March 31, 2009 and
      2008
              2Statement
      of Stockholders’ Equity for the Six Months Ended March 31,
      2009
              3Statements
      of Cash Flows for the Six Months Ended March 31, 2009 and
    2008
              4Notes
      to Financial Statements
              5-11Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              12Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risks
              20Item
      4.
              Controls
      and Procedures
              20PART
      II – OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              21Item
      1A.
              Risk
      Factors
              21Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              21Item
      3.
              Defaults
      Upon Senior Securities
              22Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              22Item
      5.
              Other
      Information
              22Item
      6.
              Exhibits
              22Signatures
 
 
  
  ACCOUNTABILITIES,
INC.
 BALANCE
SHEETS
 
 March
      31,
              
              
              September
      30,2009
              
              
              2008(unaudited)ASSETSCurrent
      assets:Cash
              
              $
              31,000
              
              
              $
              69,000Accounts
      receivable – less allowance for doubtful accounts of $515,000 and
      $445,000, respectively
              
              
              913,000
              
              
              
              1,362,000Due
      from financial institution
              
              
              271,000
              
              
              
              202,000Unbilled
      receivables
              
              
              422,000
              
              
              
              671,000Prepaid
      expenses
              
              
              243,000
              
              
              
              326,000Due
      from related party
              
              
              40,000
              
              
              
              51,000Total
      current assets
              
              
              1,920,000
              
              
              
              2,681,000Property
      and equipment, net
              
              
              286,000
              
              
              
              340,000Other
      assets
              
              
              9,000
              
              
              
              10,000Intangible
      assets, net
              
              
              1,189,000
              
              
              
              1,426,000Goodwill
              
              
              3,332,000
              
              
              
              3,332,000Total
      assets
              
              $
              6,736,000
              
              
              $
              7,789,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
              
              $
              1,566,000
              
              
              $
              1,431,000Accrued
      wages and related obligations
              
              
              1,417,000
              
              
              
              2,019,000Current
      portion of long-term debt
              
              
              413,000
              
              
              
              420,000Current
      portion of related party long-term debt
              
              
              947,000
              
              
              
              946,000Acquisition
      related contingent liability
              
              
              109,000
              
              
              
              193,000Due
      to related party
              
              
              243,000
              
              
              
              61,000Total
      current liabilities
              
              
              4,695,000
              
              
              
              5,070,000Long
      term debt, net of current portion
              
              
              248,000
              
              
              
              307,000Related
      party long-term debt, net of current portion
              
              
              936,000
              
              
              
              1,144,000Total
      liabilities
              
              
              5,879,000
              
              
              
              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; 23,703,000 and
      23,792,000 shares issued and outstanding as of March 31, 2009 and
      September 30, 2008, respectively
              
              
              2,000
              
              
              
              2,000Additional
      paid-in capital
              
              
              3,318,000
              
              
              
              3,236,000Accumulated
      deficit
              
              
              (2,463,000
              )
              
              
              (1,970,000
              )Total
      stockholders’ equity
              
              
              857,000
              
              
              
              1,268,000Total
      liabilities and stockholders’ equity
              
              $
              6,736,000
              
              
              $
              7,789,000
 The
accompanying notes are an integral part of these financial statements.
 
 
  1
  ACCOUNTABILITIES,
INC.
 
 STATEMENTS
OF OPERATIONS
 (unaudited)
 
 Three
      Months
              
              
              Six
      MonthsEnded
              
              
              EndedMarch
      31,
                2009
              
              
              March
      31,
                2008
              
              
              March
      31,
                2009
              
              
              March
      31,
                2008Revenue
              
              $
              13,376,000
              
              
              $
              15,743,000
              
              
              $
              30,727,000
              
              
              $
              33,891,000Direct
      cost of services
              
              
              11,470,000
              
              
              
              13,304,000
              
              
              
              26,128,000
              
              
              
              28,391,000Gross
      profit
              
              
              1,906,000
              
              
              
              2,439,000
              
              
              
              4,599,000
              
              
              
              5,500,000Selling,
      general and administrative expenses *
              
              
              2,207,000
              
              
              
              2,747,000
              
              
              
              4,627,000
              
              
              
              5,346,000Depreciation
      and amortization
              
              
              103,000
              
              
              
              118,000
              
              
              
              215,000
              
              
              
              225,000Loss
      from operations
              
              
              (404,000
              )
              
              
              (426,000
              )
              
              
              (243,000
              )
              
              
              (71,000
              )Interest
      expense
              
              
              107,000
              
              
              
              229,000
              
              
              
              250,000
              
              
              
              543,000Loss
      on goodwill impairment
              
              
              -
              
              
              
              148,000
              
              
              
              -
              
              
              
              148,000Net
      loss on debt extinguishments
              
              
              -
              
              
              
              100,000
              
              
              
              -
              
              
              
              100,000Net
      loss
              
              $
              (511,000
              )
              
              $
              (903,000
              )
              
              $
              (493,000
              )
              
              $
              (862,000
              )Net
      loss per share:Basic
              
              $
              (0.02
              )
              
              $
              (0.05
              )
              
              $
              (0.02
              )
              
