UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
One)




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended: March 31, 2009




or




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from _________ to _________




Commission
File Number:  000-51200




ClearPoint
      Business Resources, Inc.(Exact
      name of registrant as specified in its charter)Delaware
            
            98-0434371State
      or other jurisdiction of incorporation or
              organization
            
            (I.R.S.
      Employer Identification No.)1600
      Manor Drive, Suite 110, Chalfont, Pennsylvania
  18914(Address
      of principal executive offices) (Zip Code)Registrant’s
      telephone number, including area code:  (215)
      997-7710N/A(Former
      name, former address and former fiscal year, if changed since last
      report)


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes  x
No   ̈




Indicate
by check mark whether the registrant 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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes   ̈
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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large accelerated filer   ̈
                Accelerated filer   ̈Non-accelerated filer ̈
                Smaller reporting company  x(Do not check if a smaller reporting company)





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




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
              
              Outstanding
      as of May 11, 2009Common
      Stock
              
              14,251,964










CLEARPOINT
BUSINESS RESOURCES, INC.




TABLE
OF CONTENTS




Page
      No.PART
      I – FINANCIAL INFORMATIONITEM
      1.  FINANCIAL STATEMENTS
            1ITEM
      2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
            46ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
            70ITEM
      4T.  CONTROLS AND PROCEDURES
            70PART
      II – OTHER INFORMATIONITEM
      1.  LEGAL PROCEEDINGS
            71ITEM
      1A.  RISK FACTORS
            72ITEM
      2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            74ITEM
      3.  DEFAULTS UPON SENIOR SECURITIES
            74ITEM
      4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
            74ITEM
      5.  OTHER INFORMATION
            74ITEM
      6.  EXHIBITS
            75SIGNATURES
            S-1EXHIBIT
      INDEX
            E-1





i




PART
I — FINANCIAL INFORMATION




ITEM
1.                      FINANCIAL
STATEMENTS




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
INTERIM CONSOLIDATED BALANCE SHEETS




-
ASSETS -




March 31,
                    2009
                
                
                December 31, 2008
                    2008(Unaudited)
                
                
                (Audited)CURRENT
      ASSETSCash
      and cash equivalents
                
                $
                319,232
                
                
                $
                960,145Accounts
      receivable, net of allowance for doubtful accounts of $5,574,921 and
      $5,774,921 at March 31, 2009 and December 31, 2008,
      respectively
                
                
                78,093
                
                
                
                736,750Accounts
      receivable – related party
                
                
                502,339
                
                
                
                336,670Unbilled
      revenue
                
                
                61,530
                
                
                
                127,685Prepaid
      expenses and other current assets
                
                
                62,386
                
                
                
                217,882Refundable
      federal income tax
                
                
                26,128
                
                
                
                26,128TOTAL
      CURRENT ASSETS
                
                
                1,049,708
                
                
                
                2,405,260EQUIPMENT,
      FURNITURE AND FIXTURES, net
                
                
                1,193,930
                
                
                
                1,296,689INTANGIBLE
      ASSETS, net
                
                
                120,833
                
                
                
                133,333DEFERRED
      FINANCING COSTS, net of current
                
                
                469,389
                
                
                
                536,444OTHER
      ASSETS
                
                
                968,277
                
                
                
                709,404TOTAL
      ASSETS
                
                $
                3,802,137
                
                
                $
                5,081,130




See notes
to condensed interim consolidated financial statements




1




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
INTERIM CONSOLIDATED BALANCE SHEETS




- LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT) -




March 31,
                  2009
              
              
              December 31, 2008
                  2008(Unaudited)
              
              
              (Audited)CURRENT
      LIABILITIESCurrent
      portion of long-term debt
              
              $
              5,498,192
              
              
              $
              5,950,209Accounts
      payable
              
              
              2,495,959
              
              
              
              2,725,659Accrued
      expenses and other current liabilities
              
              
              3,040,573
              
              
              
              3,336,117Accrued
      payroll and related taxes
              
              
              573,775
              
              
              
              744,758Current
      portion of retirement benefit payable
              
              
              84,420
              
              
              
              146,900Current
      portion of deferred revenue
              
              
              996,104
              
              
              
              996,104Current
      portion of accrued restructuring costs – related party
              
              
              64,177
              
              
              
              256,709Current
      portion of accrued restructuring costs
              
              
              155,950
              
              
              
              186,055TOTAL
      CURRENT LIABILITIES
              
              
              12,909,150
              
              
              
              14,342,511ACCRUED
      RESTRUCTURING COSTS, net of current
              
              
              192,532
              
              
              
              —LONG-TERM
      DEBT, net of current
              
              
              11,068,273
              
              
              
              10,306,054LIABILITY
      FOR WARRANTS ISSUED
              
              
              1,266,016
              
              
              
              1,213,433DEFERRED
      REVENUE, net of current
              
              
              747,079
              
              
              
              996,104RETIREMENT
      BENEFIT PAYABLE, net of current
              
              
              135,646
              
              
              
              135,646TOTAL
      LIABILITIES
              
              
              26,318,696
              
              
              
              26,993,748Commitments
      and contingencies
              
              
              —
              
              
              
              —STOCKHOLDERS’
      EQUITY (DEFICIT)Preferred
      stock, $.0001 par value, authorized 1,000,000 shares; none
      issued
              
              
              —
              
              
              
              —Common
      stock, $.0001 par value (60,000,000 shares authorized March 31, 2009 and
      December 31, 2008; 14,251,964 shares issued and outstanding March 31,
      2009 and December 31, 2008)
              
              
              1,425
              
              
              
              1,425Additional
      paid in capital
              
              
              32,610,676
              
              
              
              32,576,500Accumulated
      deficit
              
              
              (55,128,660
              )
              
              
              (54,490,543
              )TOTAL
      STOCKHOLDERS’ EQUITY (DEFICIT)
              
              
              (22,516,559
              )
              
              
              (21,912,618
              )TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
              
              $
              3,802,137
              
              
              $
              5,081,130




See notes
to condensed interim consolidated financial statements




2




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




-
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS -




(UNAUDITED)




For the three months ended
                        March 31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Unaudited)REVENUE
                    
                    $
                    1,237,307
                    
                    
                    $
                    24,219,428COST
      OF SERVICES
                    
                    
                    —
                    
                    
                    
                    22,743,721GROSS
      PROFIT
                    
                    
                    1,237,307
                    
                    
                    
                    1,475,707SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                    
                    
                    1,190,515
                    
                    
                    
                    5,557,999RESTRUCTURING
      EXPENSE
                    
                    
                    —
                    
                    
                    
                    2,100,422DEPRECIATION
      AND AMORTIZATION
                    
                    
                    222,575
                    
                    
                    
                    1,143,828IMPAIRMENT
      OF GOODWILL
                    
                    
                    —
                    
                    
                    
                    16,821,586LOSS
      ON DISPOSAL OF FIXED ASSETS
                    
                    
                    4,708
                    
                    
                    
                    —(LOSS)
      FROM OPERATIONS
                    
                    
                    (180,491
                    )
                    
                    
                    (24,148,128
                    )OTHER
      INCOME (EXPENSE)Other
      income
                    
                    
                    30,390
                    
                    
                    
                    39,077Interest
      expense and factoring fees
                    
                    
                    (287,253
                    )
                    
                    
                    (548,219
                    )Interest
      expense of amortization of original issue discount and warrant
      liabilities
                    
                    
                    (148,180
                    )
                    
                    
                    —Mark
      to market loss on derivative instruments
                    
                    
                    (52,583
                    )
                    
                    
                    —Other
      expense
                    
                    
                    —
                    
                    
                    
                    (138,923
                    )Loss
      on sale of subsidiary
                    
                    
                    —
                    
                    
                    
                    (1,894,220
                    )TOTAL
      OTHER INCOME (EXPENSE)
                    
                    
                    (457,626
                    )
                    
                    
                    (2,542,285
                    )LOSS
      BEFORE INCOME TAXES
                    
                    
                    (638,117
                    )
                    
                    
                    (26,690,413
                    )INCOME
      TAX EXPENSE
                    
                    
                    —
                    
                    
                    
                    5,007,180NET
      LOSS
                    
                    $
                    (638,117
                    )
                    
                    $
                    (31,697,593
                    )NET
      LOSS PER COMMON SHAREBasic
      and Diluted
                    
                    $
                    (0.04
                    )
                    
                    $
                    (2.40
                    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDINGBasic
      and Diluted
                    
                    
                    14,251,964
                    
                    
                    
                    13,208,916


See notes
to condensed interim consolidated financial statements




3




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
INTERIM CONSOLIDATED




-
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) -




(UNAUDITED)




Common Stock
              
              
              
              
              
              
              
              
              TotalShares
              
              
              Amount
              
              
              Additional
                  Paid in Capital
              
              
              Accumulated
                  (Deficit)
              
              
              Stockholders’
                  Equity
                  (Deficit)Balance
      as of December 31, 2008
              
              
              14,251,964
              
              
              $
              1,425
              
              
              $
              32,576,500
              
              
              $
              (54,490,543
              )
              
              $
              (21,912,618
              )Issuance
      of stock
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Issuance
      of warrants
              
              
              
              
              
              
              —
              
              
              
              10,818
              
              
              
              —
              
              
              
              10,818Stock
      based compensation
              
              
              
              
              
              
              —
              
              
              
              23,358
              
              
              
              —
              
              
              
              23,358Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (638,117
              )
              
              
              (638,117
              )Balance
      as of March 31, 2009
              
              
              14,251,964
              
              
              $
              1,425
              
              
              $
              32,610,676
              
              
              $
              (55,128,660
              )
              
              $
              (22,516,559
              )




See notes
to condensed interim consolidated financial statements




4




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS




For the three months ended
                  March 31,2009
              
              
              2008(Unaudited)
              
              
              (Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      (loss)
              
              $
              (638,117
              )
              
              $
              (31,697,593
              )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Deferred
      income taxes
              
              
              —
              
              
              
              5,007,180Depreciation
      and amortization
              
              
              222,575
              
              
              
              1,143,828Loss
      on disposal of fixed assets
              
              
              4,708
              
              
              
              —Impairment
      of goodwill
              
              
              —
              
              
              
              16,821,586Provision
      for (reduction in) doubtful accounts
              
              
              (200,000
              )
              
              
              222,247Provision
      for franchise receivables
              
              
              —
              
              
              
              1,638,879Loss
      on sale of subsidiary
              
              
              —
              
              
              
              1,894,220Issuance
      of warrants
              
              
              10,818
              
              
              
              50,000Stock-based
      compensation
              
              
              23,358
              
              
              
              14,792Interest
      expense – original issue discount and warrant liabilities
              
              
              148,181
              
              
              
              —Mark
      to market (gain) on derivative instruments
              
              
              52,583
              
              
              
              —Changes
      in operating assets and liabilities:Decrease
      in accounts receivable
              
              
              319,925
              
              
              
              11,142,294Decrease
      in unbilled revenue
              
              
              66,155
              
              
              
              1,876,612(Increase)
      decrease in prepaid expenses and other current assets
              
              
              269,686
              
              
              
              (555,454
              )(Increase)
      in other assets
              
              
              —
              
              
              
              (8,961
              )Increase
      (decrease) in accounts payable
              
              
              (229,702
              )
              
              
              95,281(Decrease)
      in accrued expense and othercurrent
      liabilities
              
              
              (295,544
              )
              
              
              (1,604,431
              )(Decrease)
      in accrued payroll and related taxes
              
              
              (170,982
              )
              
              
              (1,791,541
              )(Decrease)
      in deferred revenue
              
              
              (249,027
              )
              
              
              —Increase
      (decrease) in accrued restructuring costs
              
              
              (30,106
              )
              
              
              1,498,395(Decrease)
      in retirement benefits payable
              
              
              (62,480
              )
              
              
              —Total
      adjustments to net loss
              
              
              (119,852
              )
              
              
              37,444,927Net
      cash provided by (used in) operating activities
              
              
              (757,969
              )
              
              
              5,747,334CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of equipment, furniture and fixtures
              
              
              (44,968
              )
              
              
              (643,231
              )Net
      cash (used in) investing activities
              
              
              (44,968
              )
              
              
              (643,231
              )CASH
      FLOWS FROM FINANCING ACTIVITIES(Repayments)
      of ComVest term loan
              
              
              (535,961
              )
              
              
              —Gross
      borrowings on revolving credit facility – ComVest
              
              
              1,150,000
              
              
              
              —Net
      (repayments) on long-term debt – M & T
              
              
              (192,843
              )
              
              
              (250,000
              )Net
      (repayments) on revolving credit facility – M & T
              
              
              —
              
              
              
              (6,847,744
              )(Repayment)
      of notes payable
              
              
              (259,172
              )
              
              
              —Proceeds
      from shareholder notes
              
              
              —
              
              
              
              800,000Assumption
      of shareholder notes liability by related party
              
              
              —
              
              
              
              (800,000
              )Net
      cash provided by (used in) financing activities
              
              
              162,024
              
              
              
              (7,097,744
              )Net
      increase (decrease) in cash and cash equivalents
              
              
              (640,913
              )
              
              
              (1,993,641
              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              960,145
              
              
              
              1,993,641CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              319,232
              
              
              $
              —




See notes
to condensed interim consolidated financial statements




5




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)




SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION




For the three months ended
                      March 31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Unaudited)Cash
      paid during the period for:Interest
                    
                    $
                    250,324
                    
                    
                    $
                    345,165Income
      taxes
                    
                    $
                    —
                    
                    
                    $
                    15,430Cash
      received during the period for:Income
      taxes
                    
                    $
                    —
                    
                    
                    $
                    —


SUPPLEMENTAL
SCHEDULE OF NON-CASH, INVESTING AND FINANCING ACTIVITIES:




On
February 7, 2008, ClearPoint Business Resources, Inc. (the “Company”) sold its
wholly-owned subsidiary, ClearPoint HRO, LLC (“HRO”) for an aggregate purchase
price payable in the form of an earnout payment equal to 20% of the earnings
before interest, taxes, depreciation and amortization of the operations of HRO
for a period of twenty four (24) months following February 7, 2008 (see Note 4 –
Business and Asset Acquisitions and Dispositions and Licensing
Agreements).




See notes
to condensed interim consolidated financial statements




6




CLEARPOINT
BUSINESS RESOURCES, INC. AND SUBSIDIARIES




NOTES
TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS




(Unaudited)




NOTE
1 — GOING CONCERN:




Historically,
ClearPoint Business Resources, Inc. (“ClearPoint” or the “Company”) has funded
its cash and liquidity needs through cash generated from operations and debt
financing.  At March 31, 2009, the Company had an accumulated deficit
of $55,128,660 and working capital deficiency of $11,859,442. For the three
months ended March 31, 2009, the Company incurred a net loss of $638,117.
Although the Company restructured its debt and obtained new financing in the
second quarter of 2008, cash projected to be generated from operations may not
be sufficient to fund operations and meet debt repayment obligations during the
next twelve months. In order to meet its future cash and liquidity needs, the
Company may be required to raise additional financing or restructure existing
debt. There is no assurance that the Company will be successful in obtaining
additional financing or restructuring its existing debt. If the Company does not
generate sufficient cash from operations, raise additional financing or
restructure existing debt, there is substantial doubt about the ability of the
Company to continue as a going concern. The accompanying unaudited condensed
interim consolidated financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the normal
course of business.  The unaudited condensed interim consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.




NOTE
2 — ORGANIZATION AND BASIS OF PRESENTATION:




The
accompanying unaudited condensed interim consolidated financial statements of
the Company and its wholly-owned subsidiaries have been prepared in accordance
with accounting principles generally accepted in the United States of America
and the rules and regulations of the Securities and Exchange Commission
(“SEC”).




ClearPoint
provides comprehensive workforce management technology solutions throughout the
United States, including its iLabor technology platform (“iLabor” or the “iLabor
Network”), vendor management services (“VMS”) and staff augmentation
programs.  Since its inception, ClearPoint has enhanced its platform
through organic growth and the integration of acquisitions.  Prior to
fiscal year 2008, ClearPoint provided various temporary staffing services as
both a direct provider and as a franchisor.  During the year ended
December 31, 2008, ClearPoint transitioned its business model from a temporary
staffing provider through a network of branch-based offices or franchises to a
provider that manages clients’ temporary staffing needs through its open
Internet portal-based iLabor Network. Under the new business model, ClearPoint
acts as a broker for its clients and network of temporary staffing suppliers
using iLabor. The Company now derives its revenues from fees related to iLabor
Network, royalty fees related to contracts entered into under the previous
business model and VMS fees. All operations are centralized at its offices in
Chalfont, Pennsylvania.




On
February 12, 2007, ClearPoint Resources, Inc., ClearPoint’s wholly-owned
subsidiary (“CPR”), consummated a merger (the “Merger”) with Terra Nova
Acquisition Corporation (“Terra Nova”), a blank check company. As a result, CPBR
Acquisition, Inc. (“CPBR”), a Delaware corporation and wholly-owned subsidiary
of Terra Nova, merged with CPR.  At the closing of the Merger, CPR
stockholders were issued an aggregate of 6,051,549 shares of Terra Nova common
stock.




The
merger agreement also provides for CPR’s original stockholders to receive
additional performance payments, in the form of cash and/or shares, contingent
upon the future performance of the combined company’s share price. The
performance payments are payable in a combination of cash and
shares.  No such payments have been made to date and none are yet
due.  Upon the closing of the Merger, Terra Nova changed its name to
ClearPoint Business Resources, Inc.




7




Upon
consummation of the Merger, $30.6 million was released from the Terra Nova Trust
Fund to be used by the combined company. After payments totaling approximately
$3.3 million for professional fees and other direct and indirect costs related
to the Merger, the net proceeds amounted to $27.3 million, all of which were
used by ClearPoint as follows: (i) to retire the outstanding debt to Bridge
Healthcare Finance, LLC and Bridge Opportunity Finance, LLC (collectively,
“Bridge”), of $12.45 million, (ii) to pay an early debt retirement penalty in
the amount of $1.95 million to Bridge, (iii) to pay for the redemption of
warrants related to its credit facility with Bridge in the amount of $3.29
million and (iv) to partially fund the acquisition of ALS, LLC (see Note 4 –
Business and Asset Acquisitions and Dispositions and Licensing Agreements), and
certain other related transaction costs.




The
Merger was accounted for under the purchase method of accounting as a reverse
acquisition in accordance with accounting principles generally accepted in the
United States of America for accounting and financial reporting purposes. Under
this method of accounting, Terra Nova was treated as the “acquired” company for
financial reporting purposes. In accordance with guidance applicable to these
circumstances, this Merger was considered to be a capital transaction in
substance. Accordingly, for accounting purposes, the Merger was treated as the
equivalent of ClearPoint issuing stock for the net monetary assets of Terra
Nova, accompanied by a recapitalization.




NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:




The
Company’s accounting policies are in accordance with accounting principles
generally accepted in the United States of America. Outlined below are those
policies considered particularly significant.




(a)
Basis of Presentation:




The
condensed interim consolidated financial information as of March 31, 2009 and
for the three-month periods ended March 31, 2009 and 2008 have been prepared
without audit, pursuant to the rules and regulations of the
SEC.  Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made are adequate to provide for fair
presentation.  The condensed interim consolidated financial
information should be read in conjunction with the consolidated financial
statements and the notes thereto, included in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008, previously filed with the
SEC.




In the
opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of consolidated financial
position as of March 31, 2009, and consolidated results of operations, and cash
flows for the three month-periods ended March 31, 2009 and 2008, as applicable,
have been made.  The interim results of operations are not necessarily
indicative of the operating results for the full fiscal year or any future
periods.




(b)
Use of Estimates:




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Actual results could differ from those
estimates.




(c)
Revenue Recognition:




The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No.
104, “Revenue Recognition” (“SAB 104”). Under SAB 104, revenue is recognized
when there is persuasive evidence of an arrangement, delivery has occurred or
services have been rendered, the sales price is determinable, and collectability
is reasonably assured. Revenue earned but not billed is recorded and accrued as
unbilled revenue. In 2008, the Company transitioned from a short and long term
temporary staffing provider through a network of branch based offices to a
provider that manages clients’ temporary staffing spend through its open
Internet portal based iLabor network, as well as its closed client embedded VMS
system.




8




The
Company evaluated the criteria outlined in EITF Issue No. 99-19, Reporting
Revenue Gross as a Principal Versus Net as an Agent, in determining that it was
appropriate to record the revenue from the iLabor technology platform on a net
basis after deducting costs related to suppliers for sourcing labor, which
represent the direct costs of the contingent labor supplied, for clients.
Generally, the Company is not the primarily obligated party in iLabor
transactions and the amounts earned are determined using a fixed percentage, a
fixed-payment schedule, or a combination of the two.




Prior to
2008 and for the three months ended March 31, 2008, the Company’s primary major
source of revenue was the temporary placement of workers. This revenue was
recognized when earned and realizable and therefore when the following criteria
had been met: (a) persuasive evidence of an arrangement exists; (b) services
have been rendered; (c) the fee is fixed or determinable; and (d) collectability
is reasonably assured. Revenue is recognized in the period in which services are
provided based on hours worked by the workers. As a result of changes in the
Company’s business model, in 2008, the Company recognized revenue from four
major sources:




·
            For
      the three months ended March 31, 2008, the Company recorded revenue from
      its temporary staffing operations, permanent placement fees, and
      temp-to-hire fees by formerly Company-owned and franchised operations.
      Temporary staffing revenue and the related labor costs and payroll taxes
      were recorded in the period in which the services were performed.
      Temp-to-hire fees were generally recorded when the temporary employee was
      hired directly by the customer. ClearPoint reserved for billing
      adjustments, principally related to overbillings and client disputes, made
      after year end that related to services performed during the fiscal year.
      The reserve was estimated based on historical adjustment data as percent
      of sales. Permanent placement fees were recorded when the candidate
      commenced full-time employment and, if necessary, sales allowances were
      established to estimate losses due to placed candidates not remaining
      employed for the permanent placement guarantee period, which was typically
      30-60 days;




·
            During
      the quarter ended June 30, 2008, the Company started transitioning from
      the temporary staffing provider model to its iLabor technology platform.
      Under this new model, the Company records revenue on a net fee basis after
      deducting costs paid to suppliers for sourcing labor for the Company’s
      clients. The Company acts as a broker for its clients and the Company’s
      network of temporary staffing suppliers. Revenue from the Company’s iLabor
      Network where it electronically procures and consolidates buying of
      temporary staffing for clients is recognized on a net
    basis;




·
            The
      Company records royalty revenues when earned based upon the terms of the
      agreements with Select, StaffChex and Townsend Careers, as defined below
      (see Note 4 – Business and Asset Acquisitions and Dispositions and
      Licensing Agreements); and




·
            VMS
      revenue, which consists of management fees recognized on a net basis and
      recorded as the temporary staffing service is rendered to the
      client.




The
Company also recorded deferred revenue on the balance sheet as of March 31, 2009
and December 31, 2008.  This amount of deferred revenue is being
recognized ratably over the term of the agreement reached with Select (see Note
4 – Business and Asset Acquisitions and Dispositions and Licensing
Agreements).




(d)
Accounts Receivable:




The
Company’s trade accounts receivable are generally uncollateralized. Management
closely monitors outstanding accounts receivable and provides an allowance for
doubtful accounts equal to the estimated collection losses that will be incurred
in collection of all receivables.  Receivables are written off when
deemed uncollectible.




9




(e)
Vendor Managed Services Receivables and Payables:




The
Company manages networks of temporary staffing suppliers or vendors on behalf of
clients and receives a fee for this service. The Company’s obligation to pay the
vendor is conditioned upon receiving payment from the client for services
rendered by the vendor’s personnel. As the right of offset between client and
vendor does not exist, the receivable from the client which is included in
accounts receivable, and payable to the vendor, which is included as a
liability, are not offset and are recorded on a gross basis.  Included
in the Company’s gross accounts receivable at March 31, 2009 and December 31,
2008 were VMS gross receivables of $731,394 and $1,264,168, respectively.
Included in the Company’s accounts payable at March 31, 2009 and December
31, 2008 was VMS payables of $1,200,878 and $1,320,602,
respectively.




(f)
Workers’ Compensation:




Prior to
February 29, 2008, the Company was responsible for the workers’ compensation
costs for its temporary and regular employees and was related to domestic
workers’ compensation claims ($250,000 or $500,000 per claim, depending on the
policy). The Company accrued the estimated costs of workers’ compensation claims
based upon the expected loss rates within the various temporary employment
categories provided by the Company and the estimated costs of claims reported
but not settled, and claims incurred but not reported.  As a result of
the estimated costs, the Company estimated that the insurance carriers will
issue rebates based on its findings. During 2008, the Company sold all of its
ownership interest of HRO (see Note 4 – Business and Asset Acquisitions and
Dispositions and Licensing Agreements).




(g)
Equipment, Furniture and Fixtures:




Equipment,
furniture, and fixtures are stated at cost. Depreciation and amortization is
provided using the straight-line method over the estimated useful asset lives of
three (3) to seven (7) years. The Company also provides for
amortization of leasehold improvements over the lives of the respective lease
term or the service life of the improvement, whichever is shorter.




(h)
Intangible Assets:




In
accordance with the Statement of Financial Accounting Standards (“SFAS”) No.
142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), definite lived
intangible assets are amortized over their expected lives of two (2) to five (5)
years.  The Company’s identifiable intangible asset with a definitive
life is comprised of a covenant not to compete.




(i)
Goodwill:




In
accordance with SFAS No. 142, goodwill was not amortized and was assigned to
specific reporting units and reviewed for possible impairment at least annually
or more frequently upon the occurrence of an event or when circumstances
indicated that the reporting unit’s carrying amount of goodwill was greater than
its fair value. As a result of the change in the Company’s business model in
2008 and the loss of cash flows related to the prior business model, the Company
determined that an impairment of goodwill existed during 2008 and recognized an
impairment charge of $16,821,586.




The
following table shows the change to goodwill during the fiscal year ended
December 31, 2008:




TotalBalance
      at December 31, 2007
                  
                  $
                  16,821,586Impairment
      of goodwill
                  
                  
                  (16,821,586
                  )Balance
      at December 31, 2008
                  
                  $
                  —


(j)
Advertising Expense:




The
Company expenses advertising costs in the period in which they are incurred.
Advertising expenses for the three months ended March 31, 2009 and 2008
were $7,607 and $21,200, respectively.




10




(k)
Deferred Financing Costs:




Deferred
financing costs consist of legal, banking, and other related fees that were
capitalized in connection with obtaining various loans and are being amortized
over the life of the related loan. Deferred financing costs of $469,389 at
March 31, 2009 and $90,406 at March 31, 2008 were net of accumulated
amortization of $264,058 and $51,099, respectively.




Amortization
of financing costs for the three months ended March 31, 2009 and 2008 was
$67,056 and $11,792, respectively.




(l)
Income Taxes:




The
Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are reflected on the balance sheet when it is
determined that it is more likely than not that the asset will be
realized.




(m)
Stock-based Employee Compensation




The
Company accounts for stock-based employee compensation in accordance with the
recognition and measurement provisions of SFAS No. 123 (revised 2004),
Share-Based Payment (“SFAS No. 123(R)”), related to share-based payment
transactions, including employee stock options, to be recognized in the
financial statements.  In addition, the Company adheres to the
guidance set forth within SEC Staff Accounting Bulletin No. 107 (“SAB 107”),
which certain SEC rules and regulations and provides interpretations with
respect to the valuation of share-based payments for public
companies.




(n)
Loss Per Share:




The
Company accounts for earnings per share pursuant to SFAS No. 128, “Earnings per
Share,” which requires disclosure on the financial statements of “basic” and
“diluted” earnings (loss) per share.  Basic earnings (loss) per share
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding for the year.  Diluted earnings (loss) per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding plus potentially dilutive securities outstanding
for each year.  Potentially dilutive securities include stock options
and warrants and shares of common stock issuable upon conversion of the
Company's convertible notes.




Diluted
loss per share for the three months ended March 31, 2009 and 2008 was the same
as basic loss per share, since the effects of the calculation were anti-dilutive
due to the fact that the Company incurred losses for all periods
presented.  The following securities, presented on a common share
equivalent basis, were excluded from the per share computations:




Three Months Ended
                  March 31,2009
              
              
              2008Stock
      Options
              
              
              945,600
              
              
              
              1,002,008Warrants
              
              
              15,015,825
              
              
              
              11,505,00015,961,425
              
              
              
              12,705,008


(o)
Impairment of Long Lived Assets:




In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long Lived Assets”, long-lived assets such as equipment, furniture and fixtures,
and amortizable intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset many not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized for
the amount by which the carrying amount of the asset exceeds the fair value of
the asset.




11




(p)
Concentration of Credit Risk:




Financial
instruments that potentially subject the Company to concentrations of credit
risk as defined by SFAS No. 105, “Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk”, consist principally of cash and cash
equivalents, and accounts receivable and unbilled revenues.




(i)
Cash and Cash Equivalents:




The
Company places its cash and cash equivalents with financial institutions. It is
the Company’s policy to monitor the financial strength of these institutions on
a regular basis and perform periodic reviews of the relative credit rating of
these institutions to lower its risk. At times, during the three months ended
March 31, 2009 and 2008, respectively, the Company’s cash and cash equivalent
balances exceeded the Federal Deposit Insurance Corporation (“FDIC”) insurance
limit of $100,000 which was increased to $250,000 during 2008 on interest
bearing accounts of/in financial institution.  The FDIC also removed
its $100,000 limit on non-interest bearing accounts all together.  The
Company has not experienced any losses in such accounts, and it believes it is
not exposed to any significant credit risk on cash and cash
equivalents.  The balance in interest bearing accounts at December 31,
2008 was more than the FDIC limit of $250,000.  The balance in
interest bearing accounts at March 31, 2009 was less than the FDIC limit of
$250,000 and there were no uninsured cash and cash equivalents at March 31,
2009.




(ii)
Accounts Receivable and Unbilled Revenues:




The
Company does not require collateral or other security to support customer
receivables or unbilled revenues.  One (1) customer account accounted
for 10% of the accounts receivable balance as of March 31, 2009.  The
Company believes that credit risk is dispersed and low due to the large number
of customers in different regions and different industries.




(q)
Reclassifications:




Certain
reclassifications have been made to the 2008 amounts to conform with the 2009
presentation.




(r)
Recent Accounting Pronouncements:




Recently Adopted
Standards




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. SFAS No. 157 was effective for fiscal
years beginning after November 15, 2007, and all interim periods within those
fiscal years. In February 2008, the FASB released FASB Staff Position (“FSP”)
FSP FAS 157-2 – Effective Date of FASB Statement No. 157, which delayed the
effective date of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years.




In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.” This FSP
clarifies the application of SFAS No. 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 was effective upon issuance, including prior periods for
which financial statements had not been issued.  The implementation of
SFAS No. 157 for financial assets and liabilities, effective January 1, 2008,
and FSP FAS 157-2, effective January 1, 2009, did not have a material impact on
the Company’s consolidated financial position and results of
operations.




12




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
required to be reported in earnings at each reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007, the provisions of
which are required to be applied prospectively. The implementation of SFAS No.
159 for financial assets and liabilities, effective January 1, 2008, did not
have an impact on the Company’s consolidated financial position and results of
operations, as management has not elected to measure at fair value any of the
Company’s eligible financial instruments or other items not previously required
to be measured at fair value.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations—a
replacement of FASB Statement No. 141.”  This statement establishes
principles and requirements for how the acquirer recognizes and measures assets
acquired and liabilities assumed in a business combination, as well as, goodwill
acquired and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of a business
combination. In April 2009, the FASB issued FSP SFAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies,” which amends SFAS No. 141(R) to require that contingent
assets acquired and liabilities assumed be recognized at fair value on the
acquisition date if the fair value can be reasonably estimated. If the fair
value cannot be reasonably estimated, the contingent asset or liability would be
measured in accordance with SFAS No. 5, “Accounting for Contingencies,” and FASB
Interpretation No. 14, “Reasonable Estimation of the Amount of a
Loss.”  Both pronouncements were effective for the Company as of
January 1, 2009 and will be applied prospectively to business combinations
entered into on or after that date.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51.” This statement
requires that a noncontrolling interest in a subsidiary be reported as equity
and that the amount of consolidated net income attributable to the parent and to
the noncontrolling interest should be separately identified in the consolidated
financial statements. The Company has applied the provisions of SFAS No. 160
prospectively, as of January 1, 2009, except for the presentation and disclosure
requirements, which were applied retrospectively for all periods presented. The
adoption did not have an impact on the Company’s consolidated financial
statements.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”). The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The adoption of SFAS No. 161, effective January 1, 2009, did not
have a material impact on the Company’s consolidated financial
statements.




