UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





ý
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended December 31, 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.)160
      Broadway, 11th
      Floor
              New
      York,  New York 10038(Address
      of principal executive offices)(646)
      443-2380(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  oNon
      - accelerated filer  o
            Smaller
      reporting company  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o  No ý








The
number of shares of Common Stock, $.0001 par value, outstanding as of February
12, 2010 was 26,022,000.













ACCOUNTABILITIES,
INC.


INDEX





PART
I – FINANCIAL INFORMATION




Item
      1. Financial Statements (Unaudited)Balance
      Sheets as of December 31, 2009 (unaudited) and September 30,
      2009
              3Statements
      of Operations for the Three Months Ended December 31, 2009 and 2008(unaudited)
              4Statement
      of Stockholders’ Equity for the Three Months Ended December 31, 2009
      (unaudited)
              5Statements
      of Cash Flows for the Three Months Ended December 31, 2009 and 2008
      (unaudited)
              6Notes
      to Financial Statements
              7Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              14Item
      3. Quantitative and Qualitative Disclosures about Market
    Risks
              20Item
      4. Controls and Procedures
              20PART
      II – OTHER INFORMATIONItem
      1. Legal Proceedings
              20Item
      1A. Risk Factors
              20Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              20Item
      3. Defaults Upon Senior Securities
              20Item
      4. Submission of Matters to a Vote of Security Holders
              21Item
      5. Other Information
              21Item
      6. Exhibits
              22Signatures
              23




2




ACCOUNTABILITIES,
INC.


BALANCE
SHEETS




December
      31,
            
            
            September
      30,2009
            
            
            2009(unaudited)ASSETSCurrent
      assets:Cash
            
            $
            35,000
            
            
            $
            63,000Accounts
      receivable – less allowance for doubtful accounts of $258,000 and
      $188,000, respectively
            
            
            29,000
            
            
            
            996,000Due
      from financial institution
            
            
            282,000
            
            
            
            130,000Unbilled
      receivables
            
            
            755,000
            
            
            
            783,000Prepaid
      expenses
            
            
            133,000
            
            
            
            299,000Due
      from related party
            
            
            21,000
            
            
            
            21,000Total
      current assets
            
            
            1,255,000
            
            
            
            2,292,000Property
      and equipment, net
            
            
            136,000
            
            
            
            141,000Other
      assets
            
            
            21,000
            
            
            
            21,000Intangible
      assets, net
            
            
            881,000
            
            
            
            944,000Goodwill
            
            
            2,947,000
            
            
            
            2,947,000Total
      assets
            
            $
            5,240,000
            
            
            $
            6,345,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
            
            $
            1,860,000
            
            
            $
            1,579,000Accrued
      wages and related obligations
            
            
            971,000
            
            
            
            1,836,000Current
      portion of long-term debt
            
            
            50,000
            
            
            
            454,000Current
      portion of related party long-term debt
            
            
            913,000
            
            
            
            811,000Due
      to related party
            
            
            348,000
            
            
            
            344,000Total
      current liabilities
            
            
            4,142,000
            
            
            
            5,024,000Long
      term debt, net of current portion
            
            
            -
            
            
            
            190,000Related
      party long-term debt, net of current portion
            
            
            478,000
            
            
            
            580,000Total
      liabilities
            
            
            4,620,000
            
            
            
            5,794,000Commitments
      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; 26,022,000 and
      23,689,000 shares issued and outstanding as of December 31, 2009 and
      September 30, 2009, respectively
            
            
            3,000
            
            
            
            2,000Additional
      paid-in capital
            
            
            4,580,000
            
            
            
            3,397,000Accumulated
      deficit
            
            
            (3,963,000
            )
            
            
            (2,848,000
            )Total
      stockholders’ equity
            
            
            620,000
            
            
            
            551,000Total
      liabilities and stockholders’ equity
            
            $
            5,240,000
            
            
            $
            6,345,000




See
accompanying notes to financial statements.




3




ACCOUNTABILITIES,
INC.





STATEMENTS
OF OPERATIONS


(unaudited)





Three
      MonthsEndedDecember
      31,
              2009
            
            
            December
      31,
              2008Revenue
            
            $
            14,114,000
            
            
            $
            16,655,000Direct
      cost of services
            
            
            12,687,000
            
            
            
            14,431,000Gross
      profit
            
            
            1,427,000
            
            
            
            2,224,000Selling,
      general and administrative expenses *
            
            
            1,861,000
            
            
            
            1,766,000Depreciation
      and amortization
            
            
            84,000
            
            
            
            112,000(Loss)
      income from continuing operations
            
            
            (518,000
            )
            
            
            346,000Interest
      expense
            
            
            96,000
            
            
            
            143,000Loss
      on debt extinguishment
            
            
            501,000
            
            
            
            -Net
      (loss) income from continuing operations
            
            
            (1,115,000
            )
            
            
            203,000Loss
      from discontinued operations
            
            
            -
            
            
            
            (185,000
            )Net
      (loss) income
            
            $
            (1,115,000
            )
            
            $
            18,000Net
      (loss) income per share from continuing operations:Basic
            
            $
            (0.05
            )
            
            $
            0.01Diluted
            
            $
            (0.05
            )
            
            $
            0.01Net
      loss per share from discontinued operations:Basic
            
            $
            0.00
            
            
            $
            (0.01
            )Diluted
            
            $
            0.00
            
            
            $
            (0.01
            )Total
      net (loss) income per share:Basic
            
            $
            (0.05
            )
            
            $
            0.00Diluted
            
            $
            (0.05
            )
            
            $
            0.00Weighted
      average shares outstanding:Basic
            
            
            22,767,000
            
            
            
            22,169,000Diluted
            
            
            22,767,000
            
            
            
            22,247,000




*
Includes $40,000 and $41,000 for the three months ended December 31, 2009 and
2008, respectively, in non-cash charges for stock based
compensation.





See
accompanying notes to financial statements.