              $
              (0.05
              )Diluted
              
              $
              (0.02
              )
              
              $
              (0.05
              )
              
              $
              (0.02
              )
              
              $
              (0.05
              )Weighted
      average shares outstanding:Basic
              
              
              22,445,000
              
              
              
              18,983,000
              
              
              
              22,297,000
              
              
              
              17,934,000Diluted
              
              
              22,445,000
              
              
              
              18,983,000
              
              
              
              22,297,000
              
              
              
              17,934,000*
      Includes $41,000 and $82,000 for the three and six months ended March 31,
      2009, respectively, and $198,000 and $209,000 for the three and six months
      ended March 31, 2008, 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)
 
 Six
      Months EndedMarch
      31, 2009Common
      Stock – Shares:Balance
      at beginning of period
              
              
              23,792,000Forfeitures
      of restricted stock awards
              
              
              (89,000
              )Balance
      at end of period
              
              
              23,703,000Common
      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
              
              
              82,000Balance
      at end of period
              
              $
              3,318,000Accumulated
      Deficit:Balance
      at beginning of period
              
              $
              (1,970,000
              )Net
      loss
              
              
              (493,000
              )Balance
      at end of period
              
              $
              (2,463,000
              )
 
 The
accompanying notes are an integral part of these financial
statements.
 
 
  3
  
 ACCOUNTABILITIES,
INC.
 
 STATEMENTS
OF CASH FLOWS
 (unaudited)
 
 
 Six
      Months EndedMarch
      31,
              
              
              March
      31,2009
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (493,000
              )
              
              $
              (862,000
              )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
              
              
              215,000
              
              
              
              225,000Stock-based
      compensation
              
              
              82,000
              
              
              
              209,000Bad
      debt expense
              
              
              76,000
              
              
              
              159,000Loss
      on goodwill impairment
              
              
              -
              
              
              
              148,000Net
      loss on debt extinguishments
              
              
              -
              
              
              
              100,000Amortization
      of discount on long-term debt
              
              
              -
              
              
              
              18,000Changes
      in operating assets and liabilities:Trade
      accounts receivable
              
              
              622,000
              
              
              
              (100,000
              )Due
      from financial institution
              
              
              (69,000
              )
              
              
              106,000Prepaid
      expenses
              
              
              83,000
              
              
              
              (10,000
              )Due
      to/from related party
              
              
              193,000
              
              
              
              (94,000
              )Other
      assets
              
              
              1,000
              
              
              
              26,000Accounts
      payable and accrued liabilities
              
              
              (467,000
              )
              
              
              464,000Net
      cash provided by operating activities
              
              
              243,000
              
              
              
              389,000Cash
      flows from investing activities:Purchase
      of property and equipment
              
              
              (8,000
              )
              
              
              (244,000
              )Net
      cash used in investing activities
              
              
              (8,000
              )
              
              
              (244,000
              )Cash
      flows from financing activities:Principal
      payments on long-term debt
              
              
              (66,000
              )
              
              
              (137,000
              )Proceeds
      from issuance of long-term debt – related parties
              
              
              -
              
              
              
              27,000Principal
      payments on long-term debt – related parties
              
              
              (207,000
              )
              
              
              (387,000
              )Payments
      on contingent acquisition related liability
              
              
              -
              
              
              
              (62,000)Proceeds
      from issuance of common stock
              
              
              -
              
              
              
              310,000Net
      cash used in financing activities
              
              
              (273,000
              )
              
              
              (249,000
              )Change
      in cash
              
              
              (38,000
              )
              
              
              (104,000
              )Cash
      at beginning of period
              
              
              69,000
              
              
              
              137,000Cash
      at end of period
              
              $
              31,000
              
              
              $
              33,000
 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 administrative support.  Light
industrial support 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 Company conducts all of its business in the
United States through the operation of 13 staffing and recruiting
offices.
 
 In April
2009, the Company discontinued its CPA Partner on Premise Program service
offering through which it had provided staffing and recruiting services for the
placement of finance and accounting personnel through sales and marketing
agreements with ten public accounting firms.  The Company has also
ceased promoting the provision of finance and accounting services through its
Direct Professional Services offering and is currently in discussions with a
third party, controlled by certain officers of the Company, to assume this
business.
 
 2.           Summary
of Significant Accounting Policies
 
 Interim
Financial Information
 
 The
financial information as of and for the three and six months ended March 31,
2009 and 2008 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 the U.S. Securities and Exchange Commission 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 Loss per Share
 
 The
Company presents both basic and diluted loss 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 and diluted EPS are calculated by
dividing net income by the weighted average number of common shares outstanding
during the period.  Common stock equivalent shares are excluded from
the computation in periods in which they have an anti-dilutive
effect.   The weighted average number of common shares outstanding
does not include the anti-dilutive effect of approximately 688,000 common stock
equivalent shares for the three and six months ended March 31, 2009, and
1,355,000 common stock equivalent shares for the three and six months ended
March 31, 2008, representing warrants, convertible debt and non-vested
shares.
 
  5
  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 included 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 No.
141.  Through November 28, 2008, $485,000 had been paid relating to
the Stratus Earnout.
 