Standards Issued But Not Yet
Adopted




In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets,” which amends FAS 132(R) to provide guidance
on disclosures about plan assets of a defined benefit pension or other
postretirement plan. These new disclosures will provide users of the financial
statements with an understanding of how investment allocation decisions are
made, the major categories of plan assets, the input and valuation techniques
used to measure the fair value of plan assets, the effects of fair value
measurements and the significant concentrations of risk in regard to the plan
assets. This FSP is effective for fiscal years ending after December 15, 2009.
As the position only requires enhanced disclosures, management believes its
adoption will not have an impact on the Company’s consolidated financial
statements.




13




In April
2009, the FASB issued FSP FAS 157-4, “Determining Whether a Market Is Not Active
and a Transaction Is Not Distressed”, which supersedes FSP FAS 157-3 This FSP
provides additional guidance in determining whether a market is active or
inactive and whether a transaction is distressed. It is applicable to all assets
and liabilities that are measured at fair value and requires enhanced
disclosures. This FSP is effective for interim and annual reporting periods
ending after June 15, 2009, and shall be applied prospectively. Management
believes that the adoption of FSP FAS 157-4 will not have a material impact on
the Company’s consolidated financial statements.




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” which amends FAS No. 107, “Disclosures
about Fair Values of Financial Instruments,” to require disclosures about fair
value of financial instruments in interim, as well as, annual financial
statements. It also amends APB Opinion No. 28, “Interim Financial Reporting,” to
require those disclosures in all interim financial statements. This FSP is
effective for interim reporting periods ending after June 15, 2009. Management
believes that the adoption of this position will not have a material impact on
the Company’s consolidated financial statements.




NOTE
4 — BUSINESS AND ASSET ACQUISITIONS AND DISPOSITIONS AND LICENSING
AGREEMENTS:




(a)           Acquisition
of ALS




On
February 23, 2007, the Company acquired certain assets and liabilities of ALS,
LLC and its subsidiaries, doing business as Advantage Services Group based in
Florida that expanded the Company’s operations to clients in California and
Florida. The purchase price of $24.4 million consisted of cash of $19 million, a
note of $2.5 million (the “ALS Note”), shares of the Company’s common stock with
a value of $2.5 million (439,367 shares) and the assumption of $0.4 million of
current liabilities. ALS’s stockholders may also receive up to two additional $1
million payments in shares of the Company’s common stock based on financial and
integration performance metrics of the Company in calendar years 2007 and 2008.
No such payments have been earned to date. The Company allocated the purchase
price to the assets acquired and the liabilities assumed at their estimated
values as of the acquisition date as stated in the table below.




The
following table represents the net assets acquired.




Equipment,
      furniture and fixtures
                      
                      $
                      630,000Contract
      rights
                      
                      
                      7,190,000Goodwill
                      
                      
                      16,566,00024,386,000Liabilities
      assumed
                      
                      
                      (386,000
                      )Net
      assets acquired
                      
                      $
                      24,000,000


(b)           Sale
of MVI




On
December 31, 2007, CPR entered into a purchase agreement (the “MVI Purchase
Agreement”) effective as of December 31, 2007 with CPR’s wholly owned
subsidiary, Mercer Ventures, Inc. (“MVI”), and TradeShow Products Inc.
(“TradeShow”). Pursuant to the MVI Purchase Agreement, CPR sold all of the
issued and outstanding securities of MVI to TradeShow for the aggregate purchase
price equal to the liabilities assumed of $1,205,983. In addition, CPR will earn
a perpetual commission equal to 1.75% of the weekly revenue generated by a
specified list of MVI clients. TradeShow is obligated to pay such fee in arrears
on the first business day of every month. Unpaid fees will be subject to
interest at a rate of 1.5% per month.  The Company recorded
$44,193 during the three months ended March 31, 2008 for such fees, which were
not paid by TradeShow.




The
Company considered the guidance in EITF 03-13 “Applying the Conditions in
Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report
Discontinued Operations” and concluded that the operations of MVI should not be
reported as discontinued operations. The Company conclusion included an
assessment of the qualitative and quantitative impact of the direct cash flows
to be received from the ongoing operations of MVI through the commission
structure as well as the Company’s involvement in the management of the ongoing
MVI business.




14




(c)           Asset
Purchase Agreement with StaffChex




On
February 28, 2008, ClearPoint entered into an Asset Purchase Agreement (the
“StaffChex Purchase Agreement”) with StaffChex, Inc. (“StaffChex”), a privately
owned company. Under the StaffChex Purchase Agreement, StaffChex acquired all of
the rights to customer accounts, as defined in the StaffChex Purchase Agreement,
related to the temporary staffing services serviced by (i) KOR Capital, LLC
(“KOR”) pursuant to the Franchise Agreement – Management Agreement, dated August
30, 2007, and (ii) StaffChex Servicing, LLC (“StaffChex Servicing”), an
affiliate of StaffChex, pursuant to the Exclusive Supplier Agreement, dated
September 2, 2007. The prior agreements with StaffChex Servicing and KOR were
terminated on February 28, 2008 and March 5, 2008, respectively. The Company did
not incur any early termination penalties in connection with such terminations.
On March 5, 2008, ClearPoint completed the disposition and transfer of all of
the customer accounts.  In consideration for the customer accounts
acquired from ClearPoint, StaffChex issued to ClearPoint 15,444 shares of common
stock of StaffChex, and ClearPoint is entitled to receive an additional 15,568
shares of StaffChex common stock, pursuant to the earnout provisions set forth
in the StaffChex Purchase Agreement, which have been met. As a result, the
Company is entitled to 31,012 shares (16.4%) of StaffChex’s outstanding stock,
of which 15,568 shares have not yet been issued to the Company.




ClearPoint
is using the cost accounting method to record earnings from this investment in
StaffChex. In addition, ClearPoint entered into an iLabor agreement with
StaffChex whereby StaffChex agreed to process its temporary labor requests
through iLabor and to pay to ClearPoint 2.25% (such percentage subject to
reduction based on meeting certain volume targets) of StaffChex’s total
collections from its total billings under the acquired customer accounts for
temporary staffing services (the “Royalty”).




On March
16, 2009, the Company and StaffChex entered into Amendment No. 1 to the iLabor
agreement (the “Amendment”) pursuant to which the payment terms of the iLabor
agreement were restated.  The Amendment provides that the Company will
pay StaffChex for client-approved billable work hours at the agreed-upon hourly
rate with respect to such client.  Royalties payable to the Company
shall be calculated based on weekly collections.  For weekly
collections of less than $1.4 million, the Royalty is one and one-quarter
percent (1.25%) and for weekly collections of more than $1.4 million, the
Royalty is two percent (2%).  These weekly payments commenced on March
18, 2009.  In addition, StaffChex agreed to make 104 weekly payments
of $4,096 followed by 52 weekly payments of $3,105 for past-due Royalties owed
through February 28, 2009.  Such additional payments will commence on
June 3, 2009.  The failure of StaffChex to make payments due pursuant
to the iLabor agreement constitutes a material breach of the iLabor
agreement.  In the event of nonpayment, StaffChex will have a ten (10)
day cure period to make any delinquent payments.  If such payments
remain outstanding following the cure period, StaffChex agreed to direct its
affiliated receivables factoring company to make the required payment to the
Company.  In addition, the Amendment provides that StaffChex may not
assign, convey, sell, transfer or lease the customer account property or the
underlying customer agreements transferred to StaffChex without the prior
written consent of the Company.  Such consent will not be required in
connection with a transaction occurring after February 28, 2012 and that is part
of a sale of 100% of the stock of StaffChex or all or substantially all of its
assets.




(d)           Sale
of ClearPoint HRO




On March
5, 2008, ClearPoint completed the disposition and transfer of the balances of
customer accounts related to its temporary staffing business. On February 7,
2008, CPR and HRO, a wholly owned subsidiary of CPR, entered into a Purchase
Agreement (the “HRO Purchase Agreement”) with AMS Outsourcing, Inc. (“AMS”).
Pursuant to the HRO Purchase Agreement, CPR sold all of its ownership interest
of HRO to AMS for an aggregate purchase price payable in the form of an earnout
payment equal to 20% of the earnings before interest, taxes, depreciation and
amortization of the operations of HRO for a period of twenty four (24) months
following February 7, 2008. To date, no such earnout has been earned or
received.




15




Subsequent
to the original estimated loss of $1,894,220 recorded on the sale of HRO, CPR
recorded a $600,000 reversal of the originally estimated loss in the second
quarter of 2008 in conjunction with the refinancing of debt owed to
Manufacturers and Traders Trust Company (“M&T”) reducing the certificate of
deposit sold.




The
Company recorded a net loss in 2008 of $1,294,220 on the transaction as
follows:




Assets
      sold:Prepaid
      expenses
                      
                      $
                      153,861Certificate
      of deposit
                      
                      
                      900,000Other
      current assets
                      
                      
                      1,128,271Expected
      Workers’ Compensation  Collateral Refunds
                      
                      
                      5,091,8587,273,990Liabilities
      assumed:Accrued
      payroll and related taxes
                      
                      
                      (3,838,611
                      )Letter
      of credit – Workers compensation insurance policy
                      
                      
                      (1,500,000
                      )Accrued
      expenses and other liabilities
                      
                      
                      (641,159
                      )(5,979,770
                      )Loss
      on sale
                      
                      $
                      (1,294,220
                      )


(e)           License
Agreement




On
February 28, 2008, CPR and ClearPoint Workforce, LLC (“CPW”), a wholly owned
subsidiary of CPR, entered into a Licensing Agreement (the “Optos Licensing
Agreement”) with Optos Capital, LLC (“Optos”), of which Christopher Ferguson, a
principal stockholder of the Company, is the sole member. Pursuant to the Optos
Licensing Agreement, the Company (i) granted to Optos a non-exclusive license to
use the ClearPoint Property and the Program, both as defined in the Optos
Licensing Agreement, which included certain intellectual property of CPR, and
(ii) licensed and subcontracted to Optos the client list previously serviced by
TZG Enterprises, LLC (“TZG”), a Delaware limited liability company controlled by
J. Todd Warner, a former officer of the Company, pursuant to an Agreement dated
August 13, 2007 (the “TZG Agreement”) and all contracts and contract rights for
the clients included on such list.  In consideration of the licensing
of the Program, which was part of the ClearPoint Property, CPR was entitled to
receive a fee equal to 5.2% of total cash receipts of Optos related to temporary
staffing services. On April 8, 2008, the Optos Licensing Agreement was
terminated.  In consideration for terminating the Optos Licensing
Agreement, CPR and Optos agreed that there would be a net termination fee for
any reasonable net costs or profit incurred, if any, when winding up the
operations associated with termination. The estimated net termination fee of
$500,000 was recognized in selling, general and administrative expenses in 2008
and was included in accrued expenses at March 31, 2009 and December 31,
2008.  The payment of the net termination fee is expected to be in the
form of cash and shares of common stock of the Company.  See Note 19 –
Related Party Transactions for a description of the fees payable under the Optos
Licensing Agreement recorded by the Company.




16




On April
8, 2008, CPR entered into a License Agreement dated April 8, 2008 (the “Select
License Agreement”) with Koosharem Corp., doing business as Select Staffing
(“Select”) and a Temporary Help Services Subcontract dated April 8, 2008 (the
“Select Subcontract”) with Select.  Pursuant to the Select License
Agreement and the Select Subcontract, CPR was entitled to receive annually the
first 10% of all gross billings of the subcontracted contracts up to $36 million
of gross billings ($3.6 million per year to CPR) and whereby Select licensed use
of the iLabor network in exchange for a $1.2 million payment ($900,000 paid on
April 8, 2008 and $300,000 was payable on July 1, 2008, but was not
paid).  On July 29, 2008, Select and Real Time Staffing Services, Inc.
(“Real Time”), filed a complaint (the “Select Litigation”) in the Superior Court
of California (Santa Barbara County), against the Company alleging that the
Company owed it $1,033,210 for services performed for the Company’s
clients.  On August 22, 2008, CPR, Select and Real Time entered into a
Settlement Agreement and Release (the “Select Settlement Agreement”) pursuant to
which each party released the others from all prior, existing and future claims
including, without limitation, the parties’ claims with respect to the Select
Litigation the Select License Agreement and the Select
Subcontract.  Pursuant to the Select Settlement Agreement, the parties
also agreed (i) that CPR would retain the $900,000 paid to it under the Select
License Agreement; (ii) to allocate between Select and CPR amounts paid or
payable with respect to certain client accounts; (iii) to execute an amendment
to the Select Subcontract (the “Subcontract Amendment”), as described below; and
(iv) that Select would file the required documents to dismiss the Select
Litigation with prejudice. In addition, Select and CPR agreed not to commence
any future action arising from the claims released under the Select Settlement
Agreement, and, on August 28, 2008, this lawsuit was dismissed.  The
monthly revenue fees are split between the parties as provided in the Select
License Agreement. Effective September 21, 2008, licensing fees related to the
Select License Agreement consisted of amortizing deferred revenue of $83,000
plus an additional $250,000 of cash paid by Select over the life of the
contract, which was 28 months.




The
deferred revenue of $1,743,173 as of March 31, 2009, which has a remaining life
of 21 months, was comprised of the remaining balance of the original $900,000
payment, cash received on behalf of Select and relief of certain accounts
payable owed to Select as of the settlement date (see Note 20 – Litigation for
further detail).




Pursuant
to the Subcontract Amendment dated August 22, 2008, the Subcontract fee was
amended to provide that Select would pay CPR, for twenty-eight consecutive
months, 25% of each month’s gross sales generated by the customers and contracts
described in the Select Subcontract as well as, without duplication, sales
generated by certain locations in accordance with the Select Subcontract,
subject to a maximum fee of $250,000 per month.  The payments are
subject to acceleration upon occurrence of certain breaches of the Select
Subcontract or bankruptcy filings by Select.  In addition, the term of
the Select Subcontract was amended to provide that the term will expire upon the
payment of all fees owed under the Select Subcontract, as amended.




On May
22, 2008, ClearPoint entered into an amendment to a Managed Services Agreement
with Townsend Careers, LLC (“Townsend Careers”) to take over certain contracts
that were being serviced out of ClearPoint’s former Baltimore, MD office. Under
the terms of the agreement, Townsend Careers agreed to pay ClearPoint a royalty
fee of 6% of billings.




NOTE
5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS:




March 31,
                  2009
              
              
              December 31,
                  2008(Unaudited)
              
              
              (Audited)Prepaid
      insurance
              
              $
              31,353
              
              
              $
              125,410Other
      current assets
              
              
              31,033
              
              
              
              92,472$
              62,386
              
              
              $
              217,882


NOTE
6 — EQUIPMENT, FURNITURE AND FIXTURES:




March 31,
                  2009
              
              
              December 31,
                  2008(Unaudited)
              
              
              (Audited)Furniture
      and fixtures
              
              $
              40,078
              
              
              $
              29,150Computer
      software and equipment
              
              
              1,768,570
              
              
              
              1,740,180Leasehold
      improvements
              
              
              9,201
              
              
              
              9,2011,817,849
              
              
              
              1,778,531Less,
      accumulated depreciation
              
              
              (623,919
              )
              
              
              (481,842
              )Equipment,
      furniture and fixtures, net
              
              $
              1,193,930
              
              
              $
              1,296,689


Depreciation
expense for the three months ended March 31, 2009 and 2008 was $143,019 and
$97,326, respectively.  In March 2008, the Company recorded a loss of
$1,022,210 as a result of the abandonment of leasehold improvements, furniture
and fixtures and computer equipment resulting from termination of franchise
agreements described in Note 15 – Franchise Agreements.  During the
three months ended March 31, 2008, the Company removed $1,837,918 of fixed
assets and $815,708 of accumulated depreciation as a result of this
impairment.




17




NOTE
7 — INTANGIBLE ASSETS:




March 31,
                  2009
              
              
              December 31,
                  2008(Unaudited)
              
              
              (Audited)Covenant
      not to compete
              
              $
              250,000
              
              
              $
              250,000Less,
      accumulated amortization
              
              
              (129,167
              )
              
              
              (116,667
              )Intangibles,
      net
              
              $
              120,833
              
              
              $
              133,333




The
covenant not to compete is being amortized over its five (5) year life.
Amortization expense of intangible assets for the three months ended March 31,
2009 and 2008 was $12,500 for each period respectively. Amortization expense
expected to be incurred for the fiscal years ending December 31, 2009, 2010 and
2011 is $50,000, $50,000 and $33,333, respectively.




NOTE
8 — OTHER ASSETS




March 31,
                  2009
              
              
              December 31,
                  2008(Unaudited)
              
              
              (Audited)Due
      from ALS
              
              $
              567,877
              
              
              $
              500,667Long
      term portion of related party receivable
              
              
              373,063
              
              
              
              181,400Security
      deposits and other assets
              
              
              27,337
              
              
              
              27,337$
              968,277
              
              
              $
              709,404




NOTE
9 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:




March
      31,
                  2009
              
              
              December
      31,
                  2008(Unaudited)
              
              
              (Audited)Other
      accrued expenses
              
              $
              1,612,035
              
              
              $
              1,873,437Insurance
      premiums payable
              
              
              928,538
              
              
              
              962,680Accrued
      termination fee - Optos
              
              
              500,000
              
              
              
              500,000$
              3,040,573
              
              
              $
              3,336,117




NOTE
10 — ACCRUED RESTRUCTURING COSTS:




Effective
June 29, 2007, the Company’s management approved a restructuring program to
consolidate operations and reduce costs of its field and administrative
operations. As part of the restructuring program, the Company closed 24 branch
and administrative offices and eliminated approximately 75 positions. The
Company initially recorded $1,902,000 of restructuring charges for costs of
severance, related benefits and outplacement services related to the termination
of these employees and $950,000 of charges relating to the early termination of
office spaces leases for a total of $2,852,000 in 2007. The Company subsequently
reduced the initial expense recorded in 2007 by $650,884 due to decreases in
anticipated severance costs resulting in a net charge of
$2,210,116.  During the year ended December 31, 2007, the Company paid
out $1,176,514.  These expenses were present valued and accrued and
were scheduled to be paid out over a one year period.  During the year
ended December 31, 2008, the Company paid out $678,865 related to the 2007
restructuring reserve and recognized a reduction of initially estimated
restructuring costs of $196,994 due to severance and related benefits for which
the Company believed it was no longer liable as a result of a breach of contract
as well as $95,913 related to early termination settlements of office
spaces.  During the three months ended March 31, 2009, the Company
paid out $4,352 related to the 2007 reserve.




18




As a
result of the sale of certain entities and the transition to the Company’s new
business model, effective March 12, 2008, the Company’s management approved an
additional restructuring program of its field and administrative operations. As
part of the restructuring program, the Company closed its remaining branch and
administrative office in Florida and eliminated approximately 20 positions.
During the three months ended March 31, 2008, the Company initially recorded
$314,709 of restructuring charges for costs of severance and related benefits to
a related party (see Note 18 – Management and Employment Agreements and Note 19
– Related Party Transactions), $182,075 of restructuring charges for costs of
severance, related benefits and outplacement services related to the termination
of employees and $1,603,638 of charges relating to the early termination of
office spaces leases for a total of $2,100,422. These expenses were present
valued and accrued on a one time basis and were scheduled to be paid out over a
three year period. During the year ended December 31, 2008, the Company paid out
$1,252,917 and recognized a reduction of the initial recorded restructuring
costs of $457,571 related to early termination settlements of office spaces
related to the 2008 restructuring reserve.  During the three months
ended March 31, 2009, the Company paid out $25,753 related to early termination
of office space leases related to the 2008 restructuring reserve.




2007
      Restructuring Reserve
              
              Employee
                  Separation
                  Costs
              
              
              Lease
                  Termination
                  Obligation
              
              
              TotalAccrued
      restructuring costs at inception
              
              $
              1,902,000
              
              
              $
              950,000
              
              
              $
              2,852,000Payments
              
              
              (548,253
              )
              
              
              (628,261
              )
              
              
              (1,176,514
              )Reductions in costs previously
      accrued
              
              
              (650,884
              )
              
              
              —
              
              
              
              (650,884
              )Accrued
      restructuring costs at December 31, 2007
              
              
              702,863
              
              
              
              321,739
              
              
              
              1,024,602Payments
              
              
              (505,869
              )
              
              
              (172,996
              )
              
              
              (678,865
              )Reductions in costs previously
      accrued
              
              
              (196,994
              )
              
              
              (95,913
              )
              
              
              (292,907
              )Total
      accrued restructuring costs at December 31, 2008
              
              
              —
              
              
              
              52,830
              
              
              
              52,830Payments
              
              
              —
              
              
              
              (4,352
              )
              
              
              (4,352
              )Total
      accrued restructuring costs at March 31, 2009
              
              
              —
              
              
              
              48,478
              
              
              
              48,478Less:  current
      portion
              
              
              —
              
              
              
              (48,478
              )
              
              
              (48,478
              )Total
      accrued restructuring costs – long-term
              
              $
              —
              
              
              $
              —
              
              
              $
              —




2008
      Restructuring Reserve
              
              Employee
                  Separation
                  Costs
              
              
              Lease
                  Termination
                  Obligation
              
              
              TotalAccrued
      restructuring costs at inception
              
              $
              182,075
              
              
              $
              1,603,638
              
              
              $
              1,785,713Accrued
      restructuring costs at inception – related party
              
              
              314,709
              
              
              
              
              
              
              
              314,709Payments
              
              
              (182,075
              )
              
              
              (1,012,842
              )
              
              
              (1,194,917
              )Payments – related
      party
              
              
              (58,000
              )
              
              
              —
              
              
              
              (58,000
              )Reductions in costs previously
      accrued
              
              
              —
              
              
              
              (457,571
              )
              
              
              (457,571
              )Total
      accrued restructuring costs at December 31, 2008
              
              
              —
              
              
              
              133,225
              
              
              
              133,225Total
      accrued restructuring costs at December 31, 2008 – related
      party
              
              
              256,709
              
              
              
              —
              
              
              
              256,709Payments
              
              
              —
              
              
              
              (25,753
              )
              
              
              (25,753
              )Total
      accrued restructuring costs at March 31, 2009
              
              
              —
              
              
              
              107,472
              
              
              
              107,472Total
      accrued restructuring costs at March 31, 2009 – related
    party
              
              
              256,709
              
              
              
              —
              
              
              
              256,709Less:  current
      portion
              
              
              (64,177
              )
              
              
              (107,472
              )
              
              
              (171,649
              )Total
      accrued restructuring costs – long-term
              
              $
              192,532
              
              
              $
              —
              
              
              $
              192,532




19


NOTE
11 — DEBT OBLIGATIONS:




A summary
of all debt is as follows:




March
      31, 2009
              
              
              December
      31, 2008(Unaudited)
              
              
              (Audited)Term
      Loan with ComVest due December 31, 2010. Principal and interest payments
      payable monthly bearing interest of 10% per annum (net of $976,289 and
      $1,124,468 OID at March 31, 2009 and December 31, 2008, respectively
      )
              
              $
              6,141,760
              
              
              $
              6,529,542Revolver
      with ComVest due December 31, 2010. Interest payments payable monthly
      bearing interest of 7.250% per annum
              
              
              2,150,000
              
              
              
              1,000,000M&T
      Loan modification and restructure agreement dated June 20, 2008. Principal
      payments begin January 1, 2011 in equal amounts over 36 months plus
      interest at 5% per annum
              
              
              4,801,536
              
              
              
              4,994,379Note
      payable monthly to Blue Lake Rancheria with a final, balloon payment due
      April 30, 2009. Interest of 10% per annum is payable quarterly. This note
      has been guaranteed by two of the principal stockholders of the
      Company
              
              
              590,000
              
              
              
              690,000Subordinated
      notes payable due March 31, 2010.  The notes have an interest
      rate of 12%
              
              
              550,000
              
              
              
              550,000Note
      payable to ALS, LLC. This note has an interest rate of 5%
              
              
              2,155,652
              
              
              
              2,155,652Note
      payable to unrelated individuals for purchase of the common stock of
      StaffBridge, Inc. due and payable December 31, 2009.  Interest
      is calculated at 8% per annum
              
              
              177,517
              
              
              
              336,69016,566,465
              
              
              
              16,256,263Add
      Original Issue Discount (OID)
              
              
              976,289
              
              
              
              1,124,468Total
      principal payments of long term debt
              
              
              17,542,754
              
              
              
              17,380,731Less:
      Current
      portion
              
              
              5,498,192
              
              
              
              5,950,20912,044,562
              
              
              
              11,430,522Less
      OID
              
              
              (976,289
              )
              
              
              (1,124,468
              )Long
      term debt, net of current and OID
              
              $
              11,068,273
              
              
              $
              10,306,054




20




Principal
payments of long-term debt for each of the next five years and thereafter are as
follows:




2009
                
                $
                5,498,1922010
                
                
                6,670,1592011
                
                
                804,6872012
                
                
                1,072,9162013
                
                
                1,072,916Thereafter
                
                
                2,423,883$
                17,542,754




Revolving
Credit and Term Loan Agreement with ComVest




On June
20, 2008, the Company entered into a Revolving Credit and Term Loan Agreement
(the “Loan Agreement”) with ComVest Capital, LLC (“ComVest”). Pursuant to the
Loan Agreement, ComVest extended to the Company: (i) a secured revolving credit
facility for up to $3 million (the “Revolver”) and (ii) a term loan (the “Term
Loan” and, together with the Revolver, the “Loans”) in the principal amount of
$9 million, of which $1 million was treated as an original issue discount, and
the Company received $8 million in respect of the Term Loan. The Company also
issued a warrant to purchase 2,210,825 shares of common stock at an exercise
price of $0.01 per share, immediately exercisable during the period commencing
June 20, 2008 and ending on June 30, 2014. This warrant was valued at $634,000
and treated as a discount to the long term portion of the debt and will be
amortized over the life of the long term debt.  Amortization related
to the warrants amounted to $57,494 and $0 for the three months ended March 31,
2009 and March 31, 2008, respectively. Amortization related to the original
issue discount of $1,000,000 amounted to $90,685 and $0 for the three months
ended March 31, 2009 and March 31, 2008, respectively.  The maximum
amount that may be outstanding under the Revolver was initially $3 million (the
“Revolver Maximum”). Effective as of the first day of each calendar month
beginning January 1, 2010, the Revolver Maximum will be reduced by an amount
equal to 5.5% of the Revolver Maximum in effect for the previous month. To the
extent the amounts outstanding under the Revolver exceed the Revolver Maximum,
the Company must make a payment to ComVest sufficient to reduce the amount
outstanding to an amount less than or equal to the Revolver Maximum. The Company
may borrow under the Revolver from time to time, up to the then applicable
Revolver Maximum. The amounts due under the Revolver bear interest at a rate per
annum equal to the greater of: (i) the prime rate of interest announced by
Citibank, N.A. plus 2.25% or (ii) 7.25%. At March 31, 2009, the interest rate on
the Revolver was 7.25% and during the year ended December 31, 2008, averaged
7.25%.  The Term Loan bears interest at a rate of 10% per
annum.  The Loans provide that the stated interest rates are subject
to increase by 500 basis points during the continuance of an event of default
under the Loan Agreement. Amounts due under the Loans are payable monthly,
beginning July 1, 2008.




The
outstanding principal amount of the Term Loan is payable as follows: $150,000 on
July 1, 2008 and subsequent payments are to be in an amount equal to the greater
of (i) $200,000 less the amount of interest accrued during the preceding month
or (ii) the amount equal to (a) the lesser of $450,000 or certain license fees,
royalties, use fees and/or other such payments collected by the Company during
the preceding month less (“Royalties”) (b) the amount of interest accrued during
the preceding month (but not greater than the principal balance of the Term
Loan). The installments under (ii) above are payable monthly starting August 1,
2008, including December 1, 2010. The final installment due and payable on
December 31, 2010 will be in an amount equal to the entire remaining principal
balance, if any, of the Term Loan.




21




As of
March 31, 2009, the Company was in default on principal installment payments due
for February and March, 2009 under the Term Loan in the amount of $419,285, in
the aggregate.  The Company was also in default on principal
installment payments for April, 2009 of $255,250 under the Term
Loan.  The failure to make such payments constitutes an event of
default under the Loan Agreement.  The Company is obligated to pay a
default interest rate of 500 basis points over the prevailing rate on the
foregoing amounts, which difference between the default rate and the prevailing
rate was not paid as of the date of filing this Quarterly Report on Form
10-Q.  On May 19, 2009, ComVest executed a waiver letter (the “Term
Loan Waiver”) related to the Loan Agreement.  Pursuant to the Term
Loan Waiver, ComVest waived the foregoing defaults, provided that ComVest
reserved the right to collect at a later time, but not later than the maturity
date of the Term Loan under the Loan Agreement, the increased interest ComVest
was permitted to charge during the continuance of such defaults.




On
January 29, 2009, in order to assist the Company in making the payments under
the XRoads Agreement, as defined in Note 18 – Management and Employment
Agreements, the Company and ComVest entered into Amendment No. 1 (“Amendment No.
1”) to the Term Loan.  Pursuant to Amendment No. 1, the Term Loan
installments due and payable on each of February 1, 2009, March 1, 2009, April
1, 2009 and May 1, 2009, respectively, will be reduced by an amount equal to the
positive difference (if any) of (i) the lesser of (a) $50,000 or (b) the amount
paid or payable to XRoads during the immediately preceding calendar month
pursuant to the XRoads Agreement, minus (ii) the amount (if any) by which the
aggregate Royalties collected during the immediately preceding calendar month
exceeded $450,000. After the effective date of any termination of the XRoads
Agreement, no reduction in any subsequent Term Loan installments will be
permitted and, notwithstanding any extension beyond the initial four month term
of the XRoads Agreement, ComVest will not be obligated to reduce any further
Term Loan installments.  Amendment No. 1 also contains ComVest’s
acknowledgment and consent to the Company’s amendment of the payment terms and
payment schedule of the StaffBridge Note pursuant to the second Debt Extension
Agreement described below.




The Loans
mature on December 31, 2010 subject to certain prepayment requirements related
to the Term Loan. The Loan Agreement provides that, subject to certain
exceptions, the Company must prepay the Term Loan (i) in full upon certain
transactions involving the sale or issuance of the majority of the outstanding
stock of the Company, change of control of the Company or the sale of all or a
material portion of the Company’s assets or (ii) in part to the extent of 30% of
proceeds received from sales of certain securities of the
Company.  Royalty payments received primarily from StaffChex and
Select are segregated and solely used for the repayment of the Term Loan. To the
extent that royalty receipts from these sources do not meet the minimum
threshold of $200,000 per month, the Company must make up the difference from
its operating cash.  In the event that royalty receipts from these
sources exceed $450,000 in a given month, the Company may utilize the excess for
operations or offset amounts owed on the ComVest Revolver at its discretion. The
outstanding borrowings under the Loan Agreement are secured by all the assets of
the Company.




Beginning
with the fiscal quarter ending December 31, 2009, the Company must maintain
certain fixed charge coverage ratios and must make all necessary adjustments to
its system of internal control over financial reporting and disclosure controls
and procedures no later than December 31, 2009. Until all obligations owing to
ComVest have been paid in full and the Revolver has been terminated, the Company
must comply with various notice and other reporting covenants including, but not
limited to, providing notice to ComVest upon the occurrence of certain events,
periodically furnishing certain financial statements and other information to
ComVest, maintaining its books and records and permitting inspection of such
materials by ComVest upon reasonable request. At March 31, 2009, the
Company was in compliance with the applicable notice and reporting
requirements required under the ComVest Loan Agreement.