4




ACCOUNTABILITIES,
INC.





STATEMENT
OF STOCKHOLDERS’ EQUITY


(unaudited)





Three
      Months EndedDecember
      31, 2009Common
      stock – shares:Balance
      at beginning of period
            
            
            23,689,000Debt
      conversion to unregistered common stock
            
            
            2,333,000Balance
      at end of period
            
            
            26,022,000Common
      stock – par value:Balance
      at beginning of period
            
            $
            2,000Debt
      conversion to unregistered common stock
            
            
            1,000Balance
      at end of period
            
            $
            3,000Additional
      paid-in capital:Balance
      at beginning of period
            
            $
            3,397,000Debt
      conversion to unregistered common stock
            
            
            1,143,000Stock-based
      compensation relating to unregistered common stock
            
            
            40,000Balance
      at end of period
            
            $
            4,580,000Accumulated
      deficit:Balance
      at beginning of period
            
            $
            (2,848,000
            )Net
      loss
            
            
            (1,115,000
            )Balance
      at end of period
            
            $
            (3,963,000
            )Total
      stockholders’ equity
            
            $
            620,000





See
accompanying notes to financial statements.




5




ACCOUNTABILITIES,
INC.





STATEMENTS
OF CASH FLOWS


(unaudited)




Three
      Months EndedDecember
      31,
            
            
            December
      31,2009
            
            
            2008Cash
      flows from operating activities:Net
      (loss) income
            
            $
            (1,115,000
            )
            
            $
            18,000Add:
      net loss from discontinued operations
            
            
            -
            
            
            
            (185,000
            )Net
      (loss) income from continuing operations
            
            $
            (1,115,000
            )
            
            $
            203,000Adjustments
      to reconcile net (loss) income to cash provided by operating
      activities:Depreciation
      and amortization
            
            
            84,000
            
            
            
            112,000Stock-based
      compensation
            
            
            40,000
            
            
            
            41,000Bad
      debt expense
            
            
            70,000
            
            
            
            11,000Loss
      on debt extinguishment
            
            
            501,000
            
            
            
            -Changes
      in operating assets and liabilities:Trade
      accounts receivable
            
            
            886,000
            
            
            
            1,521,000Due
      from financial institution
            
            
            (151,000
            )
            
            
            (37,000
            )Prepaid
      expenses
            
            
            166,000
            
            
            
            (46,000
            )Due
      to/from related party
            
            
            4,000
            
            
            
            (20,000
            )Accounts
      payable and accrued liabilities
            
            
            (495,000
            )
            
            
            (1,513,000
            )Net
      cash (used in) provided by operating activities – continuing
      operations
            
            
            (10,000
            )
            
            
            272,000Net
      cash provided by (used in) operating activities – discontinued
      operations
            
            
            2,000
            
            
            
            (96,000
            )Net
      cash (used in) provided by operating activities
            
            
            (8,000
            )
            
            
            176,000Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (16,000
            )
            
            
            (9,000
            )Net
      cash used in investing activities – continuing operations
            
            
            (16,000
            )
            
            
            (9,000
            )Net
      cash used in investing activities – discontinued
operations
            
            
            -
            
            
            
            -Net
      cash used in investing activities
            
            
            (16,000
            )
            
            
            (9,000
            )Cash
      flows from financing activities:Principal
      payments on long-term debt
            
            
            (4,000
            )
            
            
            (48,000
            )Principal
      payments on long-term debt – related parties
            
            
            -
            
            
            
            (108,000
            )Net
      cash used in financing activities – continuing operations
            
            
            (4,000
            )
            
            
            (156,000
            )Net
      cash used in financing activities – discontinued
operations
            
            
            -
            
            
            
            -Net
      cash used in financing activities
            
            
            (4,000
            )
            
            
            (156,000
            )Change
      in cash
            
            
            (28,000
            )
            
            
            11,000Cash
      at beginning of period
            
            
            63,000
            
            
            
            69,000Cash
      at end of period
            
            $
            35,000
            
            
            $
            80,000




See
accompanying notes to financial statements.




6





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.





Reorganization





On
December 24, 2009, the Board of Directors approved a reorganization of the
Company into a holding company structure.  In the transaction, the
Company will become a wholly-owned subsidiary of a newly formed holding
company.  Stockholders of record will receive shares of the holding
company on a one-for-one basis and will not otherwise be affected by the
anticipated reorganization.  The transaction is expected to be
consummated in the Company’s second fiscal quarter ending March 31,
2010.




2.      Summary
of Significant Accounting Policies





Interim
Financial Information





The
financial information as of and for the three months ended December 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 (the “SEC”) rules and
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 full 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, 2009, which are included in the Company’s Form 10-K as filed
with the SEC on December 28, 2009.





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. Discontinued
Operations


CPA
Partner on Premise Program (“CPA POP”):





In April
2009, the Company discontinued its CPA POP 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 reported the results of the CPA POP as
discontinued operations in the accompanying statements of
operations.  All prior period information has been reclassified to be
consistent with the current period presentation.




7








Direct
Professional Services:





In the
first quarter of fiscal 2010, in an effort to focus management’s efforts, and
use the Company’s capital more directly on its light industrial and
administrative service offerings, the Company discontinued the portion of the
Direct Professional Services offering associated with the provision of
accounting services offered directly to clients.  Accordingly, in
these financial statements issued for the quarter ended December 31, 2009, the
operations associated with the direct provision of accounting and finance
services are reported as discontinued operations for all prior periods
presented.