 In
December, 2008 the Company received an assessment from the California Employment
Development Department (“EDD”) as disclosed in Note 11.  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” was dependent on the resolution of the assessment
from the EDD.   On March 11, 2009, the Company received a
notification from the EDD that it was granted full relief from this
assessment.  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 was recorded as a reduction in the value of the
acquired intangible assets on the accompanying balance sheets in accordance with
SFAS No. 141.  This liability has been reclassified as a current
liability together with the corresponding amount from September 30, 2008 for
comparative purposes.
  5.           Intangible
Assets and Goodwill
 
 The
following table provides a detailed presentation of the Company’s intangible
assets, estimated lives, related accumulated amortization and
goodwill:
 
 As
      of March 31, 2009
              
              
              As
      of September 30, 2008Accumulated
              
              
              
              
              
              
              
              
              AccumulatedGross
              
              
              Amortization
              
              
              Net
              
              
              Gross
              
              
              Amortization
              
              
              NetCustomer
      lists and relationships (7 years)
              
              $
              1,923,000
              
              
              $
              (759,000
              )
              
              $
              1,164,000
              
              
              $
              2,007,000
              
              
              $
              (625,000
              )
              
              $
              1,382,000Non-competition
      agreements
                (3
      years)
              
              
              111,000
              
              
              
              (86,000
              )
              
              
              25,000
              
              
              
              111,000
              
              
              
              (67,000
              )
              
              
              44,000Total
              
              $
              2,034,000
              
              
              $
              (845,000
              )
              
              $
              1,189,000
              
              
              $
              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 six months ended March 31, 2009
and 2008 of $153,000 and $177,000, respectively.  Estimated intangible
asset amortization expense (based on existing intangible assets) for the
remaining six months of fiscal 2009 is $143,000 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
  
 6.           Due
to Related Party
 
 During
the second quarter of fiscal 2009, a related party, which is a holder of
approximately 43% of the Company’s outstanding shares, advanced the Company
$212,000, interest-free, to help finance its operations, all of which remains
outstanding as of March 31, 2009.
 
 7.           Long-Term
Debt
 
 Long-term
debt at March 31, 2009 and September 30, 2008 is summarized as
follows:
  March
      31,
              
              
              September
      30,2009
              
              
              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)
              
              
              10,000
              
              
              
              38,000Long
      term capitalized lease obligation (xii)
              
              
              12,000
              
              
              
              21,000Other
      debt
              
              
              50,000
              
              
              
              50,000Total
              
              
              661,000
              
              
              
              727,000Less
      current maturities
              
              
              413,000
              
              
              
              420,000Non-current
      portion
              
              
              248,000
              
              
              
              307,000Related
      party long-term debt13%
      unsecured demand note (iv)
              
              
              104,000
              
              
              
              104,000Long
      term capitalized consulting obligations (vi)
              
              
              3,000
              
              
              
              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)
              
              
              1,521,000
              
              
              
              1,631,0009%
      unsecured note (xi)
              
              
              -
              
              
              
              73,000Total
              
              
              1,883,000
              
              
              
              2,090,000Less
      current maturities
              
              
              947,000
              
              
              
              946,000Non-current
      portion
              
              
              936,000
              
              
              
              1,144,000Total
      long-term debt
              
              
              2,544,000
              
              
              
              2,817,000Less
      current maturities
              
              
              1,360,000
              
              
              
              1,366,000Total
      non-current portion
              
              $
              1,184,000
              
              
              $
              1,451,000
 
 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 imposed 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.
 
  7
  (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 expired
on March 31, 2009.
 
 (v)
              Two
      of the agreements were entered into with the principals of US Temp and
      each requires 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.
 
 Demand
Loans
 
 (viii)
              Demand
      Loans consist of amounts due to two separate shareholders of the
      company.  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 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 calendar year during the term of the note.  The debt
described in (xi) below was issued to a separate major shareholder of the
Company.
  8
  
 (ix)
              In February
      2008, a $100,000 unsecured note was issued.  The note was due
      March 5, 2009, and bore an annual interest rate of 6%.  The note
      will be subject to an interest rate of 18% beginning in April, 2009, due
      to the failure to pay the principal at its maturity
  date.
 
 (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 calendar year during the term of the note.  The Company
      is currently in discussions with the note holder to review the net income
      calculation for the year ended December 31, 2008, and potentially
      favorably restructure both the amount and terms 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
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.
 
 8.           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 March 31, 2009, 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.
 
 A summary
of the status of the Company’s nonvested shares as of March 31, 2009, and the
changes during the six months ended March 31, 2009 is presented
below:
 
 
 Nonvested Shares
              
              Shares
              
              
              Weighted-Average
                Grant-Date Fair ValueNonvested
      at October 1, 2008
              
              
              1,624,000
              
              
              $
              0.31Vested
              
              
              (567,000
              )
              
              $
              0.31Forfeited
              
              
              (69,000
              )
              
              $
              0.25Nonvested
      at March 31, 2009
              
              
              988,000
              
              
              $
              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 six months ended March 31, 2009 and 2008,
compensation expense relating to restricted stock awards was $82,000 and
$92,000, respectively.   As of March 31, 2009, there was $265,000 of
total unrecognized compensation cost.  That cost is expected to be
recognized as an expense over a weighted-average period of 2.3
years.  The total fair value of the shares that vested during the
three months ended March 31, 2009, was $68,000.
  9
  In March
2008, the Company issued 400,000 shares of common stock to a related party in
exchange for the cancellation of $26,000 of outstanding invoices payable and
$54,000 in cash.  The shares had a fair value of $108,000 on the date
of issuance.  The difference between the fair value of the shares
issued and the consideration received was recorded as stock-based compensation
expense of $26,000.
 