The
Company paid to ComVest non-refundable closing fees in the amount of $530,000,
charged to the Revolver, simultaneously with funding of the amounts payable to
the Company under the Loan Agreement. In addition, the Company must pay to
ComVest a monthly collateral monitoring, availability and administrative fee
equal to 0.15% of the average daily principal amount outstanding under the
Revolver during the preceding calendar month, up to $4,500 per
month.




22




As of
March 31, 2009, the outstanding balance on the Revolver and the Term
Loan  was $2,150,000 and $7,118,049, respectively.




The
Company utilized the proceeds of the Loans to repay approximately $1,050,000
pursuant to the M&T Restructure Agreement, as defined below, owed to
M&T, a creditor of the Company and approximately $530,000 in closing costs
and expenses.




On May 7,
2009, the Company entered into a non-binding term sheet (the “Term Sheet”) with
ComVest outlining certain terms of restructuring the Revolver and Term Loan,
subject to entering into final binding agreements between ComVest and the
Company.  The Term Sheet contemplates converting the existing credit
facility into a senior secured revolving credit facility (the “New Revolver”) in
the principal amount of $10,500,000.




Loan Modification and
Restructure Agreement with M&T




On
February 23, 2007, pursuant to a Credit Agreement (the “M&T Credit
Agreement”), the Company entered into credit facilities with M&T consisting
of a $20 million revolving credit facility (“M&T Revolver”) expiring in
February 2010 and a $3 million term loan (“M&T Term Loan”) expiring in
February 2012.  In July 2007, the Company amended the M&T Credit
Agreement to increase the M&T Term Loan to $5 million in the First Amendment
to the M&T Credit Agreement. These credit facilities carried an interest
rate of LIBOR plus between 1.50% and 2.25%, depending on the Company’s ratio of
debt to earnings before interest, tax, depreciation and amortization. The
available amount to be borrowed from the M&T Revolver was limited based upon
ratios of accounts receivable and unbilled revenue. The M&T Revolver and
M&T Term Loan contained certain financial covenants including leverage
ratios and a fixed charge coverage ratio. On March 21, 2008, ClearPoint entered
into the Second Amendment to M&T Credit Agreement, dated as of March 21,
2008, among ClearPoint and M&T. Pursuant to the Second Amendment, the
M&T Credit Agreement was amended, among other matters, as follows: (i) the
aggregate amount of the revolving credit commitments was gradually reduced from
$20 million to $15 million at March 21, 2008 and $4 million at June 30, 2008;
(ii) the applicable margin, which is a component of the interest rate
calculations, was increased to (a) 3.5% and 1.25% for any revolving credit loan
that is a “Eurodollar Loan” and a “Base Rate Loan”, respectively (as defined in
the M&T Credit Agreement), and (b) 4.5% and 2.25% for any M&T Term Loan
that is a Eurodollar Loan and a Base Rate Loan, respectively; (iii) the
applicable commitment fee percentage, which is included in the calculations of
commitment fees payable by the Company on the amount of the unused revolving
credit commitments, was increased to 0.25%; and (iv) the covenants related to
the ratios of total debt or senior debt, as applicable, to modified EBITDA were
amended to lower the ratios as of September 30, 2008.




On April
14, 2008, the Company entered into a Waiver (the “M&T Waiver”) to the
M&T Credit Agreement. Pursuant to the M&T Waiver, the required lenders
under the M&T Credit Agreement waived compliance with certain financial
covenants set forth in the M&T Credit Agreement for the period ended
December 31, 2007. In connection with the M&T Waiver, the Company paid a
$100,000 fee to M&T. The Company was not in compliance with the financial
and reporting covenants at March 31, 2008. The Company did not receive a waiver
for such non-compliance from M&T. On May 9, 2008, the Company received a
letter from M&T indicating, among other matters, that the principal amount
of revolving credit loans outstanding under the M&T Credit Agreement shall
be limited to a maximum amount of $7.3 million for the period ended May 16,
2008.




On May
21, 2008, the Company received a notice of default from M&T in connection
with the M&T Credit Agreement. The Company defaulted on its obligations
under the M&T Credit Agreement as a result of its failure to comply with
financial covenants contained in the M&T Credit Agreement, including
obligations to maintain certain leverage and fixed charge coverage ratios. As a
consequence of the default, M&T exercised its right to declare all
outstanding obligations under the credit facilities to be immediately due and
payable and demanded the immediate payment of approximately $12.8 million,
consisting of approximately (i) $7.4 million under the M&T Revolver; (ii)
$3.9 million under the M&T Term Loan; and (iii) $1.5 million under a letter
of credit. Also pursuant to the notice of default, M&T exercised its right
to terminate the M&T Revolver and the M&T Term Loan and to terminate its
obligation to make any additional loans or issue additional letters of credit to
the Company.




23




In
connection with the Loan Agreement with ComVest described above, the Company and
M&T entered into a Loan Modification and Restructure Agreement dated June
20, 2008 (the “M&T Restructure Agreement”) pursuant to which the parties
agreed to: (i) consolidate the M&T revolving credit loan of $7,065,809 and
the M&T term loan of $3,866,667 (the “M&T Obligations”), (ii) reduce the
carrying amount of the consolidated obligations from $10,932,476 to $8,600,000,
net of cash payments made during the negotiations, (iii) subordinate the M&T
Obligations to the Company’s obligations to ComVest (the “ComVest Obligations”)
and (iv) permit the Company to repay the M&T Obligations on a deferred term
basis. The M&T Restructure Agreement provides that on the earlier of the
first day of the calendar month following the Company’s full satisfaction of the
ComVest Obligations or January 1, 2011 (the “Obligations Amortization Date”),
the Company shall repay a total of $3 million in principal amount (the “M&T
Deferred Obligations”) to M&T in 36 equal monthly payments plus interest on
the outstanding balance of such amount at a rate of 5% per annum, subject to
increase to 12% per annum upon occurrence of certain agreement termination
events and spring back events, as set forth in the agreement. In the event of a
sale of substantially all of the Company’s or any subsidiary’s assets, a capital
infusion or an infusion of subordinated indebtedness, the Company must prepay
the M&T Deferred Obligations by an amount equal to 25% of such proceeds as
are payable to ComVest under such circumstances.




In
addition, prior to the Obligations Amortization Date, the Company must pay
M&T: (i) cash proceeds arising out of certain of its and its subsidiaries’
accounts receivable in an amount not less than $3 million and (ii) existing and
future federal and state income tax refunds of not less than $1 million due or
which become due to the Company for any period prior to January 1,
2008.  In the event such payments by the Company are less than the
stated minimum amounts, such shortfall will be added to the M&T Deferred
Obligations.  Excesses of either amounts paid by the Company will be
remitted to the Company and/or applied to the M&T Deferred Obligations in
accordance with the M&T Restructure Agreement.  The Company
remitted all applicable federal and state income tax refunds to M&T required
under the M&T Restructure Agreement.  At March 31, 2009, income
tax refunds of $1,024,000 resulting from net operating loss carry-backs and
$88,000 refunds of overpayments were received by the Company and remitted to
M&T.  At March 31, 2009, the Company remitted to M&T a total
of approximately $2,417,000, which was comprised of approximately $1,305,000
applied to the $3 million accounts receivable target and $1,112,000 applied to
the $1 million federal and state income tax refund target.  The excess
of $112,000 over the $1 million tax refund target will be credited to the
M&T Deferred Obligations.  At March 31, 2009, the outstanding
balance related to the $3 million accounts receivable target was
$1,582,786.




The
Company issued to M&T warrants to purchase, in the aggregate, 1,500,000
shares of its common stock, of which warrants to purchase 1,200,000 shares have
an exercise price of $0.01 and warrants to purchase 300,000 shares have an
exercise price of $1.00. In accordance with SFAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”
(“SFAS 150”), the fair value of all of the warrants has been classified as a
liability since M&T has the right to put the warrants back to the Company in
exchange for a cash settlement of $1.00 per share. The Company valued the
warrants at $1,247,246 using the Black-Scholes valuation model and the value was
offset against the gain on restructuring of debt.  At March 31, 2009,
the Company’s consolidated balance sheet included a warrant liability of
$1,266,016 related to the fair value of warrants issued to M&T in connection
with the M&T Restructure Agreement.




24


The
Company accounted for the M&T Restructure Agreement pursuant to SFAS No. 15,
“Accounting by Debtors and Creditors for Troubled Debt Restructurings” (“SFAS
No. 15”), which required the Company to reduce the carrying amount of the old
debt (M&T Obligations of $10,932,476) by the minimum cash value of the put
option of the warrants issued ($1,200,000) and the warrant liability of $47,246,
and determine whether the carrying value of the remaining debt exceeded the
future cash payments of the new debt (M&T Loan Modification of $8,600,000
and future interest payment of $218,750.  SFAS No. 15 also requires
that the new debt be recorded as the total of future cash
payments.   The excess of the carrying amount of the remaining
debt over the future cash payments of the new debt was $866,480, which was
reduced by the unamortized deferred financed cost and current refinancing cost
of $179,683. As a result of the application of SFAS No. 15, the Company recorded
a gain of $686,797 ($0.05 per share), which is reflected in the consolidated
statement of operations for the year ended December 31, 2008.




M&T
had issued (i) a certain certificate of deposit to the Company in the amount of
$1.5 million (the “COD”) and (ii) a certain standby letter of credit for the
account of the Company in favor of Ace Risk Management (the “Ace Letter of
Credit”). M&T liquidated the COD and applied $600,000 of the COD to the
M&T Obligations. To the extent M&T is required to make payments under
the Ace Letter of Credit in excess of $900,000 at any time, such excess shall be
added to the M&T Deferred Obligations. Excesses of such amount paid will be
remitted to the Company and/or applied to the M&T Deferred Obligations in
accordance with the M&T Restructure Agreement.




Pursuant
to the M&T Restructure Agreement, the Company must comply with various
covenants while the M&T Deferred Obligations are outstanding and provided
that (i) no bankruptcy or insolvency event has taken place and (ii) the Company
and/or its subsidiaries have not terminated operation of their business without
the prior written consent of M&T (each being a “Spring Back Event”). Such
covenants include, but are not limited to: delivery to M&T of financial and
other information delivered to ComVest; restrictions on the aggregate
compensation which may be paid to the Chief Executive Officer and Chief
Financial Officer of the Company; limitations on dividends and distributions of
cash or property to equity security holders of the Company and/or redemptions or
purchases of capital stock or equity securities of other entities; restrictions
on collateralizing subordinated indebtedness. At March 31, 2009, the Company was
in compliance with all applicable covenants set forth in the M&T Restructure
Agreement.




The
M&T Restructure Agreement provides that the Company may continue to pay
regularly scheduled payments (but not prepayments or accelerated payments) on
(i) existing subordinated indebtedness, except to the extent prohibited by the
ComVest transaction documents and (ii) the Blue Lake Note as defined below. For
each $50,000 paid on account of the Blue Lake Note, Michael D. Traina, the
Company’s Chairman of the board of directors and Chief Executive Officer, and
Christopher Ferguson, a principal stockholder of the Company, shall, on a
several basis, be liable as sureties for the M&T Deferred Obligations, each
in the amount of $10,000, subject to an aggregate amount of each surety’s
liability of $150,000.




The
M&T Restructure Agreement does not terminate or extinguish any of the liens
or security interests granted to M&T pursuant to the M&T Credit
Agreement and related documents.




Deferred Financing
Costs




Amortization
of deferred financing costs related to M&T, for the three months ended March
31, 2009 and 2008 was $0 and $11,792 respectively. The balance of the deferred
financing costs related to the M&T financing of $78,614 was offset against
the gain on the restructuring of debt during 2008.  Amortization of
deferred financing costs related to ComVest for the three months ended March 31,
2009 and 2008 was $67,056 and $0, respectively.




Note Payable to Blue Lake
Rancheria




On March
1, 2005, CPR issued a Promissory Note (“Blue Lake Note”) to Blue Lake Rancheria,
a fully recognized Indian tribe (“Blue Lake”), for $1,290,000 in principal
amount guaranteed by Messrs. Traina and Ferguson. The Blue Lake Note matured on
March 31, 2008. Effective March 31, 2008, CPR amended and restated the Blue Lake
Note and extended its maturity date under the Agreement, dated as of March 31,
2008, by and between CPR and Blue Lake (the “Blue Lake Agreement”). Pursuant to
the Blue Lake Agreement, on April 14, 2008, CPR and Blue Lake entered into an
Amended and Restated Promissory Note (“Amended Blue Lake Note”) with a principal
amount of $1,290,000, which was due and payable as follows: (i) $200,000 was
paid on April 8, 2008; (ii) $50,000 is payable on the first business day of each
calendar month for 12 consecutive months (totaling $600,000 in the aggregate),
the first payment to occur on May 1, 2008, and the last to occur on April 1,
2009; and (iii) on April 30, 2009, CPR was obligated to pay to Blue Lake the
balance of the principal amount, equal to $490,000, plus accrued interest. The
interest rate on the Amended Blue Lake Note was increased from 6% to 10% per
annum. ClearPoint agreed to issue 900,000 shares (“Escrow Shares”) of
ClearPoint’s common stock in the name of Blue Lake to be held in escrow,
pursuant to an escrow agreement, as security for the payment of the principal
amount and interest under the Amended Blue Lake Note.




25




CPR did
not make the required payments of: (i) $50,000 in January, 2009 and (ii)
$490,000, plus accrued interest of $32,744, in April, 2009 under the Amended
Blue Lake Note.  On May 1, 2009, the Company received a notice from
Blue Lake indicating CPR’s failure to pay such amounts and demanding that the
Company immediately pay a total of approximately $572,744.  Pursuant
to the terms of the Amended Blue Lake Note, CPR’s failure to make the foregoing
payments when due constitutes an event of default if not cured within five
business days of receipt of written notice from Blue Lake.  The
Company did not cure such default on or prior to May 8, 2009.  On May
7, 2009, Blue Lake requested disbursement of the Escrow Shares and, pursuant to
the Escrow Agreement, the escrow agent is obligated to deliver the Escrow Shares
to Blue Lake 10 calendar days after receipt of the request for
disbursement.




An event
of default under the Amended Blue Lake Note triggers a cross-default provision
pursuant to the Loan Agreement with ComVest.  In addition, a default
under the Loan Agreement would trigger a cross-default provision pursuant to the
M&T Restructure Agreement unless the default under the Loan Agreement is
waived in writing by ComVest.  On May 13, 2009, ComVest executed a
waiver letter (the “Blue Lake Waiver”) to the Loan
Agreement.  Pursuant to the Blue Lake Waiver, effective May 1, 2009,
ComVest waived the cross-default provision which was triggered by CPR’s failure
to make the payments due under the Amended Blue Lake Note and all remedies
available to ComVest as a result of the failure to make such payments provided
that such payments due under the Amended Blue Lake Note are paid solely in
Escrow Shares.  Blue Lake
and the Company are discussing whether the issuance of the Escrow Shares will
constitute the full satisfaction of CPR’s obligations under the Amended Blue
Lake Note.




Sub
Notes




On March
1, 2005, CPR issued Amended and Restated Notes (collectively, the “Sub Notes”)
to each of Matthew Kingfield, B&N Associates, LLC, Alyson P. Drew and Fergco
Bros. LLC (collectively, the “Sub Noteholders”) for $50,000, $100,000, $100,000
and $300,000, respectively. Ms. Drew is the spouse of ClearPoint’s director
Parker Drew. Fergco Bros. LLC (“Fergco”) is twenty-five percent (25%) owned by
Mr. Ferguson, a principal stockholder of the Company.




Effective
March 31, 2008, CPR amended and restated the Sub Notes and extended their
maturity dates to March 31, 2009 (collectively, the “Amended Sub
Notes”).  All sums outstanding from time to time under each Amended
Sub Note bear the same interest of 12% per annum as under the Sub Note, payable
quarterly, with all principal payable on the maturity date. CPR’s failure to
make any payment of principal or interest under the Amended Sub Note when such
payment is due constitutes an event of default, if such default remains uncured
for 5 business days after written notice of such failure is given to CPR by the
Sub Noteholder.  Upon an event of default and at the election of the
Sub Noteholder, the Sub Note, both as to principal and accrued but unpaid
interest, will become immediately due and payable.  As of March 31,
2009, ClearPoint made all required interest payments on the Amended Sub
Notes.




In
consideration of each Sub Noteholder agreeing to extend the maturity date of the
Sub Note, ClearPoint issued warrants (“Initial Sub Note Warrants”) to the Sub
Noteholders to purchase, in the aggregate, 82,500 shares of common stock (the
“Sub Note Warrant Shares”) at an exercise price of $1.55 per share. The Initial
Sub Note Warrant is immediately exercisable during the period commencing on
March 31, 2008 and ending on March 31, 2010. CPR had the right in its sole
discretion, to extend the maturity date of the Amended Sub Notes to March 31,
2010, and in connection with such extension, the Sub Noteholders had the right
to receive additional Sub Note Warrants (the “Additional Sub Note Warrants”) to
purchase, in the aggregate, an additional 82,500 shares of common
stock.




26




On June
20, 2008, CPR exercised its right to extend the maturity date of the Amended Sub
Notes to March 31, 2010 and, in connection with such extension, the Sub
Noteholders received Additional Sub Note Warrants to purchase 82,500 Sub Note
Warrant Shares at an exercise price of $1.55 per share. The Additional Sub Note
Warrant is immediately exercisable during the period commencing on June 20, 2008
and ending on March 31, 2011.  At June 30, 2008, the Company valued
the warrants at $7,619 using the Black-Scholes valuation model and they were
expensed under selling, general and administrative expenses.  The
exercise price and the number of Sub Note Warrant Shares are subject to
adjustment in certain events, including a stock split and reverse stock
split.




In
connection with the Loan Agreement with ComVest described above, ComVest entered
into a Subordination Agreement dated June 20, 2008 (the “Noteholder
Subordination Agreement”) with each of the Sub Noteholders and CPR. Pursuant to
the Noteholder Subordination Agreement, the Sub Noteholders agreed to
subordinate the Company’s obligations to them under the Amended Sub Notes to the
ComVest Obligations. So long as no event of default under the ComVest Loan
Agreement has occurred, the Company may continue to make scheduled payments of
principal and accrued interest when due in accordance with the Sub Notes, as
amended. In the case of an event of default under the Loan Agreement with
ComVest, the Company may not pay and the Sub Noteholders may not seek payment on
the Sub Notes, as amended, until the ComVest Obligations have been satisfied in
full. The Noteholder Subordination Agreement also sets forth priorities among
the parties with respect to distributions of the Company’s assets made for the
benefit of the Company’s creditors.




Note Payable to ALS,
LLC




In
connection with the transaction with ComVest described above, on June 20, 2008,
the Company entered into a Letter Agreement dated June 20, 2008 (the “ALS
Agreement”) with ALS, LLC and its subsidiaries whereby the parties agreed, among
other things: (i) to execute the ALS Subordination Letter dated June 20, 2008,
as defined below; (ii) to amend the ALS Note (see Note 4 – Business and Asset
Acquisitions and Dispositions and Licensing Agreements for a description of the
ALS Note) to provide for an outstanding principal amount of $2,155,652
(remaining principal balance of $2,022,991 plus accrued interest of $132,661)
bearing interest at a rate of 5% per annum (a reduction from 7%) payable in 24
equal monthly installments, commencing January 2014, payable as permitted
pursuant to the ALS Subordination Letter; (iii) that the Company would issue
350,000 shares of common stock to ALS (the “ALS Shares”) in accordance with the
ALS Acquisition; (iv) that ALS may defend and indemnify the Company in
connection with the TSIL Litigation, as defined in Note 20 – Litigation, and (v)
that the parties will take all appropriate actions to dismiss their claims
against each other in connection with the TSIL Litigation.




The
transaction was not classified as a restructuring of debt. The Company valued
the ALS Shares at their fair market value as of the date of issuance of $101,500
and recorded that amount as an expense during the year ended December 31,
2008.




Pursuant
to a Subordination Letter sent by ALS to ComVest, M&T and the Company dated
June 20, 2008 (the “ALS Subordination Letter”), ALS agreed that the Company may
not make and ALS may not receive payments on the ALS Note, provided however,
that (i) upon payment in full of all obligations under the Term Loan owing to
ComVest and so long as the Company is permitted to make such payments, the
Company shall make monthly interest payments on the outstanding principal
balance of the ALS Note and (ii) upon payment in full of the M&T
Obligations, the Company shall make 24 equal monthly installments on the ALS
Note, as amended pursuant to the ALS Agreement described above.  For
the three months ended March 31, 2009 and 2008, the Company accrued $27,405 and
$9,799, respectively, in interest expense associated with the ALS
Note.  As of March 31, 2009, the Company had $85,503 of accrued
interest payable recorded on its consolidated balance sheet associated with the
ALS Note.




27




Notes Payable to
StaffBridge




On
December 31, 2007, the note payable to former shareholders of StaffBridge, Inc.
for purchase of the common stock of StaffBridge, Inc. (“StaffBridge Note”) dated
August 14, 2006 was amended from an original maturity date of December 31, 2007
to a new maturity date of June 30, 2008. In addition, the amount of the
StaffBridge Note was increased to $486,690 for accrued interest and the interest
rate was increased to eight percent from six percent per annum payable in
monthly installments starting January 15, 2008. The Company incurred an
origination fee in the amount of $19,467, which equaled four percent of the
principal amount in the form of 9,496 shares of common stock of the Company.
This fee was charged to interest expense.




In
addition, in connection with the financing transaction with ComVest, on June 30,
2008, the former shareholders of StaffBridge, Inc. (the “StaffBridge
Shareholders”), executed a Debt Extension Agreement (the “Debt Extension
Agreement”) and entered into a Subordination Agreement (the “StaffBridge
Subordination Agreement”) with ComVest and CPR.




Pursuant
to the Debt Extension Agreement, the StaffBridge Shareholders agreed that, in
connection with the receipt from the Company of $150,000 payable for work
performed by TSP 2, Inc., an entity controlled by certain StaffBridge
Shareholders and a contractor for the Company (“TSP”), the StaffBridge Note was
amended, effective June 30, 2008, to extend the maturity date to December 31,
2008 and to reduce the outstanding principal amount to $336,690.




Effective
December 31, 2008, the StaffBridge Note was further amended pursuant to a second
Debt Extension Agreement dated December 31, 2008 to provide for the following
payment schedule of the outstanding amount due under the StaffBridge Note:
$100,000 was paid on January 12, 2009 and the remaining balance shall be paid in
four equal quarterly payments of $59,172, beginning on March 31, 2009, which was
made, and ending on December 31, 2009.  Amendment No. 1 to the ComVest
Loan Agreement contains ComVest’s acknowledgment and consent to the Company’s
amendment of the payment terms and payment schedule of the StaffBridge Note
pursuant to the second Debt Extension Agreement.




Pursuant
to the StaffBridge Subordination Agreement, the StaffBridge Shareholders agreed
to subordinate the Company’s obligations to them under the StaffBridge Note to
the ComVest Obligations. So long as no event of default under the Loan Agreement
with ComVest has occurred, the Company may continue to make scheduled payments
of principal and accrued interest when due in accordance with the StaffBridge
Note. In the case of an event of default under the Loan Agreement, the Company
may not pay and the StaffBridge Shareholders may not seek payment on the
StaffBridge Note until the ComVest Obligations have been satisfied in full. The
Subordination Agreement also sets forth priorities among the parties with
respect to distributions of the Company’s assets made for the benefit of the
Company’s creditors.




Bridge
Notes




On June
6, 2008, the Company issued notes (the “Original Bridge Notes”) to each of
Messrs. Traina, Drew and TerraNova Partners, L.P. (“TerraNova Partners” and,
together with Messrs. Traina and Drew, the “Bridge Lenders”) in the principal
amounts of $104,449, $50,000 and $100,000, respectively. Mr. Traina is the
Company’s Chairman of the board of directors, Chief Executive Officer and
principal stockholder.  Mr. Drew is a member of the Company’s board of
directors and TerraNova Partners, a principal stockholder of the Company, is
100% beneficially owned by Mr. Kololian, the Company’s lead director. Mr.
Kololian also controls 100% of the voting interest and 55% of the non-voting
equity interest in the general partner of TerraNova Partners. During the course
of negotiations with ComVest, Mr. Traina agreed to loan an additional $5,000 to
the Company. On June 26, 2008, the Company issued amended and restated Original
Bridge Notes (the “Amended Bridge Notes”) to each Bridge Lender. The Amended
Bridge Notes contained identical terms and provided that (i) the principal
amount of the Amended Bridge Notes would bear interest at a rate of 8% per
annum, payable quarterly and (ii) the Company had the right to repay the Amended
Bridge Notes in shares of the Company’s common stock at a price equal to the
closing price of the Company’s common stock on June 26, 2008. The Amended Bridge
Notes did not contain the provision stating that the principal balance will bear
interest only upon demand for payment by the Bridge Lender, as provided in the
Original Bridge Note.




28




On June
25, 2008 Mr. Drew’s Amended Bridge Note was repaid in full and Mr. Traina was
repaid $5,000 in connection with his Amended Bridge Note. The balance of Mr.
Traina’s Amended Bridge Note was repaid on July 16, 2008.




On August
12, 2008, the Company’s board of directors approved the payment of the Amended
Bridge Note issued to TerraNova Partners in 204,082 shares of common stock,
based on a valuation at the June 26, 2008 closing price in accordance with the
terms of the Amended Bridge Note.  On March 6, 2009, these shares were
issued to TerraNova Partners.




Notes Payable to Messrs.
Traina and Ferguson




CPR
issued promissory notes (the “Promissory Notes”), dated February 22, 2008, in
the aggregate principal amount of $800,000, to each of Messrs. Traina and
Ferguson, in consideration for loans of $800,000, in the aggregate, made to
CPR.




The terms
of the Promissory Notes were identical. The principal amount of each Promissory
Note was $400,000, and each bore interest at the rate of 6% per annum, which was
to be paid quarterly, and each was due on February 22, 2009. The Promissory
Notes were subordinate and junior in right of payment to the prior payment of
any and all amounts due to M&T pursuant to the M&T Credit Agreement, as
amended.  On February 28, 2008, CPW advanced $800,000, on behalf of
Optos, to the provider of Optos’s outsourced employee leasing program. The
advanced funds were utilized for Optos’ payroll. In consideration of making the
advance on its behalf, Optos assumed the Promissory Notes, and the underlying
payment obligations, issued by CPR on February 22, 2008.




NOTE
12 — STOCK-BASED COMPENSATION:




On
February 12, 2007, the Company adopted the 2006 Long-Term Incentive Plan (the
“Plan”) which was approved by stockholders.  Under the Plan, the
Company grants stock options to key employees, directors and consultants of the
Company.  All grants prior to March 31, 2007 are 100%
vested.  Options granted to two employees on September 11, 2007 are
100% vested.  Options granted on September 11, 2007 to all other
employees of the Company are one-third vested as of September 11, 2007, an
additional one-third vested as of September 17, 2008 with the remaining
one-third vesting September 11, 2009.  With respect to the options
granted August 20, 2008, the vesting period is one-third on August 20, 2009, an
additional one-third on August 20, 2010 with the remaining one-third on August
20, 2011.  Options expire between 3 and 10 years from the date of
grant or earlier at the determination of the board of directors.




For
grants to non-employee directors after March 31, 2007, the vesting period is 3
years from the grant date, subject to their continuing service on the
board.  Options authorized for issuance under the Plan total
2,750,000.  The number of shares covered by stock options that may be
exercised by any participant during any calendar year cannot have an aggregate
fair market value in excess of $100,000 measured at the date of the
grant.  The exercise price for options cannot be less that the fair
market value of the Company’s common stock on the date of the
grant.  At March 31, 2009, 1,804,400 options were available for
issuance.




Accounting
for Employee Awards




The
Company’s consolidated results of operations for the three months ended March
31, 2009 and 2008 include share-based employee compensation expense totaling
$18,573 and $14,792, respectively.  Such amounts have been included in
the Consolidated Statements of Operations in selling, general and administrative
expense.  No income tax benefit has been recognized in the
Consolidated Statements of Operations for share-based compensation arrangements
as the Company has provided for a 100% valuation allowance on its deferred tax
assets.




29




Accounting
for Non-Employee Awards




Stock compensation expense related to
non-employee options was $4,785 and $0 for the three months ended March 31, 2009
and 2008, respectively.  Such amounts have been included in the
Consolidated Statements of Operations in selling, general and administrative
expense.




Total stock-based compensation
recognized by the Company for the three months ended March 31, 2009 and 2008,
all of which relates to stock options, was as follows:




Three
      Months EndedMarch
      31, 2009
              
              
              March
      31, 2008(Unaudited)Statement
      of Operations line item:SG&A
              
              $
              23,358
              
              
              $
              14,792Total
              
              $
              23,358
              
              
              $
              14,792




During
the three months ended March 31, 2009 and 2008, no stock options were
granted.  The following information relates to the stock option
activity under the Plan for the three months ended March 31, 2009 and 2008,
respectively:




Shares subject to
                  Options
              
              
              Weighted Average
                  Option Prices(Unaudited)Outstanding
      at January 1,
      2009
              
              
              1,002,008
              
              
              $
              1.01Granted
              
              
              —
              
              
              
              —Exercised
              
              
              —
              
              
              
              —Cancelled
              
              
              (56,408
              )
              
              
              3.69Outstanding
      at March 31,
      2009
              
              
              945,600
              
              
              
              2.86Exercisable
      at March 31,
      2009
              
              
              427,733
              
              
              
              5.91Weighted
      Average Remaining Contractual Terms (Years)Outstanding
              
              
              5.9Exercisable
              
              
              1.3




The
aggregate intrinsic value for the options in the table above was zero at March
31, 2009 based on the closing common share price of $0.23 as at March 31, 2009.
The aggregate intrinsic value represents the total pre-intrinsic value (the
difference between the Company’s closing stock price on the last trading day of
the first quarter of 2009 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had
all option holders exercised their options on March 31, 2009. This amount
changes based on the fair market value of the Company’s common
stock.




At March
31, 2009 and 2008, there was $109,736 and $108,820 respectively of unrecognized
compensation cost related to all unvested stock options.




Warrants




At March
31, 2009, warrants to purchase 15,015,825 shares were outstanding, having a
weighted average exercise price of $3.72 per share with an average remaining
contractual life of 2.35 years.




Number of Warrants
              
              
              Weighted Average
                  Exercise Price(Unaudited)Balance,
      January 1,
      2009
              
              
              14,915,825
              
              
              $
              3.80Issued
      during the
      period
              
              
              100,000
              
              
              
              0.12Exercised
      during the
      period
              
              
              —
              
              
              
              —Balance,
      March 31,
      2009
              
              
              15,015,825
              
              
              
              3.72




30




At March
31, 2009 the range of exercise prices of the outstanding warrants was as
follows:




Range of exercise prices
                
                Number of warrants
                
                
                Average remaining
                    contractual life
                
                
                Weighed average
                    exercise price$
                0.01
      - 5.00
                
                
                15,015,825
                
                
                
                2.35
                
                
                $
                3.72




Warrants
were valued using the Black-Scholes model, using the weighted average key
assumptions of volatility of 106 to 236%, a risk-free interest rate of 0.76 to
3.03%, a term equivalent to the life of the warrant and reinvestment of all
dividends in the Company of zero percent.




NOTE
13— FAIR VALUE MEASUREMENTS:




The
Company follows the provisions of SFAS No. 157, which clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a
fair value hierarchy to classify the inputs used in measuring fair
value.




The fair
value hierarchy has three levels based on the reliability of the inputs used to
determine fair value as follows:




Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities available at the measurement date.




Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other then quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.




Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.




The
following tables present the Company’s assets and liabilities that are measured
at fair value on a recurring basis and are categorized using the fair value
hierarchy.