The
following amounts related to the CPA POP and the discontinued portion of the
Direct Professional Services offering were derived from historical financial
information and have been segregated from continuing operations and reported as
discontinued operations:




Three
      Months Ended
            
            
            Three
      Months EndedDecember
      31, 2009
            
            
            December
      31, 2008CPA
      POP
            
            
            Direct
      Professional Services
            
            
            Total
            
            
            CPA
              POP
            
            
            Direct
      Professional Services
            
            
            TotalRevenue
            
            
            -
            
            
            $
            51,000
            
            
            $
            51,000
            
            
            $
            603,000
            
            
            $
            93,000
            
            
            $
            696,000Direct
      cost of services
            
            
            -
            
            
            
            41,000
            
            
            
            41,000
            
            
            
            185,000
            
            
            
            42,000
            
            
            
            227,000Gross
      profit
            
            
            -
            
            
            
            10,000
            
            
            
            10,000
            
            
            
            418,000
            
            
            
            51,000
            
            
            
            469,000Selling,
      general and administrative expenses
            
            
            -
            
            
            
            10,000
            
            
            
            10,000
            
            
            
            451,000
            
            
            
            203,000
            
            
            
            654,000Loss
      from discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            (33,000
            )
            
            $
            (152,000
            )
            
            $
            (185,000
            )











The
following is a summary of the assets and liabilities of the discontinued
operations of the CPA Partner on Premise Program (“CPA POP”) and the
discontinued portion of the Direct Professional Services offering, which are
included in current assets and current liabilities as of December 31, 2009 and
September 30, 2009:





December
      31, 2009
            
            
            September
      30, 2009CPA
      POP
            
            
            Direct
      Professional Services
            
            
            Total
            
            
            CPA
      POP
            
            
            Direct
      Professional Services
            
            
            TotalAssets:Due
      from financial institution
            
            
            -
            
            
            $
            1,000
            
            
            $
            1,000
            
            
            
            -
            
            
            
            -
            
            
            
            -Accounts
      receivable
            
            
            -
            
            
            
            45,000
            
            
            
            45,000
            
            
            
            -
            
            
            $
            84,000
            
            
            $
            84,000Total
      assets:
            
            
            -
            
            
            $
            46,000
            
            
            $
            46,000
            
            
            
            -
            
            
            $
            84,000
            
            
            $
            84,000Liabilities:Accounts
      payable and accrued liabilities
            
            $
            25,000
            
            
            
            -
            
            
            $
            25,000
            
            
            $
            61,000
            
            
            
            -
            
            
            $
            61,000Total
      liabilities:
            
            $
            25,000
            
            
            
            -
            
            
            $
            25,000
            
            
            $
            61,000
            
            
            
            -
            
            
            $
            61,000




8




4. Net
Income (Loss) per Share




The
Company presents both basic and diluted earnings per share amounts
(“EPS”).  Basic EPS is calculated by dividing net (loss) income by the
weighted average number of common shares outstanding during the
period.  Diluted EPS is based upon the weighted average number of
common shares and common stock equivalent shares outstanding during the period,
calculated using the treasury-stock method for stock-based compensation subject
to vesting.  Under the treasury-stock method, exercise proceeds
include the amount of compensation costs for future services that the Company
has not yet recognized.  Common stock equivalent shares are excluded
from the computation in periods in which they have an anti-dilutive
effect.   Warrants for which the exercise or conversion price exceeds
the average market price over the period are anti-dilutive and are excluded from
the calculation.





The
following table summarizes the calculation of net (loss) income per share for
the three months ended December 31, 2009 and 2008:





Three
      Months Ended
            
            
            Three
      Months EndedDecember
      31, 2009
            
            
            December
      31, 2008Net
      (loss) income from continuing operations
            
            $
            (1,115,000
            )
            
            $
            203,000Loss
      from discontinued operations
            
            
            -
            
            
            
            (185,000
            )Net
      (loss) income
            
            $
            (1,115,000
            )
            
            $
            18,000Basic:Weighted average shares
            
            
            22,767,000
            
            
            
            22,169,000Diluted:Weighted average shares
            
            
            22,767,000
            
            
            
            22,169,000Potentially
      dilutive shares
            
            
            -
            
            
            
            78,000Total
      dilutive shares
            
            
            22,767,000
            
            
            
            22,247,000Net
      (loss) income per share from continuing operations:Basic
            
            $
            (0.05
            )
            
            $
            0.01Diluted
            
            $
            (0.05
            )
            
            $
            0.01Net
      loss per share from discontinued operations:Basic
            
            $
            0.00
            
            
            $
            (0.01
            )Diluted
            
            $
            0.00
            
            
            $
            (0.01
            )Total
      net (loss) income per share:Basic
            
            $
            (0.05
            )
            
            $
            0.00Diluted
            
            $
            (0.05
            )
            
            $
            0.00





The
potentially dilutive shares presented above do not include the anti-dilutive
effect of approximately 1,052,000 and 688,000 potential common shares for the
three months ended December 31, 2009 and 2008, respectively.





9





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 December 31, 2009
            
            
            As
      of September 30, 2009Accumulated
            
            
            
            
            
            
            
            
            AccumulatedGross
            
            
            Amortization
            
            
            Net
            
            
            Gross
            
            
            Amortization
            
            
            NetCustomer
      lists and relationships (7 years)
            
            $
            1,821,000
            
            
            $
            (945,000
            )
            
            $
            876,000
            
            
            $
            1,821,000
            
            
            $
            (888,000
            )
            
            $
            933,000Non-competition
      agreements
              (3
      years)
            
            
            111,000
            
            
            
            (106,000
            )
            
            
            5,000
            
            
            
            111,000
            
            
            
            (100,000
            )
            
            
            11,000Total
            
            $
            1,932,000
            
            
            $
            (1,051,000
            )
            
            $
            881,000
            
            
            $
            1,932,000
            
            
            $
            (988,000
            )
            
            $
            944,000Goodwill
      (indefinite life)
            
            $
            2,947,000
            
            
            
            
            
            
            $
            2,947,000
            
            
            $
            2,947,000
            
            
            
            
            
            
            $
            2,947,000





The
Company recorded amortization expense for the three months ended December 31,
2009 and 2008 of $63,000 and $79,000, respectively.  Estimated
intangible asset amortization expense (based on existing intangible assets) for
the remaining nine months of fiscal 2010 is $175,000 and for the fiscal years
ending September 30, 2011, 2012, 2013 and 2014 is $227,000, $227,000, $183,000
and $69,000, respectively.