 During
the second quarter of fiscal 2008, the Company issued 1,108,000 shares of
restricted common stock to certain employees and directors at a price of $0.20
per share. The shares had a fair value of $312,000 on the date of
issuance.  The difference between the fair value of the shares issued
and the cash received from the employees and directors was recorded as
stock-based compensation expense of $91,000.
 
 
 9.           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 two quarters
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 March 31, 2009 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.
 
 10.           Supplemental
Disclosure of Cash Flow Information
 
 Six
      Months Ended
              
              
              Six
      Months EndedMarch
      31,
              
              
              March
      31,2009
              
              
              2008Cash
      paid for interest
              
              $
              229,000
              
              
              $
              444,000Non-cash
      investing and financing activities:ReStaff
      Acquisition purchase price adjustment and debt reduction
              
              
              -
              
              
              
              1,398,000Debt
      converted to restricted common stock at fair value
              
              
              -
              
              
              
              622,000Stock
      based compensation
              
              
              82,000
              
              
              
              209,000Capital
      lease obligation for computer equipment
              
              
              -
              
              
              
              33,000Issuance
      of shares for related-party outstanding invoices
              
              
              -
              
              
              
              26,000
 
 11.           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 liabilities 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 current wages, which may be reduced upon audit.  In December 2008,
the State of Connecticut concluded that the Company was a successor employer to
Nucon.  On January 22, 2009, the Company appealed the decision and
filed a detailed brief in support of its position.  The Company
believes the decision should be reversed because it believes (1) the decision is
based on false, inaccurate and concluding statements, (2) the Administrator of
the Department of Labor failed to meet his burden of producing sufficient
information to enable him to determine whether there was successor liability and
(3) neither the facts nor
the law support a finding that the Company acquired substantially all of Nucon’s
assets, organization, trade or business.  To date, the Board of Review
of the State of Connecticut has not issued a decision.
  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 was $566,000, which consisted
solely of penalties of $220,000 and interest of $346,000 and represented the
entire amount of the liability owed by Stratus.  Other entities who
also acquired offices from Stratus received a like assessment for the total
amount of the liability owed by Stratus.  On March 11, 2009, the
Company received a notification from the EDD that it was granted full relief
from this assessment.
 
 Receivable
Sale Agreement
  In
connection with the Company’s receivable sale agreement dated March 1, 2007
with a financial institution, the Company has failed to make timely
payments on its overadvance of $500,000, as well as certain other debt
obligations to third parties, which may constitute a default under the
receivable sale agreement.  In addition, while no such advice or
notification has been provided, the Company’s current negative working capital
position and limited access to additional financing could cause the financial
institution to deem themselves to be insecure.  As a consequence, the
financial institution may deem itself to be entitled to exercise its right to
either declare immediately due and payable, and to charge back, all indebtedness
including outstanding purchased accounts, and all other fees costs and expenses,
or to withhold payment on all sold receivables up to an amount equaling the sum
of outstanding purchased accounts, plus discounts and fees owed, and the
overadvance, as well as increase the discount rate to 18% while the Company is
in default.  Should this occur, there could be a severe adverse impact
on the Company’s ability to generate working capital and consequently to operate
its business going forward, if the Company would then be unable to secure new
financing with acceptable terms in an appropriate timeframe .  The
Company is currently in discussions with the financial institution to seek a
waiver of any default and to favorably restructure the amount and terms of the
overadvance, including but not limited to, its repayment.  In
addition, the Company is in discussions with its largest shareholder, which owns
approximately 43% of the Company’s outstanding common shares and which is also
the entity through which the Company obtains its leased employees, to provide
additional sources of funds.  If necessary the Company will also
continue to seek other sources of funding should a favorable restructuring
agreement with the financial institution appear unlikely.  Although
there can be no assurances that a favorable restructuring will be obtained or
additional sources of funding will be secured, management believes that the
Company’s projected cash flows from operations in combination with the above
restructuring and financing efforts will result in sufficient cash availability
to support its operations for the coming twelve months.
 
  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”. 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, and our reports filed with the
U.S. Securities and Exchange Commission. 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 are a
provider of temporary staffing services, with a focus on light industrial
services and administrative support.  We provide our services to a
diverse range of clients ranging from sole proprietorships to Fortune 500
companies.  Light industrial services include 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.  These service offerings have 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 March 31, 2009, these service offerings have
historically constituted approximately 80% of our revenues.
 