Fair Value Measurements Reporting Date (Unaudited)Description
              
              March 31, 2009
              
              
              Quoted Prices in
                  Active Markets for
                  Identical Assets
                  (Level 1)
              
              
              Significant Other
                  Observable Inputs
                  (Level 2)
              
              
              Significant
                  Unobservable
                  Inputs
                  (Level 3)Liabilities:Warrant
      Liability
              
              $
              1,266,016
              
              
              $
              —
              
              
              $
              —
              
              
              $
              1,266,016




Fair Value Measurements Using
                    Significant Unobservable Inputs
                    (Level 3)Beginning
      Balance
                
                $
                1,213,433Total
      gains or (losses) (realized/unrealized)Included
      in earnings
                
                
                52,583Included
      in other comprehensive income
                
                
                —Purchases,
      issuances and settlements
                
                
                —Transfer
      in and/or out of Level 3
                
                
                —Ending
      Balance
                
                $
                1,266,016The
      amount of total gains or (losses) for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                
                $
                0




31




NOTE
14 — COMMITMENTS AND CONTINGENCIES:




Leases:




The
Company typically leases offices and equipment under operating leases that
expire over one to four years. Future minimum rental payments required under
operating leases that have remaining lease terms in excess of one year as of
March 31, 2009 were as follows (unaudited):




Remainder
      of fiscal
      2009
                
                $
                157,970Fiscal
      2010
                
                
                84,076Fiscal
      2011
                
                
                25,631Fiscal
      2012
                
                
                3,424Thereafter
                
                
                —Total
                
                $
                271,101




The above
lease commitments do not include future minimum rental payments that have been
accrued for in restructuring costs (see Note 10 – Accrued Restructuring
Costs).  Rent expense for the three months ended March 31, 2009 and
2008 was $39,866 and $51,023, respectively.




Employee
Benefit Plan:




In 1991,
Quantum Resources Corporation (“Quantum”) established a savings and profit
sharing (IRC Section 401(k)) plan (“Plan”). The Company acquired all of the
outstanding stock of Quantum on July 29, 2005 and, as a result, assumed the
Plan.  As of January 1, 2006, the Plan was amended to include
additional employees of Quantum and to meet Internal Revenue Service (“IRS”)
safe harbor provisions. Employees are eligible to participate upon their date of
hire. Participants may elect to defer a percentage of their compensation subject
to the IRS limit on elective deferrals. The Plan also allows for a discretionary
Company match of elective deferrals that will vest on a three-year cliff vesting
schedule. There was no Company match for the Plan year ended September 30, 2005.
Effective October 1, 2005, the Company elected to change the Plan’s fiscal year
ending date to December 31. There was no Company match for the three months
ended March 31, 2009 and 2008.




Retirement
Benefit Liability:




Upon its
acquisition of Quantum, the Company assumed a stock purchase agreement dated
December 30, 1986 with a former owner. The agreement called for the payment
of retirement benefits in equal monthly payments, adjusted for the cost of
living increases equal to the Consumer Price Index. The former owner is entitled
to these benefits until his death.




The
Company recorded an estimated liability of $220,066 based upon the expected
remaining life of the former owner, and made payments of $62,480 and $78,126 in
the three months ended March 31, 2009 and 2008, respectively. Estimated
future payments to the former owner are as follows:




At
      March 31, 2009 (Unaudited)Remainder
      of fiscal
      2009
              
              $
              70,5062010
              
              
              83,4842011
              
              
              84,4202012
              
              
              84,420Total
      minimum
      payments
              
              
              322,830Present
      value (at 12.25% discount rate) net minimum retirement
      payments
              
              $
              220,066Less,
      current
      portion
              
              
              (84,420
              )$
              135,646




32




NOTE
15 — FRANCHISE AGREEMENTS:


On
August 30, 2007, the Company entered into the agreement with KOR, a Florida
limited liability company controlled by Kevin O’Donnell, a former officer of the
Company, pursuant to which the Company granted to KOR an exclusive right and
license (i) to set up and operate, in parts of Northern California and
Florida, a franchise of the Company’s system and procedures for the operation of
light industrial and clerical temporary staffing services and (ii) to use
in connection with the operation certain of the Company’s proprietary
intellectual property. The Agreement with KOR replaced the agreement between the
Company and KOR entered on July 9, 2007. In consideration for the grant and
license, KOR was required to pay to the Company, on a weekly basis, a royalty
equal to 4.5% of all gross revenues earned by KOR from its operations. KOR also
agreed to pay the Company, on a weekly basis, a royalty equal to 50% of its net
income from its operations.  On August 13, 2007, the Company
entered into the TZG Agreement with TZG pursuant to which the Company granted to
TZG an exclusive right and license (i) to set up and operate a franchise of
the Company’s system and procedures for the operation of transportation and
light industrial temporary staffing services and (ii) to use in connection
with the operation certain of the Company’s proprietary intellectual property.
In consideration for the grant and license, TZG was required to pay to the
Company, on a weekly basis, a royalty equal to 6% of all gross revenues earned
by TZG from the operation.




Through
these relationships, KOR and TZG operated and managed up to twelve and up to
twenty-five, respectively, of the Company’s former branches.  Under
these agreements, the Company processed the weekly payroll for all temporary and
contract staff placed on assignment by the franchisee and their weekly invoices.
Each of these agreements had a term of 99 years, subject to earlier termination
upon certain material breaches or defaults.  The KOR agreement was
terminated on March 5, 2008, and the TZG agreement was terminated on February
28, 2008.




NOTE
16 — INCOME TAXES:




Deferred
tax assets and liabilities are determined based on temporary differences between
income and expenses reported for financial reporting and tax reporting. The
Company is required to record a valuation allowance to reduce its net deferred
tax assets to the amount that it believes is more likely than not to be
realized. In assessing the need for a valuation allowance, the Company
historically had considered all positive and negative evidence, including
scheduled reversals of deferred tax liabilities, prudent and feasible tax
planning strategies and recent financial performance. The Company determined
that the negative evidence, including historic and current losses, as well as
uncertainties related to the ability to utilize Federal and state net loss
carry-forwards, outweighed any objectively verifiable positive factors, and as
such, concluded that a full valuation allowance against the deferred tax assets
was necessary. In the first quarter of fiscal 2008, the deferred tax asset
balance as of December 31, 2007 of $5,007,180 was offset by a 100% valuation
allowance.  For the three months ended March 31, 2009 and 2008, the
Company recorded an additional income tax benefit of $111,685 and $7,540,023,
respectively, which were offset by a 100% valuation allowance of $111,685 and
$7,540,023, respectively.




The
establishment of the deferred tax asset allowance does not preclude the Company
from reversing a portion or all of the allowance in future periods if the
Company believes the positive evidence is sufficient enough to utilize at least
a portion of the deferred tax assets, nor does it limit the ability to utilize
losses for tax purposes, subject to loss carry-forward limitations and periods
permitted by tax law.




The
Company filed all applicable federal and state income tax returns to enable it
to receive the minimum amount required under the M&T Restructure Agreement
and remit the funds directly to M&T in satisfaction of that portion of the
Company’s obligation (see Note 11 – Long-Term Debt). During the year ended
December 31, 2008, the Company received and remitted approximately $1,058,000 in
federal and state tax refunds to M&T.  During the three months
ended March 31, 2009, the Company received and remitted approximately $55,760 in
federal and state tax refunds to M&T.




33




An
analysis of the Company’s deferred tax asset is as follows:
  March
      31,
              
              
              December
      31,2009
              
              
              2008(Unaudited)
              
              
              (Audited)Deferred
      tax (liabilities) assets:Current:Allowance
      for doubtful accounts
              
              $
              2,820,090
              
              
              $
              2,898,090Accrued
      termination fee
              
              
              195,000
              
              
              
              195,000Stock
      options
              
              
              419,710
              
              
              
              410,6003,434,800
              
              
              
              3,503,690Valuation
      allowance
              
              
              (3,434,800
              )
              
              
              (3,503,690
              )Current
              
              
              —
              
              
              
              —Non-current:Book
      to tax depreciation difference
              
              
              (11,319
              )
              
              
              (11,319
              )Financing
      cost, principally due to difference in amortization
              
              
              8,012,973
              
              
              
              8,174,032Accrued
      restructuring costs
              
              
              75,087
              
              
              
              172,678Accrued
      retirement benefits
              
              
              85,826
              
              
              
              131,840Charitable
      contribution carryover
              
              
              9,514
              
              
              
              9,514Net
      operating loss carryforward
              
              
              5,905,308
              
              
              
              5,420,06914,077,389
              
              
              
              13,896,814Valuation
      allowance
              
              
              (14,077,389
              )
              
              
              (13,896,814
              )Non-current
              
              
              —
              
              
              
              —Deferred
      income tax asset
              
              $
              —
              
              
              $
              —
  The net
deferred tax asset was presented in the Company’s consolidated balance sheets as
follows:
  March
      31,
              
              
              December 31,2009
              
              
              2008(Unaudited)
              
              
              (Audited)Current
      deferred tax asset
              
              $
              3,434,800
              
              
              $
              3,503,690Non-current
      deferred tax asset
              
              
              14,077,389
              
              
              
              13,896,814Deferred
      tax asset before valuation allowance
              
              
              17,512,189
              
              
              
              17,400,504Valuation
      allowance
              
              
              (17,512,189
              )
              
              
              (17,400,504
              )Deferred
      tax asset
              
              $
              —
              
              
              $
              —
  Current
federal and state income taxes payable of $0 are included in other current
liabilities as of March 31, 2009.  The Company has net operating loss
carryforwards for federal purposes of $15,169,000 and for state purposes of
$20,892,000 which expire in various years through 2028.
  The
components of the income tax expense (benefit) are summarized as
follows:
  Three
      Months Ended
                  March
      31,2009
              
              
              2008(Unaudited)
              
              
              (Unaudited)Current:Federal
      income tax expense (benefit)
              
              $
              —
              
              
              $
              —State
      tax expense
              
              
              —
              
              
              
              —Total
      current tax expense (benefit)
              
              
              —
              
              
              
              —Deferred:Federal
      tax expense (benefit)
              
              
              (97,685
              )
              
              
              (6,573,353
              )State
      tax expense (benefit)
              
              
              (14,000
              )
              
              
              (966,670
              )Total
      deferred tax (benefit)
              
              
              (111,685
              )
              
              
              (7,540,023
              )Valuation
      allowance
              
              
              111,685
              
              
              
              12,547,203Total
      income tax expense (benefit)
              
              $
              —
              
              
              $
              5,007,180




34




The
Company follows FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). At the
adoption date of January 1, 2007 and at December 31, 2008 and March 31, 2009,
the Company did not have any unrecognized tax benefits. The Company’s practice
is to recognize interest and/or penalties related to income tax matters in
income tax expense. As of March 31, 2009, the Company had no accrued interest or
penalties. The Company currently has no federal or state tax audits in progress
although years 2005 through 2008 are open and subject to a federal or state
audit.
  The
differences between the statutory federal income tax rate and the effective
income tax rate as reflected in the accompanying consolidated statements of
operations are:
  Three
      Months Ended
                  March
      31,2009
              
              
              2008(Unaudited)
              
              
              (Unaudited)Statutory
      federal income tax (benefit)
              
              $
              (217,000
              )
              
              $
              (9,074,740
              )State
      income tax (benefit)
              
              
              (32,000
              )
              
              
              (1,334,521
              )Non-deductible
      intangible asset amortization and other permanent
    differences
              
              
              137,315
              
              
              
              2,869,238Valuation
      allowance
              
              
              111,685
              
              
              
              12,547,203$
              —
              
              
              $
              5,007,180
  For the
three months ended March 31, 2009 and 2008, respectively, non-deductible
intangible asset amortization included non-deductible contracts rights of
$50,000 and $50,000, respectively, and non-deductible interest expense related
to warrant liability of $148,180 and $0, respectively.


NOTE
17 — LOSS PER SHARE CALCULATION:




The
following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31, 2009 and 2008:




Three
      Months Ended
                  March
      31,2009
              
              
              2008(Unaudited)
              
              
              (Unaudited)NumeratorNet
      (loss)
              
              $
              (638,117
              )
              
              $
              (31,697,593
              )DenominatorBasic
      and diluted weighted average
      shares
              
              
              14,251,964
              
              
              
              13,208,916Basic
      and diluted earnings per
      share
              
              $
              (0.04
              )
              
              $
              (2.40
              )




In accordance with SFAS No. 128,
“Earnings Per Share,” stock options and warrants outstanding at March 31, 2009
and 2008 to purchase 15,961,425 shares and 12,705,000 shares, respectively, of
common stock were not included in the computation of diluted earnings per share
as they were anti-dilutive.




NOTE
18 — MANAGEMENT AND EMPLOYMENT AGREEMENTS:




On
February 12, 2007, the Company entered into an employment agreement with Mr.
Traina, Chief Executive Officer (“CEO”) of the Company, whereby the Company
agreed to pay the CEO $25,000 per month, plus benefits, with the term of the
agreement being 3 years.




35


On
February 28, 2008, Mr. Ferguson resigned from the Company in connection with the
Optos Licensing Agreement. In connection with Mr. Ferguson’s resignation as the
Company’s and CPR’s director, President and Secretary, the Company and Mr.
Ferguson entered into the Separation of Employment Agreement and General Release
(the “Ferguson Separation Agreement”). In consideration for Mr. Ferguson’s
agreement to be legally bound by the terms of the Ferguson Separation Agreement
and his release of his claims, if any, under the Ferguson Separation Agreement,
Mr. Ferguson is entitled to be reimbursed for any health insurance payments for
Mr. Ferguson for a period equal to 52 weeks. Pursuant to the Ferguson Separation
Agreement, except for the parties’ continuing obligations under the Employment
Agreement between the Company and Mr. Ferguson, dated as of February 12, 2007,
such employment agreement is of no further force and effect. Pursuant to the
Ferguson Separation Agreement, Mr. Ferguson agreed not to stand for election as
a director of the Company, and, for as long as Mr. Ferguson beneficially owns at
least 5% of the Company’s outstanding shares of common stock, Mr. Ferguson will
be entitled to be an observer at each meeting of the Company’s board of
directors. Under the Ferguson Separation Agreement, the Company entered into a
consulting agreement (the “Ferguson Consulting Agreement”) with Mr. Ferguson
pursuant to which he was entitled to be paid $25,000 per month for twelve (12)
months. In return, Mr. Ferguson was obligated to assist the Company with matters
relating to the performance of his former duties and worked with the Company to
effectively transition his responsibilities. As of December 31, 2008, the
Company paid Mr. Ferguson $58,000 pursuant to the Ferguson Consulting Agreement
and recorded a related party liability of $256,709 as of December 31, 2008
pursuant to the Ferguson Consulting Agreement.  As of March 31, 2009,
no further payments were made.  The Company agreed to resume making
payments to Mr. Ferguson in the first quarter of 2010 and recorded the short and
long term portions of such obligation of $64,177 and $192,532, respectively, at
March 31, 2009.  The long term portion of $192,532 of such obligation
was included in accrued restructuring costs (see Note 10 – Accrued Restructuring
Costs).




On June
20, 2008, Kurt Braun, the Company’s former Chief Financial Officer, resigned
effective June 20, 2008. In connection with Mr. Braun’s resignation as the
Company’s Chief Financial Officer, the Company and Mr. Braun entered into a
Separation of Employment Agreement and General Release (the “Braun Separation
Agreement”).




In
consideration of Mr. Braun’s agreement to be legally bound by the terms of the
Braun Separation Agreement, his release of his claims, if any, under the Braun
Separation Agreement, and his agreement to provide the transitional services to
the Company, the Company agreed to, among other things: (i) pay Mr. Braun
$75,000, minus all payroll deductions required by law or authorized by Mr.
Braun, to be paid as salary continuation over 26 weeks beginning within a
reasonable time after the seven day revocation period following execution of the
Braun Separation Agreement; (ii) continue to pay all existing insurance premiums
for Mr. Braun and his immediate family through the 26 week period, and
thereafter permit Mr. Braun, at his own expense, to continue to receive such
coverage in accordance with COBRA regulations; (iii) pay Mr. Braun the balance
of any accrued but unused vacation or paid time off hours, minus all payroll
deductions required by law or authorized by Mr. Braun; and (iv) amend Mr.
Braun’s Nonqualified Stock Option Agreement, dated March 30, 2007, to permit Mr.
Braun to exercise 90,000 of the 140,000 stock options granted until March 30,
2010. The balance of the Braun Stock Options expired on June 20, 2008 in
accordance with the Company’s 2006 Plan. As of March 31, 2009, the Company paid
Mr. Braun approximately $75,000 as severance under the Braun Separation
Agreement.




On June
20, 2008, John Phillips and the Company entered into an Employment Agreement
(the “Phillips Employment Agreement”). Pursuant to the Phillips Employment
Agreement, Mr. Phillips’ current base salary is $175,000 per year, which may be
increased in accordance with the Company’s normal compensation review practices.
On November 7, 2008, the Company’s board of directors increased Mr. Phillips’
base salary to $195,000 effective November 10, 2008. Mr. Phillips is also
entitled to participate in any benefit plan of the Company currently available
to executive officers to the extent he is eligible under the provisions thereof,
and the Company will pay health, dental and life insurance premiums for Mr.
Phillips and members of his immediate family. Mr. Phillips is entitled to
receive short- and long-term disability insurance, and is entitled to three
weeks of paid time off per year. Mr. Phillips may be entitled to discretionary
bonuses as determined by the Company’s CEO, the board of the directors and the
Compensation Committee. On August 20, 2008, Mr. Phillips was granted a stock
option to purchase 50,000 shares of the Company’s common stock. The option vests
in three equal annual installments beginning August 20, 2009 and expire August
20, 2018. The exercise price of the option is $0.30 per share.




On
January 13, 2009, the Company entered into an agreement (the “XRoads Agreement”)
with XRoads Solutions Group, LLC (“XRoads”). Pursuant to the XRoads Agreement,
among other matters, XRoads agreed to provide the services of Brian Delle Donne
to serve as the Company’s Interim Chief Operating Officer.  The term
of the XRoads Agreement commenced on January 13, 2009 and continued until May
13, 2009.  Effective May 14, 2009, the XRoads Agreement was amended
pursuant to Amendment No. 1 dated May 18, 2009 (the “XRoads
Amendment”).  Pursuant to the XRoads Amendment, the term of the XRoads
Agreement was extended to run from May 14, 2009 through August 13, 2009 (the
“XRoads Extension”).




36




The
Company paid XRoads $50,000 per month for each of the first four months of Mr.
Delle Donne’s services.  In addition, XRoads is entitled to a monthly
fee based upon achievement of certain increases in earnings before interest,
taxes, depreciation and amortization (“EBITDA”), calculated pursuant to the
XRoads Agreement. Such fee is equal to 10% of increases in monthly EBITDA during
the term of the XRoads Agreement over EBITDA for the month ended January 31,
2009, capped at $50,000 per month (the “EBITDA Fee”).  During the
three months ended March 31, 2009, the Company paid no EBITDA Fees to
XRoads.  The Company also agreed to pay reasonable expenses incurred
by XRoads for services related to its services and remitted a retainer in the
amount of $10,000 to XRoads for such purpose.  During the three months
ended March 31, 2009, pursuant to the XRoads Agreement, the Company paid XRoads
a total of $150,000 and the $10,000 retainer for reimbursement of expenses. Any
amounts not paid when due pursuant to the XRoads Agreement will bear interest at
an annual rate of 12% or the maximum rate allowed by law, whichever is
less.




The terms
and conditions of the original XRoads Agreement which were not affected by the
XRoads Amendment will remain in full force and effect during the XRoads
Extension.  The Company agreed to pay XRoads $45,000 per 30 day period
of the XRoads Extension and the EBITDA Fee will remain at 10%, calculated in
accordance with the XRoads Amendment, and subject to the cap of $50,000 per
month.  In addition, pursuant to the XRoads Amendment, in the event
Mr. Delle Donne is hired by the Company, the Company agreed to pay XRoads an
aggregate of $250,000 as liquidated damages.  This amount is payable
in the form of (i) $100,000 of cash due on Mr. Delle Donne’s hire date, (ii) a
warrant to purchase the Company’s common stock with a value of $100,000 based on
the closing price on the day Mr. Delle Donne begins employment and (iii) a
$50,000 promissory note bearing interest at 8% payable in four quarterly
installments at the end of each calendar quarter following the start of Mr.
Delle Donne’s employment.




In
addition, the Company issued XRoads a warrant to purchase up to 100,000 shares
of common stock at the exercise price of $0.12 per share, exercisable through
December 31, 2010 in connection with the expiration of the XRoads Agreement on
May 13, 2009.  In connection with the XRoads Extension, the Company is
obligated to issue an additional warrant to purchase 75,000 shares of common
stock with an expiration date of April 30, 2011.




In the
event the Company elects to pursue a financing (either in the form of debt or
equity) within one year of the date of the XRoads Agreement, XRoads shall serve
as its non-exclusive financial advisor for such financing in accordance with the
terms of the XRoads Agreement. If such financing is consummated pursuant to the
terms set forth in the XRoads Agreement, the Company agreed to pay XRoads a
transaction fee based on the type and value of the transaction. The transaction
fee will be prorated accordingly in the event the Company retains an additional
financial advisor in connection with the transaction, but such fee shall not be
less than $75,000 if XRoads’ efforts result in an bona fide financing
alternative.




In the
event of a material breach of the XRoads Agreement by either party, including,
but not limited to, the Company’s failure to promptly pay amounts due for
services rendered or for reimbursement of expenses, the non-breaching party may
terminate the XRoads Agreement at any time thereafter upon 5 days advance
notice.  For a description of Amendment No. 1 to the Term Loan issued
by ComVest in connection with the XRoads Agreement, as amended, see Note 11 –
Debt Obligations.




37




NOTE
19 — RELATED PARTY TRANSACTIONS




Notes
Issued to Related Parties




Alyson
Drew and Fergco




On
March 1, 2005, the Company issued a 12% Amended and Restated Subordinated
Note in the original principal amount of $100,000 due 2008 to Alyson Drew (the
“Drew Note”), the spouse of the Company’s director Parker Drew.




On
March 1, 2005, the Company issued a 12% Amended and Restated Note in the
original principal amount of $300,000 due March 31, 2008 (the “Fergco
Note”) to Fergco, a New Jersey limited liability company of which Mr. Ferguson,
the Company’s principal stockholder, owns a 25% ownership interest and his
brothers own the remaining 75% interest.




On
March 31, 2008, the Company amended the Drew Note and the Fergco Note by
issuing Second Amended and Restated Notes in the original principal amounts of
$100,000 and $300,000 to Alyson Drew and Fergco, respectively.  For
additional information regarding the Drew Note and the Fergco Note, see Note 11
– Debt Obligations.




The
proceeds of these notes were used to fund acquisitions. Pursuant to the terms of
these notes, ClearPoint has been making interest only payments until the
maturity of the notes. During the three months ended March 31, 2008, ClearPoint
made interest payments of $15,000 and $45,000 to Alyson Drew and Fergco pursuant
to the Drew Note and Fergco Note, respectively.  During the three
months ended March 31, 2009, the Company made interest payments of $3,000 and
$9,000 to Alyson Drew and Fergco pursuant to the Drew Note and Fergco Note,
respectively.




Michael
Traina and Christopher Ferguson




CPR
issued promissory notes, dated February 22, 2008, in the aggregate principal
amount of $800,000, to each of Michael Traina and Christopher Ferguson in
consideration for loans of $800,000 made to CPR.  For additional
information regarding these promissory notes, see Note 11 – Debt
Obligations.




Bridge
Notes




On June
6, 2008, the Company issued the Original Bridge Notes, to each of Michael
Traina, Parker Drew and TerraNova Partners in the principal amounts of $104,449,
$50,000 and $100,000, respectively.  During the course of negotiations
with ComVest, Mr. Traina agreed to loan an additional $5,000 to the
Company.  For additional information regarding the Original Bridge
Notes, as amended, see Note 11 – Debt Obligations.




Agreements with Related
Parties




Agreements
with Christopher Ferguson and Kurt Braun




On
February 28, 2008, Mr. Ferguson, the Company’s former director, President and
Secretary, resigned effective February 28, 2008. In connection with Mr.
Ferguson’s resignation, the Company entered into the Ferguson Separation
Agreement and the Ferguson Consulting Agreement.  On June 20, 2008,
Kurt Braun, the Company’s former Chief Financial Officer, resigned effective
June 20, 2008. In connection with Mr. Braun’s resignation, the Company entered
into the Braun Separation Agreement.  For additional information
regarding these agreements, see Note 18 – Management and Employment
Agreements.




38




Agreements
with TerraNova Management


TerraNova
Management Corporation (“TNMC”), an affiliate of Mr. Kololian, was retained to
provide certain advisory services to the Company, effective upon the closing of
the merger with Terra Nova, pursuant to the Advisory Services Agreement between
TNMC and the Company, dated February 12, 2007 (the “Advisory Services
Agreement”).  Mr. Kololian controls 100% of the voting interest and
55% of the non-voting equity interest of TNMC.  Pursuant to the
Advisory Services Agreement, TNMC provided services to the Company including:
advice and assistance to the Company in its analysis and consideration of
various financial and strategic alternatives, as well as assisting with
transition services. During the fiscal year ended December 31, 2007, TNMC
received a fixed advisory fee of $175,000 (prorated for a partial year) for such
services.  Pursuant to the terms of the Advisory Services Agreement,
it was terminated effective February 11, 2008, however TNMC continued to provide
substantially similar services under substantially similar terms to the Company
on a monthly basis.




On June
26, 2008, the Company entered into a new Advisory Services Agreement (the “New
Advisory Services Agreement”) with TNMC. Pursuant to the New Advisory Services
Agreement, the Company agreed to provide compensation to TNMC for its services
since the expiration of the former Advisory Services Agreement and to engage
TNMC to provide future advisory services. The New Advisory Services Agreement is
effective as of June 26, 2008, continues for a one year term and is
automatically renewed for successive one-year terms unless terminated by either
party by written notice not less than 30 days prior the expiration of the
then-current term.  The Company agreed to compensate TNMC for services
rendered since expiration of the former Advisory Services Agreement and for
advisory services similar to those performed under the former Advisory Services
Agreement. Monthly fees payable to TNMC under the New Advisory Services
Agreement are capped at $50,000 per month. Fees payable to TNMC may be paid 100%
in shares of common stock, at the Company’s option. Beginning in the month of
June, 2008, 75% of the fees payable to TNMC may also be paid in shares of common
stock and, with the agreement of TNMC, the remaining 25% may also be paid in
shares of common stock. Shares of common stock made as payments under the New
Advisory Services Agreement are priced at the month-end closing price for each
month of services rendered.  During the fiscal year ended December 31,
2008, the Company incurred approximately $292,665 in fees owing to TNMC for such
services.  Fees or reimbursement of expenses recorded pursuant to the
New Advisory Services Agreement during the three months ended March 31, 2009 and
2008 were $0 and $33,332, respectively.




The
Company’s board of directors approved payment of $266,000 for the services
performed by TNMC pursuant to the New Advisory Services Agreement in the form of
an aggregate of 479,470 shares of common stock for the months of February
through August, 2008 as follows: on August 12, 2008, the board of directors
approved payment for the months of February, March, April, May and June, 2008 in
417,008 shares of common stock and on November 7, 2008, the board of directors
approved payment for the months of July and August, 2008 in 62,462 shares of
common stock.




Additionally,
the Company incurred approximately $99,202 for reimbursement of expenses
incurred by TNMC in connection with the New Advisory Services Agreement for the
fiscal year ended December 31, 2008.




Agreements
with ALS, LLC




On
February 23, 2007, the Company acquired certain assets and liabilities of ALS.
The purchase price of $24.4 million consisted of cash of $19 million, the ALS
Note, shares of common stock with a value of $2.5 million (439,367 shares) and
the assumption of approximately $400,000 of current liabilities. ALS is a holder
of more than 5% of the Company’s common stock.  For additional
information regarding the ALS Note, see Note 11 – Debt Obligations.




Transactions
with Dennis Cook, The Cameron Company, LLC  and WES Health
System




Dennis
Cook, a member of the Company’s board of directors, serves as the President and
Chief Executive Officer of WES Health System (“WES”).  During the
three months ended March 31, 2008, the Company leased office space from WES for
which it paid a total of $1,875. In addition, on March 29, 2007, Mr. Cook was
granted options to purchase 20,000 shares of common stock at an exercise price
of $6.10. The options vested immediately.  During the three months
ended March 31, 2008, the Company provided certain temporary employees and
payroll services to WES for approximately $657,000.  The Company did
not lease office space from, and did not provide services to, WES during the
three months ended March 31, 2009.




39




Transactions
with Optos




On
February 28, 2008, CPR and its subsidiary, CPW, entered into the Optos Licensing
Agreement with Optos, of which Christopher Ferguson is the sole member. Pursuant
to the Optos Licensing Agreement, the Company (i) granted to Optos a
non-exclusive license to use the ClearPoint Property and the Program, both as
defined in the Optos Licensing Agreement, which included certain intellectual
property of CPR, and (ii) licensed and subcontracted to Optos the client list
previously serviced by TZG, pursuant to the TZG Agreement, dated August 13, 2007
and all contracts and contract rights for the clients included on such
list.  In consideration of the licensing of the Program, which was
part of the ClearPoint Property, CPR was entitled to receive a fee equal to 5.2%
of total cash receipts of Optos related to temporary staffing
services.  The foregoing agreement with TZG was terminated on February
28, 2008 in connection with the Optos Licensing Agreement.  During the
three months ended March 31, 2009 and 2008, the Company recorded $0 and
$336,670, respectively, in fees payable by Optos under the Optos Licensing
Agreement.




On April
8, 2008, the Optos Licensing Agreement was terminated. In consideration for
terminating the Optos Licensing Agreement, CPR and Optos agreed that there would
be a net termination fee for any reasonable net costs or profit incurred, if
any, when winding up the operations associated with termination. This fee is
estimated to be $500,000 and was recorded as an expense. The payment of the net
termination fee will be in the form of cash and shares of common stock of the
Company.  As of March 31, 2009, the following balances concerning the
Optos Licensing Agreement were recorded:




Accounts
      receivable – related party
                
                $
                336,670Accrued
      termination fee
                
                
                (500,000
                )Vendor
      managed services payable and other liabilities
                
                
                (201,799
                )Net
      (due) Optos
                
                $
                (365,129
                )




Agreement
with StaffChex




On March
16, 2009, the Company and StaffChex entered into the Amendment to the iLabor
agreement pursuant to which the payment terms of the iLabor agreement were
restated.  For additional information regarding the Amendment with
StaffChex, see Note 4 – Business and Asset Acquisitions and Dispositions and
Licensing Agreements.




Agreement
with XRoads Solutions




On
January 13, 2009, the Company entered into the XRoads Agreement. Pursuant to the
XRoads Agreement, among other matters, XRoads agreed to provide the services of
Brian Delle Donne to serve as the Company’s Interim Chief Operating
Officer.  For additional information regarding the XRoads Agreement,
as amended, see Note 18 – Management and Employment Agreements.




NOTE
20 — LITIGATION:




Temporary
Services Insurance Ltd.




On
September 21, 2007, Temporary Services Insurance Ltd. (“TSIL”), which claims to
be a captive reinsurance company offering workers’ compensation insurance to its
shareholders through an insurance program, filed a complaint (the “TSIL
Litigation”) in the U.S. District Court in Florida against ALS, Advantage
Services Group, LLC (“Advantage Services”), certain officers and shareholders of
ALS and Advantage Services as well as certain other third party companies
(collectively, the “ALS Defendants”) alleging that it was owed at least
$2,161,172 in unpaid insurance assessments, as well as other requested damages,
from the ALS Defendants. Kevin O’Donnell, a former officer of the ALS companies
and a named defendant in the TSIL Litigation, controls KOR, a former franchisee
of the Company.