6.      Due
to Related Party





Due to
related party primarily consists of amounts advanced to the Company by Tri-State
Employment Services, Inc. (“TSE”), a holder of approximately 61% of the
Company’s outstanding shares, and an amount due to a former officer of the
Company.





7.      Long-Term
Debt





Long-term
debt at December 31, 2009 and September 30, 2009 is summarized as
follows:




December
      31,
            
            
            September
      30,2009
            
            
            2009Long-term
      debt16.25%
      subordinated note (i)
            
            
            -
            
            
            $
            102,0003%
      convertible subordinated note (ii)
            
            
            -
            
            
            
            408,00018%
      unsecured note (iii)
            
            
            -
            
            
            
            80,000Long
      term capitalized lease obligation (viii)
            
            
            -
            
            
            
            4,000Other
      debt
            
            $
            50,000
            
            
            
            50,000Total
            
            
            50,000
            
            
            
            644,000Less
      current maturities
            
            
            50,000
            
            
            
            454,000Non-current
      portion
            
            
            -
            
            
            
            190,000Related
      party long-term debt13%
      unsecured demand note (iv)
            
            
            104,000
            
            
            
            104,00018%
      unsecured convertible note (v)
            
            
            100,000
            
            
            
            100,000Demand
      loans (vi)
            
            
            131,000
            
            
            
            131,0006%
      unsecured note (vii)
            
            
            1,056,000
            
            
            
            1,056,000Total
            
            
            1,391,000
            
            
            
            1,391,000Less
      current maturities
            
            
            913,000
            
            
            
            811,000Non-current
      portion
            
            
            478,000
            
            
            
            580,000Total
      long-term debt
            
            
            1,441,000
            
            
            
            2,035,000Less
      current maturities
            
            
            963,000
            
            
            
            1,265,000Total
      non-current portion
            
            $
            478,000
            
            
            $
            770,000




(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
was 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.  On December 29, 2009, the obligations under this
note were transferred by the holder to TSE and then settled in full in exchange
for shares of the Company’s unregistered common stock, as further described
below.




10





(ii)           A
$675,000 convertible subordinated note was issued March 31, 2006, and was to be
due on March 31, 2012.  The note bore interest at an annual rate of
3%, and was 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 was secured by office equipment and other fixed
assets.  On December 29, 2009, the obligations under this note were
transferred by the holder to TSE and then settled in full in exchange for shares
of the Company’s unregistered common stock, as further described
below.





(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.  On December 29, 2009, the obligations under this note were
transferred by the holder to TSE and then settled in full in exchange for shares
of the Company’s unregistered common stock, as further described
below.





On
December 29, 2009, TSE acquired from a third party the debt described in (i),
(ii) and (iii) above, and on the same date entered into an Exchange Agreement
with the Company whereby all obligations associated with the debt, including the
outstanding principal and accrued interest at that date, were satisfied through
the issuance of 2,333,333 shares of the Company’s unregistered common
stock.  On the date of the exchange, there was $590,000 in principal
and accrued interest of $52,000 outstanding on the notes.  The Company
recorded a loss of $501,000 on the extinguishment of the debt representing the
difference between the fair value of the shares issued on the date of the
exchange and the remaining principal and accrued interest payable on the
notes.   The fair value of the shares issued in the exchange was
determined by reference to the per share closing price of the Company’s common
stock on the date of the exchange which was $0.49.  A special
committee of independent directors of the Company approved entering into the
Exchange Agreement.





(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 an 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.





(v)           A
$100,000 unsecured convertible note and 600,000 shares of unregistered 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.





(vi)           Demand
loans consist of amounts due to three 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.  Included in the balances is the disputed claim amount
asserted by the former owner of Restaff Services, Inc. of $75,000, as discussed
further below.




11




(vii)           On
February 26, 2007, the Company acquired the operations, including three offices
of ReStaff Services, Inc. (“ReStaff”), for a total original purchase price of
$4,710,000.  Per the terms of the asset purchase agreement and
accompanying notes, outstanding debt issued by the Company as consideration for
the purchase of ReStaff is subject to reduction if ReStaff’s net income (as
defined in the asset purchase agreement) falls below certain
thresholds.  During the third fiscal quarter of 2009, the Company
recognized the second of two reductions in the outstanding indebtedness to the
former owner of Restaff as a consequence of the acquired operations generating
less than $1,000,000 in net income in the calendar year 2008.  The
total reduction in debt equaled $459,000.  As a result, a new note
dated March 1, 2009 was issued in the amount of $1,201,000 in exchange for the
two notes issued February 28, 2008 with outstanding balances of $1,560,000 and
$100,000.   The new note bears an annual interest rate of 6% and
is payable in equal monthly installments of $36,540 through March 1,
2012.  This new note is also subject to proportionate reduction in
principal in the event the acquired operations generate less than $1,000,000 in
net income in any calendar year during the term of the note.  The
former owner of Restaff is currently disputing this
reduction.  Consequently, the Company recognized an additional $75,000
in short term debt, which is the expected amount required to settle these
claims.  Subsequent to December 31, 2009 all amounts related to this
note were settled in exchange for a series of future payments totaling $545,000,
as explained further in Note 12 below.