 In
addition to our light industrial and clerical service offerings, we historically
have provided professional niche consulting and staffing services in areas such
as accounting and finance, engineering, biotechnology and
biopharmaceuticals.  In April 2009, we discontinued our CPA Partner on
Premise Program service offering, which provided finance and accounting staffing
and recruiting services through ten public accounting firms.  Also in
April 2009, we ceased promoting our finance and accounting services through our
Direct Professional Services offering and are currently in discussions with a
third party, controlled by our certain officers, to assume this
business.  We cannot currently estimate the costs to exit these
service offerings or any anticipated gain or loss on sale, should a sale
occur.  During the six month periods ended March 31, 2009 and 2008,
our total accounting and finance service offerings generated revenue of
approximately $1,137,000 and $2,348,000, respectively, and losses from
operations of approximately ($371,000) and ($347,000),
respectively.  During the fiscal year ended September 30, 2008, these
service offerings generated revenue of approximately $4,056,000 and losses from
operations of approximately ($539,000).  The Company reached its
conclusion to exit these service offerings after reviewing the historical
operating performance and future prospects of these services and the likely need
for continued capital to support ongoing losses.
 
 The
following are additional material trends that are creating opportunities and
risks to our business, and a discussion of how management is
responding.
 
 ▪
              The
      economic uncertainties in which we currently operate make it challenging
      for us to predict the near-term future.  If the U.S. recession
      continues for an extended period, it would likely have a significant
      adverse impact on our clients and our business.  The effects of
      the recession have resulted in a deterioration of employment markets and
      temporary staffing.  We expect to continue to focus on our
      strategic plan; however, until we witness sustained temporary staffing job
      creation and signs of a strengthening economy, we will continue to take
      decisive actions to minimize short-term
risks.
 
 ▪
              We
      have financed our growth largely through the issuance of debt and have
      incurred negative working capital.  As of March 31, 2009 we had
      negative working capital of ($2,775,000), for which the component
      constituting the current portion of long-term debt was
      $1,360,000.  Total outstanding debt as of March 31, 2009 was
      $2,544,000, $764,000 of which is past due or due upon demand, and
      $1,521,000 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.
  12
  
 ▪
              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.
 
 ▪
              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 OTC Bulletin
      Board .  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.
 
 Mergers
and Acquisitions
 
 One of
our key strategies is to focus on mergers and acquisitions of companies that
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
offering.  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.
 
  13
  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 U.S. 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.
 
 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 No. 109, “Accounting for Income
Taxes” (“SFAS 109”).  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.”
 
  14
  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.
  In
December 2007, the FASB issued SFAS No. 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 141(R) 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 SFAS 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 our
financial position, results of operations and cash flows.  We 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.
 
 
  15
  Results
of Operations
 
 Three
months ended March 31, 2009 compared to three months ended March 31,
2008
 
 Revenue
 
 For the
three months ended March 31, 2009, revenue decreased $2,367,000, or 15%, to
$13,376,000, as compared to $15,743,000 in the same period of the prior
year.  This decrease in revenue was primarily attributable to a
decrease in revenue of $1,043,000 from the business acquired in the US Temps
Acquisition, a decrease in revenue of $512,000 from the CPA Partner on Premise
Program, a decrease in revenue of $1,087,000 from the business acquired in the
Stratus Acquisition and a decline of $854,000 associated with a single office in
Connecticut which focuses on the provision of temporary
engineers.  These declines were due to a combination of the loss of
accounts and lower billings for several larger customers in our light industrial
and engineering service offerings that were not fully offset by the acquisition
of new accounts or existing account increases as well as significant declines
industry wide in demand for temporary finance and accounting
personnel.   The revenue decreases were partially offset by
increased revenue of $289,000 provided by the business acquired in the ReStaff
Acquisition and revenue of $800,000 from new commercial offices in California
and Virginia.
 
 Direct
cost of services
 
 For the
three months ended March 31, 2009, direct cost of services decreased by
$1,834,000 or 14% to $11,470,000, as compared to $13,304,000 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 March 31, 2009, gross profit decreased $533,000, or 22%, to
$1,906,000, as compared to $2,439,000 in the same period in the prior
year.  As a percentage of revenue, gross profit for the three months
ended March 31, 2009, decreased to 14.2% as compared to 15.5% in the same period
in the prior year, primarily as a result of weakening demand for temporary
services industry wide, coupled with greater competition for existing customer
accounts without the ability to offset these pricing decreases with lower labor
costs in a sufficiently timely manner.
 
 Selling,
general and administrative expenses
 
 For the
three months ended March 31, 2009, selling, general and administrative expenses
decreased $540,000, or 20%, to $2,207,000, as compared to $2,747,000 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 March 31, 2009, as compared with $198,000 in
the same period of the prior year.  As a percentage of revenue,
selling, general and administrative expenses were 16.5% for the three months
ended March 31, 2009, compared to 17.4% during the same period in the prior
year.  This decrease reflects the combination of lower commissions
incurred to CPA firms resulting from the decrease in revenues of the CPA Partner
on Premise Program and the impact of management aggressively managing expenses
and successfully seeking efficiencies in operating offices and corporate
functions.
 