40


The
Company is also named as a defendant because it acquired certain assets from ALS
and its wholly owned subsidiaries, including Advantage Services Group II, LLC
(“ASG II”), in February 2007, for which it paid a portion of the purchase price
at closing to the ALS Defendants, through ALS. It is alleged that this transfer
rendered ASG II, one of the named insureds on the TSIL policy, insolvent and
unable to pay the insurance assessments and damages owed to TSIL. TSIL requested
in its complaint that its damages be satisfied from the assets transferred to
the Company.  Agreements related to the acquisition of certain assets
and liabilities of ALS in February 2007 contain provisions under which the
Company may seek indemnification from ALS in connection with the foregoing. the
Company intends to pursue all appropriate claims for such indemnification and
cannot estimate the potential liability, if any.




On
January 11, 2008, the Company filed its Answer denying all claims in the TSIL
Litigation and also filed a Crossclaim against ALS making claims for contractual
and common law indemnity. ALS filed its Answer to the Company’s Crossclaim,
denying all claims, and filed a Counterclaim asking for a declaratory judgment
that it does not have to indemnify the Company and asserting a breach of
contract claim based on an alleged failure to pay ALS certain amounts due under
the ALS Note arising out of the acquisition of certain assets and liabilities of
ALS in February 2007. The court in the TSIL Litigation entered an order dated
February 22, 2008 (the “TSIL Order”), requiring the Company not to make any
payments to ALS pursuant to the purchase agreement without first seeking leave
of court.




On or
about June 20, 2008, in connection with ALS’ agreement to subordinate the ALS
Note to ComVest and M&T, ALS and its subsidiaries and certain other
individuals (the “ALS Parties”) entered into a letter agreement with the Company
(the “ALS Agreement”). Pursuant to the ALS Agreement, the ALS Parties and the
Company agreed, among other things, as follows:




·
            That
      the ALS Parties acknowledge their obligation to indemnify the Company in
      connection with the TSIL Litigation, subject to certain sections of the
      ALS purchase agreement;




·
            That
      the ALS Parties shall be responsible for the Company’s attorney’s fees
      incurred in the TSIL Litigation from June 20, 2008, not to exceed
      $300,000;




·
            That
      the ALS Parties and the Company shall take all appropriate actions to
      dismiss all of their respective claims against one another in the TSIL
      Litigation, and that following such dismissal, the Company shall cooperate
      as reasonably requested by the ALS Parties in connection with the TSIL
      Litigation including consenting in connection with a request to lift the
      TSIL Order, or otherwise permit payment to the ALS Parties in accordance
      with the terms of the ALS purchase agreement and the ALS Note;
      and




·
            In
      addition, the Company agreed not to assert its right to set off from the
      Note any other amounts in connection with the TSIL Litigation until such
      time (if at all) as a final judgment is entered against the Company in the
      TSIL Litigation, or the amount of TSIL’s claims against the Company are
      liquidated by settlement or
otherwise.




ALS did
not elect to provide a defense to the Company, and the Company remains
represented by its own counsel. On November 21, 2008, a joint stipulation for
voluntary dismissal was filed with the court pursuant to which the Company and
ALS jointly dismissed such claims with prejudice. On December 8, 2008, the court
entered an order dismissing all claims between the Company and ALS with
prejudice. The litigation between TSIL and ALS is currently concluding its fact
discovery phase and commencing its expert discovery phase.




James
W. Brown et al.




On or
about October 29, 2007, the Company received a copy of a letter sent by a law
firm to the California Labor & Workforce Development Agency, pursuant to
which such law firm sought permission under the California Labor Code Private
Attorney General Act of 2004 to file a complaint against the Company, a wholly
owned subsidiary of the Company and ALS and one of its subsidiaries, on behalf
of a class of employees currently and formerly employed by the defendants in
California (the employees had not been named). On January 30, 2008, James W.
Brown (“Brown”), on behalf of himself and all others similarly situated, on
behalf of the general public and as an “aggrieved employee” under the California
Labor Code Private Attorneys General Act, filed a complaint in the Superior
Court of the State of California (Alameda County) (the “Brown Litigation”)
against ClearPoint Advantage, LLC, a wholly owned subsidiary of CPR (“CP
Advantage”). Agreements related to the acquisition of certain assets and
liabilities of ALS in February 2007 contain provisions under which the Company
may seek indemnification from ALS in connection with the foregoing. the Company
intends to pursue all appropriate claims for such indemnification.




41




The
complaint in the Brown Litigation alleges that CP Advantage (i) failed to pay
overtime compensation to employees who worked a 4/10 schedule but did not work a
4 day week (Calif. Labor Code Section 1194 and 2699(f)) to him and to all
California employees similarly situated, (ii) failed to pay wages at the end of
the assignment (Calif. Labor Code Sections 201, 202 and 203 and 2699(f)) to him
and to all California employees similarly situated, (iii) failed to pay all
wages due on termination (Calif. Labor Code Sections 204 and/or 204b and
2699(f)) to him and to all California employees similarly situated, (iv) failed
to provide proper itemized wage statements (Calif. Labor Code Section 226(a)) to
him and to all California employees similarly situated, and (v) issued checks
with no in-state address for presentation that could not be cashed on demand and
without a fee (Calif. Labor Code Section 212 and 2699(f)) to him and to all
California employees similarly situated. On March 25, 2008, CP Advantage filed
its Answer and denied all claims. In addition, on March 26, 2008, CP Advantage
filed a Notice of Removal to remove the Brown Litigation to the United States
District Court of the Northern District of California. Brown sought unspecified
penalties, damages, interest, attorneys’ fees, costs of suit and, in relation to
the claim regarding the alleged issuance of checks drawn on out-of-state banks
with no in-state address for presentation, an injunction to preclude such
alleged conduct.




On
November 17, 2008, a settlement was reached and as part of such settlement the
lawsuit was dismissed. With respect to the claim relating to the issuance of
paychecks to Brown and other similarly situated California employees with no
in-state address listed on the checks, and which could not be cashed without fee
and on demand, the parties agreed to toll the statute of limitations until June
30, 2010, so that if any action is later brought based on those same claims, the
statute of limitations on those claims will relate back to January 30,
2008.




APX
Holdings, LLC




On or
about March 4, 2008, Richard K. Diamond, Chapter 7 Trustee (“Trustee”) for In Re
APX Holdings, LLC et al., filed a complaint (the “APX Litigation”) in the United
States Bankruptcy Court in California against ASG Northern California, Advantage
Services Group, the Company and MVI, alleging, among other things, that APX
Holdings, LLC and other related parties (collectively, the “Debtors”) made
transfers to the defendants within ninety (90) days prior to March 16, 2006
(Debtors’ petition date).  Plaintiff filed a First Amended Complaint
on March 14, 2008. Plaintiff alleged that those transfers had been made to or
for the benefit of the defendants as creditors of the Debtors and that the
transfers had been made for or on account of an antecedent debt owed by one or
more of the Debtors before the transfers had been made. Plaintiff also alleged
that the transfers had been made while the Debtors were insolvent. Plaintiff
made similar claims alleging that the transfers constituted the receipt of an
interest of the Debtors in property and that the Debtors had received less than
a reasonably equivalent value from the defendants in exchange for the transfers.
Plaintiff claimed that the defendants owed plaintiff at least $506,000 plus
interest and costs and such other relief deemed proper by the
court.




The
Company was named as a defendant in the APX Litigation because it had acquired
certain assets from ALS and its wholly owned subsidiaries, which referred to
themselves collectively as Advantage Services Group, in February 2007. All of
the transfers alleged in the APX Litigation took place almost a year prior to
the time that the Company consummated the asset acquisition with
ALS.




On June
27, 2008, the Trustee filed a Stipulation dismissing the Company and MVI from
the APX Litigation.




Alliance
Consulting Group Associates, Inc.




On April
25, 2008, Alliance Consulting Group Associates, Inc. (“Alliance”) filed a
complaint (the “Alliance Litigation”) in the Court of Common Pleas (Montgomery
County, Pennsylvania), against CPR alleging that CPR failed to honor certain of
its contractual obligations to pay Alliance for services rendered under a
Professional Services Master Agreement, dated June 18, 2007.




42




Namely,
Alliance alleged that CPR failed to pay approximately $600,000. Alliance seeks
damages in the amount of approximately $600,000, plus interest, costs and
attorneys’ fees and such other relief deemed proper by the court.  CPR
filed an answer and counterclaim on June 16, 2008. In its counterclaim, CPR
alleged in a breach of contract claim that Alliance had failed to deliver
certain computer programming and consulting services according to specifications
and that CPR had to expend certain monies to fix the resulting
problems.  On or about July 2, 2008, Alliance answered CPR’s
counterclaim denying the allegations.  This litigation is currently in
the discovery phase.




Sunz
Insurance




On or
about June 25, 2008, Sunz Insurance Company (“Sunz”) filed a complaint (the
“Sunz Litigation”) in the Circuit Court of the 9th Judicial Circuit (Orange
County, Florida), against ASG, LLC d/b/a ClearPoint HR (“ALS”) and CP Advantage.
Sunz claims to have provided workers compensation insurance to ALS and CP
Advantage and that such policy was cancelled on February 22, 2008, for alleged
nonpayment of funds due under the insurance contract. Sunz claims that ALS and
CP Advantage owe in excess of $500,000 under the policy. Sunz, in addition to
damages, seeks pre-judgment interest, court costs, attorneys’ fees and such
other relief deemed proper by the court.  On February 9, 2009, the
court ordered Sunz to conduct an audit of ALS and CP Advantage and set this
matter for mandatory mediation.  On March 3, 2009, ALS and CP
Advantage answered Sunz’s allegations and denied any liability.  On
April 29, 2009, this dispute was settled in mediation, and the Company agreed to
make a cash payment of approximately $49,000 to Sunz and to issue an irrevocable
letter of credit to cover future claims, if any.  The letter of credit
will expire on February 23, 2013.




Select




On July
29, 2008, Select and Real Time, filed a complaint (the “Select Litigation”) in
the Superior Court of California (Santa Barbara County), against the Company
and, on August 1, 2008, Select filed an amended complaint. In the amended
complaint, Select alleged that the Company had entered into an agreement with
Select whereby Select would supply services and personnel for temporary
employment through the Company to its clients. Select claimed that the Company
owed it $1,033,210 for services performed. Select sought, in addition to the
monies claimed, interest, attorneys’ fees and punitive damages of $1,000,000 as
well as court costs and other just and proper relief.




On August
22, 2008, CPR, Real Time and Select entered into the Select Settlement Agreement
pursuant to which each party released the others from all prior, existing and
future claims including, without limitation, the parties’ claims with respect to
the Select Litigation, the Select License Agreement and the Select Subcontract.
Pursuant to the Select Settlement Agreement, the parties also agreed (i) that
CPR would retain $900,000 paid to it under the Select License Agreement; (ii) to
allocate between them amounts paid or payable with respect to certain client
accounts; (iii) to execute an amendment to the Select Subcontract; and (iv) that
Select would file the required documents to dismiss the Select Litigation with
prejudice. In addition, the parties agreed not to commence any future action
arising from the claims released under the Select Settlement Agreement and to
terminate the Select License Agreement effective August 22, 2008. On August 28,
2008, this lawsuit was dismissed with prejudice.




Leon
R. Cobaugh




On or
about October 20, 2008, Leon R. Cobaugh (“Cobaugh”) filed a complaint in the
Circuit Court for Chesterfield County of the Commonwealth of Virginia against
the Company and Quantum. The complaint alleges that, pursuant to the Stock
Purchase Agreement dated December 30, 1986 (“SPA”), Cobaugh retired from his
positions as an officer, director and employee of AIDE Management Resources
Corporation, the prior name of Quantum, and sold his stock in such entity to the
remaining stockholders in exchange for lump sum payments and monthly payments
from Quantum for the rest of Cobaugh’s life. The Company acquired all of the
outstanding stock of Quantum on July 29, 2005. Upon its acquisition of Quantum,
the Company assumed Quantum’s obligations under the SPA. Cobaugh alleged that
the Company had failed to make the required monthly payments due under the SPA
beginning June 1, 2008 and sought to recover a minimum of $200,000 as may be
adjusted based on the Consumer Price Index under the SPA.  This
dispute was settled on January 22, 2009.  Pursuant to the settlement
agreement among the parties, past due amounts to Cobaugh were paid, and the
Company agreed to continue making future payments as required by the
SPA.




43




XL
Specialty Insurance Company




On
November 10, 2008, XL Specialty Insurance Company (“XL”) filed a complaint in
the Supreme Court of the State of New York (New York County), and, on December
9, 2008, XL filed an amended complaint (the “XL Complaint”) alleging that, among
other things, XL issued workers’ compensation insurance policies to CP Advantage
during 2007 and CP Advantage failed to make certain payments with regard to
claims made against CP Advantage under the policies and maintain collateral
required by the insurance policy documents. XL seeks to recover from the
Company, as a guarantor of CP Advantage’s obligations under the insurance
policies, $745,548, in the aggregate, in connection with certain claims against
and pursuant to the collateral obligations of, CP Advantage. XL, in addition to
damages, seeks pre-judgment interest, attorneys’ fees, costs and expenses and
such other relief deemed proper by the court.  The Company filed its
answer in this matter on February 17, 2009 and contends that a third party is
liable for the payments under the insurance policies pursuant to an agreement
governing the sale of HRO.  This litigation is currently moving into
the discovery phase.




AICCO,
Inc.




On
November 18, 2008, AICCO, Inc. (“AICCO”) filed a complaint in the Court of
Common Pleas of Bucks County, Pennsylvania against the Company alleging that
AICCO agreed to finance premiums of certain insurance policies procured by the
Company pursuant to a certain premium finance agreement among AICCO and the
Company. AICCO claims that the Company breached the terms of such agreement by
failing to make certain installment payments and seeks damages in excess of
approximately $600,000, together with interest and attorney’s fees and
costs.  On December 23, 2008, the Company filed an answer in this
matter and joined two additional defendants on January 23, 2009.  The
joined defendants filed their answer to the Company’s complaint on March 27,
2009.  The additional defendants’ answer included a counter-claim for
indemnification from the Company.  The Company replied to the
additional defendants’ counterclaim on April 27, 2009 denying any
liability.  The Company contends that the joined defendants are liable
for the installment payments pursuant to an agreement governing the sale of
HRO.  The Company alleged breach of contract against the joined
defendants and seeks contribution and indemnification from such parties in this
matter.  This litigation is currently in the discovery
phase.




The
Company has accrued for some, but not all, of these matters where payment is
deemed probable and an estimate or range of outcomes can be made. An adverse
decision in a matter for which the Company has no reserve may result in a
material adverse effect on its liquidity, capital resources and results of
operations. In addition, to the extent that the Company’s management has been
required to participate in or otherwise devote substantial amounts of time to
the defense of these matters, such activities would result in the diversion of
management resources from business operations and the implementation of the
Company’s business strategy, which may negatively impact the Company’s financial
position and results of operations.




The
principal risks that the Company insures against are general liability,
automobile liability, property damage, alternative staffing errors and
omissions, fiduciary liability and fidelity losses. If a potential loss arising
from these lawsuits, claims and actions is probable, reasonably estimable, and
is not an insured risk, the Company records the estimated liability based on
circumstances and assumptions existing at the time. Whereas management believes
the recorded liabilities are adequate, there are inherent limitations in the
estimation process whereby future actual losses may exceed projected losses,
which could materially adversely affect the financial condition of the
Company.




44




Generally,
the Company is engaged in various other litigation matters from time to time in
the normal course of business. Management does not believe that the ultimate
outcome of such matters, either individually or in the aggregate, will have a
material adverse impact on the financial condition or results of operations of
the Company.




NOTE
22 — SUBSEQUENT EVENTS:




On May 7,
2009, the Company entered into the non-binding Term Sheet with ComVest outlining
certain terms of restructuring the Revolver and Term Loan, subject to entering
into final binding agreements between ComVest and the Company.  For
additional information regarding the Term Sheet, see Note 11 – Debt
Obligations.




On May
13, 2009, ComVest executed the Blue Lake Waiver to the Loan Agreement with
ComVest.  For additional information regarding the Blue Lake Waiver,
see Note 11 – Debt Obligations.




On May
18, 2009, the Company and XRoads entered into the XRoads
Amendment.  For additional information regarding the XRoads Amendment,
see Note 18 – Management and Employment Agreements.




On May
19, 2009, ComVest executed the Term Loan Waiver.  For additional
information regarding the Term Loan Waiver, see Note 11 – Debt
Obligations.




45


ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




The
following discussion is intended to assist in the understanding and assessment
of significant changes and trends related to the results of operations and
financial condition of ClearPoint Business Resources, Inc. together with its
consolidated subsidiaries (“ClearPoint” or the “Company”).  The
information contained in Item 2 has been derived from, and should be read in
conjunction with, the consolidated financial statements and notes thereto
included in this Quarterly Report on Form 10-Q and ClearPoint’s Annual Report on
Form 10-K filed with the Securities and Exchange Commission (the
“SEC”).




This
Quarterly Report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).  ClearPoint’s forward-looking statements
include, but are not limited to, statements regarding ClearPoint’s expectations,
hopes, beliefs, intentions or strategies regarding the future.  In
addition, any statements that refer to projections, forecasts or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements.  The words “anticipate,”
“believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,”
“plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and
similar expressions may identify forward-looking statements, but the absence of
these words does not mean that a statement is not forward-looking.




The
forward-looking statements contained in this Quarterly Report on Form 10-Q are
not guarantees of future performance and are based on ClearPoint’s current
assumptions, estimates, forecasts, expectations and beliefs concerning
ClearPoint’s business and their potential effects on ClearPoint and speak only
as of the date of such statement.  ClearPoint has no plans to update
its forward-looking statements to reflect events or circumstances after the date
hereof.  There can be no assurance that future developments affecting
ClearPoint will be those that it has anticipated. These forward-looking
statements involve a number of risks and uncertainties (some of which are beyond
ClearPoint’s control) that may cause actual results or performance to be
materially different from those expressed or implied by these forward-looking
statements. These risks and uncertainties include, but are not limited to, the
following factors:




·
            ClearPoint’s
      ability to continue as a going concern and obtain adequate
      financing;




·
            ClearPoint’s
      ability to service and repay outstanding debt
  obligations;




·
            limitations
      that ClearPoint’s outstanding debt obligations impose on cash flow
      available for operations;




·
            ClearPoint’s
      ability to facilitate the market acceptance of the iLabor Network and
      increase revenues; and




·
            the
      effect of the current economic
downturn.




The
foregoing risks are not exhaustive.  The “Risk Factors” set forth in
Part I, Item 1A. of ClearPoint’s Annual Report on Form 10-K filed for the year
ended December 31, 2008 and this Quarterly Report on Form 10-Q include
additional risk factors which could impact ClearPoint’s business and financial
performance.  Should one or more of these risks or uncertainties
materialize, or should any of ClearPoint’s assumptions prove incorrect, actual
results may vary in material respects from those projected in these
forward-looking statements.  You should not place undue reliance on
forward-looking statements.




Information
contained in this section and in Part II of this Quarterly Report on Form 10-Q
and expressed in U.S. dollars is presented in thousands (000s), except for per
share data and as otherwise noted.  Percentages contained in this
section were calculated, where possible, using the information from ClearPoint’s
consolidated financial statements, and not the rounded information provided in
this section. As a result, these percentages may differ slightly from
calculations obtained based upon the rounded figures provided in this section
and totals contained in this section may be affected by rounding.




46




Overview




ClearPoint
is a workplace management solutions company. ClearPoint focuses its services on
helping companies manage their contingent labor needs. Through the iLabor
Network, ClearPoint provides services to clients ranging from small businesses
to Fortune 500 companies. The iLabor Network specializes in the highly
transactional “go to work” or “on-demand” segment of the temporary labor market.
ClearPoint considers the hospitality, distribution, warehouse, manufacturing,
logistics, transportation, convention services, hotel chains, retail and
administrative sectors among the segments best able to be served by the iLabor
Network.




During
the fiscal year ended December 31, 2008, ClearPoint began to transition its
business model from a temporary staffing provider through a network of
branch-based offices or franchises to a provider that manages clients’ temporary
staffing needs through its open Internet portal-based iLabor Network. Under its
new business model, ClearPoint acts as a broker for its clients and network of
temporary staffing suppliers.




ClearPoint
derives its revenues from the following sources: (i) royalty payments related to
client contracts which ClearPoint subcontracted or sold to other providers of
temporary staffing services; (ii) revenues generated by the iLabor Network; and
(iii) revenues related to VMS.




Historically,
ClearPoint has funded its cash and liquidity needs through cash generated from
operations and debt financing.  ClearPoint incurred net losses of
approximately $638 and $31,697 for the three months ended March 31, 2009 and
2008, respectively. ClearPoint is highly leveraged and has very limited
financial resources.  At March 31, 2009, ClearPoint had cash and cash
equivalents of $319, $26,319 of total liabilities and accumulated deficit of
approximately $55,129.




In 2008,
ClearPoint defaulted on its debt obligations to M&T and had to restructure
its outstanding debt obligations. Effective June 20, 2008, ClearPoint replaced
M&T with ComVest as its senior lender and entered into subordination
agreements with its other lenders.  As a result of its liquidity
problems as well as the absence of firm commitments for any additional
financing, ClearPoint’s independent registered public accounting firm included
an explanatory paragraph in its report on ClearPoint’s consolidated financial
statements for the fiscal year ended December 31, 2008 regarding ClearPoint’s
ability to continue as a going concern.




During
the three months ended March 31, 2009, CPR did not make certain required
payments under the Blue Lake Note and Loan Agreement with
ComVest.  See “—Liquidity and Capital Resources—Debt Restructuring –
M&T and ComVest” and “—Notes Issued to Blue Lake and Sub Noteholders” for
additional information regarding such defaults and waivers from ComVest relating
to the defaults.




ClearPoint
included a “going concern” note in its condensed interim consolidated financial
statements for the fiscal quarter ended March 31, 2009 (see Note 1 of the Notes
to the Condensed Interim Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q).  As of March 31, 2009, cash projected
to be generated from operations will not be sufficient to fund operations and
meet debt repayment obligations during the next twelve months.  In
order to meet its cash and liquidity needs, ClearPoint will be required to raise
additional financing or restructure existing debt, and there is no assurance
that ClearPoint will be successful in obtaining additional financing or
restructuring existing debt obligations. If ClearPoint cannot generate
sufficient cash from operations, raise additional financing or restructure
existing debt, there is substantial doubt about the ability of ClearPoint to
continue as a going concern for the next twelve months.




47


Demand
for ClearPoint’s staffing services has been adversely affected by the general
level of economic activity and rising unemployment in the United
States.  During the current economic downturn, some of ClearPoint’s
clients have been reducing their temporary labor spending as part of a general
cost reduction strategy.  In addition, some of ClearPoint’s clients
have limited their utilization of temporary employees before laying off regular
full-time employees.  Generally, ClearPoint has experienced less
demand for its services and more competitive pricing pressure during this period
of economic downturn, which has adversely affected its business, financial
condition and results of operations.  ClearPoint is dependent on its
approved staffing supplier base to fill open positions posted by its
clients.  If due to the economic downturn, some of ClearPoint’s
suppliers curtail their operations or are otherwise unable to fill sufficient
open positions posted by its clients, ClearPoint may be unable to compete
effectively and which could materially adversely affect its business, financial
condition and results of operations.




In
addition, ClearPoint continues to face significant business challenges related
to:




·
            its
      ability to service and repay its outstanding debt
    obligations;




·
            limitations
      imposed by the outstanding debt obligations on the cash flow available for
      its operations; and




·
            its
      ability to facilitate the market acceptance of the iLabor
      Network.




In the
face of these challenges, ClearPoint expects to focus on:




·
            evaluating
      additional sources of financing or restructuring its existing debt
      obligations in the event that iLabor penetration and adoption does not
      meet ClearPoint’s operating cash
requirements;




·
            maintaining
      and enhancing the functionality of its iLabor Network for current and
      prospective clients;




·
            continuing
      to expand its supplier base to provide more extensive market coverage;
      and




·
            increasing
      sales and marketing efforts through direct and indirect
      channels.




Application
of Critical Accounting Policies and Estimates




ClearPoint’s
discussion and analysis of its financial condition and results of operations are
based on ClearPoint’s condensed interim consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of financial statements in
conformity with these principles in the United States of America requires
ClearPoint to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the financial statements and also affect the amounts of
revenues and expenses reported for each period. Actual results could differ from
those which result from using the estimates.




The SEC
defines “critical accounting policies” as those that require application of
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.




ClearPoint’s
significant accounting policies are described in Note 2 to the Notes to
ClearPoint’s Consolidated Financial Statements for the year ended December 31,
2008, as set forth in the Annual Report on Form 10-K filed with the SEC on April
15, 2009 and additional policies are described in Note 3 to the Notes to the
Condensed Interim Consolidated Financial Statements included in this Quarterly
Report on Form 10-Q.




Seasonality


ClearPoint
experiences fluctuation in revenue and operating results based on a number of
factors, including, but not limited to, competition in its markets, availability
of qualified personnel and the personnel demands of its clients. Historically,
ClearPoint has experienced a rise in demand from its transportation and retail
clients in the third and fourth quarter due to the increase in the shipment of
products for the holiday season. The first quarter has been traditionally the
slowest quarter from a revenue perspective due to national holidays and client
planning cycles. Inclement weather can cause a slowdown in ClearPoint’s business
due to business shutdowns by its clients. This revenue seasonality will also
typically impact ClearPoint’s profitability as most operating expenses are
spread evenly throughout the year.




48




Results
of Operations (Unaudited)




Three
Months Ended March 31, 2009 Compared to


Three
Months Ended March 31, 2008 (000’s)




The
following summarizes select items of ClearPoint’s condensed interim consolidated
statements of operations for the three months ended March 31, 2009 and March 31,
2008:




$ (000’s)
              
              2009
              
              
              % of
                  Revenue
              
              
              2008
              
              
              % of
                  Revenue
              
              
              % ChangeRevenues
              
              $
              1,237
              
              
              
              100.0
              %
              
              $
              24,220
              
              
              
              100.0
              %
              
              
              (94.9
              )%Cost
      of services
              
              
              —
              
              
              
              —
              
              
              
              22,744
              
              
              
              93.9
              %
              
              NAGross
      profit
              
              
              1,237
              
              
              
              100.0
              %
              
              
              1,476
              
              
              
              6.1
              %
              
              
              (16.1
              )%SG&A
      expenses
              
              
              1,190
              
              
              
              96.2
              %
              
              
              5,558
              
              
              
              23.0
              %
              
              
              (81.1
              )%Restructuring
      expense
              
              
              —
              
              
              
              —
              
              
              
              2,100
              
              
              
              8.7
              %
              
              NALoss
      on disposal of fixed assets
              
              
              5
              
              
              
              0.4
              %
              
              
              —
              
              
              
              —
              
              
              NAImpairment
      of goodwill
              
              
              —
              
              
              
              —
              
              
              
              16,822
              
              
              
              69.5
              %
              
              NADepreciation
      and amortization expense
              
              
              222
              
              
              
              17.9
              %
              
              
              1,144
              
              
              
              4.7
              %
              
              
              (80.6
              )%(Loss)
      from operations
              
              
              (180
              )
              
              
              (14.5
              )%
              
              
              (24,148
              )
              
              
              (99.7
              )%
              
              
              (99.3
              )%Other
      income (expense)
              
              
              (23
              )
              
              
              1.9
              %
              
              
              (1,995
              )
              
              
              (8.2
              )%
              
              NAInterest
      (expense)
              
              
              (435
              )
              
              
              (35.2
              )%
              
              
              (548
              )
              
              
              (2.3
              )%
              
              
              (20.6
              )%Loss
      before income taxes
              
              
              (638
              )
              
              
              (51.6
              )%
              
              
              (26,961
              )
              
              
              (110.2
              )%
              
              
              (97.63
              )%Income
      tax expense
              
              
              —
              
              
              
              —
              
              
              
              5,007
              
              
              
              20.7
              %
              
              NANet
      (loss)
              
              $
              (638
              )
              
              
              (51.6
              )%
              
              $
              (31,698
              )
              
              
              (130.9
              )%
              
              
              (97.99
              )%




Net
Revenues




ClearPoint’s
revenues for the three months ended March 31, 2009 and 2008 were $1,237 and
$24,220, respectively, which represented a decrease of $22,983 or 94.9%. This
decrease was due primarily to the changes in ClearPoint’s business model, as
described in the Overview above, which resulted in all revenues being recognized
on a net fee basis such as franchise, royalty and license
fees.  ClearPoint recorded $1,142 of royalties in net revenue during
the three months ended March 31, 3009 and $1,302 in franchise fees for the three
months ended March 31, 2008.




Cost
of Services and Gross Profit




Cost of
services consists of direct labor expenses for time charged directly to a client
and related payroll taxes, unemployment and workers’ compensation insurance
expenses, employee benefits, and other out-of-pocket expenses directly
associated with the performance of the service to the client. ClearPoint’s cost
of services for the three months ended March 31, 2009 and 2008 was $0 and
$22,744, respectively, which represented a decrease of $22,744.  Under
the new business model, there are no cost of services
rendered.  ClearPoint’s gross profit for the three months ended March
31, 2009, and 2008 was $1,237 and $1,476, respectively, which represented a
decrease of $239 or 16.1%. This decrease was due primarily to the changes in
ClearPoint’s business model, as described in the Overview above, which resulted
in more revenues being recognized on a net fee basis such as royalty and license
fees with no cost of services. As a percentage of revenue for the three months
ended March 31, 2009 and 2008, ClearPoint’s gross profit was 100% and 6.1%
respectively.




49




Selling,
General, Administrative and Restructuring Expenses




ClearPoint’s
selling, general, administrative (“SG&A”) and restructuring expenses for the
three months ended March 31, 2009 and 2008 were $1,190 and $5,558, respectively,
which represented a decrease of $4,368 or 78.6%. The decrease was a direct
result of ClearPoint’s 2008 restructuring and franchising of many of its
branches, as ClearPoint had substantially less SG&A expenses associated with
ClearPoint’s branch based operations during the three months ended March 31,
2009, which include expenses related to salaries, employee benefits and
rents.  The Company also recognized $200 in recovery of bad debt for
the three months ended March 31, 2009.  During the three months ended
March 31, 2008, ClearPoint recorded  a provision for amounts due from
the former franchisees that are no longer in operation and allowances for
doubtful accounts totaling $1,639. As a percentage of revenue for the three
months ended March 31, 2009 and 2008, SG&A expenses were 96.2% and 23%
respectively, largely as a result of reduced revenue due to the recording of
franchise royalties on a net basis.




Effective
March 12, 2008, ClearPoint initiated an additional restructuring program of its
field and administrative operations in order to further reduce its ongoing
SG&A expenses. As part of the restructuring program, ClearPoint closed its
remaining branch and administrative office in Florida and eliminated
approximately 20 positions.  Restructuring expenses related to these
closures and position eliminations during the three months ended March 31, 2009
and 2008, were $0 and $2,100, respectively, which represented a decrease of
$2,100.  The decrease was related to the fact that ClearPoint did not
initiate an additional reserve in 2009 to further reduce its ongoing SG&A
expenses.




Impairment
of Goodwill and Depreciation and Amortization Expense




ClearPoint’s
depreciation and amortization expense for the three months ended March 31, 2009
and 2008 were $222 and $1,144, respectively, which represented a decrease of
$922 or 80.6%. For the three months ended March 31, 2008, ClearPoint recorded an
impairment charge of $1,022 related to fixed assets as a result of the
termination of franchise agreements described in Note 15 and Note 4 of the Notes
to the Condensed Interim Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q. The Company removed $1,838 of fixed assets and
$816 of accumulated depreciation as a result of this impairment. The Company
also recorded an impairment of goodwill for the three months ended March 31,
2008 of $16,822 based upon management’s determination that the carrying amount
of the goodwill was less than its fair value.