(viii)           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), (v), (vi) and (vii)
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 of Directors adopted the Accountabilities, Inc.
Equity Incentive Plan (“the Plan”).  The Plan provides for the grant
of stock options, stock appreciation rights and restricted stock awards to
employees, directors and other persons in a position to contribute to the growth
and success of the Company.  A total of 2,000,000 shares of common
stock have been reserved for issuance under the Plan, and as of December 31,
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.  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 December 31, 2009, and the
changes during the three months ended December 31, 2009, is presented
below:




Number
      of Non- Vested Award
              Shares
            
            
            Weighted-Average
              Grant-Date Fair ValueNonvested
      at October 1, 2009
            
            
            974,000
            
            
            $
            0.31Vested
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -Nonvested
      at December 31, 2009
            
            
            974,000
            
            
            $
            0.31




12




Compensation
expense is measured using the grant-date fair value of the shares granted and is
recognized on a straight-line basis over the required vesting
period.  Fair value is determined as a discount from the current
market price quote to reflect a) lack of liquidity resulting from the restricted
status and low trading volume and b) recent private placement
valuations.  For the three months ended December 31, 2009 and 2008,
compensation expense relating to restricted stock awards was $40,000 and
$41,000, respectively.   As of December 31, 2009, there was $143,000
of total unrecognized compensation cost.  That cost is expected to be
recognized as an expense over a weighted-average period of 1.8
years.





9.      Receivable
Sale Agreement





Additional
overadvance amounts are occasionally extended to the Company at the election of
the financial institution to which the Company sells its trade
receivables.  As of December 31, 2009, the total amount outstanding
under the overadvance was $228,000.  Overadvances are subject to a fee
of 2%.  The overadvance is repayable in $8,500 weekly payments with
the balance, if any, due by May 28, 2010.





10.      Supplemental
Disclosure of Cash Flow Information





Three
      Months Ended
            
            
            Three
      Months EndedDecember
      31,
            
            
            December
      31,2009
            
            
            2008Cash
      paid for interest
            
            $
            64,000
            
            
            $
            134,000Non-cash
      investing and financing activities:Stock
      based compensation
            
            
            40,000
            
            
            
            41,000Debt
      converted to restricted common stock at fair value
            
            
            1,143,000
            
            
            
            -





11.      Commitments
and Contingencies





Unremitted
Payroll Taxes Related to Predecessor Company





Included
in Accounts payable and accrued liabilities in the accompanying financial
statements are assessments for unremitted payroll taxes for calendar year 2004
received from the IRS and certain state taxing authorities totaling
approximately $700,000.  The assessments relate to a subsidiary which
had been conducting employee leasing and benefits processing operations which
were discontinued in December 2004.  The amount included in Accounts
payable and accrued liabilities in the accompanying financial statements
represents what management estimates 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.





12.      Subsequent
Event




In
February 2010, the Company entered into a Settlement and Release Agreement with
ReStaff Services, Inc. and its owner (together hereby referred to as“ReStaff”)
whereby all obligations owed by the Company to ReStaff, including all amounts
related to the $1,201,000 note described in Note 7 (vii) above, were released in
exchange for a series of payments totaling $545,000. The payments will occur
through April 2011 according to a payment schedule which includes weekly
payments of $5,000 in addition to a series of eight payments of $25,000
occurring in February 2010, March 2010, April 2010 and every two months
thereafter through April 2011. The Company is currently negotiating with
TSE a transaction in which TSE would assume the Company's obligations
to pay the $545,000 to the other party.  The terms of such assumption
have not yet been concluded.
 
 Subsequent
events have been evaluated through February 12, 2010, the date the financial
statements were issued.


13




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 annual report on
Form 10-K for the fiscal year ended September 30, 2009, and our other reports
filed with the SEC. 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. Except as required by law, 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





Our
future profitability and rate of growth, if any, will be directly affected by
our ability to continue to expand our service offerings at acceptable gross
margins, and to achieve economies of scale, through the continued introduction
of differentiated marketing and sales channels, and through the successful
completion and integration of acquisitions.  Our ability to sustain
profitability will also be affected by the extent to which we must incur
additional expenses to expand our sales, marketing, and general and
administrative capabilities to expand our business.  The largest
component of our operating expenses is personnel costs.  Personnel
costs consist of salaries, benefits and incentive compensation, including
bonuses and stock-based compensation, for our employees.  Our
management expects our operating expenses will continue to grow in absolute
dollars, assuming our revenues continue to grow.  As a percentage of
revenue, we expect these expenses to decrease as our revenues increase, although
we have no assurance that either will.





The
following are material trends that are creating opportunities and risks for our
business:




·
            We
      have financed our growth largely through the issuance of debt and have
      incurred negative working capital.  As of December 31, 2009, we
      had negative working capital of $2,887,000, of which $963,000 constituted
      the current portion of long-term debt.  Total outstanding debt
      as of December 31, 2009 was $1,441,000, $516,000 of which is either past
      due or due upon demand, and $1,056,000 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 costs of being a
      reporting company and our growth initiatives, we must be able to generate
      sufficient amounts of cash flow and working capital.  Our
      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.





·
            Any
      further economic downturn could result in less demand from customers and
      lower revenues.  Because demand for staffing services is
      sensitive to changes in the level of economic activity, our business
      suffers during economic downturns.  As economic activity slows,
      companies tend to reduce their use of temporary employees and recruitment
      services before undertaking layoffs of their regular employees, resulting
      in decreased demand for our
personnel.





·
            A
      significant component of our growth to date has come through
      acquisitions.  Our management continues to invest resources in
      activities to seek, complete and integrate acquisitions that grow or
      enhance our current service offerings.  Additionally, management
      seeks acquisitions in desired geographical markets and that have minimal
      costs and risks associated with integration.  Our management
      believes that effectively acquiring businesses with these attributes will
      be critical to carrying out our
strategy.




·
            On
      December 24, 2009, our Board of Directors approved a reorganization into a
      holding company structure.  In the transaction, we will become a
      wholly-owned subsidiary of a newly formed holding
      company.  Stockholders of record will receive shares of the
      holding company on a one-for-one basis and will not otherwise be affected
      by the anticipated reorganization.  The transaction is expected
      to be consummated in the Company’s second fiscal quarter ending March 31,
      2010.  Our management believes such structure will provide
      enhanced operational flexibility and greater opportunities for future
      growth.