 Depreciation
and amortization
 
 For the
three months ended March 31, 2009, depreciation and amortization decreased
$15,000, or 13%, to $103,000, as compared to $118,000 in the same period in the
prior year.  The decrease is attributable to lower amortization
expense recorded on intangible assets as a result of the final valuation on
February 26, 2008, of the intangible assets acquired in the ReStaff Acquisition
and the reduction recorded on November 28, 2008, in the value of the intangible
assets acquired in the Stratus Acquisition.
 
 Loss
from operations
 
 As a
result of the above, loss from operations was ($404,000) for the three months
ended March 31, 2009 versus a loss from operations of ($426,000) for the same
period in the prior year.
 
  16
  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 March 31,
2009 was $107,000, as compared to $229,000 during the same period in the prior
year, representing a decrease of 53%.
 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 shares of common stock and repayments of
principal.  In addition, the 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
loss
 
 The
factors described above resulted in net loss for the three months ended March
31, 2009, of ($511,000), as compared to ($903,000) during the same period of the
prior year.
 
 Six
months ended March 31, 2009 compared to six months ended March 31,
2008
 
 Revenues
 
 For the
six months ended March 31, 2009, revenue decreased $3,164,000, or 9%, to
$30,727,000, as compared to $33,891,000 in the same period of the prior year.
This decrease in revenue is primarily attributable to a decrease in revenue of
$2,383,000 from the business acquired in the US Temps Acquisition, a decrease in
revenue of $1,195,000 from the CPA Partner on Premise Program, a decrease in
revenue of $1,208,000 from the business acquired in the Stratus Acquisition, and
a decline of $868,000 associated with a single office in Connecticut which
focuses on the provision of temporary engineers.  These declines were
due to a combination of the loss of accounts and lower billings for several
larger customers in our light industrial and engineering service offerings that
were not fully offset by the acquisition of new accounts or existing account
increases as well as significant declines industry wide in demand for temporary
finance and accounting personnel  The revenue decreases were partially
offset by increased revenue of $1,028,000 provided by the business acquired in
the ReStaff Acquisition and revenue of $1,473,000 from new commercial offices in
California and Virginia.
 
 Direct
cost of services
 
 For the
six months ended March 31, 2009, direct cost of services decreased $2,263,000,
or 8%, to $26,128,000, as compared to $28,391,000 in the same period of the
prior year. The decrease is consistent with the decline in revenue during the
period.
 
 Gross
profit
 
 For the
six months ended March 31, 2009, gross profit decreased $901,000, or 16%, to
$4,599,000, as compared to $5,500,000 in the same period in the prior
year.  As a percentage of revenue, gross profit for the six months
ended March 31, 2009, decreased to 15.0% as compared to 16.2% in the same period
in the prior year, primarily as a result of weakening demand for temporary
services industry wide, coupled with greater competition for existing customer
accounts without the ability to offset these pricing decreases with lower labor
costs in a sufficiently timely manner.
 Selling,
general and administrative expenses
 
 For the
six months ended March 31, 2009, selling, general and administrative expenses
decreased $719,000, or 13%, to $4,627,000, as compared to $5,346,000 in the same
period in the prior year.  Selling, general and administrative
expenses reflect stock-based compensation expense of $82,000 for the six months
ended March 31, 2009, as compared with $209,000 in the same period in the prior
year.  As a percentage of revenue, selling, general and administrative
expenses were lower at 15.1% for the six months ended March 31, 2009, compared
to 15.8% during the same period in the prior year.  This decrease
reflects the combination of lower commissions incurred to CPA firms resulting
from the decrease in revenues of the CPA Partner on Premise Program, and the
impact of management aggressively managing expenses and successfully seeking
efficiencies in operating offices and corporate functions.
 
  17
  Depreciation
and amortization
 
 For the
six months ended March 31, 2009, depreciation and amortization decreased
$10,000, or 4%, to $215,000, as compared to $225,000 in the same period in the
prior year.  The decrease is attributable to lower amortization
expense recorded on intangible assets as a result of the final valuation on
February 26, 2008, of the intangible assets acquired in the ReStaff Acquisition
and the reduction recorded on November 28, 2008, in the value of the intangible
assets acquired in the Stratus Acquisition.
 
 Loss
from operations
 
 As a
result of the above, the loss from operations was ($243,000) for the six months
ended March 31, 2009 versus loss from operations of ($71,000) for the same
period in the prior year.
 
 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.  We have historically issued debt as a
primary means of funding our growth.  Consequently, interest expense
for the six months ended March 31, 2009 was $250,000, as compared to $543,000
during the same period in the prior year.  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
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
loss
 
 The
factors described above resulted in a net loss for the six months ended March
31, 2009 of ($493,000), as compared to a net loss of ($862,000) during the same
period in the prior year.
 
 Liquidity
and Capital Resources
 
 Cash
Flows
 
 We have
historically relied on cash flows from operations, borrowings under debt
facilities, selling our trade receivables prior to collection, 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 March
31, 2009, cash was $31,000, a decrease of $38,000 from $69,000 as of September
30, 2008.
 