Interest
Expense




ClearPoint’s
interest expense for the three months ended March 31, 2009 and 2008 was $435 and
$548, respectively, which represented a decrease of $113, or 20.6%, primarily
due to the reduced interest cost from the reduction in the company’s overall
debt.




Other
Income or Expense




For the
three months ended March 31, 2009 and 2008, total Other Expense was $23 and
$1,995, respectively. For the three months ended March 31, 2009, the expense was
primarily due to the loss on derivative instruments of $53 partially offset by
other income of $30. During the three months ended March 31, 2008, the expense
was primarily attributable to the recording of a loss on the sale of HRO for
$1,894 and other expense of $139 primarily related to an early termination fee,
which was partially offset by other income of $38.




Net
Loss




ClearPoint’s
net loss for the three months ended March 31, 2009 and 2008 was $638 and
$31,968, respectively, which represented a decrease in the loss of $31,330 or
98.0%. The net loss was due primarily to the reduced gross profit offset by
reduced ongoing SG&A, which included a $200 reduction in the allowance for
doubtful accounts, and interest expenses as a result of the factors discussed
above. The net loss for the three months ended March 31, 2008 was also a result
of a number of non-cash items relating to the 2008 restructuring program of
$2,100, the impairment charge of goodwill of $16,822, the impairment charge of
fixed assets of $1,022, and the recording of a deferred tax assets valuation
allowance of $5,007 in the provision for income taxes for deferred tax benefits
recognized primarily in prior periods.




50




Liquidity
and Capital Resources




General




Historically,
ClearPoint has funded its cash and liquidity needs through cash generated by
operating activities and through various forms of debt and equity financing. As
of March 31, 2009, cash projected to be generated from operations may not be
sufficient to fund operations and meet debt repayment
obligations.  Based on ClearPoint’s cash position and working capital
deficiency, it may need to raise additional financing or restructure existing
debt in order to support its business operations. The amount of financing
required will be determined by many factors, some of which are beyond
ClearPoint’s control, and may require financing sooner than currently
anticipated. ClearPoint has no commitment for any additional financing or debt
restructuring and can provide no assurance that such additional financing or
debt restructuring will be negotiated on terms acceptable to ClearPoint, if at
all. If ClearPoint is unable to generate sufficient cash from operations, obtain
additional financing or restructure existing debt or if such funds cannot be
negotiated on terms favorable to ClearPoint, there is substantial doubt about
the ability of ClearPoint to continue as a going concern (see also Note 1 of the
Notes to the Condensed Interim Consolidated Financial Statements included in
this Quarterly Report on Form 10-Q).




ClearPoint’s
traditional use of cash flow was for funding payroll in advance of collecting
revenue, particularly during periods of economic upswings and growth and during
periods in which sales are seasonally high throughout the year. Temporary
personnel were generally paid on a weekly basis while payments from clients were
generally received 30 to 60 days after billing. ClearPoint’s new iLabor-focused
business model has essentially eliminated these funding requirements since
ClearPoint’s main focus is no longer to act as the employer for the temporary
personnel, but rather to be the facilitator, bringing together clients and
suppliers of temporary labor, via ClearPoint’s iLabor Network. Revenue from
ClearPoint’s iLabor Network where it electronically procures and consolidates
buying of temporary staffing for clients nationally is recognized on a net
basis. ClearPoint contracts directly with clients seeking to procure temporary
staffing services through its iLabor portal. ClearPoint also contracts directly
with, and purchases from, temporary staffing suppliers, the temporary placement
of workers which is then subsequently resold to its clients. There is no
specific fee or other payment charged to ClearPoint’s clients or suppliers in
connection with their respective use of the iLabor Network.




ClearPoint’s
primary cash requirements include the payment of interest and principal on its
debt obligations, payments to suppliers providing temporary staffing services to
ClearPoint’s clients and general working capital of the business.




Cash
and Cash Equivalents and Cash Flows




The table
below sets forth, for the periods indicated, ClearPoint’s beginning balance of
cash and cash equivalents, net cash flows from operating, investing and
financing activities and ClearPoint’s ending balance of cash and cash
equivalents:




Three Months Ended
                  March 31,$
      (000’s)
              
              2009
              
              
              2008(Unaudited)
              
              
              (Unaudited)Cash
      and cash equivalents at beginning of period
              
              $
              960
              
              
              $
              1,994Cash
      provided by (used in) operating activities
              
              
              (758
              )
              
              
              5,747Cash
      (used in) investing activities
              
              
              (45
              )
              
              
              (643
              )Cash
      provided by (used in) financing activities
              
              
              162
              
              
              
              (7,098
              )Cash
      and cash equivalents at end of period
              
              $
              319
              
              
              $
              —




51




Three
Months Ended March 31, 2009 and 2008




Net cash
provided by (used in) operating activities was ($758) and $5,747 for the three
months ended March 31, 2009 and 2008, respectively.  The primary
effect in the three months ended March 31, 2009 of cash used in operating
activities was due to: a book loss of $638; non-cash items of: depreciation and
amortization expense of $223; partially offset by a reduction in the provision
for doubtful accounts of $200; interest expense related to the original issue
discount and warrant liability of $148; issuance of warrants relating to a
consulting agreement of $11; a loss on derivatives of $53; stock based
compensation of $23; and loss on disposal of fixed assets of $5; and cash items
of: a decrease in accounts receivable of $320 related to collections and a
decrease in new revenues related to the adoption of new iLabor business; a
decrease in unbilled revenue of $66; a decrease in prepaid expenses and other
current assets of $270; a decrease in accounts payable of $230; a decrease in
accrued expenses of $296; a decrease in accrued payroll taxes of $171; a
decrease in deferred revenue of $249; a decrease in accrued restructuring costs
of $30; and a decrease in retirement benefits of $62.




During
the three months ended March 31, 2008, net cash provided by operating activities
was due to the following major components: a book loss of ($31,698); an increase
in deferred income tax of $5,007; depreciation and amortization expense of
$1,143, largely due to the write-off of fixed assets of $1,022 associated the
discontinuance of branch operations; the impairment of goodwill of $16,822; a
provision for doubtful accounts of $222; a provision for franchise receivables
of $1,638; loss on the sale of ClearPoint HRO, LLC of $1,894; issuance of
warrants to sub-debt holders of $50; and stock based compensation of $15; and
cash items of: a decrease in accounts receivable of $11,142 due to the
franchising of ClearPoint’s branches  and related decrease associated
with the adoption of ClearPoint’s new technology based iLabor business model; a
decrease in unbilled revenue of $1,876; an increase in prepaid expenses of $555;
increase in other assets of $9; a decrease in accrued expenses of $1,604; a
decrease in accrued payroll taxes of $1,792; an increase of accrued
restructuring costs of $1,498.




Net cash
(used in) investing activities was ($45) and ($643) for the three months ended
March 31, 2009 and 2008, respectively.  The primary use of cash for
investing activities for the three months ended March 31, 2009 was for the
purchase of fixtures and software.  The primary use of cash for
investing activities for the three months ended March 31, 2008 was for
capitalized software development of $643.




Net cash
provided by (used in) financing activities was $162 and ($7,098) for the three
month periods ended March 31, 2009 and 2008, respectively.  The
following primary financing activities in the three months ended March 31, 2009
resulted in the net cash provided of $162: repayments of ComVest debt of $536;
borrowings against ClearPoint’s credit facility of $1,150; repayments of long
term M&T debt of $193; repayments of Blue Lake debt of $100; repayments on
notes payable of $159.




The
primary financing activities for the three months ended March 31, 2008 were:
repayments of long-term debt to M&T of $250; repayments on the M&T
credit facility of $6,848; proceeds from the stockholders note of $800; and
assumption of the stockholders note of $800.




Debt
Restructuring – M&T and ComVest




M&T


On
February 23, 2007, pursuant to a Credit Agreement (the “M&T Credit
Agreement”), ClearPoint entered into credit facilities with M&T consisting
of a $20,000 revolving credit facility (“M&T Revolver”) expiring in February
2010 and a $3,000 term loan (“M&T Term Loan”) expiring in February 2012. In
July 2007, ClearPoint amended the M&T Credit Agreement to increase the
M&T Term Loan to $5,000 in the First Amendment to the M&T Credit
Agreement. On March 21, 2008, ClearPoint entered into the Second Amendment to
M&T Credit Agreement, dated as of March 21, 2008, among ClearPoint and
M&T. Pursuant to the Second Amendment, the M&T Credit Agreement was
amended, among other matters, as follows: (i) the aggregate amount of the
revolving credit commitments was gradually reduced from $20,000 to $15,000 at
March 21, 2008 and $4,000 at June 30, 2008; (ii) the applicable margin, which is
a component of the interest rate calculations, was increased to (a) 3.5% and
1.25% for any revolving credit loan that is a “Eurodollar Loan” and a “Base Rate
Loan”, respectively (as defined in the M&T Credit Agreement), and (b) 4.5%
and 2.25% for any M&T Term Loan that is a Eurodollar Loan and a Base Rate
Loan, respectively; (iii) the applicable commitment fee percentage, which is
included in the calculations of commitment fees payable by ClearPoint on the
amount of the unused revolving credit commitments, was increased to 0.25%; and
(iv) the covenants related to the ratios of total debt or senior debt, as
applicable, to modified EBITDA were amended to lower the ratios as of September
30, 2008.




52




On April
14, 2008, ClearPoint entered into a Waiver (the “M&T Waiver”) to the M&T
Credit Agreement. Pursuant to the M&T Waiver, the required lenders under the
M&T Credit Agreement waived compliance with certain financial covenants set
forth in the M&T Credit Agreement for the period ended December 31, 2007. In
connection with the M&T Waiver, ClearPoint paid a $100 fee to M&T.
ClearPoint was not in compliance with the financial and reporting covenants at
March 31, 2008. ClearPoint did not receive a waiver for such non-compliance from
M&T. On May 9, 2008, ClearPoint received a letter from M&T indicating,
among other matters, that the principal amount of revolving credit loans
outstanding under the M&T Credit Agreement shall be limited to a maximum
amount of $7,300 for the period ended May 16, 2008.




On May
21, 2008, ClearPoint received a notice of default from M&T in connection
with the M&T Credit Agreement. ClearPoint defaulted on its obligations under
the M&T Credit Agreement as a result of its failure to comply with financial
covenants contained in the M&T Credit Agreement, including obligations to
maintain certain leverage and fixed charge coverage ratios. As a consequence of
the default, M&T exercised its right to declare all outstanding obligations
under the credit facilities to be immediately due and payable and demanded the
immediate payment of approximately $12,800, consisting of approximately (i)
$7,400 under the M&T Revolver; (ii) $3,900 under the M&T Term Loan; and
(iii) $1,500 under a letter of credit. Also pursuant to the notice of default,
M&T exercised its right to terminate the M&T Revolver and the M&T
Term Loan and to terminate its obligation to make any additional loans or issue
additional letters of credit to ClearPoint.




ClearPoint
and M&T entered into a Loan Modification and Restructure Agreement dated
June 20, 2008 (the “M&T Restructure Agreement”) pursuant to which the
parties agreed to: (i) consolidate the certain obligations owing to M&T (the
“M&T Obligations”), (ii) reduce the carrying amount of the consolidated
obligations from $10,900, which consisted of the M&T Revolver and Term Loan
of approximately $7,000 and $3,900, respectively (net of additional cash
payments made during negotiations), to $8,600, (iii) subordinate the M&T
Obligations to ClearPoint’s obligations to ComVest (the “ComVest Obligations”)
and (iv) permit ClearPoint to repay the M&T Obligations on a deferred term
basis. The M&T Restructure Agreement provides that on the earlier of the
first day of the calendar month following ClearPoint’s full satisfaction of the
ComVest Obligations or January 1, 2011 (the “Obligations Amortization Date”),
ClearPoint shall repay a total of $3,000 in principal amount (the “M&T
Deferred Obligations”) to M&T in 36 equal monthly payments plus interest on
the outstanding balance of such amount at a rate of 5% per annum, subject to
increase to 12% per annum upon occurrence of certain agreement termination
events and Spring Back Events, as defined below. In the event of a sale of
substantially all of ClearPoint’s or any subsidiary’s assets, a capital infusion
or an infusion of subordinated indebtedness, ClearPoint must prepay the M&T
Deferred Obligations by an amount equal to 25% of such proceeds as are payable
to ComVest under such circumstances.




The
$8,600 being paid to M&T is comprised of the following components: $3,000
note payable; guarantee of $3,000 of accounts receivable; pledging a minimum of
a $1,000 tax refund; $1,000 cash payment made at the time of closing of the
ComVest transactions described below; and $600 of the $1,500 certificate of
deposit held by M&T.


ClearPoint
issued to M&T warrants to purchase its common stock of which warrants to
purchase 1,200,000 shares of common stock have an exercise price of $0.01 per
share and warrants to purchase 300,000 shares of common stock have an exercise
price of $1.00 per share (collectively, the “M&T Warrants”).  In
accordance with SFAS No. 150, the fair value of the warrants has been classified
as a liability since M&T has the right to put the M&T Warrants back to
ClearPoint in exchange for a cash settlement of $1.00 per share. At March 31,
2009, the balance sheet included a warrant liability of $1,266 related to the
fair value of M&T Warrants (see Note 11 of the Notes to the Condensed
Interim Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q). The gain on restructuring of debt of $687 recorded in the year ended
December 31, 2008 reflected the reduction in principal carrying balance offset
by the fair value of the M&T Warrants and other direct costs. ClearPoint
entered into a registration rights agreement dated June 20, 2008 to register the
shares of common stock underlying the M&T Warrants.




53




In
addition, prior to the Obligations Amortization Date, ClearPoint must pay
M&T: (i) cash proceeds arising out of certain of its and its subsidiaries’
accounts receivable in an amount not less than $3,000 and (ii) existing and
future federal and state income tax refunds of not less than $1,000 due or which
become due to ClearPoint for any period prior to January 1, 2008.  In
the event such payments by ClearPoint are less than the stated minimum amounts,
such shortfall will be added to the M&T Deferred
Obligations.  Excesses of either amounts paid by ClearPoint will be
remitted to ClearPoint and/or applied to the M&T Deferred Obligations in
accordance with the M&T Restructure Agreement.  ClearPoint
remitted all applicable federal and state income tax refunds to M&T required
under the M&T Restructure Agreement.  At March 31, 2009, income
tax refunds of $1,024 resulting from net operating loss carry-backs and $88
refunds of overpayments were received by ClearPoint and remitted to
M&T.  At March 31, 2009, ClearPoint remitted to M&T a total of
approximately $2,417, which was comprised of approximately $1,305 applied to the
$3,000 accounts receivable target and $1,112 applied to the $1,000 federal and
state income tax refund target.  The excess of $112 over the $1,000
tax refund target will be credited to the M&T Deferred
Obligations.  At March 31, 2009, the outstanding balance related to
the $3,000 accounts receivable target was $1,583.




M&T
issued (i) a certain certificate of deposit to ClearPoint in the amount of
$1,500 (the “COD”) and (ii) a certain standby letter of credit for the account
of ClearPoint in favor of Ace Risk Management (the “Ace Letter of Credit”). On
June 27, 2008, M&T liquidated the COD and applied $600 to ClearPoint’s
outstanding obligations. To the extent M&T is required to make payments
under the Ace Letter of Credit in excess of $900 at any time, such excess shall
be added to the M&T Deferred Obligations. Excesses of such amount paid will
be remitted to ClearPoint and/or applied to the M&T Deferred Obligations in
accordance with the M&T Restructure Agreement.




Pursuant
to the M&T Restructure Agreement, ClearPoint must comply with various
covenants while the M&T Deferred Obligations are outstanding and provided
that (i) no bankruptcy or insolvency event has taken place and (ii) ClearPoint
and/or its subsidiaries have not terminated operation of their business without
the prior written consent of M&T (each being a “Spring Back Event”). Such
covenants include, but are not limited to: delivery to M&T of financial and
other information delivered to ComVest; restrictions on the aggregate
compensation which may be paid to the Chief Executive Officer and Chief
Financial Officer of ClearPoint; limitations on dividends and distributions of
cash or property to equity security holders of ClearPoint and/or redemptions or
purchases of capital stock or equity securities of other entities; and
restrictions on collateralizing subordinated indebtedness. At March 31, 2009,
ClearPoint was in compliance with all applicable covenants set forth in the
M&T Restructure Agreement.




The
M&T Restructure Agreement provides that ClearPoint may continue to pay
regularly scheduled payments (but not prepayments or accelerated payments) on
(i) existing subordinated indebtedness, except to the extent prohibited by the
ComVest transaction documents and (ii) the amended and restated note issued to
Blue Lake dated April 14, 2008. For each $50 paid on account of the note issued
to Blue Lake, Michael Traina, ClearPoint’s Chairman of the board of directors
and Chief Executive Officer, and Christopher Ferguson, a principal stockholder
of ClearPoint, shall, on a several basis, be liable as sureties for the M&T
Deferred Obligations, each in the amount of $10, subject to an aggregate amount
of each surety’s liability of $150.




54




The
M&T Restructure Agreement lists various agreement termination events
including, but not limited to: default in payment of principal or interest or
any other obligations when due and payable under the M&T Restructure
Agreement; default in the observance of any covenant which is not cured within
30 days; and occurrence of an event of default under the ComVest Loan Agreement,
as defined below, which is not cured pursuant to the applicable grace or notice
period. Upon the occurrence of an agreement termination event, and at all times
during the continuance thereof, the M&T Deferred Obligations are accelerated
and become immediately due and payable. In addition, upon the occurrence of any
Spring Back Event, the amount equal to (a) all outstanding principal balance of
the M&T Obligations, together with accrued and unpaid interest thereon and
costs and expenses reimbursable pursuant to the M&T Credit Agreement less
(b) any amount received by M&T pursuant to the M&T Restructure Agreement
on account of the M&T Deferred Obligations or the M&T Obligations (the
“Spring Back Amount”) is automatically accelerated and becomes immediately due
and payable. Pursuant to one of the conditions to closing the transaction with
M&T, as set forth in the M&T Restructure Agreement, ClearPoint paid
$1,000 to M&T for application to the M&T Obligations.




The
M&T Restructure Agreement does not terminate or extinguish any of the liens
or security interests granted to M&T pursuant to the M&T Credit
Agreement and related documents.




ComVest




On June
20, 2008, ClearPoint entered into a Revolving Credit and Term Loan Agreement
(the “ComVest Loan Agreement”) with ComVest. Pursuant to the ComVest Loan
Agreement, ComVest extended to ClearPoint: (i) a secured revolving credit
facility for up to $3,000 (the “ComVest Revolver”) and (ii) a term loan (the
“ComVest Term Loan” and, together with the ComVest Revolver, the “ComVest
Loans”) in the principal amount of $9,000, of which $1,000 is treated as an
original issue discount, and ClearPoint received $8,000 in respect of the
ComVest Term Loan. ClearPoint also issued to ComVest a warrant to purchase
2,210,825 shares of common stock at an exercise price of $0.01 per warrant (the
“ComVest Warrant”). The ComVest Warrant was valued at $634 and treated as a
discount to the long term portion of the debt and will be amortized over the
life of the long term debt. ClearPoint entered into a registration rights
agreement dated June 20, 2008 to register the shares of common stock underlying
the ComVest Warrant.




The
maximum amount that may be outstanding under the ComVest Revolver is initially
$3,000 (the “ComVest Revolver maximum”). Effective as of the first day of each
calendar month beginning January 1, 2010, the ComVest Revolver maximum will be
reduced by an amount equal to 5.5% of the ComVest Revolver maximum in effect for
the previous month. To the extent the amounts outstanding under the ComVest
Revolver exceed the ComVest Revolver maximum, ClearPoint must make a payment to
ComVest sufficient to reduce the amount outstanding to an amount less than or
equal to the ComVest Revolver maximum. ClearPoint may borrow under the ComVest
Revolver from time to time, up to the then applicable ComVest Revolver maximum.
The amounts due under the ComVest Revolver bear interest at a rate per annum
equal to the greater of: (i) the prime rate of interest announced by Citibank,
N.A. plus 2.25% or (ii) 7.25%. At March 31, 2009, the interest rate on the
$2,150 outstanding under the ComVest Revolver was 7.25% and the interest rate on
$7,118 outstanding under the ComVest Term Loan was 10% per annum. The ComVest
Loans provide that the stated interest rates are subject to increase by 500
basis points during the continuance of an event of default under the ComVest
Loan Agreement.




Amounts
due under the ComVest Loans are payable monthly, beginning July 1, 2008. The
outstanding principal amount of the ComVest Term Loan is payable as follows:
$150 on July 1, 2008 and subsequent monthly payments are to be in an amount
equal to the greater of (i) $200 less the amount of interest accrued during the
preceding month or (ii) the amount equal to (a) the lesser of $450 or certain
royalties, fees and/or other such payments collected by ClearPoint during the
preceding month less (b) the amount of interest accrued during the preceding
month (but not greater than the principal balance of the ComVest Term Loan). The
installments under (ii) above are payable monthly starting August 1, 2008,
including December 1, 2010. The final installment due and payable on December
31, 2010 will be in an amount equal to the entire remaining principal balance,
if any, of the ComVest Term Loan.




As of
March 31, 2009, ClearPoint was in default on principal installment payments due
for February and March, 2009 under the ComVest Term Loan in the amount of $420,
in the aggregate.  ClearPoint was also in default on principal
installment payments for April, 2009 of $255 under the ComVest Term
Loan.  The failure to make such payments constitutes an event of
default under the ComVest Loan Agreement.  ClearPoint is obligated to
pay a default interest rate of 500 basis points over the prevailing rate on the
foregoing amounts, which difference between the default rate and the prevailing
rate was not paid as of the date of filing this Quarterly Report on Form
10-Q.  On May 19, 2009, ComVest executed a waiver letter (the “Term
Loan Waiver”) related to the ComVest Loan Agreement.  Pursuant to the
Term Loan Waiver, ComVest waived the foregoing defaults, provided that ComVest
reserved the right to collect at a later time, but not later than the maturity
date of the ComVest Term Loan under the ComVest Loan Agreement, the increased
interest ComVest was permitted to charge during the continuance of such
defaults.




55




On
January 29, 2009, in order to assist ClearPoint in making the payments under the
XRoads Agreement, as defined below, ComVest and ClearPoint entered into
Amendment No. 1 to the ComVest Term Loan, pursuant to which the installments due
and payable under the ComVest Term Loan on each of February 1, 2009, March 1,
2009, April 1, 2009 and May 1, 2009, respectively, shall be reduced by an amount
equal to the positive difference (if any) of (i) the lesser of (a) $50 or (b)
the amount paid or payable by ClearPoint to XRoads during the immediately
preceding calendar month pursuant to the XRoads Agreement, minus (ii) the amount
(if any) by which the aggregate Royalties collected during the immediately
preceding calendar month exceeded $450. After the effective date of any
termination of the XRoads Agreement, no reduction in any subsequent installments
shall be permitted and, notwithstanding any extension beyond the initial four
month term of the XRoads Agreement, ComVest shall not be obligated to reduce any
further installments.  For additional information regarding the XRoads
Agreement, as amended, see “—Agreement with XRoads Solutions.”  The
Amendment No. 1 to the ComVest Term Loan also contains ComVest’s acknowledgement
and consent to ClearPoint’s amendment of the payment terms and payment schedule
of the note payable to the former shareholders of StaffBridge, Inc. as set forth
in the Debt Extension Agreement dated December 31, 2008.  For
additional information regarding such note, see “—StaffBridge.”




On May 7,
2009, ClearPoint entered into a non-binding term sheet (the “Term Sheet”) with
ComVest outlining certain terms of restructuring the ComVest Revolver and
ComVest Term Loan, subject to entering into final binding agreements between
ComVest and ClearPoint.  The Term Sheet contemplates converting the
existing credit facility into a senior secured revolving credit facility (the
“New Revolver”) in the principal amount of $10,500.




On May
13, 2009, ComVest executed a waiver letter (the “Blue Lake Waiver”) to the
ComVest Loan Agreement.  Pursuant to the Blue Lake Waiver, effective
May 1, 2009, ComVest waived the cross-default provision which was triggered by
CPR’s failure to make certain payments due under a note issued to Blue Lake and
all remedies available to ComVest as a result of the failure to make such
payments provided that such payments due under the Blue Lake Note are paid
solely in Escrow Shares.  Blue Lake
and ClearPoint are discussing whether the issuance of the Escrow Shares will
constitute the full satisfaction of CPR’s obligations under the Blue Lake
Note.  For additional information regarding the Blue Lake Note, see
“—Notes Issued to Blue Lake and Sub Noteholders.”




As
provided by the ComVest Loan Agreement and the ComVest Loans, ComVest may
collect amounts due under the ComVest Loans from a “lockbox” account of
ClearPoint and/or charge the ComVest Revolver for such amounts. Royalty payments
received primarily from StaffChex and Select are segregated and solely used for
the repayment of the ComVest Term Loan. To the extent that royalty receipts from
these sources do not meet the minimum threshold of $200 per month, ClearPoint
must make up the difference from its operating cash. In the event that royalty
receipts from these sources exceed $450 in a given month, ClearPoint may utilize
the excess for operations or offset amounts owed on the ComVest Revolver at its
discretion.  For the three months ended March 31, 2009, ClearPoint
remitted approximately $1,882 of principal and interest payments, in the
aggregate, to ComVest, all of which was derived from its royalty
receipts.  As of March 31, 2009 ClearPoint has remitted, since
inception of the loan, $3,612 of principal and interest payments, in the
aggregate, to ComVest, of which $3,489 was derived from its royalty receipts and
$123 was derived from its other operations.




The
ComVest Loans mature on December 31, 2010 subject to certain prepayment
requirements related to the ComVest Term Loan. The ComVest Loan Agreement
provides that, subject to certain exceptions, ClearPoint must prepay the ComVest
Term Loan (i) in full upon certain transactions involving the sale or issuance
of the majority of the outstanding stock of ClearPoint, change of control of
ClearPoint or the sale of all or a material portion of ClearPoint’s assets or
(ii) in part to the extent of 30% of proceeds received from sales of certain
securities of ClearPoint. The outstanding borrowings under the ComVest Loan
Agreement are secured by all the assets of ClearPoint.




56




Beginning
with the fiscal quarter ending December 31, 2009, ClearPoint must maintain
certain fixed charge coverage ratios and must make all necessary adjustments to
its system of internal control over financial reporting and disclosure controls
and procedures no later than December 31, 2009. Until the ComVest Obligations
have been paid in full and the ComVest Revolver has been terminated, ClearPoint
must comply with various notice and other reporting covenants including, but not
limited to, providing notice to ComVest upon the occurrence of certain events,
periodically furnishing certain financial statements and other information to
ComVest, maintaining its books and records and permitting inspection of such
materials by ComVest upon reasonable request. The ComVest Loan Agreement also
provides that until the ComVest Obligations have been satisfied in full,
ClearPoint must provide written notice to ComVest of all meetings of the board
of directors and actions proposed to be taken by written consent and must permit
a representative of ComVest to attend or participate in any such meeting as a
non-voting observer. At March 31, 2009, ClearPoint was in compliance with the
applicable notice and reporting requirements required under the ComVest Loan
Agreement.




The
ComVest Loan Agreement also requires ClearPoint to obtain ComVest’s written
consent, until the ComVest Obligations have been satisfied in full, in
connection with certain transactions including, but not limited to, incurrence
of additional indebtedness or liens on ClearPoint’s assets; sales of assets;
making investments in securities or extension of credit to third parties;
purchase of property or business combination transactions; declaration or
payment of dividends or redemption of ClearPoint’s equity securities; payment of
certain compensation to ClearPoint’s executive officers; changing ClearPoint’s
business model or ceasing substantially all of its operations for a period
exceeding 10 days; sale of accounts receivable; amendment of ClearPoint’s
organizational documents; certain transactions with ClearPoint’s affiliates; and
making certain capital expenditures.




The
ComVest Loan Agreement lists various events of default including, but not
limited to: default in the payment of principal or interest under the ComVest
Obligations or in the observance or performance of any covenant set forth in the
ComVest Loan Agreement; default of ClearPoint or any of its subsidiaries under
any indebtedness exceeding $100; occurrence of certain bankruptcy or insolvency
events; and common stock of ClearPoint ceasing to be listed on a national
securities exchange or quoted on The OTC Bulletin Board for more than 30
consecutive days. Upon occurrence of an event of default, and at all times
during the continuance of an event of default, (i) the ComVest Obligations
become immediately due and payable, both as to principal, interest and other
charges, without any requirement for demand or notice by ComVest, and bear
interest at the default rates of interest as described above; (ii) ComVest may
file suit against ClearPoint and its subsidiaries under the ComVest Loan
Agreement and/or seek specific performance thereunder; (iii) ComVest may
exercise its rights under a collateral agreement against the assets of
ClearPoint and its subsidiaries; and (iv) the ComVest Revolver may be
immediately terminated or reduced, at ComVest’s option.


In
connection with the ComVest Loan Agreement described above, ComVest entered into
a Subordination and Intercreditor Agreement (the “ComVest-M&T Agreement”)
dated June 20, 2008 with M&T. The ComVest Loans issued to ClearPoint
pursuant to the ComVest Loan Agreement have effectively replaced M&T with
ComVest as a senior lender of ClearPoint. Pursuant to the ComVest-M&T
Agreement, the parties confirmed their agreements and understandings with
respect to the relative priorities of their respective claims and liens against
ClearPoint. The ComVest-M&T Agreement provides that, subject to certain
exceptions, M&T may not receive payment on certain of the M&T
Obligations, as described in the ComVest-M&T Agreement, or seek enforcement
against the collateral securing the M&T Obligations from ClearPoint or any
other person, other than from Messrs. Traina and/or Christopher Ferguson
pursuant to personal guarantees, until the ComVest Obligations have been
satisfied in full. In addition, the ComVest-M&T Agreement provides for
priorities with respect to the various components of collateral securing
ClearPoint’s obligations to the parties and sets forth certain restrictions on
the parties with respect to collection of such obligations.




57








ClearPoint
utilized the proceeds of the ComVest Loans to repay approximately $1,050
pursuant to the M&T Restructure Agreement owed to M&T and approximately
$530 in closing costs and expenses.




ALS




On
February 23, 2007, ClearPoint acquired certain assets and liabilities of ALS
(see Note 4 of the Notes to the Condensed Interim Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q). The purchase price
of $24,400 consisted of cash of $19,000, the ALS Note of $2,500 at an interest
rate of 7%, shares of common stock with a value of $2,500 (439,367 shares) and
the assumption of approximately $400 of current liabilities. ALS’ stockholders
may also receive up to two additional $1,000 payments in shares of common stock
based on financial and integration performance metrics of ClearPoint in calendar
years 2007 and 2008. No such payments have been made to date. The balance of
this note payable at March 31, 2009 was not repaid due to the pending litigation
with TSIL (see Part II, Item 1 “Legal Proceedings” of this Quarterly Report on
Form 10-Q). In connection with the transaction with ComVest described above, on
June 20, 2008, ClearPoint entered into the ALS Agreement with ALS and certain
other parties whereby the parties agreed, among other things: (i) to execute the
ALS Subordination Letter dated June 20, 2008 (defined below); (ii) to amend the
ALS Note to provide for an outstanding principal amount of $2,156 (remaining
principal balance of $2,023 plus accrued interest of $133), which balance was
$2,156 at March 31, 2009, bearing interest at a rate of 5% per annum payable in
24 equal monthly installments, payable as permitted pursuant to the ALS
Subordination Letter; (iii) that ClearPoint would issue 350,000 shares of common
stock to ALS (the “ALS Shares”) in accordance with the acquisition of ALS; (iv)
that ALS may defend and indemnify ClearPoint in connection with the TSIL
Litigation and (v) that the parties will take all appropriate actions to dismiss
their claims against each other in connection with the TSIL Litigation. On
November 21, 2008, a joint stipulation for voluntary dismissal was filed with
the court pursuant to which ClearPoint and ALS jointly dismissed such claims
with prejudice. On December 8, 2008, the court entered an order dismissing all
claims between ClearPoint and ALS with prejudice. ClearPoint valued the shares
issued at their fair market value as of the date of issuance of $102 and
recorded that amount as expense.  ClearPoint has no future obligation
to issue any additional shares of common stock to ALS.