·
            On
      December 29, 2009, we entered into an Exchange Agreement with Tri-State
      Employment Services, Inc. (“TSE”) whereby all amounts due to TSE under the
      terms of notes recently acquired by them from a third party, were settled
      in exchange for the issuance of unregistered shares of our common
      stock.  On the date of the exchange, there was $590,000 in
      principal and accrued interest of $52,000 outstanding on the notes for
      which we issued 2,333,333 shares of our unregistered common
      stock.




14




Discontinued
Operations





In
addition to our light industrial and administrative service offerings, we
historically have provided professional accounting and finance consulting and
staffing services through both our CPA Partner on Premise Program and directly
to clients.





In April
2009, we discontinued our CPA Partner on Premise Program service offering, which
provided finance and accounting staffing and recruiting services through sales
and marketing agreements with regional public accounting firms.  We
reached our conclusion to exit this service offering after reviewing the
historical operating performance and future prospects of these services and the
likely need for continued capital to support ongoing losses.  As a
result, the CPA Partner on Premise Program is classified as discontinued
operations for all periods presented in the accompanying financial
statements.





In the
first quarter of fiscal 2010, in an effort to focus management’s efforts, and
use our capital more directly on our light industrial and administrative service
offerings, we discontinued the remaining accounting and finance operations,
which formed part of our Direct Professional Services offering.  As a
result, the operations associated with the direct provision of accounting and
finance services is classified as discontinued operations for all periods
presented in the accompanying financial statements.




Mergers
and Acquisitions





One of
our key strategies is to focus on mergers and acquisitions of companies that
grow or complement our existing service offerings, expand our geographic
presence and/or further expand and strengthen our existing
infrastructure.





Our most
recent material acquisition occurred on February 26, 2007 when we acquired the
operations, including three offices of ReStaff Services Inc. (the “ReStaff
Acquisition”), in exchange for cash, notes and shares of our common
stock.





We
account for acquisitions as purchases and the results of operations of acquired
operations have been included in our results since the dates of
acquisitions.





Our
management continues to invest resources in activities to seek, complete and
integrate acquisitions that may grow or enhance our current service offerings,
expand our geographical market presence, and effectively assimilate into our
marketing and sales strategies.   Currently, our management
expects acquisitions to continue to constitute a significant portion of any
future growth.  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,
as discussed below.





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 SEC.  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 our
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.




15





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.  Our 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 ASC Topic 718, “Compensation-Stock Compensation” (ASC
718).  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 ASC 718,
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 ASC Topic 740, “Income Taxes” (ASC
740).  Under ASC 740, 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 ASC Topic 350,
“Intangibles-Goodwill and Other” (ASC 350), 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 May 31, 2009 and will continue to test for impairment
annually.  No impairment was indicated as of May 31,
2009.  Other intangible assets with finite lives are subject to
amortization, and impairment reviews are performed in accordance with ASC Topic
360, “Property, Plant & Equipment” (ASC 360).





Recent
Accounting Pronouncements




There are
no recently issued accounting pronouncements that are not yet effective that we
believe will have a material effect on our financial statements.


Results
of Operations





Three
months ended December 31, 2009 compared to three months ended December 31,
2008





Revenue





For the
three months ended December 31, 2009, revenue decreased $2,541,000, or 15%, to
$14,114,000, as compared to $16,655,000 for the same period of the prior
year.  This decrease in revenue was primarily attributable to the
overall decline in economic activity since the beginning of the recession that
began in December 2007.  We began experiencing declines in revenue
versus the prior year most significantly in the second quarter of fiscal
2009.  Our current revenue decline encompassed declines in billable
hours at current clients, losses of accounts and lower billings for several
larger customers, which were not fully offset by the acquisition of new accounts
in existing offices.





Direct
cost of services





For the
three months ended December 31, 2009, direct cost of services decreased by
$1,744,000, or 12%, to $12,687,000, as compared to $14,431,000 for the same
period of the prior year.  This decrease was primarily due to the
decrease in revenues for the period.




16





Gross
profit





For the
three months ended December 31, 2009, gross profit decreased $797,000, or 36%,
to $1,427,000, as compared to $2,224,000 for the same period in the prior
year.  As a percentage of revenue, gross profit for the three months
ended December 31, 2009 decreased to 10.1% compared to 13.4% for the same period
in the prior year, reflecting a combination of lower bill rate pricing to retain
or gain new clients in the current recession as well as changes in our client
mix.





Selling,
general and administrative expenses


For the
three months ended December 31, 2009, selling, general and administrative
expenses increased $95,000, or 5%, to $1,861,000, as compared to $1,766,000 in
the same period of the prior year. Selling, general and administrative expenses
include non-cash charges for stock based compensation expense of $40,000 for the
three months ended December 31, 2009, as compared with $41,000 in the same
period of the prior year. As a percentage of revenue, selling, general and
administrative expenses were 13.2% for the three months ended December 31, 2009,
compared to 10.6% during the same period in the prior year. During the first
quarter of the current fiscal year we received notices from Los Angeles and
Culver City California and the state of New Hampshire notifying us of business
taxes and related penalties and interest due for prior fiscal years which we
have estimated to total approximately $274,000. This total includes
approximately $85,000 of penalties and $16,000 of interest, all of which have
been included in selling general and administrative expenses in the current
quarter ending December 31, 2009. Before taking into account the expense
associated with these local business taxes selling general and administrative
expenses in the first quarter of the current year decreased $179,000, or 10% as
compared to the first quarter of the prior year primarily as a result of reduced
administrative headcount and compensation in addition to broad efforts at
lowering general overhead expenditures. We are in preliminary conversations with
all three jurisdictions to seek waivers of the associated
penalties.


Depreciation
and amortization





For the
three months ended December 31, 2009, depreciation and amortization decreased
$28,000, or 25%, to $84,000, as compared to $112,000 in the same period in the
prior year.  The decrease is attributable to lower amortization
expense recorded on certain intangible assets acquired after the value of the
assets were reduced during the first and fourth quarters of fiscal
2009.