 Net cash
provided by operating activities during the six months ended March 31, 2009,
decreased ($146,000) to $243,000, from $389,000 during the same period of the
prior year.  This was primarily due to a reduction in outstanding
accounts payable and accrued liabilities of ($931,000), offset by a decrease in
trade accounts receivable of $722,000, as well as a variety of other normal
operating fluctuations in other operating assets and liabilities.
 
 Net cash
used in investing activities during the six months ended March 31, 2009,
decreased ($236,000) to ($8,000) from ($244,000) during the same period of the
prior year, which reflects expenditures associated with the relocation of our
corporate headquarters and additional purchases of computer equipment in the
second quarter of the prior year.
 
 Net cash
used in financing activities during the six months ended March 31, 2009,
increased $24,000 to ($273,000) from ($249,000) during the same period of the
prior year, primarily as a result of debt repayments that were offset by sales
of our restricted common stock during the second quarter of the prior
year.
 
  18
  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 March
31, 2009 we had negative working capital of ($2,775,000), for which the
component constituting the current portion of long-term debt was
$1,360,000.  Within the current portion of long-term debt $764,000 is
past due or due upon demand as explained further below.  Total
outstanding debt as of March 31, 2009 was $2,544,000.  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 address key risks and provide sufficient cash flow and working
capital:
 
 a)
              In
      October 2008, we extended the terms of three forbearance agreements with
      respect to $286,000 of the $764,000 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
      the second fiscal quarter of 2009, we received advances totaling $212,000
      from a major shareholder.
 
 c)
              In
      connection with our receivable sale agreement dated March 1, 2007
      with a financial institution, we have failed to make timely
      payments on our overadvance of $500,000, as well as certain other
      debt obligations to other third parties, which may constitute a default
      under the receivable sale agreement.  In addition, while no such
      advice or notification has been provided, our current negative
      working capital position and limited access to additional financing could
      cause the financial institution to deem themselves to be
      insecure.  As a consequence, the financial institution may deem
      itself to be entitled to exercise its right to either declare immediately
      due and payable, and to charge back, all indebtedness including
      outstanding purchased accounts, and all other fees costs and expenses, or
      to withhold payment on all sold receivables up to an amount equaling the
      sum of outstanding purchased accounts, plus discounts and fees owed, and
      the overadvance, as well as increase the discount rate to 18%
      while we are in default.  Should this occur, there could be
      a severe adverse impact on our ability to generate working capital and
      consequently to operate our business going forward, if we would
      then be unable to secure new financing with acceptable terms in an
      appropriate timeframe .  We are currently in discussions with
      the financial institution to seek a waiver of any default and to favorably
      restructure the amount and terms of the overadvance, including but not
      limited to, its repayment.  In
      addition, we are in discussions with our largest shareholder, which owns
      approximately 43% of our outstanding common shares and which is also the
      entity through which we obtain our leased employees, to provide additional
      sources of funds.  If necessary we will also continue to seek
      other sources of funding should a favorable restructuring agreement with
      the financial institution appear unlikely.  Although there can
      be no assurances that a favorable restructuring will be obtained or
      additional sources of funding will be secured, we believe that our
      projected cash flows from operations in combination with the above
      restructuring and financing efforts will result in sufficient cash
      availability to support our operations for the coming twelve
      months.
 
 d)
              We
      are currently in discussion with the holder of the $1,700,000 note
      disclosed in Note 7 (x) to our financial statements to review the net
      income calculation performed by management for the year ended December 31,
      2008, and potentially favorably restructure both the amount and terms of
      the note.
 
 e)
              In
      April 2009, we discontinued our CPA Partner on Premise strategy and are in
      discussions with a third party controlled by certain officers, to assume
      the finance and accounting services that were provided through our Direct
      Professional Services offering.  During the six months ended
      March 31, 2009 and 2008, these service offerings generated losses from
      operations of approximately ($371,000) and ($347,000),
      respectively.
 
 f)
              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 ($2,775,000) as of March 31, 2009, represents an
increase in the deficit of $386,000 as compared to a working capital deficit of
($2,389,000) as of September 30, 2008.
 
 Our
revenue depends primarily on billable labor hours, and 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 has been
received, which is secured by outstanding receivables, and is to be repaid in
weekly payments of $7,500.  As of March 31, 2009, the amount of sold
receivables outstanding was $4,121,000, which includes $206,595 of the
overadvance.
  19
  
 Debt
 
 Long-term
debt at March 31, 2009 and September 30, 2008 is summarized as
follows:
 
 March
      31,
              
              
              September
      30,2009
              
              
              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)
              
              
              10,000
              
              
              
              38,000Long
      term capitalized lease obligation (xii)
              
              
              12,000
              
              
              
              21,000Other
      debt
              
              
              50,000
              
              
              
              50,000Total
              
              
              661,000
              
              
              
              727,000Less
      current maturities
              
              
              413,000
              
              
              
              420,000Non-current
      portion
              
              
              248,000
              
              
              
              307,000Related
      party long-term debt13%
      unsecured demand note (iv)
              
              
              104,000
              
              
              
              104,000Long
      term capitalized consulting obligations (vi)
              
              
              3,000
              
              
              
              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)
              
              
              1,521,000
              
              
              
              1,631,0009%
      unsecured note (xi)
              
              
              -
              
              
              
              73,000Total
              
              
              1,883,000
              
              
              
              2,090,000Less
      current maturities
              
              
              947,000
              
              
              
              946,000Non-current
      portion
              
              
              936,000
              
              
              
              1,144,000Total
      long-term debt
              
              
              2,544,000
              
              
              
              2,817,000Less
      current maturities
              
              
              1,360,000
              
              
              
              1,366,000Total
      non-current portion
              
              $
              1,184,000
              
              
              $
              1,451,000
 
 
 For
further explanations of (i) through (xii) above please see Note 7 to our
financial statements beginning on page 3 of this report on Form
10-Q.
 