Pursuant
to a Subordination Letter sent by ALS to ComVest, M&T and ClearPoint dated
June 20, 2008 (the “ALS Subordination Letter”), ALS agreed that ClearPoint may
not make and ALS may not receive payments on the ALS Note, provided however,
that (i) upon payment in full of all obligations under the ComVest Term Loan so
long as ClearPoint is otherwise permitted to make such payments, ClearPoint
shall make monthly interest payments on the outstanding principal balance of the
ALS Note and (ii) upon payment in full of the M&T Obligations, ClearPoint
shall make 24 equal monthly installments on the ALS Note, as amended pursuant to
the ALS Agreement described above.  The transaction did not classify
as a restructuring of debt.  For the three months ended March 31, 2009
and 2008, ClearPoint accrued $27 and $10, respectively, in interest expense
associated with the ALS Note.  As of March 31, 2009, ClearPoint had
$86 of accrued interest payable recorded on its consolidated balance sheet
associated with the ALS Note.




58




StaffBridge




On August
14, 2006, ClearPoint acquired 100% of the common stock of StaffBridge for $233
in cash and the StaffBridge Note payable of $450 due December 31, 2007. The
StaffBridge Note, due to the StaffBridge Shareholders, bears interest at 6% per
annum and is payable quarterly. On December 31, 2007, the StaffBridge Note was
amended to extend the maturity date to June 30, 2008. In addition, the amount of
StaffBridge Note was increased to $487 to include accrued interest and the
interest rate was increased to 8% per annum payable in monthly installments
starting January 15, 2008. ClearPoint incurred an origination fee equal to 4% of
the principal amount payable in the form of 9,496 shares of common stock. As of
June 30, 2008, ClearPoint did not pay any monthly interest installments pursuant
to the amended StaffBridge Note. The failure to pay such interest installments
would permit noteholders to declare all amounts owing under the StaffBridge Note
due and payable. On August 13, 2008, the outstanding accrued interest of $24 was
paid and ComVest waived any default related thereto effective June 30, 2008. The
balance of the StaffBridge Note payable at March 31, 2009 was $177 and, as of
March 31, 2009, ClearPoint paid all monthly interest installments pursuant to
the amended StaffBridge Note, amounting to $38.




In
addition, in connection with the financing transaction with ComVest, on June 30,
2008, the StaffBridge Shareholders executed a certain Debt Extension Agreement
(the “Debt Extension Agreement”) and entered into a Subordination Agreement (the
“StaffBridge Subordination Agreement”) with ComVest and CPR.




Pursuant
to the Debt Extension Agreement, the StaffBridge Shareholders agreed that, in
connection with the receipt from ClearPoint of $150 payable for work performed
by TSP, the StaffBridge Note was amended, effective June 30, 2008, to extend the
maturity date to December 31, 2008 and to reduce the outstanding principal
amount to approximately $337.




Pursuant
to the StaffBridge Subordination Agreement, the StaffBridge Shareholders agreed
to subordinate ClearPoint’s obligations to them under the StaffBridge Note to
the ComVest Obligations. So long as no event of default under the ComVest Loan
Agreement has occurred, ClearPoint may continue to make scheduled payments of
principal and accrued interest when due in accordance with the StaffBridge Note.
In the case of an event of default under the ComVest Loan Agreement, ClearPoint
may not pay and the StaffBridge Shareholders may not seek payment on the
StaffBridge Note until the ComVest Obligations have been satisfied in full. The
StaffBridge Subordination Agreement also sets forth priorities among the parties
with respect to distributions of ClearPoint’s assets made for the benefit of
ClearPoint’s creditors.




Effective
December 31, 2008, the StaffBridge Note was further amended pursuant to a second
Debt Extension Agreement dated December 31, 2008 to provide for the following
payment schedule of the outstanding amount due under the StaffBridge Note: $100
was paid on or about December 31, 2008 and the remaining balance shall be paid
in four equal quarterly payments of $59, beginning on March 31, 2009 and ending
on December 31, 2009.




Notes
Issued to Blue Lake and Sub Noteholders




Blue
Lake




On March
1, 2005, CPR issued a promissory note to Blue Lake in the amount of $1,290 which
was due March 31, 2008 (the “Blue Lake Note”). Interest of 6% per annum was
payable quarterly. This note has been guaranteed by Michael Traina and
Christopher Ferguson and was primarily used to assist ClearPoint in funding its
workers’ compensation insurance policy. The Blue Lake Note matured on March 31,
2008. Effective March 31, 2008, CPR amended and restated the Blue Lake Note and
extended its maturity date under an agreement dated as of March 31, 2008, by and
between CPR and Blue Lake (the “Blue Lake Agreement”). Pursuant to the Blue Lake
Agreement, on April 14, 2008, CPR and Blue Lake entered into an Amended and
Restated Promissory Note (the “Amended Blue Lake Note”), with a principal amount
of $1,290, which was due and payable as follows: (i) $200 was paid on April 8,
2008, (ii) $50 is payable on the first business day of each calendar month for
12 consecutive months (totaling $600 in the aggregate), the first payment to
occur on May 1, 2008 and the last to occur on April 1, 2009, and (iii) on April
30, 2009, CPR was obligated to pay to Blue Lake the balance of the principal
amount, equal to $490, plus accrued interest. The interest rate was increased
from 6% to 10% per annum. ClearPoint agreed to issue 900,000 shares (“Escrow
Shares”) of common stock in the name of Blue Lake to be held in escrow, pursuant
to an escrow agreement, as security for the payment of the principal amount and
interest under the Amended Blue Lake Note.




59




CPR did
not make the required payments of: (i) $50 in January, 2009 and (ii) $490, plus
accrued interest of $33, in April, 2009 under the Blue Lake Note.  On
May 1, 2009, ClearPoint received a notice from Blue Lake indicating CPR’s
failure to pay such amounts and demanding that ClearPoint immediately pay a
total of approximately $573.  Pursuant to the terms of the Blue Lake
Note, CPR’s failure to make the foregoing payments when due constitutes an event
of default if not cured within five business days of receipt of written notice
from Blue Lake.  ClearPoint did not cure such default on or prior to
May 8, 2009.  On May 7, 2009, Blue Lake requested disbursement of the
Escrow Shares and, pursuant to the Escrow Agreement, the escrow agent is
obligated to deliver the Escrow Shares to Blue Lake 10 calendar days after
receipt of the request for disbursement.




An event
of default under the Blue Lake Note triggers a cross-default provision pursuant
to the ComVest Loan Agreement.  In addition, a default under the
ComVest Loan Agreement would trigger a cross-default provision pursuant to the
M&T Restructure Agreement, unless the default under the ComVest Loan
Agreement is waived in writing by ComVest.  On May 13, 2009, ComVest
executed the Blue Lake Waiver to the Loan Agreement, pursuant to which,
effective May 1, 2009, ComVest waived the cross-default provision which was
triggered by CPR’s failure to make the payments due under the Blue Lake Note and
all remedies available to ComVest as a result of the failure to make such
payments, provided that such payments due under the Blue Lake Note are paid
solely in Escrow Shares.  Blue Lake
and ClearPoint are discussing whether the issuance of the Escrow Shares will
constitute the full satisfaction of CPR’s obligations under the Blue Lake
Note.




Sub
Noteholders




On March
1, 2005, CPR issued a 12% Amended and Restated Note in the original principal
amount of $300 due March 31, 2008 to Fergco Bros. LLC (“Fergco”), a New Jersey
limited liability company of which Christopher Ferguson owns a twenty-five
percent (25%) ownership interest. The balance of this note payable at March 31,
2009 was $300 (“$300 Note”).




On March
1, 2005, CPR issued 12% Amended and Restated Notes in the aggregate original
principal amount of $310 due March 31, 2008 to several ClearPoint stockholders
who do not individually own 5% or more of the outstanding securities of
ClearPoint and who are not members of the immediate family of any ClearPoint
director or executive officer, except of $100 owed to Alyson Drew, the spouse of
Parker Drew, a director of ClearPoint. The balance of these notes payable at
March 31, 2009 was $250 (“$250 Notes”).  The holders of the $300 Note
and the $250 Notes are collectively referred to as the Sub
Noteholders.




Effective
March 31, 2008, CPR amended and restated the $300 Note and the $250 Notes
(collectively “Sub Notes”), and extended their maturity dates to March 31, 2009
under the amended sub notes, dated March 31, 2008 and issued by CPR to each Sub
Noteholder (collectively, the “Amended Sub Notes”). All sums outstanding from
time to time under each Amended Sub Note bear the same interest of 12% per annum
as under the Sub Note, payable quarterly, with all principal payable on the
maturity date. CPR’s failure to make any payment of principal or interest under
the Amended Sub Note when such payment is due constitutes an event of default,
if such default remains uncured for 5 business days after written notice of such
failure is given to CPR by the Sub Noteholder. Upon an event of default and at
the election of the Sub Noteholder, the Sub Note, both as to principal and
accrued but unpaid interest, will become immediately due and payable. As of
March 31, 2009, ClearPoint made all required interest payments on the Amended
Sub Notes.




In
consideration of each Sub Noteholder agreeing to extend the maturity date of the
Sub Note, ClearPoint issued warrants (“Initial Sub Note Warrants”) to the Sub
Noteholders to purchase, in the aggregate, 82,500 shares of common stock (the
“Sub Note Warrant Shares”) at an exercise price of $1.55 per share. The Initial
Sub Note Warrant is immediately exercisable during the period commencing on
March 31, 2008 and ending on March 31, 2010. CPR had the right in its sole
discretion, to extend the maturity date of the Amended Sub Notes to March 31,
2010, and in connection with such extension, the Sub Noteholders had the right
to receive additional Sub Note Warrants (the “Additional Sub Note Warrants”) to
purchase, in the aggregate, an additional 82,500 shares of common
stock.




60




On June
20, 2008, CPR exercised its right to extend the maturity date of the Amended Sub
Notes to March 31, 2010 and, in connection with such extension, the Sub
Noteholders received Additional Sub Note Warrants to purchase 82,500 Sub Note
Warrant Shares at an exercise price of $1.55 per share. The Additional Sub Note
Warrant is immediately exercisable during the period commencing on June 20, 2008
and ending on March 31, 2011. The exercise price and the number of Sub Note
Warrant Shares are subject to adjustment in certain events, including a stock
split and reverse stock split.




In
connection with the transaction with ComVest described above, ComVest entered
into a Subordination Agreement dated June 20, 2008 (the “Noteholder
Subordination Agreement”) with each of the Sub Noteholders and CPR. Pursuant to
the Noteholder Subordination Agreement, the Sub Noteholders agreed to
subordinate ClearPoint’s obligations to them under the Amended Sub Notes to the
ComVest Obligations. So long as no event of default under the ComVest Loan
Agreement has occurred, ClearPoint may continue to make scheduled payments of
principal and accrued interest when due in accordance with the Sub Notes, as
amended. In the case of an event of default under the ComVest Loan Agreement,
ClearPoint may not pay and the Sub Noteholders may not seek payment on the Sub
Notes, as amended, until the ComVest Obligations have been satisfied in full.
The Noteholder Subordination Agreement also sets forth priorities among the
parties with respect to distributions of ClearPoint’s assets made for the
benefit of ClearPoint’s creditors.




On
February 22, 2008, CPR issued promissory notes (the “Promissory Notes”), in the
aggregate principal amount of $800, with $400 to each of Michael Traina and
Christopher Ferguson in consideration for loans totaling $800 made to CPR. The
terms of the Promissory Notes issued to Messrs. Traina and Ferguson are
identical. The principal amount of each Promissory Note is $400, they bear
interest at the rate of 6% per annum, which will be paid quarterly, and they are
due on February 22, 2009.  The Promissory Notes are subordinate and
junior in right of payment to the prior payment of any and all amounts due to
M&T pursuant to the M&T Credit Agreement.




On
February 28, 2008, ClearPoint Workforce, LLC (“CPW”) advanced $800, on behalf of
Optos, to the provider of Optos’ outsourced employee leasing program. The
advanced funds were utilized for Optos’ payroll. In consideration of making the
advance on its behalf, Optos assumed the Promissory Notes, and the underlying
payment obligations, issued by CPR on February 22, 2008.




On June
6, 2008, ClearPoint issued notes (the “Bridge Notes”) to each of Michael Traina,
Parker Drew and TerraNova Partners (collectively, the “Bridge Lenders”) in the
principal amounts of $104, $50 and $100, respectively. During the course of
negotiations with ComVest, Mr. Traina agreed to loan an additional $5 to
ClearPoint. TerraNova Partners, ClearPoint’s principal stockholder, is 100%
owned by Vahan Kololian, ClearPoint’s lead director and principal stockholder.
Mr. Kololian also controls 100% of the voting interest and 55% of the non-voting
equity interest in the general partner of TerraNova Partners.




The
Bridge Notes contained identical terms. The Bridge Notes were unsecured and
payable on demand. No interest accrued on the unpaid principal balance of the
Bridge Notes until demand. After demand, the Bridge Notes would bear interest at
an annual rate of 5%.


On June
26, 2008, ClearPoint issued amended and restated Bridge Loans (the “Amended
Bridge Notes”) to each Bridge Lender. The Amended Bridge Notes contained
identical terms and provided that (i) the principal amount of the Amended Bridge
Notes will bear interest at a rate of 8% per annum, payable quarterly and (ii)
ClearPoint had the right to repay the Amended Bridge Notes in shares of common
stock at a price equal to the closing price of the common stock on June 26,
2008. The Amended Bridge Notes did not contain the provision stating that the
principal balance will bear interest only upon demand for payment by the Bridge
Lender, as provided in the Bridge Note. Mr. Drew’s Amended Bridge Note was
repaid in full and Mr. Traina was repaid $5 during the quarter ended June 30,
2008. The balance of Mr. Traina’s loan was repaid in July 2008. On August 12,
2008, ClearPoint’s board of directors approved the payment of the Amended Bridge
Note issued to TerraNova in 204,082 shares of common stock.




61




Transactions
Related to Transition from Temporary Staffing Business Model to iLabor Network
Model




HRO




On
February 7, 2008, CPR entered into a Purchase Agreement effective as of February
7, 2008 (the “HRO Purchase Agreement”) with HRO, CPR’s wholly owned subsidiary,
and AMS Outsourcing, Inc. (“AMS”). Pursuant to the HRO Purchase Agreement, CPR
sold all of the issued and outstanding securities of HRO to AMS for an aggregate
purchase price payable in the form of an earnout payment equal to 20% of the
earnings before interest, taxes, depreciation and amortization of the operations
of HRO for a period of twenty four (24) months following February 7, 2008. AMS
was obligated to pay such fee in arrears on the first business day of every
month. Unpaid fees were subject to interest at a rate of 1.5% per month. As of
March 31, 2009, AMS did not pay to CPR the earnout payments required under the
HRO Purchase Agreement.




ClearPoint
ceased recording revenues related to the HRO Purchase Agreement during the year
ended December 31, 2008.




KOR and
StaffChex




On August
30, 2007, ClearPoint entered into an agreement (the “KOR Agreement”) with KOR, a
Florida limited liability company controlled by Kevin O’Donnell, a former
officer of ClearPoint, pursuant to which ClearPoint granted to KOR an exclusive
right and license (i) to set up and operate, in parts of northern California and
Florida, a franchise of ClearPoint’s system and procedures for the operation of
light industrial and clerical temporary staffing services and (ii) to use in
connection with the operation certain of ClearPoint’s proprietary intellectual
property. The KOR Agreement replaced the agreement between ClearPoint and KOR
entered on July 9, 2007. In consideration for the grant and license, KOR was
required to pay to ClearPoint, on a weekly basis, a royalty equal to 4.5% of all
gross revenues earned by KOR from its operations. KOR also agreed to pay
ClearPoint, on a weekly basis, a royalty equal to 50% of the net income from
KOR’s operations. Through this relationship KOR operated and managed up to
twelve of ClearPoint’s former branches. The KOR Agreement was terminated on
March 5, 2008 as described below.




On
February 28, 2008, CPR entered into a Purchase Agreement (the “StaffChex
Purchase Agreement”) with StaffChex subject to certain conditions for the
completion of the transaction. Under the StaffChex Purchase Agreement, StaffChex
assumed certain liabilities of CPR and acquired from CPR all of the Customer
Account Property, as defined in the StaffChex Purchase Agreement, related to the
temporary staffing services serviced by (i) KOR, pursuant to the KOR Agreement,
dated August 30, 2007, and (ii) StaffChex Servicing, LLC (“StaffChex Servicing”)
pursuant to an Exclusive Supplier Agreement, dated September 2, 2007. In
consideration for the Customer Account Property acquired from CPR, StaffChex
issued to CPR 15,444 shares of common stock and CPR is entitled to receive an
additional 15,568 shares of StaffChex common stock, pursuant to the earnout
provisions set forth in the StaffChex Purchase Agreement, which have been
met.  As a result, CPR is entitled to 31,012 shares (16.4%) of
StaffChex’s outstanding stock, of which 15,568 shares have not yet been
issued.




In
addition, CPR entered into an iLabor agreement with StaffChex (the “StaffChex
iLabor Agreement”) whereby StaffChex agreed to process its temporary labor
requests through iLabor and to pay to CPR a percentage (the “Royalty”) (as of
March 31, 2009, the percentage was 1.25%) of StaffChex’s total collections from
its total billings for temporary staffing services provided to ClearPoint’s
clients through the iLabor Network or otherwise. On March 5, 2008, CPR completed
the disposition of all of the Customer Account Property related to the temporary
staffing services formerly provided by StaffChex Servicing and KOR, agreements
with whom were terminated on February 28, 2008 and March 5, 2008, respectively.
ClearPoint did not incur any early termination penalties in connection with such
terminations.




62




On March
16, 2009, CPR and StaffChex entered into Amendment No. 1 to the StaffChex iLabor
Agreement pursuant to which the payment terms of the StaffChex iLabor Agreement
were restated as follows: for weekly collections of less than $1,400, the
Royalty is one and one-quarter percent (1.25%) and for weekly collections of
$1,400 or more, the Royalty is two percent (2%).  If collections for a
calendar year exceed $110,000, the Royalty will be one and one-half percent
(1.5%) for each dollar exceeding $110,000 and if such collections exceed
$150,000, the Royalty will be one and one-quarter percent (1.25%) for each
dollar exceeding $150,000.  Unpaid Royalties shall bear interest at
the rate of one and one-half percent (1.5%) per month.  Weekly
payments commenced on March 18, 2009.  In addition, StaffChex agreed
to make 104 weekly payments of $4 followed by 52 weekly payments of $3 for
past-due Royalties owed through February 28, 2009.  Such additional
payments will commence on June 3, 2009.




TZG, Optos and
Select




On August
13, 2007, ClearPoint entered into an Agreement with TZG, a Delaware limited
liability company controlled by J. Todd Warner, a former officer of ClearPoint,
pursuant to which ClearPoint granted to TZG an exclusive right and license (i)
to set up and operate a franchise of ClearPoint’s system and procedures for the
operation of transportation and light industrial temporary staffing services and
(ii) to use in connection with the operation certain of ClearPoint’s proprietary
intellectual property. In consideration for the grant and license, TZG was
required to pay to ClearPoint, on a weekly basis, a royalty equal to 6% of all
gross revenues earned by TZG from the operation. Through this relationship, TZG
operated and managed up to twenty-five of ClearPoint’s branches. The Agreement
with TZG was terminated on February 28, 2008, as described below.




On
February 28, 2008, CPR and its subsidiary, CPW, entered into a Licensing
Agreement (the “Optos Licensing Agreement”) with Optos, of which Christopher
Ferguson is the sole member. Pursuant to the Optos Licensing Agreement,
ClearPoint (i) granted to Optos a non-exclusive license to use the ClearPoint
Property and the Program, both as defined in the Optos Licensing Agreement,
which include certain intellectual property of CPR, and (ii) licensed and
subcontracted to Optos the client list previously serviced by TZG, pursuant to
the TZG Agreement, dated August 13, 2007 and all contracts and contract rights
for the clients included on such list. In consideration of the licensing of the
Program, which is part of the ClearPoint Property, CPR was entitled to receive a
fee equal to 5.2% of total cash receipts of Optos related to temporary staffing
services. With CPR’s consent, Optos granted, as additional security under
certain of its credit agreements, conditional assignment of Optos’ interest in
the Optos Licensing Agreement to its lender under such credit agreements. The
foregoing agreement with TZG was terminated on February 28, 2008 in connection
with the Optos Licensing Agreement. ClearPoint did not incur any early
termination penalties in connection with such termination.




On April
8, 2008, the Optos Licensing Agreement was terminated. In consideration for
terminating the Optos Licensing Agreement, CPR and Optos have agreed that there
will be a net termination fee for any reasonable net costs or profit incurred,
if any, when winding up the operations associated with termination. This fee is
estimated to be $500 and has been recorded as an expense. The payment of the net
termination fee will be in the form of cash and shares of common stock of
ClearPoint.




On April
8, 2008, CPR entered into the Select License Agreement dated April 8, 2008 with
Select. The initial term of the Select License Agreement was for a period of six
years. Pursuant to the Select License Agreement, CPR granted to Select a
non-exclusive, non-transferable right and license to use the iLabor Network as a
hosted front-office tool. CPR exclusively retains all right, title and interest
in and to the iLabor Network. In addition, Select agreed to become a supplier of
temporary personnel to third party clients through the iLabor Network and to
fulfill agreed-upon orders for such personnel accepted by Select through the
iLabor Network. CPR also agreed to permit Select to use the iLabor Network to
find and select third-party, temporary personnel suppliers to fulfill orders for
Select’s end-user client. In consideration of the license granted, Select agreed
to pay a non-refundable fee equal to $1,200, of which $900 was paid on April 8,
2008 and $300 was due on July 1, 2008, but was not paid. The July payment was
waived and incorporated into the Select Settlement Agreement described below.
Under the License Agreement, if Select used the iLabor Network to find and
select third-party, temporary personnel suppliers to fulfill orders for Select’s
end-user clients, then the parties would split the net amount billed to the
end-user clients less the amount paid to such vendors.




63




Effective
March 30, 2008, CPR entered into the Select Subcontract with Select. The Select
Subcontract expires April 7, 2013. Pursuant to the Select Subcontract, CPR
subcontracts to Select the client contracts and contract rights previously
serviced on behalf of CPR by other entities (the “Customers”). Pursuant to the
Select Subcontract, the parties agree that Select will directly interface with
the Customers, but at no time will CPR relinquish its ownership, right, title or
interest in or to its contracts with the Customers (the “Contracts”). Subject to
certain exceptions, upon expiration of the Select Subcontract, CPR will abandon
such rights in the Contracts and Select may solicit the Customers serviced under
the Select Subcontract. Select is responsible for invoicing the Customers and
for collection of payment with regard to services provided to Customers by
Select. During each one year period of the term of the Select Subcontract,
Select was obligated to pay CPR 10% of such year’s annual gross sales, not
exceeding $36,000 annually in gross sales, generated by the client contracts as
well as certain other revenue generated by location (the “Subcontract
Fee”).




On July
29, 2008, Select, together with Real Time, initiated the Select Litigation
claiming that ClearPoint owed it $1,033 for services performed.  For
additional information regarding the Select Litigation, see “Note 20 –
Litigation” to ClearPoint’s condensed interim consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.




On August
22, 2008, CPR, Real Time and Select entered into the Select Settlement Agreement
pursuant to which each party released the others from all prior, existing and
future claims including, without limitation, the parties’ claims with respect to
the Select Litigation, the Select License Agreement and the Select Subcontract.
Pursuant to the Select Settlement Agreement, the parties also agreed (i) that
CPR would retain $900 paid to it under the Select License Agreement; (ii) to
allocate between them amounts paid or payable with respect to certain client
accounts; (iii) to execute an amendment to the Select Subcontract, as described
below; and (iv) that Select would file the required documents to dismiss the
Select Litigation with prejudice. In addition, the parties agreed not to
commence any future action arising from the claims released under the Select
Settlement Agreement, and on August 28, 2008 this lawsuit was
dismissed.




Also,
pursuant to the Select Settlement Agreement, the parties terminated the Select
License Agreement effective August 22, 2008. There were no termination penalties
incurred in connection with the termination of the Select License
Agreement.




In
connection with the Select Settlement Agreement, on August 22, 2008, CPR and
Select entered into the First Amendment to the Select Subcontract (the
“Subcontract Amendment”). Pursuant to the Subcontract Amendment, the following
changes were made to the Select Subcontract:




·
            The
      Subcontract Fee was amended to provide that Select would pay CPR, for
      twenty-eight consecutive months, 25% of each month’s gross sales generated
      by the Customers and Contracts as well as, without duplication, sales
      generated by certain locations in accordance with the Select Subcontract,
      subject to a maximum fee of $250 per month. The payments are subject to
      acceleration upon occurrence of certain breaches of the Select Subcontract
      or bankruptcy filings by Select.




·
            The
      term of the Select Subcontract was amended to provide that the term will
      expire upon the payment of all fees owed under the Select Subcontract, as
      amended.




64




Advisory
Services Agreement




TerraNova
Management Corp., an affiliate of Mr. Kololian and the manager of TerraNova
Partners (“TNMC”), was retained to provide certain advisory services to
ClearPoint, effective upon the closing of the merger with Terra Nova, pursuant
to the Advisory Services Agreement between TNMC and us, dated February 12, 2007
(the “Initial Agreement”). Pursuant to the Initial Agreement, TNMC provided
services to ClearPoint including: advice and assistance in analysis and
consideration of various financial and strategic alternatives, as well as
assisting with transition services. During the fiscal year ended December 31,
2007, TNMC received a fixed advisory fee of $175 (prorated for a partial year)
for such services. Additionally, ClearPoint recorded approximately $2 for
reimbursement of expenses incurred by TNMC in connection with the Initial
Agreement for the fiscal year ended December 31, 2007. Pursuant to the terms of
the Initial Agreement, it was terminated effective February 11, 2008, however
TNMC continued to provide substantially similar services under substantially
similar terms to ClearPoint on a monthly basis. No payments were accrued or paid
to TNMC for January, 2008.




On June
26, 2008, ClearPoint entered into a new Advisory Services Agreement (the
“Advisory Services Agreement”) with TNMC in order to: (i) provide compensation
to TNMC for its services since the expiration of the Initial Agreement and (ii)
engage TNMC to provide future advisory services. Pursuant to the Advisory
Services Agreement, TNMC is obligated to provide advice and assistance to
ClearPoint in its analysis and consideration of various financial and strategic
alternatives (the “Advisory Services”), however the Advisory Services will not
include advice with respect to investments in securities or transactions
involving the trading of securities or exchange contracts. The Advisory Services
Agreement is effective as of June 26, 2008, continues for a one year term and is
automatically renewed for successive one-year terms unless terminated by either
party by written notice not less than 30 days prior the expiration of the
then-current term.




ClearPoint
agreed to compensate TNMC for services rendered since expiration of the Initial
Agreement and for Advisory Services going forward in accordance with the rates
set forth in the Advisory Services Agreement and to reimburse TNMC for
reasonable travel, lodging and meal expenses relating to the provision of the
Advisory Services. Monthly fees payable to TNMC pursuant to the Advisory
Services Agreement are capped at $50 per month. Fees payable to TNMC may be paid
100% in shares of common stock, at ClearPoint’s option. At ClearPoint’s option,
75% of the fees payable to TNMC beginning in the month of June, 2008 may be paid
in shares of common stock and, with the agreement of TNMC, the remaining 25% may
also be paid in shares of common stock. Shares of common stock made as payments
under the Advisory Services Agreement are priced at the month-end closing price
for each month of services rendered. ClearPoint incurred approximately $293 in
fees owing to TNMC for its services in the fiscal year ended December 31, 2008.
ClearPoint’s board of directors approved payment of $266 for the Advisory
Services in the form of an aggregate of 479,470 shares of common stock for the
months of February through August, 2008 as follows: on August 12, 2008, the
board of directors approved payment for the months of February, March, April,
May and June, 2008 in 417,008 shares of common stock and, on November 7, 2008,
the board of directors approved payment for the months of July and August, 2008
in 62,462 shares of common stock. ClearPoint recorded approximately $99 for
reimbursement of expenses incurred by TNMC in connection with the Advisory
Services provided from February, 2008 through March, 2009.




Agreements
with Christopher Ferguson, Kurt Braun and John Phillips




On
February 28, 2008, Christopher Ferguson resigned as ClearPoint’s and CPR’s
director, President and Secretary in connection with the Optos Licensing
Agreement described above. ClearPoint and Mr. Ferguson entered into the
Separation of Employment Agreement and General Release (the “Ferguson Separation
Agreement”). In consideration for Mr. Ferguson’s agreement to be legally bound
by the terms of the Ferguson Separation Agreement and his release of his claims,
if any, under the Ferguson Separation Agreement, Mr. Ferguson is entitled to be
reimbursed for any health insurance payments for Mr. Ferguson for a period equal
to 52 weeks. Pursuant to the Ferguson Separation Agreement, ClearPoint entered
into a consulting agreement with Mr. Ferguson pursuant to which he was entitled
to be paid $25 per month for twelve (12) months. In return, Mr. Ferguson was
obligated to assist ClearPoint with matters relating to the performance of his
former duties and worked with ClearPoint to effectively transition his
responsibilities. As of March 31, 2009, ClearPoint paid Mr. Ferguson
approximately $58 pursuant to the consulting agreement and recorded a related
party liability of $257 as of March 31, 2009 pursuant to the consulting
agreement.  ClearPoint agreed to resume making payments to Mr.
Ferguson in the first quarter of 2010 and recorded the short and long term
portions of such obligation of $64 and $193, respectively, at March 31,
2009.




65




On June
20, 2008, Kurt Braun, ClearPoint’s former Chief Financial Officer, resigned
effective June 20, 2008. In connection with Mr. Braun’s resignation as
ClearPoint’s Chief Financial Officer, ClearPoint and Mr. Braun entered into a
Separation of Employment Agreement and General Release (the “Braun Separation
Agreement”). In consideration of Mr. Braun’s agreement to be legally bound by
the terms of the Braun Separation Agreement, his release of his claims, if any,
under the Braun Separation Agreement, and his agreement to provide the
transitional services to ClearPoint, ClearPoint has agreed to, among other
things: (i) pay Mr. Braun $75, minus all payroll deductions required by law or
authorized by Mr. Braun, to be paid as salary continuation over 26 weeks
beginning within a reasonable time after the seven day revocation period
following execution of the Braun Separation Agreement; (ii) continue to pay all
existing insurance premiums for Mr. Braun and his immediate family through the
26 week period, and thereafter permit Mr. Braun, at his own expense, to continue
to receive such coverage in accordance with COBRA regulations; (iii) pay Mr.
Braun the balance of any accrued but unused vacation or paid time off hours,
minus all payroll deductions required by law or authorized by Mr. Braun; and
(iv) amend Mr. Braun’s Nonqualified Stock Option Agreement, dated March 30,
2007, to permit Mr. Braun to exercise 90,000 of the 140,000 stock options
granted until March 30, 2010. The balance of the Braun Stock Options expired on
June 20, 2008 in accordance with ClearPoint’s 2006 equity incentive plan. As of
December 31, 2008, ClearPoint paid Mr. Braun approximately $75 as severance
under the Braun Separation Agreement.