(Loss)
income from continuing operations





As a
result of the above, loss from continuing operations was ($518,000) for the
three months ended December 31, 2009, compared to income from operations of
$346,000 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. Interest expense for the three months ended December
31, 2009 was $96,000, which represents a 33% decrease from interest expense of
$143,000 for the same period in the prior year.  The decrease is
attributable to a reduction in the amount of debt outstanding that occurred
during fiscal 2009 through restructuring outstanding debt as well as the
reduction in the federal prime lending rate from 5.00% in effect at the
beginning of the prior fiscal year to 3.25% at the beginning of the current
fiscal year resulting in lowered interest expense on our sold outstanding
accounts receivable.





Loss
on debt extinguishment





On
December 29, 2009, we entered into an Exchange Agreement with TSE whereby all
amounts due to TSE under the terms of notes recently acquired by TSE from a
third party, were settled in full in exchange for the issuance of unregistered
shares of common stock of the Company.  On the date of the exchange,
there was $590,000 in principal and accrued interest of $52,000 outstanding on
the notes for which we issued 2,333,333 shares of our unregistered common
stock.  Loss on debt extinguishment of $501,000 was measured as the
difference between the fair value of the unregistered common stock issued and
the remaining outstanding principal and accrued interest on the notes that were
exchanged during the first quarter of fiscal 2010.





Net
(loss) income from continuing operations





The
factors described above resulted in a net loss from continuing operations for
the three months ended December 31, 2009 of ($1,115,000) as compared to income
from continuing operations of $203,000 for the same period in the prior
year.




17





Loss
from discontinued operations





Loss from
discontinued operations reported during the three months ended December 31, 2009
and 2008 relates to our discontinued CPA Partner on Premise Program and the
discontinued portion of the Direct Professional Services offering associated
with the provision of accounting services directly to clients.





Net
(loss) income





The
factors described above resulted in net loss for the three months ended December
31, 2009 of ($1,115,000), as compared to net income of $18,000 during the same
period of the prior year.




Liquidity
and Capital Resources





Cash
Flows





We have
historically relied on cash flows from operations, borrowings under debt
facilities, selling our trade receivables prior to collection, loans from
related parties and proceeds from sales of stock to satisfy our working capital
requirements and 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.  To the extent that
funds are not available to meet our operating needs, we may have to further
reduce operating expenses or eliminate portions of our operations.





At
December 31, 2009, cash was $35,000, a decrease of $28,000 from $63,000 as of
September 30, 2009.





Net cash
flows provided by operating activities from continuing operations during the
three months ended December 31, 2009 decreased ($282,000) to ($10,000), from
$272,000 during the same period of the prior year.  This decrease
reflects the increase in Net loss from continuing operations in the first
quarter of 2010, which, after adding back certain non-cash expenses to both the
first quarter of fiscal 2010 and 2009, such as Loss on debt extinguishment,
Depreciation and amortization, Stock based compensation expense, and Bad debt
expense, resulted in a revised decrease of ($787,000).  Offsetting
this decrease was greater cash provided by changes in operating assets in
liabilities during the three months ended December 31, 2009, which totaled
$410,000, as compared to cash used of ($95,000) in the same period of the prior
year.





Net cash
used in investing activities during the three months ended December 31, 2009,
increased $7,000 to ($16,000) from ($9,000) during the same period of the prior
year, which reflects expenditures associated with the relocation of our
corporate headquarters from New Jersey to New York during the current fiscal
quarter.





Net cash
used in financing activities during the three months ended December 31, 2009,
decreased ($152,000) to ($4,000) from ($156,000) during the same period of the
prior year.  This decrease was primarily due to our failure to make
scheduled principal payments on debt outstanding.





Working
Capital





As of
December 31, 2009, we had negative working capital of ($2,887,000), for which
the component constituting the current portion of long-term debt was
$963,000.  Within the current portion of long-term debt $516,000 is
past due or due upon demand as explained further below.  Of the
negative working capital, $968,000 is due and payable to TSE relating to leasing
costs charged by TSE for professional employment organization services provided
by TSE to us, which arise and are paid in the ordinary course of business,
normally on a weekly basis.  Total outstanding debt as of December 31,
2009 was $1,441,000.  The working capital deficit of ($2,887,000) as
of December 31, 2009, represents an increase in the deficit of $155,000 as
compared to a working capital deficit of ($2,732,000) as of September 30,
2009.





In order
to service our debt, maintain our current level of operations, as well as fund
the increased costs of being a reporting company and our growth initiatives, we
must be able to generate sufficient amounts of cash flow and working
capital.  Our management has engaged and continues to engage in the
following activities to effectively accomplish these objectives:





a)
            On
      December 29, 2009, we entered into an Exchange Agreement with TSE whereby
      all amounts due to TSE under the terms of notes recently acquired by TSE
      from a third party, were settled in full in exchange for the issuance of
      unregistered shares of our common stock.  On the date of the
      exchange, there was $590,000 in principal and accrued interest of $52,000
      outstanding on the notes for which we issued 2,333,333 shares of our
      unregistered common stock.




18




b)
            In
      the first quarter of fiscal 2010, we discontinued the operations
      associated with the direct provision of accounting and finance services in
      order to focus management’s efforts, as well as our capital more directly
      on our light industrial and administrative service
      offerings.  This segment of our operations generated losses from
      its operations of $0 and ($152,000) for the three months ended December
      31, 2009 and 2008, respectively.  This segment has been reported
      as discontinued operations in the accompanying financial
      statements.


c)
            We
      are aggressively managing cash and expenses, including the increased costs
      of being a reporting company, with activities such as seeking additional
      efficiencies in our operating offices and corporate functions including
      headcount reductions, if appropriate, improving our accounts receivable
      collection efforts, obtaining more favorable vendor terms, and using our
      finance and accounting consultants when available to aid in the necessary
      obligations associated with being a reporting
  company.