 Sales
of Common Stock
 
 None
during the three months ended March 31, 2009.
 
 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.
 
 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 Securities and
Exchange Commission’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 March 31, 2009, that have materially affected,
or are reasonably likely to have materially affected our internal controls over
financial reporting.
  20
  
 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
Information
 
 Item
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.
 
 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 was $566,000, which consisted solely of penalties of $220,000
and interest of $346,000 and represented the entire amount of the liability owed
by Stratus.  Other entities who also acquired offices from Stratus
received a like assessment for the total amount of the liability owed by
Stratus.  On March 11, 2009, we received a notification from the EDD
that we were granted full relief from this assessment.
 
 In 2005,
we acquired the outstanding receivables of Nucon Engineering Associates, Inc.
(“Nucon”).   During the third quarter of fiscal 2008, we were
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 ours 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 current wages, which may be
reduced upon audit.  In December 2008, the State of Connecticut
concluded we were a successor employer to Nucon.  On January 22, 2009,
we appealed the decision and filed a detailed brief in support of our
position.  We believe the decision should be reversed because we
believe (1) the decision is based on false, inaccurate and concluding
statements, (2) the Administrator of the Department of Labor failed to meet his
burden of producing sufficient information to enable him to determine whether
there was successor liability and (3) neither the facts nor the law support a
finding that we acquired substantially all of Nucon’s assets, organization,
trade or business.  To date, the Board of Review of the State of
Connecticut has not issued a decision.
 
 Item
1A. - Risk
Factors
 
 The Risk
Factor presented below should be read in conjunction with the risk factors and
information disclosed in our Annual Report on Form 10-K for the year ended
September 30, 2008.
 
 In
connection with the Company’s receivable sale agreement dated March 1, 2007,
with a financial institution, the Company has failed to make timely
payments on its overadvance of $500,000, as well as certain other debt
obligations to other third parties, which may constitute a default under the
receivable sale agreement.  In addition, while no such advice or
notification has been provided, the Company’s current negative working capital
position and limited access to additional financing could cause the financial
institution to deem themselves to be insecure.  As a consequence, the
financial institution may deem itself to be entitled to exercise its right to
either declare immediately due and payable, and to charge back, all indebtedness
including outstanding purchased accounts, and all other fees costs and expenses,
or to withhold payment on all sold receivables up to an amount equaling the sum
of outstanding purchased accounts, plus discounts and fees owed, and the
overadvance, as well as increase the discount rate to 18% while the Company is
in default.  Should this occur, there could be a severe adverse impact
on the Company’s ability to generate working capital and consequently to operate
its business going forward, if the Company would then be unable to secure new
financing with acceptable terms in an appropriate timeframe .  The
Company is currently in discussions with the financial institution to seek a
waiver of any default and to favorably restructure the amount and terms of the
overadvance, including but not limited to, its repayment.  In
addition, the Company is in discussions with its largest shareholder, which owns
approximately 43% of the Company’s outstanding common shares and which is also
the entity through which the Company obtains its leased employees, to provide
additional sources of funds.  If necessary the Company will also
continue to seek other sources of funding should a favorable restructuring
agreement with the financial institution appear unlikely.  Although
there can be no assurances that a favorable restructuring will be obtained or
additional sources of funding will be secured, management believes that the
Company’s projected cash flows from operations in combination with the above
restructuring and financing efforts will result in sufficient cash availability
to support its operations for the coming twelve months.
  Item
2. Unregistered Sales of
Equity Securities and Use of Proceeds
 
 None
during the three months ended March 31, 2009.
 
  21
  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, $100,000, 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 also
currently negotiating the terms of a debt restructuring with the holder of the
other $100,000 note.  There remains another note in the amount of
$100,000 for which we are currently in discussions with the holder concerning
the terms of a possible forbearance agreement or restructuring.  As of
March 31, 2009, the aggregate amount of payments due but not made under the
notes was $485,000.
  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
March 31, 2009.
 
 Item
5. Other
Information
 
 None
 
 Item
6. Exhibits
 
 Number
              Description31.1
              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
 
  22
  
 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: 
      May 15, 2009
                By:
                /s/ Jay
      H. SchecterName: 
      Jay H. SchecterTitle: 
      Chief Executive Officer
  Date: 
      May 15, 2009
                By:
                /s/ Stephen
      DelVecchiaName: 
      Stephen DelVecchiaTitle: 
      Chief Financial Officer
  23