On June
20, 2008, John Phillips and ClearPoint entered into an Employment Agreement (the
“Phillips Employment Agreement”). Pursuant to the Phillips Employment Agreement,
Mr. Phillips’ current base salary is $175 per year, which may be increased in
accordance with ClearPoint’s normal compensation review practices. On November
7, 2008, ClearPoint’s board of directors increased Mr. Phillips’ base salary to
$195 effective November 10, 2008. Mr. Phillips is also entitled to participate
in any benefit plan of ClearPoint currently available to executive officers to
the extent he is eligible under the provisions thereof, and ClearPoint will pay
health, dental and life insurance premiums for Mr. Phillips and members of his
immediate family. Mr. Phillips is entitled to receive short- and long-term
disability insurance, and is entitled to three weeks of paid time off per year.
Mr. Phillips may be entitled to discretionary bonuses as determined by
ClearPoint’s Chief Executive Officer, the board of directors and the
Compensation Committee of the board of directors. On August 20, 2008, Mr.
Phillips was granted a stock option to purchase 50,000 shares of common stock.
The option vests in three equal annual installments beginning August 20, 2009
and expires August 20, 2018. The exercise price of the option is $0.30 per
share.




Agreement
with XRoads Solutions




On
January 13, 2009, ClearPoint entered into an agreement with XRoads (the “XRoads
Agreement”). Pursuant to the XRoads Agreement, among other matters, XRoads
agreed to provide the services of Brian Delle Donne to serve as ClearPoint’s
Interim Chief Operating Officer (the “XRoads Engagement”). In such capacity, Mr.
Delle Donne will have direct responsibility over ClearPoint’s day to day
operations and will report to Michael D. Traina, ClearPoint’s Chief Executive
Officer. XRoads will submit bi-weekly oral or written progress reports to
ClearPoint’s board of directors. The term of the XRoads Agreement commenced on
January 13, 2009 and continued until May 13, 2009.  Effective May 14,
2009, the XRoads Agreement was amended pursuant to Amendment No. 1 dated May 18,
2009 (the “XRoads Amendment”).  Pursuant to the XRoads Amendment, the
term of the XRoads Agreement was extended to run from May 14, 2009 through
August 13, 2009 (the “XRoads Extension”).




66


ClearPoint
paid XRoads $50 per month for each of the first four months of Mr. Delle Donne’s
services.  In addition, XRoads is entitled to a monthly fee based upon
achievement of certain increases in earnings before interest, taxes,
depreciation and amortization (“EBITDA”), calculated pursuant to the XRoads
Agreement.  Such fee is equal to 10% of increases in monthly EBITDA
during the term of the XRoads Agreement over EBITDA for the month ended January
31, 2009, capped at $50 per month (the “EBITDA Fee”).  During the
three months ended March 31, 2009, ClearPoint paid no EBITDA Fees to
XRoads.  ClearPoint also agreed to pay reasonable expenses incurred by
XRoads for services related to its services and remitted a retainer in the
amount of $10 to XRoads for such purpose.  During the three months
ended March 31, 2009, pursuant to the XRoads Agreement, ClearPoint paid XRoads a
total of $150 and the $10 retainer for reimbursement of expenses.  Any
amounts not paid when due pursuant to the XRoads Agreement will bear interest at
an annual rate of 12% or the maximum rate allowed by law, whichever is
less.




The terms
and conditions of the original XRoads Agreement which were not affected by the
XRoads Amendment will remain in full force and effect during the XRoads
Extension.  ClearPoint agreed to pay XRoads $45 per 30 day period of
the XRoads Extension and the EBITDA Fee will remain at 10%, calculated in
accordance with the XRoads Amendment, and subject to the cap of $50 per
month.  In addition, pursuant to the XRoads Amendment, in the event
Mr. Delle Donne is hired by ClearPoint, ClearPoint agreed to pay XRoads an
aggregate of $250 as liquidated damages.  This amount is payable in
the form of (i) $100 of cash due on Mr. Delle Donne’s hire date, (ii) a warrant
to purchase ClearPoint’s common stock with a value of $100 based on the closing
price on the day Mr. Delle Donne begins employment and (iii) a $50 promissory
note bearing interest at 8% payable in four quarterly installments at the end of
each calendar quarter following the start of Mr. Delle Donne’s
employment.




In
addition, ClearPoint issued XRoads a warrant to purchase up to 100,000 shares of
common stock at the exercise price of $0.12 per share, exercisable through
December 31, 2010 in connection with the expiration of the XRoads Agreement on
May 13, 2009.  In connection with the XRoads Extension, ClearPoint is
obligated to issue an additional warrant to purchase 75,000 shares of common
stock with an expiration date of April 30, 2011.




In the
event ClearPoint elects to pursue a financing (either in the form of debt or
equity) within one year of the date of the XRoads Agreement, XRoads shall serve
as ClearPoint’s non-exclusive financial advisor for such financing in accordance
with the terms of the XRoads Agreement. If such financing is consummated
pursuant to the terms set forth in the XRoads Agreement, ClearPoint agreed to
pay XRoads a transaction fee based on the type and value of the transaction. The
transaction fee will be prorated accordingly in the event ClearPoint retains an
additional financial advisor in connection with the transaction, but such fee
shall not be less than $75 if XRoads’ efforts result in an bona fide financing
alternative for ClearPoint.




In the
event of a material breach of the XRoads Agreement by either party, including,
but not limited to, ClearPoint’s failure to promptly pay amounts due for
services rendered or for reimbursement of expenses, the non-breaching party may
terminate the Engagement at any time thereafter upon 5 days advance
notice.




Warrants
and Unit Purchase Option Issued in 2005 Public Offering




As a
result of the 2005 public offering, there were 11,040,000 common stock purchase
warrants issued and outstanding at March 31, 2009, which included warrants that
were part of the outstanding units. Each warrant entitled the holder to purchase
one share of common stock at an exercise price of $5.00 per share commencing on
February 12, 2007 (the completion of the merger with Terra
Nova).  Such warrants expired on April 17, 2009 according to their
terms. In connection with the 2005 public offering, an option was issued for
$100 to the representative of the underwriters to purchase 240,000 units at an
exercise price of $9.90 per unit with each unit consisting of one share of
common stock and two common stock purchase warrants. In addition, the warrants
underlying such units were exercisable at $6.65 per share.  The option
expired on April 17, 2009 according to its terms.




67




Income
Taxes




As of
March 31, 2009, ClearPoint had a net current and non-current deferred tax asset
of $0. Deferred tax assets and liabilities are determined based on temporary
differences between income and expenses reported for financial reporting and tax
reporting. ClearPoint is required to record a valuation allowance to reduce its
net deferred tax assets to the amount that it believes is more likely than not
to be realized. In assessing the need for a valuation allowance, ClearPoint
historically had considered all positive and negative evidence, including
scheduled reversals of deferred tax liabilities, prudent and feasible tax
planning strategies and recent financial performance. ClearPoint determined that
the negative evidence, including historic and current losses, as well as
uncertainties related to the ability to utilize federal and state net loss
carry-forwards, outweighed any objectively verifiable positive factors, and as
such, concluded that a full valuation allowance against the deferred tax assets
was necessary.




Contingencies
and Litigation




ClearPoint
is involved in various litigation matters.  For a description of such
matters, see Note 20 to the Notes to the Condensed Interim Consolidated
Financial Statements included elsewhere in this Quarterly Report on Form
10-Q.  ClearPoint has accrued for some, but not all, of these matters
where payment is deemed probable and an estimate or range of outcomes can be
made. An adverse decision in a matter for which ClearPoint has no reserve may
result in a material adverse effect on its liquidity, capital resources and
results of operations. In addition, to the extent that ClearPoint’s management
has been required to participate in or otherwise devote substantial amounts of
time to the defense of these matters, such activities would result in the
diversion of management resources from business operations and the
implementation of ClearPoint’s business strategy, which may negatively impact
ClearPoint’s financial position and results of operations.




The
principal risks that ClearPoint insures against are general liability,
automobile liability, property damage, alternative staffing errors and
omissions, fiduciary liability and fidelity losses. If a potential loss arising
from these lawsuits, claims and actions is probable, reasonably estimable, and
is not an insured risk, ClearPoint records the estimated liability based on
circumstances and assumptions existing at the time. Whereas management believes
the recorded liabilities are adequate, there are inherent limitations in the
estimation process whereby future actual losses may exceed projected losses,
which could materially adversely affect the financial condition of
ClearPoint.




Generally,
ClearPoint is engaged in various other litigation matters from time to time in
the normal course of business. Management does not believe that the ultimate
outcome of such matters, either individually or in the aggregate, will have a
material adverse impact on the financial condition or results of operations of
ClearPoint.




Listing
on Nasdaq




On July
16, 2008, staff of the Nasdaq Listing Qualifications Department notified
ClearPoint that it had determined to delist ClearPoint’s securities from The
Nasdaq Capital Market. On July 23, 2008, ClearPoint requested an appeal of this
determination. On September 9, 2008, the Staff notified ClearPoint that its
appeal had been denied and that trading in ClearPoint’s securities would be
suspended on September 11, 2008. ClearPoint’s securities were delisted from
Nasdaq effective at the opening of the trading session on November 24, 2008.
Effective September 11, 2008, ClearPoint’s common stock was quoted on The OTC
Bulletin Board under the symbol “CBPR.OB.” Effective September 15, 2008,
ClearPoint’s units and warrants were quoted on The OTC Bulletin Board under the
symbols “CBPRU.OB” and “CPBRW.OB,” respectively.  Following the
expiration of ClearPoint’s warrants in April, 2009, ClearPoint’s units and
warrants were no longer quoted on The OTC Bulletin Board.




Recent
Accounting Pronouncements




Recently Adopted
Standards




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. SFAS No. 157 was effective for fiscal
years beginning after November 15, 2007, and all interim periods within those
fiscal years. In February 2008, the FASB released FASB Staff Position (“FSP”)
FSP FAS 157-2 – Effective Date of FASB Statement No. 157, which delayed the
effective date of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years.




68




In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.” This FSP
clarifies the application of SFAS No. 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 was effective upon issuance, including prior periods for
which financial statements had not been issued.  The implementation of
SFAS No. 157 for financial assets and liabilities, effective January 1, 2008,
and FSP FAS 157-2, effective January 1, 2009, did not have a material impact on
ClearPoint’s consolidated financial position and results of
operations.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
required to be reported in earnings at each reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007, the provisions of
which are required to be applied prospectively. The implementation of SFAS No.
159 for financial assets and liabilities, effective January 1, 2008, did not
have an impact on ClearPoint’s consolidated financial position and results of
operations, as management has not elected to measure at fair value any of
ClearPoint’s eligible financial instruments or other items not previously
required to be measured at fair value.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations—a
replacement of FASB Statement No. 141.”  This statement establishes
principles and requirements for how the acquirer recognizes and measures assets
acquired and liabilities assumed in a business combination, as well as, goodwill
acquired and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of a business
combination. In April 2009, the FASB issued FSP SFAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies,” which amends SFAS No. 141(R) to require that contingent
assets acquired and liabilities assumed be recognized at fair value on the
acquisition date if the fair value can be reasonably estimated. If the fair
value cannot be reasonably estimated, the contingent asset or liability would be
measured in accordance with SFAS No. 5, “Accounting for Contingencies,” and FASB
Interpretation No. 14, “Reasonable Estimation of the Amount of a
Loss.”  Both pronouncements were effective for ClearPoint as of
January 1, 2009 and will be applied prospectively to business combinations
entered into on or after that date.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51.” This statement
requires that a noncontrolling interest in a subsidiary be reported as equity
and that the amount of consolidated net income attributable to the parent and to
the noncontrolling interest should be separately identified in the consolidated
financial statements. ClearPoint has applied the provisions of SFAS No. 160
prospectively, as of January 1, 2009, except for the presentation and disclosure
requirements, which were applied retrospectively for all periods presented. The
adoption did not have an impact on ClearPoint’s consolidated financial
statements.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”). The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The adoption of SFAS No. 161, effective January 1, 2009, did not
have a material impact on ClearPoint’s consolidated financial
statements.




69




Standards Issued But Not Yet
Adopted




In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets,” which amends FAS 132(R) to provide guidance
on disclosures about plan assets of a defined benefit pension or other
postretirement plan. These new disclosures will provide users of the financial
statements with an understanding of how investment allocation decisions are
made, the major categories of plan assets, the input and valuation techniques
used to measure the fair value of plan assets, the effects of fair value
measurements and the significant concentrations of risk in regard to the plan
assets. This FSP is effective for fiscal years ending after December 15, 2009.
As the position only requires enhanced disclosures, management believes its
adoption will not have an impact on ClearPoint’s consolidated financial
statements.




In April
2009, the FASB issued FSP FAS 157-4, “Determining Whether a Market Is Not Active
and a Transaction Is Not Distressed”, which supersedes FSP FAS 157-3 This FSP
provides additional guidance in determining whether a market is active or
inactive and whether a transaction is distressed. It is applicable to all assets
and liabilities that are measured at fair value and requires enhanced
disclosures. This FSP is effective for interim and annual reporting periods
ending after June 15, 2009, and shall be applied prospectively. Management
believes that the adoption of FSP FAS 157-4 will not have a material impact on
ClearPoint’s consolidated financial statements.




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” which amends FAS No. 107, “Disclosures
about Fair Values of Financial Instruments,” to require disclosures about fair
value of financial instruments in interim, as well as, annual financial
statements. It also amends APB Opinion No. 28, “Interim Financial Reporting,” to
require those disclosures in all interim financial statements. This FSP is
effective for interim reporting periods ending after June 15, 2009. Management
believes that the adoption of this position will not have a material impact on
ClearPoint’s consolidated financial statements.




ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.




Not
applicable.




ITEM
      4T.
            CONTROLS
      AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this report, our management, under the supervision
and with the participation of the principal executive officer and principal
financial officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act).  Based on this
evaluation, our principal executive officer and principal financial officer
concluded that the disclosure controls and procedures were effective as of the
end of the period covered by this report to provide reasonable assurance that
information required to be disclosed in reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and (ii)  accumulated and
communicated to our management, including the principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.




Changes
in Internal Control Over Financial Reporting




There was
no change in our internal control over financial reporting (as that term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the quarter ended March 31, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




A control
system, no matter how well designed and operated, can provide only reasonable
assurance that the control system’s objectives will be met.  Further,
because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud
will not occur or that all control issues and instances of fraud, if any, within
the company have been detected.  Projections of any evaluation of
controls effectiveness to future periods are subject to risks.  Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or
procedures.




70




PART
II — OTHER INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS.




Sunz
Insurance




On or
about June 25, 2008, Sunz filed a complaint (the “Sunz Litigation”) in the
Circuit Court of the 9th Judicial Circuit (Orange County, Florida), against ALS
d/b/a ClearPoint HR and CP Advantage. Sunz claims to have provided workers
compensation insurance to ALS and CP Advantage and that such policy was
cancelled on February 22, 2008, for alleged nonpayment of funds due under the
insurance contract. Sunz claims that ALS and CP Advantage owe in excess of $500
under the policy. Sunz, in addition to damages, seeks pre-judgment interest,
court costs, attorneys’ fees and such other relief deemed proper by the
court.  On February 9, 2009, the court ordered Sunz to conduct an
audit of ALS and CP Advantage and set this matter for mandatory
mediation.  On March 3, 2009, ALS and CP Advantage answered Sunz’s
allegations and denied any liability.  On April 29, 2009, this dispute
was settled in mediation, and ClearPoint agreed to make a cash payment of
approximately $49 to Sunz and to issue an irrevocable letter of credit to cover
future claims, if any.  The letter of credit will expire on February
22, 2013.




Leon
R. Cobaugh




On or
about October 20, 2008, Leon R. Cobaugh (“Cobaugh”) filed a complaint in the
Circuit Court for Chesterfield County of the Commonwealth of Virginia against
ClearPoint and Quantum Resources Corporation, ClearPoint’s wholly-owned
subsidiary (“Quantum”). The complaint alleges that, pursuant to a stock purchase
agreement dated December 30, 1986 (the “SPA”), Cobaugh retired from his
positions as an officer, director and employee of AIDE Management Resources
Corporation, the prior name of Quantum, and sold his stock in such entity to the
remaining stockholders in exchange for lump sum payments and monthly payments
from Quantum for the rest of Cobaugh’s life. ClearPoint acquired all of the
outstanding stock of Quantum on July 29, 2005. Upon its acquisition of Quantum,
ClearPoint assumed Quantum’s obligations under the SPA. Cobaugh alleged that
ClearPoint had failed to make the required monthly payments due under the SPA
beginning June 1, 2008 and sought to recover a minimum of $200 as may be
adjusted based on the Consumer Price Index under the SPA.  This
dispute was settled on January 22, 2009.  Pursuant to the settlement
agreement among the parties, past due amounts to Cobaugh were paid and
ClearPoint agreed to continue making future payments as required by the
SPA.




XL
Specialty Insurance Company




On
November 10, 2008, XL filed a complaint in the Supreme Court of the State of New
York (New York County), and, on December 9, 2008, XL filed an amended complaint
alleging that, among other things, XL issued workers’ compensation insurance
policies to CP Advantage, during 2007 and CP Advantage failed to make certain
payments with regard to claims made against CP Advantage under the policies and
maintain collateral required by the insurance policy documents. XL seeks to
recover from ClearPoint, as a guarantor of CP Advantage’s obligations under the
insurance policies, $746, in the aggregate, in connection with certain claims
against and pursuant to the collateral obligations of, CP Advantage. XL, in
addition to damages, seeks pre-judgment interest, attorneys’ fees, costs and
expenses and such other relief deemed proper by the court.  ClearPoint
filed its answer in this matter on February 17, 2009 and contends that a third
party is liable for the payments under the insurance policies pursuant to an
agreement governing the sale of HRO.  This litigation is currently
moving into the discovery phase.




71




AICCO,
Inc.




On
November 18, 2008, AICCO filed a complaint the Court of Common Pleas of Bucks
County, Pennsylvania against ClearPoint alleging that AICCO agreed to finance
premiums of certain insurance policies procured by ClearPoint pursuant to a
certain premium finance agreement among AICCO and ClearPoint. AICCO claims that
ClearPoint breached the terms of such agreement by failing to make certain
installment payments and seeks damages in excess of approximately $600, together
with interest and attorney’s fees and costs.  On December 23, 2008,
ClearPoint filed an answer in this matter and joined two additional defendants
on January 23, 2009.  The joined defendants filed their answer to
ClearPoint’s complaint on March 27, 2009.  The additional defendants’
answer included a counter-claim for indemnification from
ClearPoint.  ClearPoint replied to the additional defendants’
counterclaim on April 27, 2009 denying any liability.  ClearPoint
contends that the joined defendants are liable for the installment payments
pursuant to an agreement governing the sale of HRO.  ClearPoint
alleged breach of contract against the joined defendants and seeks contribution
and indemnification from such parties in this matter.  This litigation
is currently in the discovery phase.




ClearPoint
has accrued for some, but not all, of these matters where payment is deemed
probable and an estimate or range of outcomes can be made. An adverse decision
in a matter for which ClearPoint has no reserve may result in a material adverse
effect on its liquidity, capital resources and results of operations. In
addition, to the extent that ClearPoint’s management has been required to
participate in or otherwise devote substantial amounts of time to the defense of
these matters, such activities would result in the diversion of management
resources from business operations and the implementation of ClearPoint’s
business strategy, which may negatively impact ClearPoint’s financial position
and results of operations.




The
principal risks that ClearPoint insures against are general liability,
automobile liability, property damage, alternative staffing errors and
omissions, fiduciary liability and fidelity losses. If a potential loss arising
from these lawsuits, claims and actions is probable, reasonably estimable, and
is not an insured risk, ClearPoint records the estimated liability based on
circumstances and assumptions existing at the time. Whereas management believes
the recorded liabilities are adequate, there are inherent limitations in the
estimation process whereby future actual losses may exceed projected losses,
which could materially adversely affect the financial condition of
ClearPoint.




Generally,
ClearPoint is engaged in various other litigation matters from time to time in
the normal course of business. Management does not believe that the ultimate
outcome of such matters, including the matters above, either individually or in
the aggregate, will have a material adverse impact on the financial condition or
results of operations of ClearPoint.




ITEM
      1A.
            RISK
      FACTORS.




In
addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the factors discussed below and in Part I,
Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008, which could materially affect our business, financial
condition or results of operations.




The risks
described below and in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 are not the only risks we face.  Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.




This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties.  Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of many
factors, including the risks faced by us described below and in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008.




72




This
Quarterly Report on Form 10-Q includes a going concern note to our condensed
interim consolidated financial statements for the fiscal quarter ended March 31,
2009 which may require us to scale back or cease operations.




At March
31, 2009, we had cash and cash equivalents of $319, an accumulated deficit of
approximately $55,129 and working capital deficiency of approximately
$11,859.  For the three months ended March 31, 2009, we incurred a net
loss of approximately $638.  Due to such financial position and
results of operations as well as the absence of firm commitments for any
additional financing, we included “Note 1 – Going Concern” to our condensed
interim consolidated financial statements for the quarter ended March 31, 2009,
which states that there is substantial doubt about our ability to continue as a
going concern.




If we are
unable to generate sufficient cash from operations, obtain additional funding or
restructure existing debt, we may not be able to continue operations as
proposed, requiring us to modify our business plan, curtail various aspects of
our operations or cease operations. In such event, you may lose a portion or all
of your investment. In addition, the going concern note may cause concern to one
or more of our constituencies of debt holders, clients, suppliers, or trade
creditors. If any debt holder’s, client’s or trade creditor’s concern results in
adverse changes in their respective business relations with us, these changes
may materially adversely affect our cash flows and results of
operations.




We
have defaulted on certain of our debt obligations.  If we continue to
experience liquidity issues, we may be unable to repay our outstanding debt
obligations when due and may seek, or be forced to seek, protection under the
federal bankruptcy laws.




We are
highly leveraged and we have very limited financial resources.  At
March 31, 2009, we had cash and cash equivalents of approximately $319 and
approximately $26,319 of total liabilities.




Our
ability to borrow under the ComVest revolving credit facility and term loan
would be compromised in the event of non-compliance with applicable covenants
under the ComVest loan agreement.  Such non-compliance constitutes an
event of default and, unless waived by ComVest, permits the lender to exercise
its remedies under the ComVest loan agreement, including declaring all amounts
owing under the revolving credit facility and the term loan, which constituted,
in the aggregate, approximately $9,268 at March 31, 2009, to be immediately due
and payable.  An event of default under the ComVest loan agreement
also requires us to pay higher rates of interest on the amounts we owe to
ComVest and, pursuant to a cross-default provision, may trigger an agreement
termination event under the M&T loan agreement, which would, among other
remedies available to M&T, result in the deferred obligations under such
agreement, which constituted, in the aggregate, approximately $4,802 at March
31, 2009, becoming accelerated and immediately due and payable.




As of the
date of filing this Quarterly Report on Form 10-Q, we did not make certain
required principal installment payments of $675, in the aggregate, under the
ComVest term loan.  The failure to make such payments constitutes an
event of default under the ComVest loan agreement.  We are obligated
to pay a default rate of 500 basis points over the prevailing rate on the
foregoing amount, which difference between the default rate and the prevailing
rate was not paid as of the date of filing this Quarterly Report on Form
10-Q.  On May 19, 2009, ComVest executed a waiver letter related to
the ComVest loan agreement, referred to as the term loan
waiver.  Pursuant to the term loan waiver, ComVest waived the
foregoing defaults, provided that ComVest reserved the right to collect at a
later time, but not later than the maturity date of the term loan under the loan
agreement, the increased interest ComVest was permitted to charge during the
continuance of such defaults.




Also
listed as an event of default under the ComVest loan agreement is a default with
respect to any other of our indebtedness exceeding $100, if the effect of such
default would permit the lender to accelerate the maturity of such
indebtedness.




73




CPR, our
wholly-owned subsidiary, did not make certain payments of $50 in January, 2009
and $490, plus accrued interest of approximately $33, in April, 2009 under the
note payable to Blue Lake.  On May 1, 2009, we received a notice from
Blue Lake indicating CPR’s failure to pay such amounts and demanding that we
immediately pay a total of approximately $573.  On May 13, 2009,
ComVest executed a waiver letter, referred to as the Blue Lake
waiver.  Pursuant to the Blue Lake waiver, effective May 1, 2009,
ComVest waived the cross-default provision which was triggered by CPR’s failure
to make the foregoing payments and all remedies available to ComVest as a result
of the failure to make such payments, provided that such obligations would be
satisfied solely with 900,000 shares released from escrow.  We are
discussing with Blue Lake whether the issuance of such shares will constitute
the full satisfaction of CPR’s obligations under the note payable to Blue
Lake.




If
adequate funds are not available, or are not available on acceptable terms, we
may not be able to repay our existing debt obligations, or obtain the necessary
waivers, and we may seek protection under the federal bankruptcy laws or be
forced into an involuntary bankruptcy filing.




ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.




On
January 13, 2009, ClearPoint entered into the XRoads Agreement with
XRoads.  In connection with expiration of the XRoads Agreement on May
13, 2009, ClearPoint issued to XRoads a warrant to purchase up to 100,000 shares
of ClearPoint’s common stock at the exercise price of $0.12 per share (the
“Warrant”).  Such Warrant is exercisable through December 31,
2010.  For additional information regarding the XRoads Agreement, as
amended, see Part I, Item 2 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in this Quarterly Report on Form
10-Q.




ClearPoint
offered and sold the Warrant in reliance on the exemption from the registration
requirements of Securities Act of 1933, as amended (the “Securities Act”), under
Section 4(2) of the Securities Act, based upon a determination that the Warrant
was being issued to a sophisticated investor that could fend for itself and that
had access to, and was provided with, certain information that would otherwise
be contained, or incorporated by reference, in a registration statement and
there was no general solicitation.




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES.




Other
than ClearPoint’s failure to make certain principal installment payments on the
ComVest Term Loan discussed in Part II, Item 5 “Other Information” in this
Quarterly Report on Form 10-Q, which is incorporated herein by reference, there
have been no defaults upon senior securities that were not previously reported
on a Current Report on Form 8-K.




ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.




None.




ITEM
      5.
            OTHER
      INFORMATION.




As of the
date of filing this Quarterly Report on Form 10-Q, ClearPoint did not make
certain required principal installment payments in February, March and April,
2009 of $675, in the aggregate, under the ComVest Term Loan.  The
failure to make such payments constitutes an event of default pursuant to the
ComVest Loan Agreement.  In addition, a default under the ComVest Loan
Agreement would trigger a cross-default provision pursuant to the M&T
Restructure Agreement, unless the default under the ComVest Loan Agreement is
waived in writing by ComVest.  ClearPoint is obligated to pay a
default rate of 500 basis points over the prevailing interest rate on the
foregoing amount, which difference between the default rate and the prevailing
rate was not paid as of the date of filing this Quarterly Report on Form
10-Q.  On May 19, 2009, ComVest executed the Term Loan Waiver,
pursuant to which ComVest waived the foregoing defaults, provided that ComVest
reserved the right to collect at a later time, but not later than the maturity
date of the ComVest Term Loan under the ComVest Loan Agreement, the increased
interest ComVest was permitted to charge during the continuance of such
defaults.




74




Effective May 14, 2009, the XRoads
Agreement was amended pursuant to the XRoads Amendment dated May 18,
2009.  Pursuant to the XRoads Amendment, the term of the XRoads
Agreement was extended to run from May 14, 2009 through August 13,
2009.  ClearPoint agreed to pay XRoads $45 per 30 day period of the
XRoads Extension and the EBITDA Fee will remain at 10%, calculated in accordance
with the XRoads Amendment, and subject to the cap of $50 per
month.  In addition, pursuant to the XRoads Amendment, in the event
Mr. Delle Donne is hired by ClearPoint, ClearPoint agreed to pay XRoads an
aggregate of $250 as liquidated damages.  This amount is payable in
the form of (i) $100 of cash due on Mr. Delle Donne’s hire date, (ii) a warrant
to purchase ClearPoint’s common stock with a value of $100 based on the closing
price on the day Mr. Delle Donne begins employment and (iii) a $50 promissory
note bearing interest at 8% payable in four quarterly installments at the end of
each calendar quarter following the start of Mr. Delle Donne’s
employment.  The terms and conditions of the original XRoads Agreement
which were not affected by the XRoads Amendment will remain in full force and
effect during the XRoads Extension.




The
foregoing is a summary of certain material provisions of the Term Loan Waiver
and the XRoads Amendment.  This summary is not intended to be complete
and is qualified in its entirety by reference to the Term Loan Waiver and the
XRoads Amendment, which are attached as Exhibits 10.5 and 10.2 to this Quarterly
Report on Form 10-Q, respectively.




ITEM
      6.
            EXHIBITS.




Exhibit No.
              
              Description4.1
              
              Form
      of Warrant issued to XRoads Solutions Group, LLC.10.1
              
              Letter
      Agreement dated January 13, 2009 among ClearPoint Business Resources, Inc.
      and XRoads Solutions Group, LLC (incorporated by reference from Exhibit
      10.2 to Form 8-K filed on February 4, 2009).10.2
              
              Amendment
      No. 1 dated May 18, 2009 to Letter Agreement among ClearPoint Business
      Resources, Inc. and XRoads Solutions Group, LLC.10.3
              
              Amendment
      No. 1 dated January 29, 2009 to Term Note dated June 20, 2008 issued by
      ClearPoint Business Resources, Inc. to ComVest Capital, LLC (incorporated
      by reference from Exhibit 10.3 to Form 8-K filed on February 4,
      2009).10.4
              
              Waiver
      Letter dated May 13, 2009 issued by ComVest Capital,
  LLC.10.5
              
              Waiver
      Letter dated May 19, 2009 issued by ComVest Capital,
  LLC.10.6
              
              Amendment
      No. 1 to iLabor Network Supplier Agreement among ClearPoint Resources,
      Inc., Staffchex, Inc. and Staffchex Servicing, LLC dated March 16, 2009
      (incorporated by reference from Exhibit 10.1 to Form 8-K filed on March
      20, 2009).11.1
              
              Statement
      Regarding Computation of Per Share Earnings (incorporated by reference
      Note 17 to the Notes to the Consolidated Financial
      Statements).31.1
              
              Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) promulgated under
      the Securities Exchange Act of 1934, as amended.31.2
              
              Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) promulgated under
      the Securities Exchange Act of 1934, as amended.32.1
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
              
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.




75


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.




CLEARPOINT
      BUSINESS RESOURCES, INC.By:
                    /s/ Michael D.
      TrainaDate:
      May 20, 2009
                    
                    Michael
      D. Traina
                      Chief
      Executive OfficerDate:
      May 20, 2009
                    By:
                    /s/ John G.
      PhillipsJohn
      G. Phillips
                      Chief
      Financial
Officer




S-1


EXHIBIT
INDEX




Exhibit No.
                
                Description4.1
                
                Form
      of Warrant issued to XRoads Solutions Group, LLC.10.1
                
                Letter
      Agreement dated January 13, 2009 among ClearPoint Business Resources, Inc.
      and XRoads Solutions Group, LLC (incorporated by reference from Exhibit
      10.2 to Form 8-K filed on February 4, 2009).10.2
                
                Amendment
      No. 1 dated May 18, 2009 to Letter Agreement among ClearPoint Business
      Resources, Inc. and XRoads Solutions Group, LLC.10.3
                
                Amendment
      No. 1 dated January 29, 2009 to Term Note dated June 20, 2008 issued by
      ClearPoint Business Resources, Inc. to ComVest Capital, LLC (incorporated
      by reference from Exhibit 10.3 to Form 8-K filed on February 4,
      2009).10.4
                
                Waiver
      Letter dated May 13, 2009 issued by ComVest Capital,
  LLC.10.5
                
                Waiver
      Letter dated May 19, 2009 issued by ComVest Capital,
  LLC.10.6
                
                Amendment
      No. 1 to iLabor Network Supplier Agreement among ClearPoint Resources,
      Inc., Staffchex, Inc. and Staffchex Servicing, LLC dated March 16, 2009
      (incorporated by reference from Exhibit 10.1 to Form 8-K filed on March
      20, 2009).11.1
                
                Statement
      Regarding Computation of Per Share Earnings (incorporated by reference
      Note 17 to the Notes to the Consolidated Financial
      Statements).31.1
                
                Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) promulgated under
      the Securities Exchange Act of 1934, as amended.31.2
                
                Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) promulgated under
      the Securities Exchange Act of 1934, as amended.32.1
                
                Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
                
                Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.


E-1