We
believe that, based on the above activities and our current expectations, that
we have adequate resources for liquidity to meet our operating needs through
December 31, 2010.





Because
our revenue depends primarily on billable labor hours, most of our charges are
invoiced weekly, bi-weekly or monthly depending on the associated payment of
labor costs, and are due currently, with collection times typically ranging from
30 to 60 days.  We sell our accounts receivable to a financial
institution as a means of managing our working capital.  Under the
terms of our receivable sale agreement the maximum amount of trade receivables
that can be sold is $8,000,000.  As collections reduce previously sold
receivables, we may replenish these with new receivables.  Net
discounts per the agreement are represented by an interest charge at an annual
rate of prime plus 1.5% (“Discount Rate”) applied against outstanding
uncollected receivables sold.  The risk we bear from bad debt losses
on trade receivables sold is retained by us, and receivables sold may not
include amounts over 90 days past due.  The agreement is subject to a
minimum discount computed as minimum sales per month of $3,000,000 multiplied by
the then effective Discount Rate, and a termination fee of 3% applies to the
maximum facility in year one of the agreement, 2% in year two, and 1%
thereafter.  In addition, an overadvance of $500,000 was received, is
secured by outstanding receivables, and is currently being repaid in weekly
payments of $8,500.  As of December 31, 2009, the amount of advances
against sold receivables outstanding was $4,807,000, which includes $228,000 of
the overadvance.




Debt





Long-term
debt at December 31, 2009 and September 30, 2009 is summarized as
follows:





December
      31,
            
            
            September
      30,2009
            
            
            2009Long-term
      debt16.25%
      subordinated note (i)
            
            
            -
            
            
            $
            102,0003%
      convertible subordinated note (ii)
            
            
            -
            
            
            
            408,00018%
      unsecured note (iii)
            
            
            -
            
            
            
            80,000Long
      term capitalized lease obligation (viii)
            
            
            -
            
            
            
            4,000Other
      debt
            
            $
            50,000
            
            
            
            50,000Total
            
            
            50,000
            
            
            
            644,000Less
      current maturities
            
            
            50,000
            
            
            
            454,000Non-current
      portion
            
            
            -
            
            
            
            190,000Related
      party long-term debt13%
      unsecured demand note (iv)
            
            
            104,000
            
            
            
            104,00018%
      unsecured convertible note (v)
            
            
            100,000
            
            
            
            100,000Demand
      loans (vi)
            
            
            131,000
            
            
            
            131,0006%
      unsecured note (vii)
            
            
            1,056,000
            
            
            
            1,056,000Total
            
            
            1,391,000
            
            
            
            1,391,000Less
      current maturities
            
            
            913,000
            
            
            
            811,000Non-current
      portion
            
            
            478,000
            
            
            
            580,000Total
      long-term debt
            
            
            1,441,000
            
            
            
            2,035,000Less
      current maturities
            
            
            963,000
            
            
            
            1,265,000Total
      non-current portion
            
            $
            478,000
            
            
            $
            770,000





For
further explanations of (i) through (viii) above please see Note 7 to our
financial statements beginning on page 3 of this report on Form
10-Q.




19





Sales
of Common Stock





None
during the three months ended December 31, 2009.




Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not Applicable.





Item
4. CONTROLS
AND PROCEDURES




As
required by SEC Rule 13a-15(b) under the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is
defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period
covered by this Report.  Based on this evaluation, we noted that
certain changes to the design of our disclosure controls and procedures had not
been made that were necessary to reflect significant changes that occurred in
our senior management and board of directors.  Due to this, our Chief
Executive Officer and Chief Financial Officer each concluded that our disclosure
controls and procedures were not effective as of December 31,
2009.  We are in the process of remediating the material weaknesses
identified in our assessment by defining and documenting the roles and
responsibilities of new senior management as they relate to proper disclosure
controls and procedures.





There
were no changes in our internal controls over financial reporting during the
quarter ended December 31, 2009, that have materially affected, or are
reasonably likely to have materially affected our internal controls over
financial reporting.  We are however, in the process of remediating
the material weaknesses identified in our assessment as of our fiscal year end
September 30, 2009.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




Part
      II Other
      InformationItem
      1.Legal
      Proceedings





We are
involved, from time to time, in routine litigation arising in the ordinary
course of business, including the matters described in our report on Form 10-K
for the fiscal year ended September 30, 2009.




Item
      1A.Risk
      Factors





There
have been no material changes with respect to the risk factors disclosed in our
latest report on Form 10-K for the fiscal year ended September 30, 2009 as filed
with the SEC.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





Not
applicable.





Item
      3.Defaults
      Upon Senior Securities




We are
currently in default under promissory notes in the principal amounts of
$1,201,000 and $100,000, respectively, as a result of our failure to make timely
payments of principal and/or interest.  We are currently in discussions
with the holder of the $100,000 note concerning the terms of a possible
forbearance agreement or restructuring.  As of December 31, 2009, the
aggregate amount of payments due but not made under the notes was
$282,000.




20




Item
      4.Submission
      of Matters to a Vote of Security Holders





No
matters were submitted to a vote of stockholders during the three months ended
December 31, 2009.





Item
      5.Other
      Information





None




21




Item
      6.Exhibits





Number
                    Description10.50
                    Exchange Agreement between Accountabilities, Inc.
      and Tri-State Employment Services, Inc. dated as of December 29, 2009
      (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the
      Registrant on January 5, 2010)10.51
                    Settlement
      and Release Agreement between Accountabilities, Inc. and Rhonda Faria
      dated as of February 5, 201031.1
                    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:  February
      12, 2010
            By:
      /s/ Jay H. SchecterJay
      H. SchecterChief
      Executive Officer(Principal
      Executive Officer)







Date:  February
      12, 2010
            By:
      /s/ Stephen DelVecchiaStephen
      DelVecchiaChief
      Financial Officer(Principal
      Financial and Accounting Officer)




23